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Replacing GDP

Joseph Stiglitz has been researching the inadequacies of using GDP as a measure of societal well-being recently, and he presents some of his early argument over at the Guardian.

The big question concerns whether GDP provides a good measure of living standards. In many cases, GDP statistics seem to suggest that the economy is doing far better than most citizens' own perceptions. Moreover, the focus on GDP creates conflicts: political leaders are told to maximise it, but citizens also demand that attention be paid to enhancing security, reducing air, water, and noise pollution, and so forth – all of which might lower GDP growth.

The fact that GDP may be a poor measure of well-being, or even of market activity, has, of course, long been recognised. But changes in society and the economy may have heightened the problems, at the same time that advances in economics and statistical techniques may have provided opportunities to improve our metrics.

Defenders of GDP don't tend to defend the measure so much as argue that its inadequacies are recognized. Bruce Bartlett, for instance, writes that "in the end, GDP simply measures what it measures and it serves its purpose reasonably well. The problems Stiglitz identifies are ultimately unfair because he is criticizing it for being something it's not and never was intended to be."

But whether GDP was supposed to be the all-powerful metric by which we measured progress or not, the fact of the matter is that it currently serves that role, or at least comes close to it. We speak about global warming entirely in terms of the impact the solutions will have on GDP, and we refer to the early years of the decade as a period of good growth even though median Americans saw virtually no increase in their wages. "This is like attacking aspirin for not curing the common cold," continues Bartlett, but if people were using aspirin under the assumption that it cured the common cold, it would be important to disabuse them of that notion.

Stiglitz, happily, is involved in a French project to come up with a successor to GDP. But there have been many of these projects in the past and many alternatives proposed. The question isn't developing these measures. It's popularizing them.

By Ezra Klein  |  September 15, 2009; 12:40 PM ET
Categories:  Economic Policy  
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Bartlett's metaphor misses the mark. Classical economics looks for the most efficient solution and calls that optimal while paying little attention to equity.

A couple of years back I was using some historical examples to show the absurdity of some supply-side argument about trickle down at Economist's View only to have Mark Thoma, rather sadly inform me "Economics doesn't do equity well!". And a light went off.

The foundations of modern economics were established in a time and a place where Democracy was literally a dirty word and workers organizing to bargain for better wages or to gain the vote was a crime subject to imprisonment or transportation to Australia. Calls for equitable treatment and distribution of goods in relation to actual contribution to productivity were not so much ignored but considered seditious. That is it was considered perfectly reasonable in a time of great miseration to pass the Corn Laws which barred importation of grains in the interest of keeping wheat prices up. It is why Ireland was a large exporter of food during the Great Famine, the line between whose material interests counted and whose didn't was drawn at a level that excluded a majority of the country.

I don't think Bartlett is a bad guy, my infrequent interchanges with him have always been pleasant, but he is stuok in a theoretical framework that made sense to a Manchester manufacturer in the 1840's but not so much to the girls and small children working in his mill. Something which Engels saw first hand and which Marx actually lived in his rooms in London.

It seems that GDP has replaced Bullion Reserves as the measure of a nation's wealth without resolving the central problem of equity in distribution of goods, something which tellingly conservative economists persist in calling RE-distribution.

"Economics doesn't do equity well". Boy Howdy.

Posted by: BruceWebb | September 15, 2009 1:18 PM | Report abuse

One thing's for sure. We have to replace GDP with something that makes Americans #1 again. The EU are lazy socialists. How can they possibly have a bigger GDP???

Posted by: bmull | September 15, 2009 1:19 PM | Report abuse

I forgot to give my replacement metaphor.

Bartlett says "That's like attacking aspirin for not curing the common cold" No. No. No. The reality is this:

"That's like attacking the snake oil salesman because the medicine he peddled not only didn't cure the disease as promised, it actually made the situation worse."

After all Bartlett was the author of "Reaganomics: Supply Side Economics in Action" and so to a large degree was chief Snake Oil salesman of trickle down and rising tides back in the day. Back then tax cuts were supposed to increase productivity which would then automatically translate to better average living standard. That promise was made quite explicitly in its popularized forms, whatever was being said in the academic journals, in the end that promise proved hollow.

So of course we are blaming the snake oil. And by extension the snake oil salesman. Why not?

Posted by: BruceWebb | September 15, 2009 1:28 PM | Report abuse

Great post Ezra! I blog about applying these surveys of “subjective well-being” to energy policy, in order to maximize well-being rather than only focusing on GDP: I only know of a couple of other people or groups who blog about well-being and applications to public policy.

I’m a recent Princeton grad, and my thesis tried to measure the negative impact of a rapid increase in oil prices in terms of well-being. In the process, I had to try to estimate the well-being impact of the loss of health insurance because an increase in oil prices that leads to higher unemployment and a weaker economy will also tend to reduce the number of those privately insured, but it was a very difficult task.

Although their preferred method of what should count as well-being is suspect, I do like the phrasing in the following piece that calls for a “well-being analysis” to replace the benefit/cost analysis:

Posted by: hsjcoan1 | September 15, 2009 1:37 PM | Report abuse

A lot of this GDP fight reminds me of the myriad statistical ways to determine the best college football team. Even though your particular formula is awesome, the BCS champion is still considered the national champion.

Posted by: Klug | September 15, 2009 2:50 PM | Report abuse

Dear Lord save us from touchy-feely and entirely subjective metrics. GDP can be measured. How do you measured "living standards" in a way that will not be totally ripe for abuse/politicization?

I think the progressives are tired of hearing about deficits representing an unsustainable percentage of GDP, and are looking for ways to make the GDP pie look a little bigger (and thereby justify some more spending).

Posted by: WEW72 | September 15, 2009 3:10 PM | Report abuse

Among Bartlett's problems here is using the wrong framework for his analogy. GDP is a measure, not a medicine. So focusing on GDP is more like deciding whether a heart patient's medication is working by taking their temperature really accurately.

Ultimately, the decision of what should replace GDP is a political one. Wall Street types like GDP because it measures how much *stuff* (goods and services) an economy is producing, just as corporate earnings reports tell you --subject to lots of gaming -- how much *stuff* a company made last quarter. With exactly the same kinds of ommission about whether that *stuff* was useful to anyone or how well making that *stuff* contributed to the future of the company.

There are plenty of other measures, from real median income to morbidity, mortality and shelter reports, that are at least as objective as GDP. But using them requires policymakers who actually care about how much money average households earn or how many citizens die of which causes.

Posted by: paul314 | September 15, 2009 8:00 PM | Report abuse

Outstanding article by one of the great economists, and a Nobel Prize winner.

One problem with current GDP calculation that Stiglitz doesn't mention, however, is that costs of combating and securing against theft and other crime are actually added to GDP, as if something new and useful were produced, rather than being treated as a necessary cost of production incurred.

To show the point, consider two countries, the United States and the fictional country of Pacifica. Suppose that the United States produced $9 trillion in useful goods and services; cars, haircuts, tomatos, etc., and spent $5 trillion on guarding, supervising, locks, alarms, police, prisons, courts, etc. Now suppose Pacifica produced $10 trillion in useful goods and services, and zero in security, supervision, prisons, etc.; there was no crime, and everyone trusted everyone, and this trust was warranted.

With the way GDP is calculated now, the U.S. would have a GDP of $14 trillion and Pacifica only $10 trillion, 40% higher for the U.S., even though Pacifica produced 10% more useful goods and services, and their children were able to play and roam freely without fear of crime, without isolating themselves behind walls. This clearly relates to the social isolation Stiglitz mentions.

A very interesting article on this is "Garrison America", by Samuel Bowles and Arjun Jayadev, in the Economists' Voice, March, 2007, at: . A quote:

Accepting Mill’s [the great 19th century economist John Stuart Mill] implicit welfare economics would require a revision in our national accounts, substantially altering the measured wealth of nations...When defining a welfare-based measure of net output, the case for netting out the output produced by those maintaining the stock of capital goods is, of course, uncontroversial. We wonder if a similar case could be made for netting out the services produced by those who maintain the economically relevant institutional stock. Were such adjustments made, our estimates of guard labor suggest that the impact on growth rates and relative income levels across countries would be substantial. This is especially true for the United States This is especially true for the United States where roughly one in five workers are performing guard labor (not counting prisoners and the unemployed) (page 6)

Posted by: RichardHSerlin | September 15, 2009 11:14 PM | Report abuse

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