Dave T.

Since macroeconomic indicators have no physical representation in the natural world, we must admit that their definition ultimately depends on arbitrary human choices. In other words, macroeconomic indicators are fundamentally subjective. Yet, macroeconomic indicators not only form the backbone of contemporary academic economics, they also guide political decisions aimed at making our lives more enjoyable. Remarkably, social scientists have largely neglected this issue, which poses a potential threat to the validity of a vast body of economic literature.

Illustratively, Gross Domestic Product, the most widely used indicator for measuring the economic performance of nations, is calculated by summing up all the monetary transactions in a country. This immediately reveals the myopic nature of GDP, which only accounts for market-based production and, in so doing, completely neglects non-monetary production. Furthermore, GDP does not take into account what kind of goods and services are being produced, nor how these products come into being. Understandably, several critics have argued in favor of developing indicators that take into account currently neglected aspects, varying from environmental degradation to inequality and happiness. Although many of these calls for change are sensible and have found a considerable amount of resonance in public opinion, their actual impact on policy has been small.

The question of “Who or what determines how macroeconomic indicators are defined?” constitutes an issue that has received even less attention. Roughly and briefly, two links must be established in order to answer this question. First, we should establish a link between indicators and political outcomes. That is, for indicators to be of any importance, they must have an effect on political outcomes. Second, we should find a connection between the specific interests of stakeholders and stakeholders’ attempts to manipulate the definition of economic indicators.

Influence of economic indicators

A telling example of the influence of economic indicators can be found in the European debt crisis. In the aftermath of the global financial crisis of 2008, European states – which had agreed that government deficits could not exceed 3 percent of GDP and that government debts could not exceed 60 percent of GDP – saw themselves obliged to cut government spending. In other words, the contraction of GDP forced European states to introduce austerity measures, affecting the life of millions of people. Of course, if Europe would have based its financial policies upon different indicators or would have calculated GDP in a slightly different fashion, political outcomes would have been different.

Even without these kind of political agreements, GDP affects policy. GDP gives a measure of taxable economic activity, which, in turn, determines the potential budgets of which political decision makers dispose. Consequently, when assessing the risk of financing government debts, investors closely watch GDP growth rates. When investors believe that government deficits are too high or GDP growth rates too low, the costs of financing government debt rise, costing states billions of dollars. This, of course, forms an important incentive for states to stimulate GDP growth.

Finally, politicians often refer to the development of unemployment, inflation and economic growth under their command as a means to prove that their policies have been successful. If they want to do so in a credible manner, they need to back these claims up with widely used economic indicators. It seems probable that the general public, hoping that economic growth will improve their overall well-being, is receptive to these claims of success.

Altogether, it seems reasonable to expect policies aimed at bringing down unemployment indicators, stirring up economic growth indicators, and maintaining inflation indicators at acceptable levels. If we take once again GDP as an example, we see that GDP-growth – often the ultimate policy goal – can be achieved in three manners. 1) Redefining the formulas by which GDP is calculated. 2) Encouraging the market to occupy terrain pertaining to the non-market based economy 3) Fostering growth in the number of economic transactions.

Obviously, the redefinition of GDP formulas does not add anything to the amount of economic activity in a country. Still, politicians might be tempted to redefine GDP indicators from time to time as to present a rosier picture of economic reality. If they successfully deceive investors, they might even foster real economic growth through cheap credit. However, it seems likely that changing the yardstick used for evaluating economic policy above all leads to inconsistent policies. Moreover, once investors recognize the scam that has been played upon them, their mistrust will negatively affect economic growth through higher interest rates.

According to the second method, governments are likely to introduce measures aimed at discouraging domestic and communal work and encouraging market-based work. When non-market based economic activity is replaced by market based economic activity, GDP falsely represents a rise in economic activity. By dominating an ever greater number of every-day activities, the market economy swipes away traditional forms of production, bringing about significant cultural change.

The third method seems more desirable since it is the only one that involves real economic growth. But, actually, this may not be as straightforward as it seems. A former teacher of mine once said: “One who takes economic growth as its ultimate goal, is mixing up instruments with objectives.” In other words, economic growth in general does not add much to the well-being of anyone. Further assessment – focusing at environmental costs, social consequences and the exact composition of production – is necessary to evaluate the true desirability of policies.

Who are the stakeholders and how do they manipulate indicators?

As for now, we can only speculate about the politics behind macroeconomic indicators. It is up to us, the next generation of economists, to analyze the political process that leads to the formalization of economic indicators. Two potential research lines follow below.

First, one could study how the transition from GNI to GDP, which took place in the early nineties, was decided upon. Arguably, using GDP as an indicator results in policies with a neoliberal bias. Since, by choosing GDP over GNI, one focuses on the total amount of wealth created in a given economy, rather than on who walks away with this wealth. Think, for instance, about the role the IMF plays when structural adjustment measures force development countries to open up their economies to multinational corporations.

Second, the formulas used to calculate GDP, which exclude both the economic inequality and external costs resulting from economic activity, might serve elite interests. That is, the current definition of GDP leads to policies focused on growth in general, marginalizing the importance of distributive issues. Consequently, GDP might indicate that an economy is growing, whilst the majority of people in that economy do not experience any improvement in their economic position. Similarly, the marginalization of environmental aspects might benefit elites who enjoy the profits generated by polluting industries.

Recap

Two things should be clear by know. First, macroeconomic indicators are not and will never be neutral since they result from human decisions. Second, the indicators we use to assess our policies and the formulas we use to calculate them matter, because indicators shape future policy. Consequently, the specific definition of an indicator will benefit some stakeholders, while it will hurt others. Little is known, however, about the efforts of stakeholders to manipulate indicators to their advantage. This leaves us with a black box full of potential research questions.

So, for all students out there who, despite attending yoga classes, eating super healthy, and reading lots of mindfulness books, still have sleepless nights because they cannot decide upon an interesting thesis topic. Well, here it is! Handed to you on a silver platter by Rostra. It might not be the most conventional topic, and you might need to overcome some resistance along the way. But, is it relevant? Most definitely!