Is The State of the USA designed to replace GDP as the primary measure of economic performance?

Case Study 6.1: GDP and The State of the USA

GDP estimates have been refi ned for decades and are arguably the most complex data aggregation effort in the
world. But they have their limits, as discussed already, and they have their critics. One criticism is that GDP leaves
out much of what’s going on in the nation—with health care, the environment, the family, energy use, and so on.
One challenge to GDP as the primary indicator of national progress is coming from a nonprofi t group that has
developed a Web site to bring together hundreds of indicators. The idea is to help Americans assess the progress of
the United States by using quality data selected by experts.
First, a little background. In 2003, a team at the U.S. Government Accountability Offi ce, the investigative arm of Congress, wa
s looking for
alternatives to GDP to assess national progress. The team became an independent nonprofi t agency in 2007 and took the name “The
State
of the USA.” With startup funding from the Gates, Hewlett, MacArthur, and Rockefeller foundations, the group set out to identif
y data that
would amount to a report card on how the country is doing in specifi c areas—such as health care, education, the environment, sa
fety, energy,
transportation, the economy, the family, and so forth. The goal is to help citizens and leaders assess what progress has been m
ade and where
we need to improve.
The effort got a big boost from a small provision in the massive 2010 health care bill that requires Congress to help fi nance a
nd oversee
a “key national indicator system.” State of the USA will become that system, overseen by the National Academy of Sciences, a gr
oup of pre-
eminent scholars established by Abraham Lincoln in 1863 to “investigate, examine, experiment, and report upon any subject of sc
ience or art”
whenever called upon to do so by any department of the government (half the 20 economists in the National Academy are Nobel lau
reates).
Along with the federal authorization came federal funding totaling $70 million between 2010 and 2018.
The objective is not so much to replace GDP as the primary measure of economic performance, but to broaden the conversation and
the
debate by including many more data series. Instead of just having one gauge on the dashboard, GDP, there would be many gauges.
The State
of the USA Web site went live in 2010, and is accessible for free. Eventually, The State of the USA plans to offer about 300 in
dicators. Rather
than develop original data, the site compiles and displays data gathered by others. Despite the number of data series, the grou
p says the site
will be selective, not encyclopedic. For example, in health care alone the government collects about 1,000 different measures.
The State of
the USA offers what they claim are the 20 most crucial health care measures. The group says its objective is not to interpret t
he data but to
disseminate it in a strictly nonpartisan manner.
The idea is to offer data in a form that can be easily shared to promote as wide a distribution as possible. Data will be avail
able on the
national level, state level, and as far down the jurisdictional chain as possible. For example, one of the 20 health care measu
res reports smok-
ing rates by state (West Virginia is the highest and Utah is the lowest). The State of the USA will also offer a variety of int
eractive features to
encourage exploration, such as motion charts with audio tutorials focusing on health costs and outcomes for the developed world
. Check out
the site and see what you think.
SOURCES:
Jon Gertner, “The Rise and Fall of the G.D.P.”
New York Times
, 10 May 2010; and The State of the USA site at http://www.stateoftheusa.org/.
QUESTION
1. Is The State of the USA designed to replace GDP as the primary measure of economic performance?
Case Study 6.2: Price Check on Aisle 2
The U.S. economy is one of the most dynamic in the world, marked by rapid technological change. The Bureau of Labor Statistics
(BLS), the
government agency that calculates the CPI each month, employs dozens of economists to analyze the impact of any quality changes
to prod-
ucts in the CPI market basket. Each month 400 data collectors visit stores to record about 85,000 prices for 211 item categorie
s in the CPI
basket. About a week before the CPI is released, the BLS offi ce is locked down with bright red “restricted area” signs on all t
he doors. A total of
90 people, including product specialists and the other economists working on the CPI, compute the basic indexes in each categor
y. Results are
released at 8:30
A
.
M
., Eastern Time, about two weeks after the end of the month in question. This release is a big deal.
Most price adjustments are straightforward. For example, if a candy bar shrinks 10 percent but still sells for the same price,
the CPI shows
this as a 10 percent price increase. But sometimes a product changed in a more complicated way. Economists at BLS specialize in
particular
products, such as televisions, automobiles, kitchen appliances, and so on. One of their greatest challenges is to identify subs
titutes for products
that are no longer available on the market. For example, data collectors fi nd the model of TV they priced the previous month is
missing about
one-fi fth of the time. When a particular product is missing, a four-page checklist of features such as screen size and the type
of remote control
guides the data collector to the nearest comparable model. That price is reported and the product specialist in Washington must
then decide
whether it’s an acceptable substitute.
For example, the TV specialist decided that the newer version of the 27-inch model had some important improvements, including a
fl at
screen. A complex computer model estimated that the improvements alone would be valued by consumers as worth $135 more. After f
actoring
improvements into the price of the $330 set, the analyst determined that the price of the TV had actually declined 29 percent [
=
135/(330
+
135)]. In another example, the price of a 57-inch TV dropped from $2,239 to $1,910, for an apparent decline of 15 percent. But
on closer
inspection, the analyst found that the new model lacked an HDTV tuner that had been included in the model it replaced. This tun
er would be
valued by consumers at $514. So, instead of declining 15 percent, the price of the 57-inch TV actually rose 11 percent [
=
1,910/(2,239
–
514)].
The TV analyst is applying the
hedonic method
, which breaks down the item under consideration into its characteristics, and then estimates
the dollar value of each characteristic. This is a way of capturing the impact of a change in product quality on any price chan
ge. Otherwise,
price changes would not refl ect the fact that consumers are getting more or less for their money as product features change ove
r time.
SOURCES:
Jon Hilsenrath, “A Deeper Look at the Fed’s Infl ation Debate,”
Wall Street Journal
, 5 April 2010; Javier Hernandez, “Prices of Consumer Goods Hold Steady, Indicating
That Infl ation Is at Bay,”
New York Times
, 18 March 2010; and Mary Kokoski, Keith Waehrer, and Patricia Rosaklis, “Using Hedonic Methods for Quality Adjustment in the C
PI,” U.S.
Bureau of Labor Statistics Working Paper (2000) found at http://www.bls.gov/cpi/cpiaudio.htm.
QUESTION
1. What is the hedonic method and why is it sometimes used to track changes i