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GDP & Beyond: Measuring Economic

Progress & Sustainability

COPAFSSeptember 11th, 2009

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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

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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

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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 10th 2009

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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

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Real GDP, Real DPI & Real Compensation

2.4

0.4

2.7

0.5

2.1

-1.0-1.5-1.0-0.50.00.51.01.52.02.53.0

Avg. growth, 2000-2007 2008

Perc

ent

Real GDP Real Disposable Personal Income Real Compensation

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Household Income: Alternative Estimates

2.4

0.4

2.7

0.5

1.8

-0.4

1.5

-1.4

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Avg. growth, 2000-2007 2008

Perc

ent

Real GDP Real DPI Real DPI per capita Real DPI less transfers per capita

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Spendable Income: Cash Measures

1.8

-0.4

1.5

-0.5

1.1

-0.7-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Avg. growth, 2000-2007 2008

Perc

ent

Real DPI per capita Real Compensation per worker Real Wages per worker

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Regional Household Income

7,423

-7,403-10,000

-8,000

-6,000

-4,000

-2,000

0

2,000

4,000

6,000

8,000

10,000

West Virginia New York

$ D

iffer

ence

Source: BEA Regional data.

Adjusting for regional price differences

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Regional Household Income

Source: BEA Regional data.

12.5

-4.7-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Florida Maryland

$ D

iffer

ence

Impact of classifying retirement income in state of residence

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Sustainability

▪ Measuring Sustainability: Long-Term Examples from Recent Experience

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Business Income: Real GDI & NDI

Source: BEA NIPA data

2.2

-0.4

2.0

-0.9-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Avg. growth, 2000-2007 2008

Perc

ent

Real GDI Real NDI

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Business Income: Real Gross & Net Domestic Investment

Source: BEA NIPA data

1.5

-5.5

-1.9

-21.9-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

Avg. growth, 2000-2007 2008

Perc

ent

Real Gross Domestic Invest. Real Net Domestic Invest.

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Housing & Personal Income

Source: BEA NIPA data & Federal Reserve Board Flow of Funds data

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

19701972

19741976

19781980

19821984

19861988

19901992

19941996

19982000

20022004

20062008

Ratio of Residential Fixed Investment to Personal Income

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Equity prices, NIPA profits & GDP

0

10

20

30

40

50

60

70

80

90

100

1 949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004

19

49

=1

Nom inal GDP "S&P clos ing prices" Domestic Profits from Curre nt Pdn.

Source: BEA NIPA data, Standard and Poor’s data

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Household asset values & savings

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

55000

60000

65000

80Q

1

81Q1

82Q

1

83Q1

84Q1

85Q1

86Q

187

Q188

Q189

Q190

Q191

Q192

Q193

Q194

Q195

Q196

Q197

Q198

Q199

Q100

Q101

Q102

Q103

Q104

Q105

Q106

Q107

Q108

Q1

Bill

ion

s o

f d

olla

rs

-0.20

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

Ind

ex, 8

0Q1:

1.00

Net worth Personal savings rate Net worth as % of DPI

Source: BEA NIPA data & Federal Reserve Board Flow of Funds data

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Business Sector Leveraging

Source: BEA/FRB Integrated U.S. Macroeconomic accounts

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Financial Business TL / TA

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Missing the Mark

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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.