Brave new math.

Author:Marber, Peter
Position:ESSAY: METRICS
 
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In 1968, at age 56, my grandfather had a heart attack. It surprised a lot of people. With a full head of hair, he was thin, youthful looking, and rarely sick. He received standard patient treatment for the time--prolonged bed rest and morphine. When he recovered, he continued his pre-attack lifestyle which included smoking, almost no exercise, and a diet of meat, potatoes, and my grandmother's cream pastries. Five years later, he was dead, the result of another heart attack.

Had my grandfather been born a quarter century later, he surely would have lived longer than 61 years. Scientific advances in the last 40 years have greatly improved the prevention, diagnosis, and treatment of heart disease both in the United States and abroad. In the 1960s, the chance of dying within days of a heart attack was almost 40 percent in the U.S. By the 1970s, it dropped to 25 percent, and in the 90s, it fell to under 10 percent. Today, it's about 6 percent. The field of medicine has advanced to provide us with early detection of heart disease, statins that reduce bad cholesterol, advanced coronary angiography to diagnose potential blockages, and reliable bypass surgery. We know that diet, exercise, and healthy lifestyle choices can also reduce heart disease risks, and new research continues to improve prevention and treatments.

In some respects, the fields of medicine and economics have much in common. Both are multidisciplinary fields that strive to improve and maintain the health of complex systems. But unlike medicine, economics hasn't progressed much in the last 40 years. In late 2008, the United States and many other countries suffered a major economic heart attack that might have been prevented by better diagnostics. Today, more than three years later, societies on every continent appear to be recovering, though many still face the threat of relapse. The reason so much of the world is on edge, with many countries still on life-support, is that governments have simply been prescribing the equivalent of economic bed rest and morphine (low interest rates and some fiscal stimulus) without any significant lifestyle changes.

Yet there are better, more sophisticated treatments that should be prescribed--new sets of statistical indicators to help monitor economic health, as well as fresh policies based on new numbers that can help diagnose and treat these ailments to the principal organs of our fiscal well-being. Traditional measures point to an American economy that's up even when Americans are feeling down. Across Europe and in Japan, there is also a sense of confusion over current economic directions--a universal sense that the numbers that have been our staples are increasingly meaningless to everyday people.

Newspapers, radio, and television routinely spout headlines about key statistics on GDP, inflation, and employment--astonishingly influential indicators computed in the United States by the government's Bureau of Labor Statistics and in capitals around the world. Most seem to have little correlation with the realities on the street. Yet, governments, businesses, and individuals still use these yardsticks in their decision-making worldwide, and minor revisions in the data can have major ramifications. Inflation measurements help determine mortgage and savings rates, stock market prices, interest payments on the national debt, and cost-of-living increases for wages, pensions, and Social Security benefits. Despite dramatic shifts in the world over the last few decades, we are still using the same old gauges, nomenclature, and policies of the past. These outmoded statistics skew perceptions, leaving us with a distorted worldview and a shaky foundation as a base for policy. If we can't accurately diagnose the problem, we won't cure it.

BRAVE NEW WORLD

The world of 2012 is so fundamentally different from 30 to 40 years ago that traditional, commonly held economic views and perspectives seem downright quaint today. Economically, the world of the early 1970s was a patchwork of inward-focused economies, with most goods domestically made and sold, together with small quantities of cross-border trade in finished products between 20 or 30 countries. We forget that back then, much of the world operated under some communist or socialist model. Even in the United States, trade comprised less than 10 percent of the economy. The widespread abandonment of socialist and isolationist policies since the mid1980s in favor of global trade and investment--plus new information technologies--has ushered in the first truly global era where goods, services, capital, talent, and ideas move across borders faster than ever before.

Over the last generation or two, the world has been transformed into a complex system of interdependent and constantly changing relationships. Global production and distribution chains link Brazilian iron mines, Greek ships, Chinese steelmakers, German automakers, Wall Street banks, and car dealers in Peoria. Financial markets instantly entangle California pension funds, insurers in Asia, and Cayman Island hedge funds with banks everywhere.

Yet we are still using methods of a simpler past to measure, diagnose, and direct our economy today. The most widely used and closely tracked of such metrics is the Gross Domestic Product, created in the 1930s when congress asked a young University of Pennsylvania economist Simon Kuznets to develop a uniform set of national accounts. The intention was to help government officials get a grasp on Depression-era economic realities. These stats became the prototype of the GDP--the premiere measure of economic wellbeing the world over. GDP, defined as the total market value of all final goods and services produced in a country in a given year, has permanently changed how we look at public policy. There was some genius in Kuznets' simple, easy-to-understand statistic. Previously, economists had rarely been consulted on public policy, but equipped with powerful new statistical tools, they have become the policy authorities of the postwar era.

Even its creator, however, realized the limitations of GDP. In 1934, Kuznets...

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