GDP Is The Wrong Tool For Measuring What Matters - Scientific American
GDP Is The Wrong Tool For Measuring What Matters - Scientific American
S
ince World War II, most countries around the world have come to
use gross domestic product, or GDP, as the core metric for prosperity.
The GDP measures market output: the monetary value of all the
goods and services produced in an economy during a given period, usually a
year. Governments can fail if this number falls—and so, not surprisingly,
governments strive to make it climb. But striving to grow GDP is not the same
as ensuring the well-being of a society.
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In fact, the American economy is more like an ordinary car whose owner saved
on gas by removing the spare tire, which was fine until he got a flat. And what
I call “GDP thinking”—seeking to boost GDP in the misplaced expectation that
that alone would enhance well-being—led us to this predicament. An economy
that uses its resources more efficiently in the short term has higher GDP in
that quarter or year. Seeking to maximize that macroeconomic measure
translates, at a microeconomic level, to each business cutting costs to achieve
the highest possible short-term profits. But such a myopic focus necessarily
compromises the performance of the economy and society in the long term.
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The U.S. health care sector, for example, took pride in using hospital beds
efficiently: no bed was left unused. In consequence, when SARS-CoV-2
reached America there were only 2.8 hospital beds per 1,000 people—far fewer
than in other advanced countries—and the system could not absorb the sudden
surge in patients. Doing without paid sick leave in meat-packing plants
increased profits in the short run, which also increased GDP. But workers
could not afford to stay home when sick; instead they came to work and spread
the infection. Similarly, China made protective masks cheaper than the U.S.
could, so importing them increased economic efficiency and GDP. That meant,
however, that when the pandemic hit and China needed far more masks than
usual, hospital staff in the U.S. could not get enough. In sum, the relentless
drive to maximize short-term GDP worsened health care, caused financial and
physical insecurity, and reduced economic sustainability and resilience, leaving
Americans more vulnerable to shocks than the citizens of other countries.
The shallowness of GDP thinking had already become evident in the 2000s. In
preceding decades, European economists, seeing the success of the U.S. in
increasing GDP, had encouraged their leaders to follow American-style
economic policies. But as signs of distress in the U.S. banking system mounted
in 2007, France's President Nicolas Sarkozy realized that any politician who
single-mindedly sought to push up GDP to the neglect of other indicators of
the quality of life risked losing the confidence of the public. In January 2008 he
asked me to chair an international commission on the Measurement of
Economic Performance and Social Progress. A panel of experts was to answer
the question: How can nations improve their metrics? Measuring that which
makes life worthwhile, Sarkozy reasoned, was an essential first step toward
enhancing it.
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A few countries have even incorporated this approach into their policy-
making frameworks. New Zealand, for instance, embedded “well-being”
indicators in the country's budgetary process in 2019. As the country's finance
minister, Grant Robertson, put it: “Success is about making New Zealand both
a great place to make a living and a great place to make a life.” This emphasis
on well-being may partly explain the nation's triumph over COVID-19, which
appears to have been limited to roughly 3,000 cases and 26 deaths in a total
population of nearly five million.
Kuznets repeatedly warned, however, that the GDP only measured market
activity and should not be mistaken for a metric of social or even economic
well-being. The figure included many goods and services that were harmful
(including, he believed, armaments) or useless (financial speculation) and
excluded many essential ones that were free (such as caregiving by
homemakers). A core difficulty with constructing such an aggregate is that
there is no natural unit for adding the value of even apples and oranges, let
alone of such disparate things as armaments, financial speculation and
caregiving. Thus, economists use their prices as a proxy for value—in the
belief that, in a competitive market, prices reflect how much people value
apples, oranges, armaments, speculation or caregiving relative to one another.
Credit: Amanda Montañez; Sources: World Bank (GDP data); U.S. Census Bureau (inequality data); Organization for Economic Co-operation and Development (Better Life Index data)
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The politicians knew that if Americans understood how bad coal was for our
economy correctly measured, then they would seek the elimination of the hidden
subsidies that the coal industry receives. They might even seek to move more
quickly to renewables. Although our efforts to broaden our metrics were
stymied, the fact that these representatives were willing to spend so much
political capital on stopping us convinced me we were on to something
important. (It also meant that when, a decade later, Sarkozy approached me
about heading an international panel to examine better ways of measuring
“economic performance and social progress,” I leaped at the chance.)
I left the Council of Economic Advisers in 1997, and in the ensuing years the
deregulatory fervor of the Reagan era came to grip the Clinton administration.
The financial sector of the U.S. economy was ballooning, driving up GDP. As
it turned out, many of the profits that gave that sector such heft were, in a
sense, phony. Bankers' lending practices had generated a real-estate bubble that
had artificially enhanced profits—and, with their pay being linked to profits,
had increased their bonuses. In the ideal free-market economy, an increase in
profits is supposed to reflect an increase in societal well-being, but the bankers'
takings put the lie to that notion. Much of their profits resulted from making
others worse off, such as when they engaged in abusive credit-card practices or
manipulated LIBOR (for London Interbank Offered Rate of interest for
international banks lending to one another) to enhance their earnings.
But GDP figures took these inflated figures at face value, convincing policy
makers that the best way to grow the economy was to remove any remaining
regulations that constrained the finance sector. Long-standing prohibitions on
usury—charging outrageous interest rates to take advantage of the unwary—
were stripped away. In 2000 the so-called Commodity Modernization Act was
passed. It was designed to ensure that derivatives (risky financial products that
played a big role in bringing down the financial system just eight years later)
would never be regulated. In 2005 a bankruptcy law made it more difficult for
those having trouble paying their bills to discharge their debts—making it
almost impossible for those with student loans to do so.
By the early 2000s two fifths of corporate profits came from the financial
sector. That fraction should have signaled that something was wrong: an
efficient financial sector should entail low costs for engaging in financial
transactions and therefore should be small. Ours was huge. Untethering the
market had inflated profits, driving up GDP—and, as it turned out, instability.
OPIOIDS, HURRICANES
The bubble burst in 2008. Banks had been issuing mortgages indiscriminately,
on the assumption that real-estate prices would continue to rise. When the
housing bubble broke, so did the economy, falling more than it had since the
immediate aftermath of World War II. After the U.S. government rescued the
banks (just one firm, AIG, received a government bailout of $130 billion), GDP
improved, persuading President Barack Obama and the Federal Reserve to
announce that we were well on the way to recovery. But with 91 percent of the
gains in income in 2009 to 2012 going to the top 1 percent, the majority of
Americans experienced none.
As the country slowly emerged from the financial crisis, others commanded
attention: the inequality crisis, the climate crisis and an opioid crisis. Even as
GDP continued to rise, life expectancy and other broader measures of health
worsened. Food companies were developing and marketing, with great
ingenuity, addictive sugar-rich foods, augmenting GDP but precipitating an
epidemic of childhood diabetes. Addictive opioids led to an epidemic of drug
deaths, but the profits of Purdue Pharma and the other villains in that drama
added to GDP. Indeed, the medical expenditures resulting from these health
crises also boosted GDP. Americans were spending twice as much per person
on health care than the French but had lower life expectancy. So, too, coal
mining seemingly boosted the economy, and although it helped to drive
climate change, worsening the impact of hurricanes such as Harvey, the efforts
to rebuild again added to GDP. The GDP number provided an optimistic gloss
to the worst of events.
These examples illustrate the disjuncture between GDP and societal well-being
and the many ways that GDP fails to be a good measure of economic
performance. The growth in GDP before 2008 was not sustainable, and it was
not sustained. The increase in bank profits that seemed to fuel GDP in the
years before the crisis were not only at the expense of the well-being of the
many people whom the financial sector exploited but also at the expense of
GDP in later years. The increase in inequality was by any measure hurting our
society, but GDP was celebrating the banks' successes. If there ever was an
event that drove home the need for new ways of measuring economic
performance and societal progress, the 2008 crisis was it.
THE DASHBOARD
It would have been nice, of course, if we could have come up with a single
measure that would summarize how well a society or even an economy is
doing—a GDP plus number, say. But as with the GDP itself, too much valuable
information is lost when we form an aggregate. Say, you are driving your car.
You want to know how fast you are going and glance at the speedometer. It
reads 70 miles an hour. And you want to know how far you can go without
refilling your tank, which turns out to be 200 miles. Both those numbers are
valuable, conveying information that could affect your behavior. But now
assume you form a simple aggregate by adding up the two numbers, with or
without “weights.” What would a number like 270 tell you? Absolutely
nothing. It would not tell you whether you are driving recklessly or how
worried you should be about running out of fuel.
That was why we concluded that each nation needs a dashboard—a set of
numbers that would convey essential diagnostics of its society and economy
and help steer them. Policy makers and civil-society groups should pay
attention not only to material wealth but also to health, education, leisure,
environment, equality, governance, political voice, social connectedness,
physical and economic security, and other indicators of the quality of life. Just
as important, societies must ensure that these “goods” are not bought at the
expense of the future. To that end, they should focus on maintaining and
augmenting, to the extent possible, their stocks of natural, human, social and
physical capital. We also laid out a research agenda for exploring links between
the different components of well-being and sustainability and developing good
ways to measure them.
Concern about climate change and rising inequality had already been fueling a
global demand for better measures, and our report crystallized that trend. In
2015 a contentious political process culminated in the United Nations
establishing a set of 17 Sustainable Development Goals. Progress toward them
is to be measured by 232 indicators, reflecting the manifold concerns of
governments and civil societies from around the world. So many numbers are
unhelpful, in our view: one can lose sight of the forest for the trees. Instead
another group of experts, chaired by Fitoussi, Martine Durand (chief
statistician of the OECD) and me, recommended that each country institute a
robust democratic dialogue to discover what issues its citizens most care about.
Such a conversation would almost certainly show that most of us who live in
highly developed economies care about our material well-being, our health,
the environment around us and our relations with others. We want to do well
today but also in the future. We care about how the fruits of our economy are
shared: we do not want a society in which a few at the top grab everything for
themselves and the rest live in poverty. A good indicator of the true health of
an economy is the health of its citizens. A decline in life expectancy, even for a
part of the population, should be worrying, whatever is happening to GDP.
And it is important to know if, even as GDP is going up, so, too, is pollution—
whether it is emissions of greenhouse gases or particulates in the air. That
means growth is not environmentally sustainable.
The choice of indicators may vary across time and among countries. Countries
with high unemployment will want to track what is happening to that
variable; those with high inequality will want to monitor that. Still, because
people generally want to know how they are doing in comparison with others,
we recommended that the advanced countries, at least, share some five to 10
common indicators.
Insecurity has both subjective and objective dimensions. We can survey how
insecure people feel: how worried they are about adverse effects or how
prepared they feel to cope with a shock. But we can also predict the likelihood
that someone falls below the poverty line in any given year. And some
elements of the dashboard are “intermediate” variables—things that we may
(or may not) value in themselves but that provide an inkling of how a society
will function in the future. One of these is trust. Societies in which citizens
trust their governments and one another to “do the right thing” tend to
perform better. In fact, societies in which people have higher levels of trust,
such as Vietnam and New Zealand, have dealt far more effectively with the
pandemic than the U.S., for instance, where trust levels have declined since the
Reagan era. Policy makers need to use such indicators much as physicians use
their diagnostic tools. When some indicator is flashing yellow or red, it is time
to look deeper. If inequality is high or increasing, it is important to know
more: What aspects of inequality are getting worse?
Since we began our work on well-being indicators some dozen years ago, I
have been amazed at the resonance that it has achieved. A focus on many of the
elements of the dashboard has permeated policy making everywhere. Every
three years the OECD hosts an international conference of nongovernmental
organizations, national statisticians, government officials and academics
furthering the “well-being” agenda, the most recent being in Korea in
November 2018, with thousands of participants.
Whenever the conference next convenes, the global crisis in human societies
that a microscopic virus has precipitated will surely be on the agenda. The full
dimensions of it could take years or decades to become clear. Recovering from
this calamity and steering complex societies through the even more
devastating crises that loom—catastrophic climate change and biodiversity
collapse—will require, at the very least, an excellent navigational system. To
paraphrase the OECD: We have been developing the tools to help us drive
better. It is time to use them.
RIGHTS & PERMISSIONS
JOSEPH E. STIGLITZ is a University Professor at Columbia University and chief economist at the Roosevelt
Institute. He received the Nobel prize in economics in 2001. Stiglitz chaired President Bill Clinton's Council of
Economic Advisers from 1995 to 1997 and served as the chief economist and senior vice president of the World
Bank from 1997 to 2000. He chaired the Sarkozy commission (2008–2009) and an expert group (2013–2019) at
the OECD for devising measures for well-being and sustainability.
This article was originally published with the title “Measuring What Matters” in
Scientific American Magazine Vol. 323 No. 2 (August 2020), p. 28
doi:10.1038/scientificamerican0820-24
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