Strategy

Economy: Our dangerous addiction to GDP

Did fixating on an overworked economic indicator make the recession worse?

Of all the foul forces blamed for the recession, GDP, a comforting and oft-cited bellwether, surely must rank among the more bizarre. The Commission on the Measurement of Economic Performance and Social Progress — a group convened by French President Nicolas Sarkozy and chaired by famed economist Joseph Stiglitz — recently declared that our preoccupation with gross domestic product may actually have made things worse. “Perhaps had there been more awareness of the limitations of standard metrics, like GDP, there would have been less euphoria over economic performance in the years prior to the crisis,” the commission hypothesized in its final report, delivered in early September. Had other indicators (such as rising debt) received more attention, greater caution might have prevailed.

GDP represents the sum of all economic activity within a nation’s borders, regardless of who actually owns the means of production. All major economies use it as their primary measure of economic activity, partly because it’s easily accessible. We mark the beginning and ending of recessions based on its movements. It makes frequent appearances in political rhetoric. Yet for all our obsessing over it, as an indicator of economic health, GDP leaves much to be desired. The Economist once sniffed that the acronym should really stand for “grossly deceptive product.”

The case against GDP revolves largely around its inadequacy in measuring well-being. GDP is often divided by population to obtain GDP-per-capita, a ratio commonly cited when discussing living standards. Yet in situations of growing inequality, GDP falls short — Americans’ median incomes fell in recent years, for example, yet GDP rose. “GDP doesn’t tell you about what happens to the typical citizen,” Stiglitz has said.

GDP also ignores degradation of resources and the environment. A nation may expand production while leaving depleted oilfields and decimated forests in its wake; the cost to future generations goes uncalculated. A massive oil spill drives up GDP, yet we cannot say we’re any better off for scrubbing waterfowl.

When GDP is conflated with well-being, the results often militate against common sense. If you walked to work this morning, you likely contributed nothing to GDP. If you endured an hour-long traffic jam staring at the hindquarters of someone else’s SUV, however, that national account salutes you. You consumed fuel, and you’re wearing out your vehicle in the bargain. If you rear-ended the car in front of you, even better — because you’ll need a new car, and your insurance rates might skyrocket.

GDP applies no value to leisure. An economy can produce more if its citizens work longer hours and spend less time at Caribbean resorts sunning themselves. But that’s not everybody’s idea of progress.

Let’s say the federal government commissions a 200-storey replica of the Tower of Babel in downtown Saskatoon. By the numbers, its construction would represent tremendous economic growth. But as economist Frank Shostak once pointed out, such projects divert resources from activities that actually generate long-term wealth.

“What we measure affects what we do; and if our measurements are flawed, decisions may be distorted,” the commission noted. What to do, then? A few years back, the OECD suggested GDP should be supplemented by other figures, including both monetary measures such as the distribution of household income and non-monetary measures like leisure and social conditions. Stiglitz’s commission goes into far greater detail in its nearly 300-page report. Just how to measure subjective items like the value of a hike in the Rockies will undoubtedly provoke lively debate.

But if we want to understand why GDP keeps letting us down, we should recognize that we apply it for purposes its creator never intended. GDP (actually its predecessor, gross national product (GNP), which GDP replaced by the 1990s) was introduced during the Second World War by Simon Kuznets, a meticulous economist who spent most of his professional life devising ways of measuring national income. America needed tools for wartime planning, and Kuznets provided one. In the late 1940s, however, he quit the U.S. Department of Commerce over its refusal to include the value of unpaid housework when calculating the nation’s production. Decades later, he elaborated: “Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what.” Words to remember as we mark the end of the latest recession — as measured by GDP, that is. &#8211