Business

Beyond Macroeconomic Measures: Why The Numbers Do Not Add Up

The OECD (Organisation for Economic Co-operation and Development) issued a report in November 2018 called “Beyond GDP: Measuring What Counts for Economic and Social Performance.It highlights how inadequate and inappropriate our macroeconomic measures are. However, we need to go even further and acknowledge that our microeconomic measures, namely our business measurement standards, are equally inappropriate and inadequate.

Macroeconomic Measures
kreatikar / Pixabay

Almost ten years ago, the International Commission on the Measurement of Economic Performance and Social Progress issued a report titled, “Mismeasuring Our Lives: Why GDP Doesn’t Add Up.”  Of course, GDP doesn’t add up – not if you are trying to get real insight into the workings of the economy. It’s a one-sided measure which serves the needs of vested interests, not the majority. If you want to achieve a particular outcome, then introduce measures to make sure you achieve what you want. Measures dictate outcomes by focusing your attention on what’s important to you. The opposite is equally true – if you don’t measure something you don’t focus on it, or manage it correctly. That “something” is unimportant to you. Anything can happen to it – its outcome is unimportant. So, if you want to control a system (whatever that may be) – then control the measures. That’s why the wealthy one per cent control and dictate our economic measures at both the micro and macro levels, to produce the outcomes they want. Both measures are inadequate and inappropriate for the job, but that means nothing to them because they produce the results they want.

Get The Full Ray Dalio Series in PDF

Get the entire 10-part series on Ray Dalio in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

Q1 hedge fund letters, conference, scoops etc

Based on the impact of the first report the OECD (Organisation for Economic Co-operation and Development) constructed a Better Life Index, containing a range of metrics which better reflect what constitutes and leads to wellbeing, much like a quality-of-life index. The OECD also supported a successor to the Commission which produced the first report - the High-Level Expert Group on the Measurement of Economic Performance and Social Progress. On 29th November 2018,  in Incheon, South Korea, at the OECD’s sixth World Forum on Statistics, Knowledge and Policy this group issued its first report, “Beyond GDP: Measuring What Counts for Economic and Social Performance.”

The name of the report says everything - GDP is inadequate and inappropriate and we need to go beyond it. The report showed how inadequate metrics have led to implementing wrong policies. How better indicators would have revealed the highly negative and long-lasting effects on the post-2008 downturn, in terms of productivity and wellbeing. How policymakers would not have been so keen to implement austerity programmes, had they been aware of the negative impact they have on lowering quality-of-life for the majority, which in turn adversely impacts productivity.

The report expanded on topics like trust and insecurity, which had only briefly been addressed in the previous report. It highlighted how citizens in leading economies face increasing insecurity and mistrust in government and business. Their interests are not being looked after. Too much attention is paid to improving GDP and fiscal prudence, and nothing to improve citizen’s wellbeing. Consider labour-market “reforms” which are supposed to improve “flexibility,” but weaken worker’s bargaining power by giving employers more freedom to fire them, leading in turn to lower wages and more insecurity. Although not everybody is affected by these changes, they increase the perception of mistrust and insecurity among the majority. If it happens to them - it can happen to us. Nobody has our backs, and they are powerful.

Had we better macro measures identifying things like insecurity, trust and wellbeing, countries could identify problems before they spiral out of control. There is always a higher cost involved in fixing a problem than stopping it before it gets out-of-hand. Having a short-term financial perspective may appear prudent at the time, but in the long-term, it’s costly. For example, allowing the poor’s quality-of-life to continue to plummet, sets off generational social problems, which are incredibly costly to fix, that’s without considering the human suffering it causes.

Likewise, metrics of equality of opportunity have only recently exposed the hypocrisy that America’s is a land of opportunity for all. Yes, anyone can get ahead, so long as they are born to rich, white parents. The data reveals that the US, as well as the UK, are riddled with so-called inequality traps. Those born at the bottom are likely to remain there. If we are to eliminate these inequality traps, we first have to know that they exist, and be aware of what creates and sustains them.

Pious platitudes like that of US President Bill Clinton who claimed to be  “putting people first,” aren’t worth uttering. The same for the UK Labour Party who claim to work “For the many, not the few, ” or the UK Conservative Party, who claims they are “Building a country that works for everyone.” It’s remarkable how difficult politicians find it to do what they claim, particularly in a democracy, where the majority is supposed to shape policy. Democracy has been hijacked by big business and vested interests, making sure their needs come first. The massive US tax cut enacted by the Trump administration is a prime example of government’s failure to serve the majority. Ordinary people – the dwindling but still vast middle class – must bear a tax increase, with millions possibly losing health insurance, to make billionaires and corporations wealthier.

If we want to put people first, we have to know what matters to them, what improves their wellbeing - we have to measure and manage what’s important to them. The Beyond GDP measurement agenda will play an important role in achieving this. However, providing governments with inadequate and inappropriate measures is bad enough, but it gets worse - business has equally inadequate and inappropriate measures. A bad situation gets worse - that’s why we have to go beyond macroeconomic measures and revamp our business measures as well.

When the basic building block of the economy is mismanaged, we create greater administrative and regulatory costs in trying to rectify the problems they create. In other words, we need to ensure business works for the common good, without killing the spirit of free enterprise. We need vastly improved business measures which ensure the interests of all stakeholders are met. We cannot address macro measures without addressing micro measures - we have to go beyond macro measures.

Copyright © 2019 Adrian Mark Dore