The Office for National Statistics has decided to issue monthly GDP estimates instead of merely quarterly. No, bad idea, even if better information collection and crunching methods make it possible. The accuracy of the numbers, well, something at issue. But the real problem here is the Sir John Cowperthwaite one. Collecting such information just means some damn fool will try to do something with it.
Garry Young, the director of macroeconomic modelling and forecasting at the National Institute of Economic and Social Research, said politicians and central bankers needed to know what is actually happening to the economy in real time if they are to make good decisions.
There are some drawbacks, however. “A downside of the new monthly data is that it will be volatile, subject to revision and may sometimes give a misleading steer,” Young said.
“That means that policymakers and other users will need to make sure they do not overreact to the latest data, unless it is confirmed by a range of other evidence.”
Well, actually, we’d rather prefer that politicians don’t make decisions about the macroeconomy. Get the microeconomic factors, market entry, lack of monopoly and rent extraction, basic incentives and so on right and allow the rest of it to simply be emergent. As Sir John insisted in Hong Kong when it was the fastest growing economy on the planet and on the way to becoming, as it is today, richer than we are.
But on to The Observer and the subject.
GDP is calculated by adding together three elements: all the money spent on goods and services across Britain, minus the value of imports, plus the value of exports; the money earned through wages and profits; and the total value of all goods and services produced in the UK.
This is from their Economics Correspondent recall. You know, the resident expert?
No, we don’t add those three elements together. Rather, each of the three should be equal to the other two. All incomes equals all production equals all consumption. They’re three different ways of calculating the same number, Gross Domestic Product, GDP. Sure, they should be equal but they’re not because people lie because taxes. But we’re most certainly not adding the three together.
Sigh. No wonder the economy’s crocked if this is the level of professional commentary upon it, eh?
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Would any of you economists like to explain to me why I should give a monkey's about this measurement, with its widely acknowledged flaws?
Approximately, roughly you understand, it's a reasonable enough measure of the capacity of the society to do something.
And an annual variation of the order of 1% means? I'll give you a clue, it starts with 'sweet'.
Well, 1% a year doubles that capacity in 70 years, 2% in 35, 4 % in 17 and so on. As a rough guide it's fine....
The number is not sufficiently accurate to worry about 1%. What is the error range? And the error from sheer obsolescence of counting methods based on outdated assumptions?
It's a bit like democracy, Rhoda. GDP is the worst possible way of measuring overall economic activity. Apart from all the others.
GDP's main advantages are that it's something that governments (those that tax income, anyway) already measure. And it can be turned out fairly quickly - a month or two behind actual events - whereas an ideal, perfect measure of economic activity that told us precisely how the economy was performing, but only 5 years later, would be useless as information to help set financial policy.
So, three measures that equal each other. Ok, just divide the total by three.
It's like years back when locally we had a road spfety spending budget weighted by local factors. Places where poor people live tend to have higher accidents. Poor people tend to live in poor areas. Poor areas tend to have higher accidents. So, the wonderful conclusion was to make allocation a function of poor people AND poor areas. So an area with twice the accidents would get four times the money.