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CEO of $425 billion money manager nails the big challenge in measuring GDP

The most basic and comprehensive measure of the U.S. economy is gross domestic product, or GDP. It’s a measure followed by investors, economists, and policymakers like the president of the United States.

But GDP may be failing to capture and communicate the impact of technology.

Jim McCaughan, CEO of the $425 billion asset management firm Principal Global Investors, tells Yahoo Finance that new technology has disrupted old industries and made our lives easier, but it could also be driving errors in how we measure our economy.

“[The] implementation of technology has really accelerated in recent years. You have everything from social media to WiFi to artificial intelligence, machine learning, automation. Those trends have really increased and are having a very big effect on the economy,” McCaughan says. “If you think about what they do, they tend to make things cheaper and function better.”

Technology is enabling businesses and consumers to do a lot more, which seems intuitive. However, we’re able to do a lot more but also at a lower cost. This complicates metrics like GDP because they are measured in dollars.

Principal Global Investors CEO Jim McCaughan. REUTERS/Kim Kyung-Hoon

More specifically, technology is making workers more productive than recognized, argues McCaughan. It’s also making it so the economy can function with less capital. In other words, technology is deflationary, he argues.

Fewer visits to the mechanic isn’t a bad thing

McCaughan pointed out that collision-mitigation technology in cars helps the car owner avoid trips to the mechanic because they’re less likely to bump into something. If car owners make fewer trips to auto repair shops that can impact GDP even though the cost of car ownership has come down.

“That’s reflected in something called the GDP deflator, which is really intended by economists to really recognize the inflation and deflation in the economy. I would argue that’s got a bit wonky in recent years just because the pace of accelerated change is not being properly reflected.”

McCaughan thinks that there’s a bit more deflation in the economy than people expect.

“Nominal gross domestic product [or real GDP plus inflation] is easily measurable — it’s pretty objective,” he says. “If there is more deflation in the economy than people realize, then perhaps real growth is a bit faster than the reported numbers and maybe this whole argument that growth is too slow is actually a little futile. And if we try to accelerate growth through policy making that actually might just lead to supply constraints in the economy rather than to that faster growth.”

Right now, economists aren’t properly factoring technology into their models, he says.

“I know both economists and technology people, but they tend to think in their own box,” McCaughan says. “Economists have their economic econometric models, which define how in their mind the economy works. Technology people are very good on systems, innovation, new techniques, but… if they don’t talk to each other, then the two areas don’t actually see how much change is going on in the other.”

Technology’s misunderstood impact on GDP and the economy is not news. However, the nuanced discussion has gotten little attention, perhaps due to the challenges of communicating it. It’s a whole lot easier to just look at the headline GDP number and be done with it.

Don’t make unwarranted policies based on misunderstood numbers

The biggest mistake right now is that business leaders, economists, and policymakers are underestimating the impact of technology. He pointed that technology is what’s really led to the rise of populism around the world, not the threat of foreign competitors taking away jobs.

What worries McCaughan is if the economic measures don’t reflect the reality of the underlying economy, it might lead to policymakers taking action when it’s not warranted, or vice versa.

Americans are used to hearing about 3% trend GDP growth. And even the president of the United States has talked about aiming for 4% GDP growth or greater.

But as McCaughan suggests, a lower pace of GDP growth may be fine depending on what’s driving the measure.

In fact, he thinks that 2% economic growth with relatively modest capital investment is “actually a pretty good place” to be long term.

Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter.