GDP & Beyond: Measuring Economic Progress & Sustainability COPAFS September 11th, 2009

2 Long Standing Issue ▪ Kuznets original concerns regarding the scope of the original accounts ▪ " Too much and too long, we seem to have surrendered community excellence and community values in the mere accumulation of material things. Our gross national product, if we should judge America by that, counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for those who break them. It counts the destruction of our redwoods and the loss of our natural wonder in chaotic sprawl. It counts napalm and the cost of a nuclear warhead, and armored cars for police who fight riots in our streets… ▪ Yet the gross national product does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages; the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage; neither our wisdom nor our learning; neither our compassion nor our devotion to our country; it measures everything, in short, except that which makes life worthwhile. And it tells us everything about America except why we are proud that we are Americans." -- Robert F. Kennedy Address, University of Kansas, Lawrence, Kansas, March 18, 1968

3 Long Standing Issue ▪ “The success of our economy has always depended not just on the size of our gross domestic product, but on the reach of our prosperity; on the ability to extend opportunity to every willing heart -- not out of charity, but because it is the surest route to our common good.” -- President Barak Obama, Inaugural Address, Washington D.C., January 20, 2009

4 Long Standing Issue ▪ “The big question concerns whether GDP provides a good measure of living standards. In many cases, GDP statistics seem to suggest that the economy is doing far better than most citizens' own perceptions. Moreover, the focus on GDP creates conflicts: political leaders are told to maximize it, but citizens also demand that attention be paid to enhancing security, reducing pollution, and so forth - all of which might lower GDP growth. ▪ The fact that GDP may be a poor measure of well-being, or even of market activity, has, of course, long been recognized. But changes in society and the economy may have heightened the problems, at the same time that advances in economics and statistical techniques may have provided opportunities to improve our metrics.” -- Joseph Stiglitz, Economist.com, September 10 th 2009

5 What Can We Do Within The NIPA’s: Economic Progress & Sustainability ▪ Measures of Economic Progress:  Households  Regions  Business ▪ Measures of Sustainability:  GDP  Investment  Asset Prices  Leverage

6 Real GDP, Real DPI & Real Compensation

7 Household Income: Alternative Estimates

8 Spendable Income: Cash Measures

9 Regional Household Income Source: BEA Regional data. Adjusting for regional price differences

10 Regional Household Income Source: BEA Regional data. Impact of classifying retirement income in state of residence

11 Sustainability ▪ Measuring Sustainability:  Long-Term  Examples from Recent Experience

12 Business Income: Real GDI & NDI Source: BEA NIPA data

13 Business Income: Real Gross & Net Domestic Investment Source: BEA NIPA data

14 Housing & Personal Income Source: BEA NIPA data & Federal Reserve Board Flow of Funds data Ratio of Residential Fixed Investment to Personal Income

15 Equity prices, NIPA profits & GDP Source: BEA NIPA data, Standard and Poor’s data

16 Household asset values & savings Source: BEA NIPA data & Federal Reserve Board Flow of Funds data

17 Business Sector Leveraging Source: BEA/FRB Integrated U.S. Macroeconomic accounts

18 Missing the Mark

19 What Else Should We Highlight? ▪ The thrust of the Economist cover story (and others like it) is that economists failed to adequately incorporate risk and the financial sector into their models of the real economy ▪ We need to provide them with the toolkit to help do that.