Redefining measurement could distract from negatives

By DAVID MOON, Moon Capital Management, LLC
October 4, 2009

French President Nicolas Sarkozy recently commissioned a report by Nobel Prize-winning economist Joseph Stiglitz to evaluate the effectiveness of Gross Domestic Product as a measure of economic activity. GDP measures market production – that is, the value of all of the things produced in a country during a given period.

The Sarkozy/Stigliz report concluded that a better measure of economic activity should include measures of “personal activities,” “social connections” and other subjective quality-of-life items.

Is anyone surprised that a Frenchman would suggest that you should get bonus points on your GDP if you only work 32 hours a week or take 8 weeks vacation each year?

And if you have two glasses of wine and a baguette at lunch every day with lots of friends, you’re in the French Fortune 500 of economic production.

Within two weeks of a Frenchman suggesting that the world redefine its definition of economic activity, Libya’s Muammar Gaddafi was joined by Venezuela’s Hugo Chavez in urging the world to redefine “terrorism.”

Any day now, I expect the National Association of Fat People to call on the medical community to redefine obese.

When someone wants to change the way things are measured, examine their motives. Sometimes, as in the case with Gadaffi, Sarkozy and your fat aunt, it’s obvious.

It was obvious when Alan Greenspan and Michael Boskin (chief economist for Bush the elder) wanted to redefine the way the Consumer Price Index was calculated in the early 1990s. The new definition had the effect of lowering monthly Social Security payments.

Often we see it on Wall Street. Businesses are typically valued on the basis of their earnings or assets. That’s how most of us would buy/sell a rental house or any small business. But if you don’t like the outcome such mundane valuation measures yield, simply change the way you define value.

In the late 1990s, the new economy businesses didn’t have earnings. Earnings were so passé. Stock promoters argued that companies should be valued as a multiple of their revenues, not earnings. The earnings would eventually come.

But some businesses didn’t even have revenues. (Think Twitter.) So stock promoters redefined value again – this time basing it on things like “eyeballs.” Each set of eyeballs was worth $100 million, or something similarly ridiculous.

It’s not just empty Internet-type companies and Libyan terrorists that play these word games. When real companies with real earnings are embarrassed about something or would prefer to deflect investor attention away from something unflattering, they often point to pro forma earnings or cash flow.

That is, this is what our earnings would be if we hadn’t lost a bunch of money in this area we’re trying to forget about.

By the way, this week the World Health Organization reported that the suicide rate among men is 50 percent higher in France than in the U.S. Psychiatrist and researcher Dr. Marie-France Hirigoyen blames job-related anxiety for the high rate among French workers.

Sarkozy may want Stiglitz to do some work on that report.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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