February 23, 2020

The Problem with How We Measure the Economy

“Every quarter, we look to the federal Bureau of Economic Analysis for new data on the total income and output of the economy. The nation’s topline indicator of economic performance is gross domestic product — the sum total of all that’s produced in our economy. If you pay attention to that indicator only, it would certainly seem like we’re now in the best of times: Gross domestic product has grown for 124 straight months, and we are now officially in the longest economic expansion in recorded American history.

Leaders manage by setting objectives, which is exactly what policymakers do when they point to rising gross domestic product as a measure of economic success. As Jack Welch, the former chief executive of General Electric famously put it, “What you measure is what you get.” But if you manage by the wrong measurement, it’s worse than having no metrics at all. Mr. Welch, who understood this, also asked: “Are we measuring and rewarding the specific behavior we want?”

While gross domestic product has always had flaws, it used to be a measurement that captured income gains across the economy. Today, when policymakers look to gross domestic product as a measure of their success, they are not seeing the whole picture. It is no longer good enough for what we need it to do.

The economist Simon Kuznets developed the first estimates of aggregate national income in the early 1930s at the request of the Commerce Department. In 1934, he and his team of researchers presented their findings to the Senate in a 300-page report. The data from that report provided Congress and the president with the first comprehensive snapshot of economic activity and led to the introduction of national income statistics in 1942. Nearly 30 years later, Kuznets received the Nobel Prize in economics “for his empirically founded interpretation of economic growth.””

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