At Bloomberg Justin Fox complains that GDP just isn’t a very good measure of economic performance:
GDI is gross domestic income, yet another metric of economic activity produced by the GDP estimators at the Bureau of Economic Analysis that’s released with a little more lag time than GDP. That is, the “advance†estimate of second-quarter GDP that was released in late July contained no information on second-quarter GDI. The “second estimate†of GDP that came out Wednesday did.
Now you might think that Jason Furman, a professor at Harvard’s Kennedy School of Government who was the final chairman of President Barack Obama’s Council of Economic Advisers, was just emphasizing this to make the current presidential administration look bad. But that’s really not fair, given that Furman wrote an op-ed in the Wall Street Journal in early July that wielded the GDP-GDI average to argue that the economy had really grown at a 2.8 percent pace in the first quarter, not the 2 percent reflected in GDP growth alone (those numbers have since been revised to 3.1 percent and 2.2 percent).
Also, it’s not just Furman and not just this year. The BEA started reporting the GDI-GDP average in 2015. And in 2013, the Federal Reserve Bank of Philadelphia began publishing its own “alternative measure of real U.S. output growth†called “GDPplus,†which combines GDP and GDI using a statistical smoothing technique known as a Kalman filter. That delivered a 2.1 economic growth rate for the second quarter, down from 3.3 percent in the first quarter.
GDP and GDI are both estimates of the size of the economy, one focused on expenditure and the other on income. They should in theory add up to the same amount, but they apparently never do, even after multiple rounds of revisions. The smallest gap on record is currently $200 million in 2012 dollars, recorded in the first quarter of 1974. In that quarter GDP was bigger than GDI, which it has been about two-thirds of the time since 1947. But during the current economic expansion, GDI has been bigger for 31 out of 36 quarters.
In real fairness I think that Mr. Fox should go back to 2009 and check what he, Dr. Furman, and others were saying then and have said since then. Starting the clock at 2010 or 2012 or 2016 sounds like cherry-picking to me. Even better—go back to 1946.
I have been complaining about the inadequacies of gross domestic product as a meter for measuring the performance of the economy for decades and I don’t think that gross domestic income or their ratio is much better, especially in the near term. Any metric, the entirety of which for a month can be attributed to the sale of stock in a company that represents a tiny sliver of total domestic product, leaves quite a bit to be desired. You would probably do better by going to the center of town and just getting the opinion of the first person you meet. The sooner we abandon the notion that we are capable of fine-tuning the economy the better off we will be.
And as I knew 50 years ago, social scientists’ grasp of statistics just isn’t good enough to do the jobs they’re trying to do. For one thing they suffer from a very bad case of false precision.
