Friday, October 2, 2009

Forget GDP.

Forget GDP. That is the advice offered by several economists, including Nobel prize winner Joseph Stiglitz. Their position is that too much focus on GDP (Gross Domestic Product), at the expense of other more telling indicators, actually contributed to the economic crisis. GDP has long been an important indicator of economic growth made up of all goods and services. But there are some huge problems.

Like most accounting measures, GDP can be manipulated to say what you want it to say. At least in the short term. Take this example. In 2007, a boom year for the US economy, about 41 % of corporate profits came in the financial sector. Translation: profits were generated not through improving or selling goods and services, but through borrowing. Even more chilling, according to the economists, the profit write offs (translation - losses) in 2008 actually wiped out all GDP growth for the past five years. While the world celebrated GDP growth from 2002 through 2007, we were celebrating not real profits, but borrowed profits that we couldn't sustain.

Relying on a measure such as GDP in my estimation, is that it doesn't provide any early warning signs of problems. That should be one goal of a measure - what is the health (or vulnerability) of the system.

It seems that GDP may be a trope, just like shareholder value is often a trope. (see previous blog for more on this) "Our accounting framework affects how we see the world, and our accounting framework is flawed," said Stieglitz. This sounds like something an organizational behavior professor would say. Perhaps at least some economists may have been paying attention in class after all.

The economists did suggest an alternative measure, one that takes into account well-being, environmental impact, and other 'non-economic' indicators. See more at CFO online: