The Zombie Numbers That Rule the U.S. Economy

Figures like gross domestic product were appropriate for their own time. But today, they paint a consistently misleading portrait of America.
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Reuters

This Thursday the Conference Board, a global business association, released its monthly index of “leading economic indicators.” Like the unemployment and inflation, housing starts, G.D.P. changes and other figures, these numbers arrive in metronomic waves. Financial services like Bloomberg, Dow Jones and Reuters blast them out the moment they’re released. Stock markets will often respond within seconds. Commentators and policy makers attribute to them a near-cosmic significance. 

We act as if they are markers from time immemorial, but in fact they were invented for modern industrial nations after the Depression and World War II and are now seriously outdated.

Take gross domestic product. Derived from formulas set down by the economist Simon Kuznets and others in the 1930s, its limitations have long been recognized, none more eloquently than by Robert F. Kennedy in a famous speech in 1968 when he declared that it measured everything except that which is worth measuring.

GDP treats all output as a positive. When you buy LED lights that obviate the need to spend on incandescent bulbs and reduce energy consumption, GDP goes down and what should be an unmitigated good becomes a statistical negative. If a coal company pollutes a river, the cleanup costs are positive for GDP, as are any health care costs for those harmed.

What’s more, we have also come to assume that with output comes more spending and employment, but factories today are powered by robotics and software, and robots don’t buy more lattes and shoes.

GDP is a good number for a nation that produces lots of stuff made by lots of workers, but for an information economy grounded in services and intellectual property and awash in apps that cost nothing yet enable commerce, it is not up to the task. Nor are many of our indicators. Our trade figures treat an iPhone made—more accurately, assembled—in China with no reference to the intellectual property created by Apple in California.

Our inflation numbers can barely keep up with the quality improvements embedded in our cars and appliances and homes, despite heroic efforts by statisticians to account for those efficiencies in their formulas. 

Our employment numbers are mute about 20-somethings who leave their paying jobs to create new ones.

And our national figures treat each “economy” as a sovereign island—even though flows of labor, goods and services are as indifferent to national boundaries as weather. Our lives may be ever more global, but our indicators remain stubbornly national.

We would be better served by confronting the vagaries of the world around us, unclouded by a statistical construct of an earlier time. Economic policymakers have need of some macro indicators, but few others do. The invention of the economy helped tame some of the worst of business cycles in the 20th century, but increasingly our indicators constrain our ability to understand the world and then act creatively to shape it.

There have been multiple efforts to create newer, better indicators. Most notable in recent years, Bhutan announced a gross happiness index. Less self-servingly, the United Nations developed a Human Development Index. Others have proposed new ways of assessing just about everything. All of these, however, still reduce complicated systems to simple, round numbers, and all of them therefore will fail to describe our world, even if they fail for different reasons.

What we need to do instead is access the information revolution to craft our own bespoke indicators. We are now deluged with data, and we no longer need simple one-size-fits-all national indicators. Instead, we need to use big data to fashion solutions. The result will be a plethora of bespoke indicators, each tailored to particular needs.

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Zachary Karabell is Head of Global Strategy at Envestnet, a financial services firm, and author of The Leading Indicators: A Short History of the Numbers that Rule Our World. More

At River Twice Research, Karabell analyzes economic and political trends. He is also a senior advisor for Business for Social Responsibility. Previously, he was executive vice president, head of marketing and chief economist at Fred Alger Management, a New York-based investment firm, and president of Fred Alger and Company, as well as portfolio manager of the China-U.S. Growth Fund, which won a five-star designation from Morningstar. He was also executive vice president of Alger's Spectra Funds, which launched the $30 million Spectra Green Fund based on the idea that profit and sustainability are linked. Educated at Columbia, Oxford, and Harvard, where he received his Ph.D., he is the author of several books, including Superfusion: How China and America Became One Economy and Why the World's Prosperity Depends on It (2009), The Last Campaign: How Harry Truman Won the 1948 Election, which won the Chicago Tribune Heartland Award, and Peace Be Upon You: The Story of Muslim, Christian, and Jewish Coexistence (2007), which examined the forgotten legacy of peace among the three faiths. In 2003, the World Economic Forum designated Karabell a "Global Leader for Tomorrow." He sits on the board of the World Policy Institute and the New America Foundation and is a member of the Council on Foreign Relations. He is a regular commentator on national news programs, such as CNBC and CNN, and has written for The Wall Street Journal, Newsweek, Time, The Washington Post, The New Republic, The Los Angeles Times, The New York Times, and Foreign Affairs.

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