Measuring Economic Progress: Is GDP the Bottom Line?
Delia Lloyd
Correspondent
Posted:
09/18/09
Earlier this week, French President Nicolas Sarkozy called upon world leaders to stop using gross domestic product as their primary measure of economic progress. Instead, he pushed for a focus on quality-of-life indicators like health care availability and leisure time.
Sarkozy's plea followed the release of a report by an international commission advocating these new measures of economic output. He has already tasked his own national statistics bureau to update its data methods and will ask other governments to follow suit at the upcoming G20 summit.
At first blush, it's easy to dismiss this policy initiative as just one more show of bravado by the famously in-your-face French leader. France has a long history of trying to enhance its image on the world stage, and one might be tempted to write this off as this country's latest attempt to challenge American economic hegemony.
After all, when you look strictly at GDP (which measures the market value of all goods and services produced in the economy), the U.S. invariably comes out at or near the top in international rankings. But if you use a "softer" (some would say more nuanced) measure like the United Nations development index -- which incorporates things like life expectancy, literacy and educational attainment -- the U.S. only ranks 15th.
But it's not just France speaking up here. There are a lot of economists who also acknowledge that GDP is a problematic measure of economic performance. The report in question was chaired by Nobel laureates Joseph Stiglitz and Amartya Sen, among others. What are some of the problems they cite?
As Stiglitz points out in an op-ed in the Financial Times, by focusing exclusively on market activity, GDP measures miss a great deal of economic activity -- like, say, housekeeping or child care -- that takes place within the home and also contributes to societal well being. At the same time -- and as many developing-country environmentalists are aware -- economic growth often comes with large trade-offs for things like environmental sustainability. Should we reward countries with higher growth rates even if it comes at the cost of ecological soundness and the physical health of their citizens?
Finally, a myopic focus on GDP arguably distracts us from looking at other market variables that point in a different direction. Stiglitz notes that in the years preceding the present economic crisis, analysts failed to look at crucial indicators such as median household income or household indebtedness, which painted a much bleaker picture than overall measures of GDP. In some sense, then, this whole debate arguably takes us to the heart of understanding the current financial collapse.
In light of all this, should we, as one historian of economics colorfully put it, consign GDP to join buggy whips and VCRs on the dust-heap of history?
That's not clear either. While many welcome the incorporation of non-market variables like work/life balance, environmental sustainability or even subjective measures of happiness into the equation, it's not clear that creating some kind of meta-index of national well-being is any less problematic.
Take happiness. For starters, the relationship between money and happiness is actively under debate. Moreover, there's considerable evidence that people -- and countries -- adapt to their circumstances. So, for example, people in really tough places like Afghanistan appear just as happy as others in less difficult environments because they adapt to the presence of violence, crime, corruption and poverty. Finally, happiness itself is inherently difficult to measure.
Argh.
I, for one, am glad that Sarkozy has put this topic on the agenda for the upcoming G20 conference, thereby obliging other leaders to broaden the debate on what we mean by "progress." Particularly at a moment when our own country is engaged in a tortured battle over health care's contribution to societal well-being, I'm glad that France is throwing down the gauntlet.
But I'm also glad -- excuse me, happy -- that I'm not an economist, so that I don't have to puzzle this through myself.
Joann?
Follow Delia on Twitter.
Sarkozy's plea followed the release of a report by an international commission advocating these new measures of economic output. He has already tasked his own national statistics bureau to update its data methods and will ask other governments to follow suit at the upcoming G20 summit.
At first blush, it's easy to dismiss this policy initiative as just one more show of bravado by the famously in-your-face French leader. France has a long history of trying to enhance its image on the world stage, and one might be tempted to write this off as this country's latest attempt to challenge American economic hegemony.
After all, when you look strictly at GDP (which measures the market value of all goods and services produced in the economy), the U.S. invariably comes out at or near the top in international rankings. But if you use a "softer" (some would say more nuanced) measure like the United Nations development index -- which incorporates things like life expectancy, literacy and educational attainment -- the U.S. only ranks 15th.
But it's not just France speaking up here. There are a lot of economists who also acknowledge that GDP is a problematic measure of economic performance. The report in question was chaired by Nobel laureates Joseph Stiglitz and Amartya Sen, among others. What are some of the problems they cite?
As Stiglitz points out in an op-ed in the Financial Times, by focusing exclusively on market activity, GDP measures miss a great deal of economic activity -- like, say, housekeeping or child care -- that takes place within the home and also contributes to societal well being. At the same time -- and as many developing-country environmentalists are aware -- economic growth often comes with large trade-offs for things like environmental sustainability. Should we reward countries with higher growth rates even if it comes at the cost of ecological soundness and the physical health of their citizens?
Finally, a myopic focus on GDP arguably distracts us from looking at other market variables that point in a different direction. Stiglitz notes that in the years preceding the present economic crisis, analysts failed to look at crucial indicators such as median household income or household indebtedness, which painted a much bleaker picture than overall measures of GDP. In some sense, then, this whole debate arguably takes us to the heart of understanding the current financial collapse.
In light of all this, should we, as one historian of economics colorfully put it, consign GDP to join buggy whips and VCRs on the dust-heap of history?
That's not clear either. While many welcome the incorporation of non-market variables like work/life balance, environmental sustainability or even subjective measures of happiness into the equation, it's not clear that creating some kind of meta-index of national well-being is any less problematic.
Take happiness. For starters, the relationship between money and happiness is actively under debate. Moreover, there's considerable evidence that people -- and countries -- adapt to their circumstances. So, for example, people in really tough places like Afghanistan appear just as happy as others in less difficult environments because they adapt to the presence of violence, crime, corruption and poverty. Finally, happiness itself is inherently difficult to measure.
Argh.
I, for one, am glad that Sarkozy has put this topic on the agenda for the upcoming G20 conference, thereby obliging other leaders to broaden the debate on what we mean by "progress." Particularly at a moment when our own country is engaged in a tortured battle over health care's contribution to societal well-being, I'm glad that France is throwing down the gauntlet.
But I'm also glad -- excuse me, happy -- that I'm not an economist, so that I don't have to puzzle this through myself.
Joann?
Follow Delia on Twitter.