Letters to the Editor: What's in a GDP? A Recipe for Clarity
Your concerns regarding the upcoming revisions of GDP (Intrinsic Value column: "New Recipe for the GDP Leaves Sour Taste," Dec. 21) merit a response.</br></br>All economists understand that we now measure goods and services using a historical (read "antiquated") benchmark year, which overstates output. Commerce's Bureau of Economic Analysis updates this benchmark every five years to correct this tendency. It's this standard, periodic "rebenchmarking" that produces the imminent revisions to GDP that you find controversial. You confuse these with a new methodology that does away with the "benchmark" method and its attendant problems. In reality, our new method won't significantly affect the estimates of recent growth, but it will reduce the need for future rewrites of economic history. That's why it's widely supported among economists.</br></br>Users will still be provided with a dollar value for GDP while getting more accurate estimates of growth rates for both GDP and its components. And your concern that GDP's components won't add up to the total is overstated. The "adding up" error will be a few hundredths of a percentage point. Contrast that to the revisions of half a percentage point or more that the new system will obviate.</br></br>You point to a second widely known problem in the data: that they don't reflect the apparent improved quality or convenience of many goods and services. Correcting for "quality changes" requires a good-by-good, industry-by-industry analysis. If credible numbers existed for these effects, then we'd be using them, but they don't -- yet. In fact, the first stage of the Bureau of Economic Analysis's program to make these adjustments will be released this summer. But we're limited by resources: President Clinton's 1996 budget produced adequate funding for this task that was stripped on the Senate floor.</br></br>In essence, you argue that fixing the first problem in our data is inappropriate unless the second is fixed as well. But the alternative -- postponing this revision until the quality measurement problem was "solved" -- is a bad idea. To do so, as Morgan Stanley's Steve Roach suggests, assumes that the two sources of errors in GDP estimates are offsetting in magnitude when, in truth, we don't know. In essence, postponing this revision means feeding financial markets a guess as to how our output has changed, one that would have to be revised regardless once real answers were available.