All of the questions this week about whether or not the US economy has fallen into recession missed an important consideration: What if the GDP measure we all focus on is itself deeply flawed?
It is a heretical question, because there is a “GDP complex” here.
There is a whole apparatus (economists, bankers, government officials and forecasters) of people whose livelihoods are based on measuring GDP, which is held up as the overall and final method of measuring economic health, or even social, of a country.
And of course GDP growth is never quite “correct”. It’s too fast or too slow, and these parties are always ready to help fix things.
Leaving aside the shortcomings of experts when it comes to predicting or solving, by focusing on GDP, this August group often misses elements such as sustainability and quality of life.
“[GDP] it’s a shortcut, it’s not comprehensive enough,” economist Mohamed El-Erian told me recently. “It’s a cognitive trap. We’ve all gotten used to measuring things by GDP, and we have a big problem getting out of it. The nature of GDP growth is also important. Is it inclusive? It’s a useful measure, but it’s only a small view of an economy.”
Mohamed El-Erian speaks during the Milken Institute Global Conference in Beverly Hills, California, U.S., May 1, 2017. REUTERS/Lucy Nicholson
“What we’re concerned about now has to do with the quality of our economy’s output, the quality of the food we eat, the quality of the air we breathe,” says David Pilling, author of the 2018 book “The illusion of growth“, which explored our societal obsession with economic growth. “The only way to increase the GDP of Beethoven’s Ninth Symphony is to play it twice as fast so you can have more of it.”
Before you accuse me of making you crunchy granola, you know that in some cases we look beyond GDP.
Example: The fastest way to grow a factory is to keep costs as low as possible, which means dumping toxic waste into the nearby river. We certainly don’t do that today, but we could do a lot more.
Questioning GDP, however, raises an even more fundamental question: Does an economy need to grow? It’s a point that has been debated since at least John Stuart Mill in the mid-nineteenth century. More recently, Herman Daly, a former senior economist at the World Bank, has been a leading voice in the “steady state” movement, with whom he spoke at a recent interview in the New York Times.
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There’s a lot of interesting stuff from Daly, like, “The Earth is not expanding. We’re not getting new materials and we’re not exporting things into space. So you have a steady-state Earth, and if not I don’t recognize that , well, there’s an education problem.”
Of course, holistic socio-economic models have not been widely adopted, with some notable exceptions.
In 1972, Bhutan abandoned GDP as a measure of economic progress and replaced it with…happiness. the guardian reports: “[Bhutan] has advocated a new approach to development, which measures prosperity through the formal principles of gross national happiness (GNH) and the spiritual, physical, social and environmental health of its citizens and the natural environment.”
Much has been written about the Bhutanese experiment (here i here) and there are shortcomings, but even his critics have to acknowledge his achievements. New Zealand, meanwhile, now has a “Welfare budget.”
Britain’s Prince William, Duke of Cambridge, poses with his wife Catherine, Duchess of Cambridge outside Paro Taktsang Monastery, Bhutan, April 15, 2016. REUTERS/Cathal McNaughton
vox notes: “For Prime Minister Jacinda Ardern, the purpose of government spending is to ensure citizens’ health and life satisfaction, and that, not wealth or economic growth, is the metric by which must measure a country’s progress. GDP alone, he said, “does not guarantee the improvement of our standard of living” nor does it “take into account who benefits and who is left out.”
“The most important thing New Zealand understands is that subjective well-being data can be used to unlock the political situation,” says John Helliwell, professor emeritus at the University of British Columbia.
Some US economists scoff at Bhutan and New Zealand (or is it Aotearoa?): “Marginal economies”, sort of thing. These same sad scientists also look down on Italy, Spain and France, who in my opinion have budgeted, unwittingly to some extent, along these lines for centuries. And how I pointed out that they are also decent places to live.
GDP is hardly a sacred metric, nor is it infallible.
In the first count, remember that until 1991 we used GNP (gross national product) to measure the economy. As for fallibility, look at Ireland and its “Economic Leprechaun” episode, a phrase coined by Paul Krugman after the country recorded GDP growth of 26.3% in 2015the result of massive tax protection schemes by multinational companies, in particular, it seems, Apple.
Two years later, Ireland replaced GDP Modified GRN (Gross National Income).
But the “GDP complex” does not have to resort to such extremes to win in this game.
Fixing a low or non-growing GDP through fiscal policy (tax cuts) and monetary policy (interest rate cuts) disproportionately helps the shareholder class, which includes the aforementioned economists, bankers, government officials government and forecasts. These tools do not directly address life expectancy, infant mortality, drug addiction, murder, and suicide rates. No country is more obsessed with GDP data than the US, and yet our quality of life relative to other countries (see here i here) is a shocking shame.
“GDP is weighted toward people with higher incomes. It’s their experience that dominates GDP,” says Richard Easterlin, professor emeritus of economics at USC. “In the case of happiness, it doesn’t matter if you are a shareholder or a farmer. Each of you counts the same.”
Is it possible to have strong GDP growth and a high quality of life in an entire society?
Some might argue that we did it before in America, even though large portions of our population had a dearth of civil rights in those “good old days.” Singapore maybe, but it also has limited civil liberties.
So what would you prefer: strong GDP growth and a poor quality of life for most citizens, or find another measure to help lift all boats?
I think I agree with the latter.
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This article was featured in a Saturday edition of the Morning Brief on July 30, 2022. Get the Morning Brief delivered directly to your inbox Monday through Friday at 6:30am ET. Subscribe
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