It’s long past time to discard an antiquated, and often wrong, indicator.
FROM POLITICO | JUNE 26, 2015
It’s our national mantra: GDP. Gross Domestic Product. No other figure rules our world more completely. We saw it again this week when the government released its latest revision of the first-quarter GDP numbers that showed the U.S. economy is contracting slightly. The only thing that’s now growing, it seems, is the fretting of pundits and economists over the new numbers. Their common cry: How do we get things moving again?
And yet GDP is a critically flawed measure—so flawed that, believe it or not, ever-larger portions of the world would be best served not by GDP going up but possibly by it going down. GDP growth these days is nothing less than a relic of the past.
Take the current impasse over more free trade. The debate assumes that cheaper imports and less domestic manufacturing are unequivocal negatives. GDP measures support that. Imports reduce GDP, as do lower incomes. But less expensive essential goods, from drugs to appliances, increase living standards, while simultaneously lowering GDP. More GDP is one way to measure and create higher living standards. It is not the only way.
That is hardly the only limitation of GDP. First, the number itself is more like quicksilver than a solid marker. Consider: this week the Bureau of Economic Analysis released no less than its third revision of first quarter GDP growth, reporting that the U.S. economy contracted by 0.2 percent. That was revised from an earlier reading of minus 0.7 percent, which in turn had been a revision from an initial reading of plus 0.2%.
While this recent release is called the last revision, in fact it is not. In a few years, the BEA will once again revisit the numbers and factor in new data, and issue multi-year revisions. That too will not be the final word. New methods could lead to strikingly different optics, as happened in the summer of 2013, when the BEA announced a change to how it would calculated intellectual property, leading to a $400 billion revision upward in the stated size of the American economy.
Yet the constant revisions are only part of the problem of using GDP as an absolute litmus. The more substantial issue is what GDP measures.
GDP was invented only in the middle of the 20th century. It was originally an outgrowth of the national accounts initially designed under the aegis of economist Simon Kuznets. That system of national accounts was designed as a tool for British and American policymakers to assess whether the extraordinary spending measures of the New Deal and Labor governments in the U.S. and the U.K. respectively were doing any good. The formulas for Gross National and Gross Domestic Product were then refined during World War II to help the government figure out how much domestic production could be switched to war production without causing widespread shortages and triggering dangerous inflation.
During the Cold War, Americans turned to GDP as a way to measure whether capitalism was trumping Communism, and meanwhile the Soviets developed their own version of GDP to prove that their system was better. In many ways, the Cold War evolved as a contest of whose economy was bigger and better, better at making stuff and better at enriching people. Think of the famous “kitchen debate” in 1959 between then U.S vice president Richard Nixon and Soviet premier Nikita Khrushchev in front of a model kitchen at a Soviet industrial fair, arguing about whose economy was more modern and more productive. Bragging rights went to the country with biggest GDP.
GDP was and is very good at measuring how much stuff a country makes and how much stuff (or services) it then sells either to its own citizens or to other countries. It was and is very good at measuring the output of mid-20th century industrial nation states that manufacture things. It is not, however, very good at measuring the interconnected world of globalized supply chains, with most manufactured items containing parts and intellectual property from multiple countries and not one place of origin. It also lags, understandably, the technology-infused transformations of our modern economies. How does one measure apps and Internet services like Google that are free? Yes, the efficiencies created by these should in theory show up in more productivity or more output, but many economists have duly noted that here as in so many areas theory seems detached from reality.
Yet it isn’t just that the methodology of GDP lags. It’s that the equation between more GDP and economic and societal strength has broken down. In the developing world, perhaps, more output does translate into better lives. Starting from a low base, more GDP in places such as India and China is closely correlated to raising living standards in terms of more calories, better health, shelter and security. But in already affluent countries such as the United States, the nations of Western Europe and the developed economies of East Asia, more GDP is not necessarily better. It may actually be worse.
GDP measures all output as a positive. As Robert Kennedy memorable intoned shortly before his assassination in 1968, GDP treats the production of weapons as a plus but is neutral about the strength of family ties. Today, GDP treats higher gas prices as a positive, and lower as a negative; phosphorescent bulbs as a positive because they burn out and must be replaced and LED bulbs as a negative because they last and last; a polluted river from coal and the cleanup cost as a plus and imported solar panels as a negative. GDP counts lower health care costs as a drag on growth, and while a next generation multi-billion dollar fighter jet boosts GDP, next generation drones, counterinsurgency and peace-keeping forces do not.
Even more, by making higher GDP the greatest societal good, we completely elide the cost side of our lives. The current debate over inequality assumes that if we all had more income, from a higher minimum wage to better distribution, then our living standards would improve and societal cohesion would rise.
Now let’s go back to the example of trade. If our collective and individual incomes ceased to rise while our costs of necessary goods and services declined, our living standards would improve in much the same fashion. If the proverbial man or woman on the American street were told that their income would be stagnant, the reaction almost certainly would be negative. If you were told that whatever you earn today would be identical in 20 years, that would be taken as bad news. Yet if during that time costs fell by 25 percent, the effect would be the same as a 25 percent raise. By lowering the cost side of the equation, you can boost collective affluence just as effectively as by increasing the income side of the equation.
By making GDP growth a normative good, however, we make it nearly impossible to increase affluence by reducing costs. If GDP goes up, however, that does not necessarily mean that living standards improve, and if it goes down, it does not mean that living standards must as well. We have absolutely no simple way of engaging that possibility as long as GDP growth and income maximization remain a fixation.
To add what should be the clinching argument against GDP maximation, GDP going up in the United States today can easily exist in tandem with declining incomes for the vast and sundry. If a new factory employs 400 people and 40 robots rather than several thousand people as was once the case, output will increase without any commensurate gain in income. The once-tight link between middle-class income and GDP has broken down. The once-sacrosanct belief that more GDP is inherently good should as well.
Rather than nurturing the GDP fetish, we should instead look to a better accounting of collective needs and the best way to meet those. More output might meets some of those needs, but so might less output. Increasingly–in a world where technology is leading to efficiencies that are reducing costs and lowering the use of raw materials– lower GDP could be a greater societal positive than higher GDP. And higher GDP could boost “the economy” whilst leaving the vast majority of citizens no better off. GDP worked well for decades, but it is a product of a world that no longer exists. Continuing to measure GDP has real uses, but tethering our sense of strength and success to the number going up is not a recipe for a better future. It is a recipe for the futile pursuit of more at the expense of what we need.