Published in the National Post on May 22, 2015
By William Robson
William Robson is president and CEO of the C. D. Howe Institute.
Economists may not be known for sartorial style, but they do have their fads. Influential ones, too — affecting our lives and livelihoods more than ups and downs in hemlines or the changing width of lapels. Among the more durable economic fashions has been the habit of measuring the national economy using flows of activity: GDP and related indicators.
GDP has its uses. But it’s time the economic paparazzi directed their cameras at GDP’s counterpart, used to measure the country’s stock of wealth: Canada’s national balance sheet. Though far from complete, it addresses such key questions as the sustainability of our living standards and the prospects for today’s youngsters when they grow up — the stuff we really want to know.
Accounting offers a useful parallel — and not just because it’s another profession that rarely makes the glamour magazines. Businesses have flow measures: statements of income and expenditure over an interval of time. And stock measures: balance sheets that net liabilities against assets to calculate net worth. The two measures complement each other: income statements explain changes in net worth. At different times, though, one or the other tends to be more in vogue.
The balance sheet was first on the scene. Double-entry book-keeping was mainly about measuring stocks. Think of a 14th-century merchant tallying inventories of cash and spices to monitor the liquidity and solvency of the enterprise.
Over time, the insights from measuring flows — revenue and expenditure, profits and losses — gained followers for the income statement. By the second half of the 20th century, it was all the rage. Its devotees disliked the “noise” of fluctuating asset and liability values on balance sheets. The view of continuing operations in an income statement, they said, gave a clearer signal of a business’s health.
Lately, though, the balance sheet has been trending. Recent decades — notably the 2008 crisis — yielded many examples of healthy-looking income statements accompanied by what turned out to be unmanageable bonds, pension promises and contingent payments. The balance sheet has won new fans.
What about measuring national economies? Censuses and other efforts to measure stocks of wealth at that level also go back centuries. By the time statisticians undertook comprehensive economic measurement in the 1930s and 1940s, however, contemporary concerns put the spotlight on flows of income, spending and output — hence the GDP and other flow indicators that still dominate the headlines.
They are popular for a reason: the pace of activity does matter. On a national scale, rising output and incomes mean more resources — to enjoy as food, clothing, medicine and other good things now, or to save and invest in capital to produce more good things later. Since the pace of activity relative to the economy’s productive capacity affects inflation, moreover, central banks watch it when setting monetary policy — which means that the myriad avid followers of trends in interest rates and exchange rates watch it too.
But the pace of activity is not all that matters. We know that GDP alone does not measure wellbeing. It is such a star, though, that we often treat it that way. Putting so much focus on activity distorts our thoughts, and our actions.
Take an economic impact study — the sort of infrastructure project evaluation, for instance, that regularly shows up in the news. It typically tallies as “benefits” the resources — labour, materials and so on — the project will use up. Those aren’t benefits — they’re costs! A balance sheet makes clear what goes on which side of the ledger, and that only a net increase in productive capacity can justify a project.
A more extreme example is the notion that wars are good for the economy. They do indeed stimulate activity. But if that’s all you measure, you are missing a crucial fact about war. A balance sheet tells it straight: the most important thing wars do is destroy.
Less extreme, but very trendy, is the mislabelling of most government spending as “investment”. Sure, capital spending is. So is some “consumption” spending, such as education that actually adds to the stock of students’ knowledge and skills. But most spending — including sadly, most education spending — is not. Look at flows of activity, and it’s easier to be fooled. Look at stocks of wealth, and you see through the flimflam.
So here’s a call to all the statistical trendsetters — all you accountants and economists. Don’t let GDP have the catwalk to itself. We need the national balance-sheet accounts up there too. Statistics Canada’s quarterly figures on housing, structures, equipment, consumer durables, land, all the rest — we need them to strut their stuff. We also need the annual figures on natural resources. Stats Can has environmental measures; bring them on, as well!
Ultimately, we want to assess our most important asset: our knowledge, skills and aptitudes — that is, our human capital. That’s the information that will help us see if Canadians are adding capacity to produce food, clothing, medicine — all the good things we want — now and in the future.
As it happens, the wealth data Statistics Canada already produces suggests we are. National net worth per Canadian stood at $231,500 at the end of 2014 — up more than 5 percent on the year, and more than 30 percent since 2009. The figures for the first quarter of 2015 will be out June 12th. Don’t miss them! Good or bad, the story they tell matters at least as much as the current quarter’s GDP.
GDP is so twentieth century. Trust me: national net worth is the Next Big Thing.
