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Stiglitz, Sen, and the End of Recession

Posted by: Michael Mandel on September 23

Most forecasters expect third quarter real GDP growth to be positive, perhaps as much as 3%. This will be widely hailed as a sign that the nasty recession of 2008-2009 has come to an end. Indeed, the Fed’s statement today that “economic activity has picked up” seems to fuel the belief that the recovery has started.

But is the recession really over? Coincidentally, the Commission on the Measurement of Economic Performance and Social Progress, headed by Nobel Prize winners Joseph Stiglitz and Amyarta Sen, has come out with its new report, which pointed out substantial flaws in using GDP as a measure of well-being:

…the crisis is teaching us a very important lesson: those attempting to guide the economy and our societies are like pilots trying to steering a course without a reliable compass.

the time is ripe for our measurement system to shift emphasis from measuring economic production to measuring people’s well-being….emphasising well-being is important because there appears to be an increasing gap between the information contained in aggregate GDP data and what counts for common people’s well-being.

Now, ‘well-being’ is a broad concept, which includes everything from household income and consumption to fuzzy measures of happiness. But the main point is that market production—which is what GDP purports to measure—may be less important than other aspects of the economy.

Stiglitz and Sen mainly stress the long-term problems of emphasizing GDP as the main measure of economic performance. But their criticism applies in the short-run as well.

In particular, as we try to figure out if the recession is coming to an end, we should look with skepticism at the reported growth rate of reported real GDP. Real GDP does not include all sorts of intangible investments, such as R&D, product development and training. So companies may be cutting back on long-term R&D and new product investments, but those negatives won’t show up in GDP growth.

Similarly, GDP does not do a good job of tracking many aspects of international trade, such as offshoring of domestically-produced goods and services. For example, if companies are using this downturn to offshore more of their production activities, that shift will be undercounted in the GDP calculations.

And finally, as jobs continue to disappear and unemployment rises, many Americans would not agree with the statement that the recession is over. Stiglitz and Sen are telling us that we need to take that sentiment seriously.

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Reader Comments


September 24, 2009 12:08 PM

What a wonderful concept, export Stiglitz to France

Thomas Esmond Knox

September 25, 2009 02:57 AM

Tell Stiglitz and Sen to come up with a new name for their concept.

Richard Stone was an accountant. He knew what he was doing.

Maybe Stiglitz and Sen's concept will be accepted as more useful.

Todd Dwyer

September 25, 2009 07:23 PM

When a drunk driver runs a red light and t-bones a minivan full of children, GDP grows.

When the Exxon Valdez runs aground and spills 11-million gallons of crude oil, GDP grows.

When two kids walk onto a high school campus and shoot the place up, killing 13 of their classmates, GDP grows.

GDP, the current tool for measuring overall health of the economy, takes absolute social negatives and portrays them as absolute economic positives.

Perhaps it is time to come up a new metric for measuring our socio-economic health and well-being. A "Genuine Progress Indicator," or GPI, as opposed to the current "Gross Domestic Product."

Thank you for your interest. This blog is no longer active.



Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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