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Why GDP is a 20th Century Measure of a 21st Century Economy

The U.S. Gross Domestic Product (GDP) rose a healthy 3.5 percent in the third quarter, and everything is swell again. Employment and consumer confidence should be rising right behind it. Right?

Maybe not, said Michael Mandel, chief economist at BusinessWeek. Mandell calls the GDP an outdated measure of the economic performance and argues that it relies on factors, like auto sales and construction, that have little to do with a knowledge-based economy.

In effect, government statisticians are trying to track a 21st century bust with 20th century tools. Not only is that distorting the critical data that investors, policymakers, and corporate executives use to evaluate the economy, but it might also be creating a false sense of relief as Americans battle a brutal recession.

A better measure of the new economy would be factors like venture capital funding, product development,  research and development and worker training paid for by companies. Almost all of those have been frozen or cut since 2008 and a GDP based on those factors would still be rising, but more slowly, Mandel said.

U.S. companies spend an enormous amount on worker training—$134 billion worldwide—but they have been cutting back. The drop started in 2008, when employers reduced their per-worker “learning expenditures” by 3.8%, according to the American Society for Training and Development. No data are available for 2009, but “from anecdotal evidence, obviously there’s a lot of cutback,” says Pat Galagan, executive editor of publications.

Ideally, a big burst of training would occur during a period of creative destruction such as this so that people can acquire the skills needed for the jobs of the future. The problem is how to pay for that training, since unemployed people don’t dare spend money on long-term training when they’re worried about short-term survival.

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