Gross domestic product, the total value of a country’s goods and services, was a barely adequate tool for measuring the U.S. economy of the 20th century.
GDP has now become obsolete and needs to be upgraded for the needs of our time. It was never a great measure of national well-being in the first place, and now it’s falling down as a measure of economic strength.
We need a more honest accounting of how the economy is working for people. We need data not only on aggregate supply and demand, but also information on activity that takes place outside of the traditional markets that GDP concentrates on. We also need to take account of inequality, sustainability and overall well-being.
GDP covers none of those.
But there are efforts under way in the United States and around the globe to tweak, improve or completely overhaul the way we measure our economy to better reflect the well-being of the people and the planet.
Someday soon, maybe we’ll get a report that tells us output slowed modestly, offset by a more equal distribution of income and a decrease in opioid addiction.
Someday soon, maybe we’ll get a report that tells us output slowed modestly, offset by a more equal distribution of income and a decrease in opioid addiction.
Robert F. Kennedy put his finger on the inadequacy of gross domestic product in his March 1968 speech in Lawrence, Kan.: GDP “counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage,” he said.
And yet, Kennedy continued, GDP “does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything, in short, except that which makes life worthwhile.”
As far as GDP is concerned, the only things that have any value are those things that can fetch a price.
How GDP was started
The faults of GDP are a feature, not a bug. Gross national product, its precursor, was created by economists in the 1930s and 1940s who knew its weaknesses and strengths, but they did the best they could with what was the state of the art at the time. They had the Great Depression to fight and the Second World War to win, and the best way to do that was to carefully measure the output of every industry and ignore subjective or intangible aspects of the economy.
No one had ever attempted to measure the whole economy before.
After World War II, GNP (and later GDP) was adopted as the official scorecard in the advanced nations for the recovery from war and in the Third World for economic development. In a world impoverished by depression, war and imperialism, growth was the thing that mattered most. GDP enabled us to conceptualize, categorize and count output, consumption, income, investment and inflation.
Growth is still seen as the only thing that matters, even if the fruits of growth are largely reserved for the elites, even if some growth today comes at the expense of investing in the human, physical and intangible capital needed for growth tomorrow, even if growth uses up irreplaceable resources or creates externalities such as pollution, crime and dysfunctional societies.
GDP, in short, is flawed shorthand for our national well-being. GDP does not equal happiness. But it’s the best tool we have. So far.
Too much focus on growth
Why does it matter that GDP is flawed? Because focusing on growth to the exclusion of everything else can change priorities.
“Economic policies are justified, or lobbied for, on the basis of whether they will increase GDP growth,” economists Diane Coyle of the U.K. and Benjamin Mitra-Kahn of Australia wrote in “Making the Future Count.” The 2017 paper won the Indigo Prize, a competition that challenges economists to consider how to measure economic activity in a 21st-century economy.
Think for a moment of how Donald Trump talks about the economy. He’s big on GDP, the unemployment rate and the stock market, and he rarely speaks about wages, the environment or economic mobility.
The recent U.S. tax cut, for instance, was sold almost entirely on the promise, however implausible, that it would boost GDP. But the benefits of the tax cut went almost entirely to the richest sliver of our economy, and there was little discussion about whether it would improve the well-being of the typical American.
It was just assumed that growth was all that mattered, as if a rising tide really did lift all boats.
The emphasis on the growth that might come over the next few years obscured the costs (and perhaps the true intent) of the tax cut. It worsened inequality and created a mountain of public debt that might, in the long run, outweigh all the good that cutting taxes was supposed to do. Is it worth it to raise GDP by a few tenths of a percentage point for a couple of years if it means that income security for tens of millions of Americans is undermined for decades to come?
“It is the GDP figure that has the moral weight in policy debates,” Coyle and Mitra-Kahn wrote.
Reflecting reality — or not
Politicians and voters have begun to notice a disconnect between the official economic statistics and the public’s well-being.
Trump capitalized on the anxiety of white working-class voters who felt left behind by the sluggish recovery from the Great Recession. During Barack Obama’s tenure in the White House, Obama’s critics complained that the “real” unemployment rate wasn’t the 5% or 6% officially reported at the time but actually 20% or maybe even 42%. They said 90 million people were unable to find work.
It was a crass misrepresentation, of course, but it felt right to a lot of people who knew that the official statistics weren’t capturing the truth of their lives.
Now, of course, Trump and the Republicans insist everything is fixed. Now, it’s the Democrats’ turn to point out the obvious fact that a low unemployment rate or a high GDP growth rate doesn’t guarantee that the typical American’s life is any better. Real GDP may be up 29% since 2000, but real median household incomes are up just 2.2%, even as the costs of a middle-class lifestyle keep rising faster than inflation.
In August, Democratic Sens. Chuck Schumer of New York and Martin Heinrich of New Mexico introduced a bill that would require the Bureau of Economic Analysis, which provides official macroeconomic and industry statistics including GDP, to measure and report on how national income is distributed among the poor, the middle class and the rich.
“It is not enough to know how rapidly the economy is growing,” said Heather Boushey, executive director and chief economist for the Washington Center for Equitable Growth, which helped design Schumer and Heinrich’s proposal. “Americans want and need to know how the economy is performing for people like them.”
GDP and wages decouple
For a long time — from the 1940s into the 1970s — GDP and wages grew at similar rates. But since then, wage gains for typical workers have fallen behind GDP growth. More of the benefits of growth have been captured by the wealthy, particularly the top 1%.
Since Trump took office, real GDP has risen at a 2.7% annual rate, but average real hourly wages have risen only 0.5% a year. It’s hard to tell people who are barely keeping ahead of inflation that this economy is the best ever.
Despite its obvious political appeal, Schumer and Heinrich’s proposal for a distributional GDP isn’t going anywhere soon. There’s institutional inertia against change. It’s also a political issue because it would reveal that the economic policies favored in Washington aren’t working for average Americans.
There are other proposals by academics and multinational institutions that would change the way we measure the economy even more dramatically.
‘Happiness’ indicator
For instance, in the tiny kingdom of Bhutan, between India and China, the government tracks a “gross national happiness” indicator, with the idea that improving civic participation, health, education or the environment does more for the average citizen’s happiness than a boost in, say, steel output. The index has been formally measured only twice: in 2010 and in 2015. But the concept has spread globally.
There have been many attempts to measure what matters. There’s the Happy Planet Index, the United Nations’ Human Development Index, the Legatum Prosperity Index, different versions of a so-called genuine progress indicator, the Organisation for Economic Co-operation and Development’s well-being indicators and others.
Most of them suffer from the same flaw: They add apples and oranges. In attempting to produce a single index number that can be compared across countries and time, they arbitrarily assign weights to the different components to create a recipe for well-being: two cups of growth, one cup of inequality, two tablespoons of happiness.
Changing the weights assigned to each component would produce a completely different answer. The 2016 Happy Planet Index, for instance, ranks Mexico second and the United States 108th in the world, as the U.S. suffers from a high “ecological footprint” — it’s a polluter nation. But the 2018 Human Development Index puts the United States in 13th place and Mexico in 74th, owing to a high gross national income per capita for U.S. residents. Which one you believe depends on what you value most.
It’s an issue that’s plagued economists for nearly 300 years. Jeremy Bentham, an early political economist born in 1748, based his philosophy of utilitarianism around what would give the most people happiness. But economists despaired of ever being able to meaningfully compare one person’s happiness with another’s. They moved away from trying to measure happiness directly and concentrated on studying how people maximized their happiness in market transactions, which reflect real-world constraints on resources.
Dashboard approach
The alternative to constructing a single index number is to use the dashboard approach, much like a car has separate gauges for speed, fuel supply, engine temperature, miles traveled and oil pressure. This approach may be more robust, but the public hasn’t embraced these sorts of dashboards in economics. People, even sophisticated policy makers, seem to prefer a simple answer.
Janet Yellen, after taking the helm of the Federal Reserve in 2014, started a labor-market dashboard because the central bank didn’t think the regular unemployment rate was good enough. It may have been a useful tool inside the Fed, but it failed as a way to communicate the complexities of the labor market to the public.
The Doyle and Mitra-Kahn paper “Making the Future Count” entered for the 2017 Indigo Prize argued for a dashboard approach. A seven-person team led by Carol Corrado of the Conference Board in New York and Jonathan Haskel of the Imperial College Business School in London shared the prize with Doyle and Mitra-Kahn.
Doyle and Mitra-Kahn based their approach on the work of Nobel Prize winner Amartya Sen, an Indian economist who argued that economic development should be seen in terms of human freedom, with the goal of providing everyone with the capabilities needed to live the kind of life they value. Their dashboard would include six essential assets people need to live a full life, including physical and social resources.
Unified index
But Corrado and her team took the opposite approach, attempting to do what’s always been considered impossible: to create a unified index of well-being by putting a price on everything we value, including clean skies and happy homes. They advocate extending GDP to cover intangible and environmental capital, leisure and security.
To create an index that’s not entirely subjective, Corrado and Haskel would assign prices to nonmarket production and to dimensions of well-being, such as life expectancy, education, health, the environment, social interactions and creativity.
This is very difficult. How do we assign prices to clean air, or having friends on Facebook, or good government?
One way is to ask people how much they would be willing to pay for these things, as if there were a market. “In the era of the internet, we can cheaply reach many people (if they are online) and ask them,” Corrado and Haskel write.
For instance, a recent study found that people value a month of Facebook FB, -0.56% at about $14, a month of “free” email at $500 and a month of search engines at $1,300. To check whether people were lying or fooling themselves, a few were actually offered the amount they said they would require to give up these digital goods.
The same could be done for other things that we value but that don’t have a price.
“We believe this approach is appealing in that asking people to vote with real money is likely to yield useful measures rather than constructing indexes or dashboards with an arbitrary collection of elements and weights,” Corrado and her team write.
Growth fetishism
The point of this exercise is to move away from what Nobel Prize–winning economist Joseph Stiglitz calls “growth fetishism” and to think about what kind of economy would develop human freedom.
In coming years, when robots could take most jobs and when the bare necessities of life could be provided to everyone with little human effort, GDP would be further divorced from the reality of our lives, particularly if a small number of large corporations owned all the robots, as seems likely.
In such a world, we’d want to put a higher value on the things that make life worth living, rather than on production and consumption of material goods. If we want to maximize human development and freedom, we’d need a way to measure what we value most.
Which kind of world do we prefer: one where we live in order to work, or one where we work in order to live? Do we value human lives only as much as they produce and consume? Or do we put people first?
Rex Nutting is a commentary editor and columnist at MarketWatch.
