Stephen C. Sexauer is the San Diego County Employees Retirement Association (SDCERA)’s chief investment officer and oversees SDCERA’s $13 billion Trust Fund, investment team, and investment consultants. Between 1980 and 2016, per capita income of the wealthiest US citizens more than doubled (at constant 2010 US$), while per capita income of the country’s poorest barely changed. He wrote back, “I am well aware how these are quoted. In the end, the art and science of economic measurement is not at a stand still. The Fed and the Federal government’s emergency response has been rapid, broad-based, and gigantic. Not much is known about Simon’s parents except that his father was a banker and that they had three sons, out of which Simon … His website is www.larrysiegel.org. in 1924, Ph.D. in 1926). They are completely unbiased and uncommonly diligent. Among other unrealistic assumptions, everyone is measured as renting their home! Kuznets was honest about the method’s shortcomings, stating that “the welfare of a nation can scarcely be inferred from a measure of national income.” Still, with nothing else to work with, economists found GNP a vast improvement over the primitive tools they had been using to understand the mystery of the economic collapse. Readers may want to know more about the father of GDP accounting. This sum was called gross national product (GNP), from which GDP was later derived. This situation was partially remedied between 1931 and 1934, in the depths of the Depression, by Simon Kuznets, a Jewish immigrant from Byelorussia, now Belarus, who taught at the University of Pennsylvania. In the Great Depression, real GDP shrank by about 27% from the 1929 top to the 1933 bottom. Laurence B. Siegel is the Gary P. Brinson Director of Research at CFA Institute Research Foundation and an independent consultant. All posts are the opinion of the author. And, for scores of millions of Americans, it meant no work and no income. in 1923, M.A. But they are not intended to calculate the impact of a lockdown. a measure of the value of income generated by the economy. Simon Kuznets was born in Kharkov, Russia, in 1901. The spread of digital technologies combined with alternative data creates opportunities for the implementation of cutting-edge ideas to improve national accounting and GDP measures and governments around the world are already dabbling in these new approaches. So, what is the value of GDP in modern economic systems if it can show us whether an economy is growing faster or slower but not if the basic needs of a country’s population are better met, making people healthier, happier, and yes, more productive?2 Let’s also not lose sight of the fact that a singular focus on GDP risks obscuring pathways to economic and environmental sustainability. Previously, Siegel was director of research in the Investment Division of the Ford Foundation. Simon Kuznets Biographical I was born in Russia in 1901, of Jewish parents, and came to the United States in 1922 to join my father who left Russia for the United States before World War I. in 1923, M.A. In 1922 the family emigrated to the U.S. Four years later he had earned bachelor's, master's and doctor's degrees at … It sells more newspapers — or eyeballs, or whatever is being sold on the internet — by stating quarterly rates of change as annualized ones. The buildings are there, the human capital is there, and most of the financial capital is still there. In general, beyond that point, income growth does little to improve the well-being dimensions we examined. But enough about units of measurement. GDP is Destroying the Planet. In addition to the day-to-day operation of SDCERA’s Investment Division, he also assists SDCERA’s Board with determining the Fund’s investment policies, strategy and asset allocation. 3. The decline in economic activity due to the lockdown is almost certainly much more than 7.5%, yet most of the now-empty jobs and businesses are still there, waiting for the lockdown to end so that measured GDP snaps up about as quickly as it fell — we hope! He headed to Washington to develop the United States’ first official national accounts. The Visual Capitalist collection of labor market data will be very helpful in crafting a plan for gradual reopening of the economy. Because conditions on the ground change much faster than any of these numbers do.3 The novel coronavirus (SARS-CoV-2) and the random, rapidly growing blooms of acute respiratory illness are a true crisis. After World War II brought an end to the Great Depression, Congress took upon itself responsibility for economic well-being, as measured by employment, production, and purchasing power, through the Full Employment Act of 1946. We know, or used to know, some of the people in government agencies who compile these numbers. GDP Is Broken – Meet The Leaders Trying To Fix It. He has authored, edited, or co-edited six CFA Institute Research Foundation monographs as well as the book Fewer, Richer, Greener, published by Wiley. What matters immediately is cash flow until the lockdown ends. Sergey Procopovich, Moscow 1918. We will get through this, but only if the worries we enumerate below do not come to pass. While generally well thought out, these measures are still very crude and imprecise indicators of economic performance and there is a vast literature on their weaknesses, especially unemployment and consumer price measures. Knoema Professional enables experts, analysts, and researchers with a powerful toolkit to find, manipulate, visualize, and export data from Knoema’s global database with our streamlined interface and Workflow Tools. It’s time to retire metrics like GDP. Who knows, maybe it will not be long before every transaction in an economy will be scored good or bad for the economy based on its contribution to building social and natural capital, offering a whole new perspective on economic conditions across our world.2. Why? This has to change. But only now have we come to appreciate the devastating consequences of this growth for the natural capital of the planet and income inequality suffered among populations worldwide, as illustrated in the charts below. A two-week lockdown is like a long, boring vacation, unless you are poor. In fact, no-one has stated this more clearly than Simon Kuznets, the founding father of modern methods of estimating GDP, in his Nobel Prize lecture in 1971. He replied, “No one in the media ever divides by four, ever.” (Our next paper will incorporate some of Ed’s ideas in a more positive light. That’s only a 7.5% contraction in one quarter, a little more than the top-to-bottom contraction in US GDP during the global financial crisis (GFC) of 2007–2009. We often draw inferences then about which are ‘good’ investments and ‘good’ policies by considering their relationships to economic growth (i.e. And, by the way, it’s not moving the needle on the uneven distribution of income either. © 2020 CFA Institute. Instead of a supply-demand mismatch, we now have a massive solvency and liquidity problem that requires a different set of measures. By continuing to use the site, you agree to the use of cookies. Income inequality and (especially) environmental sustainability relative to GDP are entirely different stories. Our free product gives members access to Knoema’s comprehensive data repository to easily search, discover and source information and statistics with Knoema.com, as well as access to limited data in our Workflow Tools in Word and Excel. • Simon Kuznets, “father of modern GDP metrics” "The welfare of a nation can scarcely be inferred from a measurement of national income".-Simon Kuznets on GDP and well-being in 1934. • Robert Kennedy: On GDP “It measures everything, in short, except that which makes life Still, we shouldn't scrap GDP and start over. So the Reuters headline heralds what amounts to the worst news in US history, if it’s taken at face value. “U.S. The benefits of using GDP (for now) greatly outweigh its limitations. 4. They are not stated in misleading units. Simon Kuznets was born on April 30, 1901 in the city of Pinsk, then under the Russian Empire. It is a Gordian Knot that Alexander the Great is not available to cut. In September 2009, the Commission submitted a report with guidelines for the creation of a set of indicators to provide a more comprehensive understanding of economic performance and changes in quality of life.1. Empirical evidence and common sense already tell us that what GDP is not; it is not a holistic measure of national prosperity. Our tools allow individuals and organizations to discover, visualize, and present their data and the world’s data to facilitate better decisions and better outcomes. This contrasts with the usual meaning of “lost jobs” — those rendered unnecessary and unlikely to return due to a change in technology, industry consolidation, or foreign competition. Sadly, these numbers are accurate. People who are unemployed for a long time become demoralized and lose their skillsets. Enter Kuznets. Kuzent’s work was published in the late 1930’s and marked the introduction of “Gross National Product” into standard economic analysis.4, Fast forward to WWII. . Across the pond, Churchill was facing the same question as the Czar during WW1. For correspondence, he can be reached at lbsiegel@uchicago.edu. By 1929, he was working on his doctoral dissertation, seeking to develop economic accounts for the United States following the ideas initially developed by the Czar’s commission.4, Around the same time, the US stock market collapsed and the US government was looking urgently for someone who could define the magnitude of the recession. Prior to joining SDCERA in 2015, Sexauer worked at Allianz Global Investors as CIO, US Multi Asset, of Allianz Global Investors Solutions, managing over $7 billion in multi-asset institutional portfolios and retirement income solutions. During the Great Depression, economists struggled to figure out what was going on. Economist Simon Kuznets is often described as the father of GDP - the man who figured out the deep science behind economic “size”. Why? Rising inequality and environmental constraints on the back of strong economic growth prompted the French government in 2008 to create a special commission on the measurement of economic performance and social progress (CMEPSP), generally referred to as the Stiglitz-Sen-Fitoussi Commission. Our chief worry is that, through bad policies, much of the capital — human, social, and otherwise — that a strong recovery requires will be destroyed. Whew! As a result, downward price spirals feed on themselves and spread more widely instead of being self-limiting. Policymakers must formulate and revise policies and regulations, the consequences of which have potentially life-altering effects on careers, communities, and lives. If you can ... Kuznets was not in favour of using GDP a "measure for well-being". Notify me of follow-up comments by email. We don’t need GDP numbers to know the effect of the lockdown: 45 of our 50 states, and practically all of our trading partners, stopped us from eating at restaurants (and then maybe going to the gym to work it off), having elective surgery for a bum knee, sending our kids to school, or having our teeth cleaned. The cookie settings on this website are set to "allow cookies" to give you the best browsing experience possible. Simon Kuznets: A Russian-American economist and statistician who won the 1971 Nobel Memorial Prize in Economic Sciences for his research on economic growth. The effects of the lockdown are not linear. Can we withstand a loss of two months’ national income? What has been destroyed in this crisis? Others will take longer. Why do we have GDP data in the first place? не́ц, IPA: [sʲɪˈmʲɵn ɐˈbraməvʲɪtɕ kʊzʲˈnʲɛts]; April 30, 1901 – July 8, 1985) was an American economist and statistician who received the 1971 Nobel Memorial Prize in Economic Sciences "for his empirically founded interpretation of economic growth which has … And most often people refer to Simon Kuznets as the father of GDP. (20 March 2020, When Chicago Came to a Stop, Cropped.). A recession transfers ownership of businesses, real estate, etc., from weak hands to strong hands. As technology ushers in changes to global economic and social systems, how are the metrics we have used historically to measure national economic performance, metrics designed primarily for the industrial economies of the early-mid 20th century, holding up? GDP is an imperfect indicator of human well-being at best, and outright misleading at worst. Joseph Stiglitz, November 2019. [00:11:00] But there was a key difference between pre war efforts and what became GDP. Times were good in the United States in 2004. Born in Kharkiv, Russia, Kuznets immigrated to the United States in 1922. Up to a point, GDP does tell us important facts about people's lives, livelihoods and aspirations. So that is not our main worry. And if GDP does dip that far, it will probably come roaring back on a new, faster growth path from that lower level. In the 1930s, millions and millions of able-bodied men and women wanted to work but couldn’t. They are not the problem. It will be faster because of pent-up demand and cheap supply: low oil prices, a large labor force eager to get back to work, and so forth. According to the World Bank, Germany had a per capita, purchasing power adjusted (PPP) GDP of $53,075 in 2018. In fact, Simon Kuznets, the founding father of the system of national accounts that include GDP, explicitly warned against using it this way, writing "The welfare of a nation can scarcely be inferred from a measurement of national income as defined [by the GDP.]" CFA Institute is the global, not-for-profit association of investment professionals that awards the CFA® and CIPM® designations. In other words, knowing that the US GDP per capita was expected to grow by 1.5-1.7 percent in 2019 did not help us to understand how, if at all, this positive growth would change the life of the ordinary American. However, as long as the goal of raising the basic level of well-being remained a priority for policymakers, the use of GDP to measure economic development did not cause alarm. They are (or were) highly paid, so whoever was selling them stuff may be out of work too. Kuznets changed all that. (Kuznets 1934)2. more information Accept. (Business bankruptcies and profoundly impaired tax receipts are the two others, but we haven’t space to address them all here. Let’s check in with what the data show in terms of GDP and well-being, setting aside for a moment income inequality and environmental consequences of growth. Simon S. Kuznets, recipient of the third Nobel Prize in economics, was a pivotal figure in the transformation of economics from a speculative and ideologically driven dis-cipline into an empirically based social science. He has assisted a variety of nonprofit organizations in the role of investment committee chair or member. Even US-based Nobel Laureate Simon Kuznets, the depression-era father of GDP, said in 1934 that “the welfare of a nation can scarcely be inferred from a measure of national income.” The good news is that a robust, simple and effective framework for measuring sustainability already exists. Simon Kuznets, the father of GDP, acknowledged its shortcomings. This means higher taxes and consequently lower after-tax income growth in the future, especially for the young. Simon Kuznets has 33 books on Goodreads with 325 ratings. American economist, researcher, and author, Simon Kuznets (1901-1985) won the Nobel Prize in 1971 for pioneering the use of a nation's gross national product to analyze economic growth. Your email address will not be published. The data show that economic growth in developing and developed countries is absorbing more and more natural resources, depleting natural capital, and polluting the environment. It will be hard for governments to pay back massive new debts, as necessary as they seem to be. ), Tags: Coronavirus, economics, Financial History, GDP, unemployment rate. Siegel received a BA in urban geography and an MBA in finance from the University of Chicago. GDP). Knoema Enterprise empowers teams focused on strategy, market intelligence, and business intelligence by providing their data in context of the world’s data in an easy-to-use secure web portal with powerful analytic, forecasting, and modeling tools. Is the ubiquitous gross domestic product (GDP) measure even steering us in the right direction in an increasingly digital and global economic system? Google will do the rest for you. After that, we need to know how much damage was done — the lost jobs, closed businesses, bankruptcies, failed municipal budgets, shuttered schools and colleges, and all the other aspects of everyday economic life that have been put in suspended animation. In fact, in 1971 Kuznets received the Nobel Prize in economics “for his empirically founded interpretation of economic growth.” But Kuznets was not the first to design a measure for the size of an economy or to estimate GDP at the national level. Dec. 1, 2020. David Dawkins, August 2019. 1:20 Skip to 1 minute and 20 seconds Simon Kuznets, who's often described as the father of GDP, actually was opposed to what we ended up with as GDP. Effectively, the lockdown became a ban on living everyday life. Simon Kuznets was born on April 30, 1901 in the city of Pinsk, then under the Russian Empire. It factors in the difference between the value of total output and the value of the intermediate inputs in the production process. Before that, he served as a managing director at Ibbotson Associates (now Morningstar). They used measures such as railroad car loadings to assess the progress (or retrogression) of the economy, but these metrics were obviously incomplete. measure. For example, if people don’t pay their mortgages, the mortgage system will break down. The work of Simon Kuznets is perhaps best represented in his two-volume work entitled National Income and Its Composition, 1919-1938 (1941). Share with your friends. With these facts in mind, let’s turn to unemployment, one of our three main concerns. (Supply) Throughout the Nice Melancholy, economists struggled to determine what was occurring. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer. Not good, but not the end of the world. Simon Kuznets, the “father” of GDP and winner of the 1971 Nobel Prize in economics. Still, we shouldn’t scrap GDP and start over. This is stands for Gross Domestic Product. Let’s briefly review their histories. Other measures of economic performance and well-being as highlighted in this article are important, yes, but should be considered in addition to GDP, especially while the validity and continuity of these newer measures remains uncertain. Nevertheless, they govern how our elected leaders in Congress and our unelected leaders, like those in the US Federal Reserve, choose to “manage” our economy and dominate our assessment of how well they are serving us. Your email address will not be published. The United States and almost all of our trading partners pulled the emergency brake to stop the spread of the virus and halted a stunningly large swath of everyday life. Kuznets also examined long-term economic growth in 14 Western industrial nations in his book Modern Economic Growth: Rate, Structure, and … Investors must assess economic risk and opportunity to guide their capital allocation decisions. This difference is termed ‘value added’ and is essentially corporate profits, wages and taxes, i.e. Though even then, over such short periods, there is plenty of charitable aid to go around. Both are amazingly imprecise measures of all the commerce transacted across the 3.8 million square miles and 330 million people that constitute the United States and its territories. Nevertheless, the way the GDP is defined today is not something that Kuznets was comfortable with. Over short periods, say quarter to quarter, it is less accurate and more “noisy” because it’s impossible to keep track of all the transactions in an economy as large as that of the United States. Simply because the numbers are bigger — as long as the results aren’t too ridiculous. The US is a classical example of inequality of economic growth. Report by the Commission on the Measurement of Economic Performance and Social Progress. So, how far back do we have to go to find a time in our history when we earned what Germans do now? We asked Edwin Burton, a delightful friend and curmudgeonly senior faculty member at the University of Virginia, why he, too, announced the quarterly GDP change in annualized terms. This idea spread around the world, and GDP became the key measure of progress for more … Volume 29. The combined contributions of economists from Russia, the United States, the United Kingdom, and the United Nations thus laid the foundation for GDP to become the primary measure of a country’s economy in the post Bretton Woods (1944) period. Gross Domestic Product: An Economy’s All. retirement portfolios published in The Financial Analysts Journal, The Institutional Investor Journal of Retirement, and The Retirement Management Journal. Because of the transportation collapse, oil has become absurdly cheap, putting another 150,000 people out of work in the United States. Criticism leveled at GDP is hardly new. A two-month lockdown is a monumental pain in the neck and implies a return to 15-year-old living standards. If you liked this post, don’t forget to subscribe to the Enterprising Investor. But, if our metrics of performance are flawed, so too may be the inferences and decisions that we draw from them.1. The first attempts were attempts to measure economic welfare, and what we ended up with GDP was a measurement of economic production, or expenditure, and they're related but they're different things. In the timeless words of the actor Jimmy Stewart as George Bailey in It’s A Wonderful Life: “It means we’re ruined . Our comparison across a broad collection of countries shows that GDP growth is a strong predictor for quality of human capital, labor vulnerability, health status (except countries that become “rich” rapidly due to external factors), and subjective measures such as happiness, at least until per capita income reaches $50,000 (2010 prices). Knoema Acquires Alternative Data Aggregator and Solutions Provider Adaptive Management. For businesses from airlines to multi-generation family-owned stores, it’s the end of the road. A two-year lockdown would send us back to the Dark Ages.5. Simon Kuznets was born in Pinsk in what is now Belarus, but he received his basic education in Kharkov in present-day Ukraine. in 1924, and Ph.D. in 1926. What is … Born in Pinsk, Russia, on April 30, 1901, he received his education In 1921, Kuznets enrolled at Columbia University and got a job at the National Bureau of Economic Research in New York. (It would have helped to go into this crisis with much less accumulated debt from the past.) Simon Smith Kuznets (April 30, 1901 – July 8, 1985) was a Belarusian-American economist, statistician, demographer, and economic historian who won the 1971 Sveriges Riksbank Prize in Economic Sciences in memory of Alfred Nobel "for his empirically founded interpretation of economic growth which has led to new … Compounded over a typical year of 252 trading days, that’s an annual rate of return of +169,305%. To that we’d add the toll in human health exacted by the extreme stress and lack of activity while in confinement. Of course, we should not take it at face value. They worsen at an accelerating rate. 1. Studies on Russian Economic Development. Simon Kuznets, the father of GDP, acknowledged its shortcomings. But economists have known for a long time that GDP is an imperfect measure of the overall well-being of a country. In fact, a note in small print below the headline reads: “This April 8 story corrects to clarify that 30% contraction is the annualized rate.”. It still may not be possible to prevent a short, sharp depression, but these actions will help many avoid bankruptcy and ruin. 5. There is more and more evidence that economic growth is not necessarily a path to improved or sustained well-being. The Fed and Congress have responded to the crisis with unprecedented liquidity and lending programs. Economist Simon Kuznets is widely regarded as the father of the concept of the GDP. Can they really be accurate enough to justify reporting them to one decimal place? But the numbers are almost meaningless for gauging longer-term US prospects, or even the current state of the economy. In this article we will look closer at cross-country panel GDP data and alternative measures of socioeconomic development to analyse whether national accounts are as obsolete as is commonly thought of late.3. So is my audience [of professional economists].” We then asked whether one might divide by four to communicate with a general audience. Simon Kuznets’s most popular book is The Economics Book: Big Ideas Simply Explained. The economist Simon Kuznets is often described as the ‘father of GDP’. We also face physical infrastructure problems. It’s the social capital that is impaired, but only for a while. Simon Kuznets has been listed as a level-5 vital article in People, Social scientists. But even the father of GDP didn't like what it became. But it will not remain there, in good shape, forever. Simon Kuznets was born on April 30, 1901 in the city of Pinsk. Save my name, email, and website in this browser for the next time I comment. The Guardian. Subscribe to Enterprising Investor and receive the weekly email newsletter. . Simon Kuznets was born in Kharkiv, Ukraine, on April 30, 1901; he moved to the United States with his father in 1922.He attended Columbia University and received his B.Sc. We face some financial infrastructure problems. They are a stark assessment of extreme loss in a very short period — and those absorbing the losses are mostly helpless to do anything about it. Simon Kuznets, the father of GDP, acknowledged its shortcomings. Here’s an Alternative. He wanted that it was not a measure of social progress, and he was much more focused on constructing some aggregate that would give governments exactly that measure– how is the economy progressing? And, thanks to the efforts of the UN and other international institutions the methodology behind GDP is accepted and identical across the globe, so that quarterly updates from national governments can continue to serve as important fodder for investors and decision makers. Simon Kuznets, in full Simon Smith Kuznets, (born April 30 [April 17, Old Style], 1901, Kharkov, Ukraine, Russian Empire [now Kharkiv, Ukraine]—died July 8, 1985, Cambridge, Massachusetts, U.S.), Russian-born American economist and statistician who won the 1971 Nobel Prize for Economics, cited “for his empirically founded … GDP measures can capture such relationships — that’s what they were designed to do in the first place! ), The problem for consumers of the news media is that when a story bleeds, it leads. Up to a point, GDP does tell us important facts about people’s lives, livelihoods and aspirations. Blog. Whether we like it or not, for now GDP remains the measure of choice. If you continue to use this website without changing your cookie settings or you click "Accept" below then you are consenting to this. Not much is known about Simon’s parents except that his father was a banker and that they had three sons, out of which Simon was born second. Prior to World War I, measures of GNP were rough guesses, at best. If we have to retrench to 2004 levels of income to defeat the coronavirus, that is not a sacrifice on the scale of what was asked of our grandparents when they had to fight World War II. The comparable figure for the United States was $62,795. Later, he moved with his family to Rovno in Eastern Ukraine. 2. He developed some of the first… He was the second son of the family and his father was a banker. The measures themselves are the problem. To assess how well it was fulfilling this responsibility, Congress dictated that GDP, unemployment, and consumer price measures be used. They don’t measure everything that matters. The data show a clear remarkable acceleration of the global average per capita GDP since the end of the 19th century, rising nearly 5 times globally over the course of the 20th century. But in a depression. Richard Stone, a Royal Air Force officer, leveraged Kuznet’s work to address Churchill’s questions about military and economic tradeoffs and to later lay out a system of national accounts for the United Nations, the very system that became the basis for the Standard National Accounts now used by most countries.4. Even in 1934 in presenting GDP to the US Congress, Kuznets disapproved of its use as a general indication of welfare. Unemployment usually means that people want to work but employers can’t find anything for them to do, or can’t afford to pay them. The Czar, or perhaps it was his advisors, came to a painful realization: investing everything in the military would mean nothing to eat at home. We need to go back further in time and introduce you to Sergey Prokopovich. This is the engine behind the magic of creative destruction, productivity growth, and the bounty of long-term economic progress. They had been cast adrift by a downward economic spiral when the internal functioning of the industrial system and its banks, both private and central, were terribly out of sync.