“GDP has outlived its usefulness” – Hazel Henderson, Author & Futurist
Measuring GDP is more of an art than a science. It’s really tough to pinpoint the size of a country’s economy and to measure its rate of growth (or contraction during tough times). So experts take their best stab at it and tweak and refine their methodology as they go along. Yet so much rides on GDP: it shapes government policy and moves markets.
From where I sit, the main problem with the current approach to measuring GDP is that it doesn’t differentiate between actions that have a very different set of long-term consequences. For example, all of the following are considered equal because the price tag is the same: $1 million dollars spent on repairs after a storm, $1 million to build a jail, $1 million to produce a line of smartphones and $1 million to clear-cut a forest.
All spending goes into the positive category without taking into account the fact that some types of spending exacerbate inequality or deplete natural resources, which are things that can grow into major problems in the future.
With new technology comes the opportunity to harness new ways to get a read on public sentiment, which often goes hand in hand with economic growth or decline. A couple of mathematicians from the University of Vermont’s Complex Systems Center partnered with data specialist Mitre Corp. They analyzed a random sampling of 50 million tweets (in English) a day to track the ups and downs of public contentment using an index they call a hedonometer.
They’ve been doing this since the Fall of 2008, which is when the investment bank Lehman Brothers went belly up. So far, the saddest day on record was April 15, 2013… the day of the Boston Marathon bombings. Christmas and other holidays have consistently emerged as the happiest days.
So these findings aren’t exactly earth-shattering but the hedometer is an attempt at something that has long eluded economists. One of the main criticisms of GDP is that it isn’t able to measure what many consider the most important thing in life: happiness.
You can dismiss it as unscientific and flaky. But there are all kinds of unusual ways to tap into public sentiment out there that are even wackier. Like the diaper rash indicator. According to Procter & Gamble, American parents spend $1,500 on average per baby on diapers each year and they change a diaper 6.3 times a day. When the economy takes a turn for the worse though, it seems diapers are one of the first costs households cut.
And when diapers are changed less frequently that leads to more instances of diaper rash, which requires parents to pony up for diaper rash cream. Since 2009, the trend in the U.S. has been declining diaper sales and increasing diaper rash cream sales. Infer what you will.
None of these methods are a complete way of assessing economic progress, but combined with traditional methods of measuring GDP what emerges is a snapshot with more nuance and detail. With so much riding on how we quantify GDP, that’s probably a good thing. It’s easy to dismiss these other types of indicators, but to me they give you a real sense of the story behind the numbers.