Standing Up for GDP

Joseph Stiglitz is right. GDP per capita is an inadequate measure of a country’s prevailing standard of living for many reasons. If you want one number, something like median real consumption would be better. But I’m willing to stand up for GDP per capita as a rough and ready indicator of well-being within the bounds of nation states. Why?

First, as an indicator of well-being, it doesn’t get much intuitively wrong. That is, GDP per capita tends to correlate positively with most of the things most of us think are constituents or side effects of well-being and negatively or not at all with most of the things most of us think are corrosive to well-being. (I go through some of this data around p. 29 of my happiness paper [pdf].)

Moreover, alternative rankings such as the UN’s Human Development Index, which accounts for things like health and education, correlate so closely with rankings of per capita GDP, it’s pretty clear that income levels are doing most of the work. As Justin Wolfers put it:

For all the work that goes into the Human Development Index, it just doesn’t tell you much that you wouldn’t learn from simple comparisons of G.D.P. per capita.

And don’t forget that the link between GDP per capita and self-reported happiness is positive and strong! Here’s a reminder of what the relationship looks like this:

As you can see, the doubling in GDP per capita from $1000 to $2000 has about the same effect on average self-reported life satisfaction as the doubling from $16,00 to $32,00. It was this finding that led Daniel Kahneman last year to say:

The implied conclusion, that citizens of different countries do not adapt to their level of prosperity, flies against everything we thought we knew ten years ago.  We have been wrong and now we know it.  I suppose this means that there is a science of well-being, even if we are not doing it very well.

But I think the most neglected argument in favor of GDP per capita as a measure of well-being is its neutrality. Here’s how I put it in my happiness paper:

Many people seem to think that a government’s emphasis on measurements like GDP indicate a kind of collective affirmation of materialist goals, encouraging a narrowly materialist attitude at war with more exalted values. But this is simply a mistake. The very function of money is to serve as a neutral medium of exchange. It is a shape-shifting embodiment of almost any value. The same $100 can be spent on a prostitute or donated to an HIV/AIDS clinic. The relative value neutrality of money is precisely why the measurement of per-capita wealth is well suited to pluralistic liberal societies; it doesn’t beg many questions about competing concep- tions of the good life. Money can’t be converted into  anything that someone might value, but it is of the nature of money to be convertible into a phenomenally broad range of values. Societies with high levels of average income and wealth are societies in which people have more resources at their disposal to achieve their aims, no matter what those aims might be, which is why it should be no surprise that, other things equal, people with more money are more satisfied. By measuring GDP, household wealth, and the like, government is not affirming one set of values over others. It is, in fact, embodying an ideal of liberal neutrality by measuring something that is valuable in varying degrees to all of us.

Because of their neutrality, economic measures are excellent inputs to public deliberation in pluralistic societies containing a great deal of disagreement about ultimate values. There are lots of candidates for alternative indicators or progress and well-being, but most are transparently motivated by ideological antagonism to the kinds of policies known successfully to promote income growth. These are obviously not very well-suited for use in public deliberation in pluralistic societies containing a great deal of disagreement about ultimate values.

The demand for alternatives to GDP resides predominantly in certain quarters of the environmental movement. It’s easy to see why. Many environmentalists demand policies that, if implemented, would show up as unmitigated damage in economic measures like GDP per capita. I think it’s difficult to overstate how huge an impediment this is to much of the environmental movement — especially since these measures do track the elements of well-being pretty well.

Some enviromentalists, like Thomas L. Friedman and Van Jones, go the congruence route and jump into the business of retailing fantasies about pro-growth green central planning. But this kind of “and a pony!” no tradeoffs stuff is a pretty hard sell. Anybody really serious about saving the world from the peril of a more livable Canada is going to have to argue for policies that will indeed gut-punch world income growth. That argument is a lot easier to make if you can first persuade governments and journalists to shelve standard economic measures and replace them with new figures that make a virtue of green-tinted impoverishment. It’s hard to fail when you’ve redefined success.

That’s why I’m ready to hold onto my wallet when luminaries of the left like Stiglitz say they’re eagerly awaiting the September 14th publication of a report by Nikolas Sarkozy’s Commission on the Measurement of Economic Performance and Social Progress. But it probably won’t be that bad.

Here’s my predication. Good ol’ GDP per capita will be found (perhaps rather annoyingly to this congress of authors) to do better as a measure of social progress than one might have thought, for reasons similar to those detailed above. Chief among the problems with GDP-like measures will be that they fail to capture the value of environmental sustainability. Also, the value of economic equality. But not the value of economic liberty. That GDP fails to capture the value of, say, policies that reduce the probability of a future in which tens of millions die due to a massive flu pandemic, or due the availability of portable nuclear weapons, will go unmentioned. Less severe but equally indeterminate environmental threats will get many pages.

Surprise me Commission on the Measurement of Economic Performance and Social Progress!

18 thoughts on “Standing Up for GDP”

  1. It is true that GDP is correlated with many other things that matter. It does not follow that raising GDP is sufficient to get those other things. Easterly (1999) for instance finds that virtually all quality of life indicators were not predicted by country GDP; but rather with improvements common to all countries. The point of using alternate measures, as followups to Wolfers indicate, is that various interventions may have different impacts on GDP or other quality of life measures. GDP does a terrible job at capturing quality of life improvements in Africa (Charles Kenny), where there has been enormous progress on literacy, health, and conflict.Also see Easterly (2002) on how inequality is a barrier to development (though, arguably, that is just measuring Dutch Disease).

  2. GDP certainly has its limitations, but those limitations are best dealt with by introducing additional metrics or using using supplementary rules.If you're worried about inequality measure the Gini index and report changes in it as well as GDP. There's no neutral method of comparing them, but that's because there no universally-agreed method of trading off wealth and equality.Environmental concerns could be addressed by measuring the value of the stock of environmental assets (this is hard, but doable in principle), and then it should be possible to compare degradation (or improvement) to GDP in the same unit.As for supplementary rules, economist already speak of things like the “broken windows fallacy” which is all about the difference between economic activity and value to consumers.

  3. Environmental concerns could be addressed by measuring the value of the stock of environmental assets (this is hard, but doable in principle)…Yes, but it suits Will just fine to keep “indeterminate environmental threats” as indeterminate as possible and hope that nobody notices what effect that has on his definition of success.Seriously, I don't blame him. Takedowns of notorious idiots like Thomas Friedman are much more fun than the hard, but doable in principal, work of addressing and refuting Georgescu-Roegen or Daly or Costanza.

  4. you have reminded me of a long deferred project of mine: getting uncritical references to the easterlin paradox out of my norwegian undergraduate textbooks

  5. I, for one, miss the incredibly snarky liveblogging. The world will never know what Will Wilkinson would have written, in the heat of the moment, about Joe Wilson.

  6. When the GDP numbers indicate a recovered economy, yet the recovery is essential a “jobless” one – i.e. all the millions dumped from productive employment in the last year remain under- or unemployed, then GDP is an inadequate measure of an economy's success.

  7. […] Standing Up for GDP – view page – cached Joseph Stiglitz is right. GDP per capita is an inadequate measure of a country’s prevailing standard of living for many reasons. If you want one number, something like median real consumption would be better. But I’m willing to stand up for GDP per capita as a rough and ready indicator of well-being within the bounds of nation states. Why? — From the page […]

  8. Friday morning links…

    500,000,000 year-old photos from Hubble. It’s the "Butterfly nebula"
    If you haven’t seen those ACORN videos yet, here they are. Why am I not surprised?
    10 questions to ask your Congresscritter, with a sample letter. Villainous

  9. I think Thorfinn's point is an important one, but setting that aside for a moment:I always thought the more important problem with GDP was that: 1., non-priced things & experiences have always been quite important, and; 2., there's reason theoretically to expect increasing leisure with wealth, tho obvs. this hasn't happened in the US lately; 3., an increasing amount of value is being generated through things that aren't intrinsically rivalrous (cultural things, software, scientific things). A world in which everyone works 8 hr. days, and half of them can afford to buy books, is *far* worse than a world in which everyone works 1 hr days to produce the exact same supply of stuff, except that now everyone who can't pay downloads free copies of the books instead; GDP would imply the reverse. But then, I'm overly fixated on IP issues.

  10. Why would GDP imply the reverse? There appears to be a contradiction in your statements, you say that in your second hypothetical world the “exact same supply of stuff” is produced but you also say that everyone who can't buy books downloads free copies. But if they can't download free copies in your first hypothetical world, then obviously the supply of stuff is slightly different between the two worlds, in the second the supply of electronic books is higher than in the first. Perhaps GDP as currently measured by statisticians can't take measure the value of the downloaded copies of books, but that's a measurement problem, it's not a problem with the concept of GDP. Anyway, if we ignore the downloaded free books issue and assume that the exact supply of stuff is the same in both worlds, then GDP would be the same in both worlds. We wouldn't be able to use GDP to distinguish between the 8 hours worked a day world and the 1 hour worked a day. But why is that a big problem with GDP? A ruler can't tell you the difference in mass between two objects that occupy the same volume of space but weigh different amounts, that doesn't mean that rulers have an important problem with them, it just means that you need a set of scales instead to measure mass.

  11. GDP isn't only correlated with life satisfaction or happiness; also with lower levels of corruption, infant mortality rates and poverty, increases in respect for the rule of law and the principles of democracy, higher life expectancy and better education etc. (there's a list here).

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