Time to Rethink GDP

What Is It Good for Anyway?

Paul Krugman, in a recent column in the New York Times, called attention to the paradox of the U.S. economy’s astounding growth in the last few years, compared to other developed economies in Europe, or Japan, whom we’ve traditionally considered our “peers.” Does this extremely high growth rate of GDP really mean anything substantive about the true state of the American economy, and society?

Krugman concedes that it may mean something, but not as much as the mainstream media thinks. GDP (Gross Domestic Product) is the total value (yes, in $!) of everything produced or sold in the country over a specified period (usually quarterly or annual). Growth of GDP is how much that value increases (in real terms, after inflation) from the previous period. Lately, our GDP growth rate has been demolishing the rates of any EU countries, UK, or Japan. Krugman mostly dismisses the discrepancy as demographic – U.S. population of working age is growing much faster than those other countries. But there are probably some other factors, too: e.g., American productivity (output per worker hour) is somewhat higher than those peer countries.

His real point is that GDP growth DOES NOT MEASURE many of the things that contribute to happiness in a society. American life expectancy, for instance, has been falling – in those other developed economies it is increasing. Inequality (measured by the Gini Coefficient) in the U.S. is greater than most of those other countries – implying most of the gains in output and productivity may be concentrated in a few individuals!

And, most of all, Americans DO NOT describe themselves as happier than in previous times they think they remember. Even if “richer,” their wealth does not seem to bring happiness.

Is there any way we could generate data that would reliably reflect societal happiness? We usually say no, happiness is far too subjective to tabulate via surveys or other methods. That hasn’t stopped some organizations from trying to develop such measures, however. The dearth of economists accepting these instruments is likely due to a bias in academia. The cause of that bias could be the funding coming from interests who DO benefit from dollar-denominated growth numbers; i.e., Investors and corporations’ stockholders. But let’s look at some of these indices anyway.

There may be more, but three noteworthy attempts to measure social well-being over time – beyond GDP accounts – are:

1. The United Nations Human Development Index (HDI), which tabulates a variety of statistical artifacts from all countries regarding health (life expectancy at birth), education (expected and mean years of schooling), and standard of living (economic, “gross national income per capita”). It does not measure inequality, social connectedness, or contentment per se.
2. The Genuine Progress Indicator (GPI) from an international non-profit organization known as Gross National Happiness (in the United States, GNHUSA) – which began in Bhutan 50 years ago. This index is very complex, trying to measure social and psychological factors missed by both economic GDP calculations and the somewhat more comprehensive UN HDI. It is probably best thought of as a fringe instrument – not widely acknowledged as authoritative (yet!). But economic factors like capital investment and public service spending do contribute to its scoring of various countries and U.S. states.
3. The Happy Planet Index (HPI) has an orientation toward sustainability and environmental concerns. It has been putting together statistics from countries around the world since 2006. Its history is shorter than either the United Nations measures or GPI, but it, too, combines economic, life expectancy, and ecological measures into its rankings. No surprise, but the U.S., ranking 12^th out of 152 countries scored in GDP per capita, ranks 145^th in its “ecological footprint.” But we knew this already, right?

Some might say that the only reason for developing measures of well-being beyond the crass dollar figures of GDP is to make those who aren’t benefiting financially in a society feel less bad about their situation – if they score higher in other factors. Yet, it seems to this writer that accumulation of wealth, and an ever-growing rate of that accumulation, ultimately does have limited bearing on happiness. Acceptance of that fact has caused the United Nations Development Reports to use a logarithmic scale in their HDI for Gross National Income (GNI) per capita – they are acknowledging that beyond a certain level of income, further increases become less consequential. Perhaps that line of reasoning should apply to the aggregate of ALL economic activity for a nation? Is GDP growth really that meaningful? For investors, certainly – but for ordinary folks, even in the U.S., perhaps not so much.

It seems that, for the public good, we should focus more on measures of happiness for the common person, family, child, or grandparent, not reflected in GDP growth. The primary issue ought to be how we are doing as a society, in relation to the rest of the world. And to take the broader global perspective of HPI, how is the planet doing compared to our best guess of where we need to go. GDP growth means nothing if it isn’t shared widely by all – all those dollars in the hands of only a few merely increases the power of those few relative to others. And how interested can we be in the power of the few? Seems happiness for the many is a far more efficacious measurement, if only it had some authority.  Whose index should we use? Perhaps something new? Or an amalgamation of existing indices?

Efficacy and efficiency need not be a trade-off. Yes, measurement of GDP has a common denominator of $ in its favor. It does measure economic efficiency. Even the concept of “utils” some economists use to measure consumer preferences still rely on dollar purchases and decision-making (“utils” derived from utilitarian decision-making) – it has never been accepted beyond the realm of consumer behavior. We still need a denominated unit of happiness. This may be the next frontier in economic measurement.

My bet is that the Nobel Prize will go to whichever team of economists can devise such an instrument and persuade the rest of the discipline to accept it!

–William Sundwick