The Problem With Gross Domestic Product

We’ve taken Jim Womack to task a few times in the past, but today’s edition of his regular email missive is right on the money.  Of course he speaks from the 50,000 foot view and once again leaves it to the rest of us to add the operational details, but I’ll live with that this time.

Today he wrote about the problems inherent in the Gross Domestic Product statistic.  As he puts it,

GDP simply counts all economic activity in the economy. Any goods produced or services provided that someone paid for is “product.” Thus the surge of growth in on-line and telephone help desks to aid consumers using products they can’t understand how to install, that won’t work with their other products, or that simply won’t turn on, counts as growing domestic product. So does increased spending on recalls of defective products.

Clearly the problem here is that one measure called “product” co-mingles two very different things: value and waste. What we really need is to measure Gross Domestic Value (all of the “product” that actually creates value as perceived by the consumer) and compare this with Gross Domestic Waste (or maybe GDM, for Gross Domestic Muda.) We want the former to grow but we want the latter to shrink.

Obviously this isn’t a problem just with the United States.  In fact,

A recent study by the Chinese government’s environment ministry estimated that of the officially recorded 10% growth in Chinese Gross Domestic Product last year, 3% was actually expended on trying to deal with the environmental damage to human health and agriculture caused by the other 7%! In this case the “internalities,” in the form of the goods and services produced for consumers, are confused with externalities: the burden of their production on the environment. Both are counted as GDP.

Now for the hard part… how do we do it?  Jim’s high-level solutions is presumably intentionally simplistic…

What I propose instead is that Lean Thinkers help others with less vision to see that growth is good but only the growth in value, not the growth in waste. And then I hope we will all re-examine every process we touch to clearly distinguish value from waste. That of course, is just the necessary preparation. The value of the exercise lies in removing the waste, not just counting it.

… re-examine every process we touch to clearly distinguish value from waste.  Those of us in the lean world know that it is common, and almost expected, to remove at least 30% of an activity’s cost during just the first pass value stream analysis.  This statistic is surprisingly consistent, whether it’s building a car, treating a patient, or providing a government service.  Second and third passes can remove additional waste, and we’ve seen processes where almost 90% of the cost can be removed.

The problem, of course, is that the people with the power to make the improvements are usually so immeshed in the activity or process that they cannot analyze it from a detached viewpoint.  Ask any production manager, or government official, to perform his department’s same function with half the resources and they’ll laugh.  The tools are known and proven, but it takes a different perpective from outside the box.  Lean companies do it every day.  Even some lean governments, like Mesa, Arizona and Portland, Oregon, are doing it.

Bob Emiliani penned an article for Superfactory a few months ago titled Lean Government: Crazy Dream or Absolute Necessity in which he discussed some of the waste reduction opportunities in government.  He highlighted the rather spectacular waste reduction achievements of Canada Post, and how the Japanese post office is looking for similar results from its lean and privatization efforts.

About a year ago we also wrote about lean government, and the difference between porkbusting and true waste reduction.  The post quoted from one of my favorite non-partisan economic analysis blogs, The Skeptical Optimist.

When we “cut” the budget (as a % of GDP) without changing the processes, incentives, and controls in budget making and money spending, the guaranteed result will be “less of the same.”  Alternatively, if we effectively reform the government’s processes, measures, controls, and accountabilities, we’ll get better results from the same level of spending.

Welcome to value stream analysis.  Lean companies have seen the rewards.  The military has been doing a great job with rather spectacular savings.  A few pockets of government here and there.  But the enormous size of the government also creates an enormous opportunity.  Imagine what a 30% savings across the federal budget would mean… and what could be done with it (both increased services and giving it back to the people to invest).

Something to think about the next time some politician insists that taxes must go up, or a bond measure must be passed.