Gross Domestic Product Distorts Personal Wellbeing
Governments, stock markets, and captains of industry are obsessed by Gross Domestic Product (GDP) numbers; up is good, down is bad. But, some economists are saying GDP is a false god to worship, because it ignores the wellbeing of the population. If policymakers chase growing GDP as their Holy Grail, such important matters as social services, the quality of the environment, or income equality may have to be sacrificed to boost the number.
What Is GDP?
Gross Domestic Product is the value of all the goods and services produced in a national economy over a discreet period of time; it is usually calculated on a quarterly and annual basis.
But, GDP doesn’t capture all economic activity. The unpaid work of interns, volunteers, and stay-at-home caregivers is not included. The underground economy of services for unrecorded cash escapes the view of statisticians. It doesn’t measure the value of companies such as Facebook, Wikipedia, or Google that provide their services free of charge.
It was developed by the Russian-American economist Simon Kuznets in the late 1930s. But, as Massachusetts Institute of Technology Professor Erik Brynjolfsson explains, even Kuznets knew GDP had flaws: “He understood that GDP is not a welfare measure, it is not a measure of how well we are all doing. It counts the things that we’re buying and selling, but it’s quite possible for GDP to go in the opposite direction of welfare.”
The economist Joseph Stiglitz told the World Economic Forum in 2016 that “GDP in the U.S. has gone up every year except 2009, but most Americans are worse off than they were a third of a century ago. The benefits have gone to the very top. At the bottom, real wages adjusted for today are lower than they were 60 years ago. So this is an economic system that is not working for most people.” But according to GDP numbers the economy is humming along splendidly.
U.S. Senator Robert F. Kennedy said more than half a century ago, GDP measures everything “except that which makes life worthwhile.”
A Blunt Instrument
While GDP measures goods it also measures bads; it does not differentiate between beneficial and harmful economic activity.
So, when North Korea’s dictator Kim Jong Un spends vast amount of money on making nuclear weapons and rockets to deliver them that adds to the country’s GDP. At the same time, the World Food Programme reports that a third of the country’s children are chronically undernourished.
The beauty of gross domestic product is its single figure. It squishes all of human activity into a couple of digits, like a frog jammed into a matchbox. As this image of an unfortunate amphibian suggests, this condensing is also GDP’s flaw.”
World Economic Forum
In April 2010, British Petroleum’s Deepwater Horizon drilling rig blew up in the Gulf of Mexico. The massive oil spill released and the subsequent clean-up have so far cost $65 billion. But, such is the way that GDP is calculated, that the $65 billion shows up in the accounting ledger as a “good.”
The 2010 earthquake in Haiti and 2011 tsunami in Japan caused massive loss of life and destruction of buildings and infrastructure. The cost of reconstruction runs into the hundreds of billions of dollars and goes into the pot that lifts GDP higher.
However, the unpaid person who takes library books to shut ins or the volunteer who pushes wheelchairs for hospital patients are deemed not to have created anything of monetary value so they are not counted in GDP.
Let’s go back to Joseph Stiglitz for a comment: “What we measure informs what we do. And, if we’re measuring the wrong thing, we’re going to do the wrong thing.”
An Index of Wellbeing
Since 2011, the Canadian Index of Wellbeing (CIW) at the University of Waterloo has been measuring Robert Kennedy’s things that “make life worthwhile.”
Among the aspects of life the CIW measures are “Community Vitality, Democratic Engagement, Education, Environment, Healthy Populations, Leisure and Culture, Living Standards, and Time Use.” In all, the researchers examine 64 indicators that affect quality of life.
While Canada’s GDP roared ahead in the period 1994 to 2014, all was not well in the homes of many Canadians. Here’s the CIW report for 2016 “When Canadians go to bed at night, they are not worried about GDP. They are worried about stringing together enough hours of part-time jobs, rising tuition fees, and affordable housing. They are thinking about the last time they got together with friends or the next time they can take a vacation. Maybe that’s why we are getting less sleep than 21 years ago.”
There are numbers to back up the assertion that the quality of peoples’ lives has declined. During the period in question, Canada’s Gross Domestic climbed 38%. At the same time the CIW Index limped ahead by just 9.9%. “In 2007, the gap between GDP and the CIW was 22.0%. By 2010, the gap had risen to 24.5%, and by 2014, it had jumped to 28.1%.”
It’s safe to say that a similar loss in life quality is observable in all industrialized democracies.
GDP doesn’t adjust for the distribution of goods … Imagine two economies, but this time one has a ruler who gets 90 percent of what’s produced, and everyone else subsists ―barely―on what’s left over. In the second, the distribution is considerably more equitable. In both cases, GDP per capita will be the same, but it’s clear which economy I’d rather live in.”
Mark Thoma, CBS News
Alternatives to GDP
As far back as 1972, the Measure of Economic Welfare was proposed. It included market and non-market activity in its indicators.
In 1994, the economic think tank Redefining Progress developed the Genuine Progress Indicator. The Pembina Institute comments that “For the first time, a holistic measure of the welfare of a nation had been constructed—revealing the true state of the nation’s natural, social, human, and human-made capital.”
There have been other metrics such as The Happy Planet Index, National Wellbeing Accounts, The Index of Sustainable Economic Welfare, and a Gross National Happiness measure. But, none of these has been able to topple GDP off its perch.
However, some policymakers are making changes. New Zealand under the leadership of its Prime Minister Jacinda Ardern introduced its “Wellbeing Budget” in May 2019.
Ms. Ardern says “It’s a reality because while economic growth is important–and something we will continue to pursue–it alone does not guarantee improvements to our living standards … We know for example that New Zealand has had strong growth for a number of years, all the while experiencing some of the highest rates of suicide, unacceptable homelessness, and shameful rates of family violence and child poverty.”
So, the main thrusts of the Wellbeing Budget are increasing funding for mental health services, reducing child poverty, and improving the lives of disadvantaged Maori people.
Scotland’s First Minister, Nicola Sturgeon, is on the same page. In a 2019 TED Talk she said that GDP “values activity in the short term that boosts the economy, even if that activity is hugely damaging to the sustainability of our planet in the longer term.” So, in 2018, her government set up a new network called the Wellbeing Economy Governments Group.
This involves Scotland, Iceland, and New Zealand and aims to challenge the “narrow measurement of GDP. To say that yes, economic growth matters, it is important, but it’s not all that’s important … the goal of the group is that the objective of economic policy should be collective wellbeing.”
“Economic growth accompanied by worsening social outcomes is not success. It is failure.”
Jacinda Ardern, Prime Minister of New Zealand
- At about $21.5 trillion, the United States has the world’s highest Gross Domestic Product. However, the 2019 World Happiness Report puts America in 19th place.
- According to Catherine Rampell of The New York Times “A country could theoretically have both the world’s highest GDP and the world’s highest poverty rate simultaneously.”
- “GDP a Poor Measure of Progress, Say Davos Economists.” Stéphanie Thomson, World Economic Forum, January 23, 2016.
- “5 Ways GDP Gets It Totally Wrong as a Measure of Our Success.” David Pilling, World Economic Forum, January 17, 2018.
- “Never Mind the GDP. How Are the People Doing?” Elizabeth Renzetti, Globe and Mail, December 13, 2019.
- “Why GDP Fails as a Measure of Well-Being.” Mark Thoma, CBS News, January 27, 2016.
- “How Are Canadians Really Doing?” Canadian Index of Wellbeing, 2016.
- “Alternatives to the G.D.P.” Catherine Rampell, New York Times, October 30, 2008.
- “The Wellbeing Budget.” Government of New Zealand, May 30, 2019.
© 2019 Rupert Taylor