GDP Up!
October 29th, CNN-Money lead article: “Economy finally back in gear: Government says GDP grew 3.5% in third quarter, ending a year-long string of declines and coming in better than forecasts“.
Readers of this blog already know that I regard the stock market as a misleading leading indicator. Is GDP a better predictor?
Two lynchpins to understanding the work of Dr. W. E. Deming are the nature of “measurement” and “optimization” of a system. The efficacy of measurement depends on what we choose to measure and why. The concept of optimization counsels us to remain steadfastly committed toward our aims, based in our values, and cautions us against reliance on any single measure.
What does GDP really mean and is maximizing GDP a desirable thing?
GDP is widely used as a summary statistic said to be indicative of the overall well-being of a nation’s economy.
First off, here’s what GDP looks like to most economists:
It is translated into english as:
GDP = private consumption + gross investment + government spending + (exports - imports)
So what does it mean?
In a very general sense, it purports to be a measure of economic activity. It does not care what kind of economic activity. It does not care a wit about the aims and ends of that activity. It is, supposedly, just the heat being generated by the wheels of industry. Burn baby burn!
Are we there yet?
Think of it this way.
You are in your car and driving down the road. You press your foot down on the accelerator. Your speed increases and your fuel consumption increases. Your favorite band is blasting away on the CD player and you are grinning from ear to ear as you zip by other cars LOL (laughing out loud).
WAIT A MINUTE! Where are you going? What’s just up ahead, over that hill or around that curve? Is it a place of joy and happiness or is there a cliff?
A high GDP can be rightly regarded as an imperfect measure of the speed at which our economy is racing to heaven or hell, but the number does not and cannot, distinguish between the two destinations!
Nobel prize-winning economist Joseph Stiglitz explains this quite well in the following video clip. Use it as a departure point to a better understanding of Deming’s theory of measurement and optimization.
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A big part of the problem with these kinds of measures is that they represent an attempt to capture in one indicator a complex system. I had a client that was a large computer maker (you would recognize the name) and the VP of Manufacturing wanted me (the hired gun statistician) to develop an index of quality that he could look at and tell whether quality was getting better or getting worse. He specifically stated his demand that this be “one number”.
I told him it was a dumb idea and that was the end of my engagement with that company.
Your point is well taken. Summary statistics involve a complex set of assumptions about the meaning of various measures and the interactions between them. Even if we grant some validity to the summary statistic called GDP, the common assumption that increasing GDP is a desirable thing is highly questionable. Sometimes slowing things down and moderating growth is a good thing, as in the case of a life threatening cancer.
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