U.S., China and eating soup with a fork

By Bernd Debusmann
October 29, 2010

-The opinions expressed are the author’s own-

Are economists the world over using an outdated tool to measure economic progress?

The question, long debated, is worth pondering again at a time when two economic giants, the United States and China, are sparring over trade, currency exchange rates and their roles in the global economy.

In the run-up to U.S. mid-term elections on November 2, politicians from both parties, for different reasons, blamed trade with China for American job losses. China responded with irritation and hit back by accusing the U.S. of “out of control” printing of dollars tantamount to an attack on China with imported inflation.

Measured by Gross Domestic Product (GDP), the United States tops the list of countries. China overtook Japan in August to become number two. Depending on whose forecasts you believe, China will overtake the United States in 2020, 2035 or 2040 and therefore turn the 21st century into the long-predicted Chinese Century. It’s becoming conventional wisdom that the United States will play a reduced role on the world stage.

Crystal ball gazers might do well to remember that long-range forecasts have often been wrong in the past. At the turn of the 20th century, eminent strategists predicted that Argentina would be a world power within 20 years. In the late 1980s, Japan was seen as the next economic leader, on the strength of supposedly unstoppable progress. Forecasters extrapolated from past GDP growth rates.

They are widely used to compare standards of living in one country with those in another but critics say GDP is too narrow to be a realistic indicator. Joseph Stiglitz, the Nobel-prize winning American economist, has complained that world leaders make a fetish out of it and suffer from GDP-obsession.

John Robbins, a liberal author, says that using GDP as a measure of overall progress makes as much sense as “using a fork to eat soup.”

Why? GDP, developed in the 1930s, measures the total monetary value of all goods and services. It goes up whenever money changes hands, no matter whether that money is borrowed or on what it is spent. The billions it cost to clean up the Gulf of Mexico after this summer’s disastrous oil spill, for example, counted towards America’s GDP.

Viewed solely through its lens, Robbins says, someone treated for a complicated cancer while at the same time paying steep legal fees for a divorce is someone helping make GDP look good.

U.S., CHINA LOW ON HUMAN DEVELOPMENT INDEX
Where GDP fails is as a measure of living standards, particularly in a country like China which is both a manufacturing powerhouse and a Third World country where more than a third of its vast (1.3 billion) population live on less than $2 a day. GDP per capita is not a particularly reliable indicator either. It measures the average (not the median) which results in distorted figures in countries with great income inequality.

The Nobel-prize winning American economist who designed the gauge in the 1930s, Simon Kuznets, did not mean it to be an indicator of a nation’s overall well-being but that’s how it came to be seen widely. According to Stiglitz, this tends to land politicians in a dilemma. Their goal is to boost GDP but they also face demands from citizens for policies that lower GDP, from better security to anti-pollution measures.

Stiglitz chaired a commission, established by French President Sarkozy in 2008, that looked into different ways of measuring prosperity and produced a 300-page report last year that came up with a range of recommendations to measure both well-being and economic output. (The commission did not suggest dropping GDP). When, if and how widely they will be implemented is open to question.

In the meantime, those dissatisfied with GDP as the principal measure can compare its country rankings with the Human Development Index, a gauge that was adopted in 1990 by the United Nations and is compiled from data on life expectancy, education and GDP per person. On the 2009 index (this year’s will be released early in November) neither the U.S. nor China fare well.

The U.S. comes in 13th place (having dropped a slot from 2008) and China at 92nd, out of 182. A long way from the top. (You can contact the author at Debusmann@Reuters)

13 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

“Depending on whose forecasts you believe, China will overtake the United States in 2020, 2035 or 2040 and therefore turn the 21st century into the long-predicted Chinese Century…”

Bernd,
What is exactly the point you’re trying to make here?
How about the experts who think China is just too loaded with potential problems to ever surpass US GDP, or even come close?

Posted by yr2009 | Report as abusive

@yr2009

That would probably fall under his second statement about future predictions having a terrible track record, as was the case for Argentina and Japan. Most economists are naive when it comes to real physical barriers to growth like aging demographics and environmental degration, they look at unsustainable economic growth rates and assume they will continue at or only slightly below those rates almost indefinitely.

Posted by JamesEnam | Report as abusive

@yr2009 Exactly. I think all these long-range forecasts must be taken with a very large dose of salt.

Posted by BDebusmann | Report as abusive

John Robbins who this article refers to has some great writing on the GDP: http://www.johnrobbins.info/blog/gdp-lea ding-us-astray/

You should link to his work.

Posted by thecasualvegan | Report as abusive

[...] economists the world over using an outdated tool to measure economic progress? The Great Debate This entry was posted in Global News and tagged China, Eating, fork, Soup, U.S.. Bookmark the [...]

It would come as a great surprise, if state-monopolized capitalism carried the day. But even if it did, at what price?

Read more about Stamocap here:
http://brainmindinst.blogspot.com/2008/1 2/stamocap.html

Posted by PeterMelzer | Report as abusive

In China, the 10% GDP growth rate comes in this way: the local government upgrades a community by hiring construction company A to tear down the road and assigning construction company B to build a better one; then, due to “lack of forseeing planning”, trenches are dug in the newly built road by company C for TV cables or water pipes that were not laid by company B when the road was remodeled; after that, construction company D is chosen to fill up the trenches and sew the road. A viciously GDP formation cycle is born.

Posted by M82-A1 | Report as abusive

In China we drink soup, not eat it.

If you wanted to create some sort of index that considered the efficiency of how money is spent, you’d immediately run into difficult value judgments. Some Republicans would claim that a vast amount of federal spending is inefficient. I might claim that the money Americans spend on TVs is inefficient.

Economic prowess can’t be meaningfully condensed into a single statistic. GDP gives you a general idea of an economy’s size, and this makes a good starting point.

The HDI is a good measure of standard of living, but doesn’t really tell you anything about economic significance.

Posted by CapitalistBagel | Report as abusive

m82-a1: sounds like what I witnessed in the US for Over 60 years. I never could figure out why those holes were being dug in the highway, 3 months after its completion….
If you haven’t been to China, and I suspect you haven’t, don’t tell us who live here what its like….

Posted by edgyinchina | Report as abusive

How to measure well-being?

Easy.

Count the number of people who want to come INTO your country … and can’t.
Count the number of people who want to LEAVE your county …. and can’t.

hint:, Illegal immigration is NOT a problem for China

Posted by misterliu | Report as abusive

Good article, it is interesting the way statistics are used to produce the answer a society wants to hear.

As for predictions about the future, science fiction novelists always seem better at predicting future technology than scientists, so why would I believe an economists economic predictions.

misterliu it is not quite as simple as count the number who want to come to your country. Most immigrants would rather stay at home but leave home because of financial or political reasons. The country they choose to go to is dependant on many factors but the ability to actually get to the other country is a major factor.

Most of the illegal immigrants in Europe come from either eastern Europe or central Asia. The US gets most of its illegal immigrants from central and south America simply because it is easier to get to than New Zealand.

China also has a problem with illegal immigration from North Korea.

Posted by Sinbad1 | Report as abusive

As a New Yorker, this is how the road are repaved.

Week 1 – close the road. Dig up the road.

Week 4 – Repave the road.

Week 6 – Paint the lines on the road.

All these work will be done by the same union workers that split the job 3 times so they can laze around and get paid 3 times. I travel in many countries, I see a brand new road dug up, repaved and painted over-night.

Posted by sci06298250514 | Report as abusive

What exactly ,other than injured pride, is the problem with 1/3 of the worlds population representing 1/3 of the worlds GDP ,or any other measure for that matter ?
60 years of being a big fish in a small pond has distorted the US view of itself and us other dwellers in the small pond of the US but that is passing.
From what I have seen in the last 9 years in China ,I am glad to say that , whilst life for the majority in China is very hard there are visible changes and visible improvement for the majority , the greatest lifting of people out of poverty in human history or so I am told by US commentators .
Can that be said for the US starting from a dramatically higher base ? I don’t think so !
What is more any attempt to improve the lot of the majority in the US is fought tooth and nail!
Witness health-care . A very strange reaction to a beneficial change !
The US in my view for ,what it is worth, should spend more time and money making it better for it’s citizens rather than trying to make it worse for the citizens of other countries [ are you listening Mr Geithner and your protectionist friends ?] just in order to try and retain an artificial situation whose time has passed.
Look to the future and seek to participate as an equal and not ,as a significant proportion of the world see it , as an irrational, destructive and greedy country.

Posted by battersea2 | Report as abusive

Illegal immigration is not a problem for China [and there is much from Afghanistan in the west , Myanmar in the south ,Mongolia in the north ,to North Korea in the east [via the US and EU] Why ? Because it can absorb them into it’s growing economy .
Illegal immigration is a problem for the US because the economy is growing very slowly cannot absorb the influx of people following their dreams [or should that be illusions] .
Cheap Labour is a good thing unless they are cheapening my labour is the cry across the the “developed” [read privileged ] world !
Get real we all must learn to share and coexist !
Quickly Please !

Posted by battersea2 | Report as abusive