What's Wrong with GDP? The Attack on Economic Growth
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What's Wrong with GDP? The Attack on Economic Growth

iStockphoto/The Fiscal Times

Gross domestic product – and the very idea of growth that it is meant to measure – is under attack these days by a small, radical group of academics who are calling for a shrinking of the world’s developed economies through voluntary reductions in production and consumption. This kind of contraction, they argue, is needed to preserve environmental resources and rebalance inequalities between developed and emerging economies.

To these proponents of “degrowth” – who will be holding a conference in Montreal next month – GDP is a failed economic indicator ready to be consigned to the scrapheap of history. “A fixation on economic growth is at the root of our environmental issues and social inequalities,” reads a press release for the conference.

RELATED: The Economics of Happiness: Where the U.S. Ranks

Those ideas fall far outside the realm of mainstream economic thought, but at the same time, more and more traditional economic thinkers – who still believe strongly in the need for growth – have suggested that growth as we know it is not enough. One of them is President Obama’s nominee to head the World Bank, Dartmouth College President Jim Yong Kim. 

Kim came under fire last week for comments he wrote in a book released 12 years ago. In an introduction to a collection of studies he co-edited titled "Dying For Growth: Global Inequality and the Health of the Poor." Kim wrote, “The studies in this book present evidence that the quest for growth in GDP and corporate profits has in fact worsened the lives of millions of women and men.”

The reaction to Kim’s disparagement of GDP growth was swift and critical. “Obama’s pick for World Bank hates capitalism,” read one headline. “Dr. Kim would be the first World Bank president ever who seems to be anti-growth,” New York University economics professor William Easterly told The Financial Times.  “I think at the very least Kim needs to publicly clarify his beliefs about capitalism and economic freedom—or his nomination should be withdrawn,” conservative blogger James Pethokoukis wrote. “To put someone in charge of the World Bank in 2012 who holds a fundamental misunderstanding of what creates economic growth and how nations escape poverty would be a disaster in both political and human terms.”

Kim has since clarified his beliefs. “…I recognize that economic growth is vital to generate resources for investment in health, education and public goods,” he wrote in an op-ed released by the Treasury Department. “Every country must follow its own path to growth, but our collective mission must be to ensure that a new generation of low and middle-income countries enjoys sustainable economic growth that generates opportunities for all citizens.”

Kim is not the first economist to suggest that a true measurement of the economic welfare of citizens around the world should go beyond gross domestic product. For decades, economists have discussed and debated the role of economic growth and the value of metrics like gross national product in measuring the broader welfare of countries and their citizens.

“As the old axiom goes, what gets measured gets managed. And as it turns out, we’ve been measuring the wrong things,” writes Umair Haque, director of the Havas Media Lab, a think tank that studies economics and author of “Betterness: Economics for Humans.” So while measures like GDP serve an important role, economists are casting about for other statistics that can round out our understanding of global progress.

To help study the subject and come up with appropriate measurements, the field of “happiness economics” has blossomed in recent years. “There’s a lot of traction now for the idea that these measures could be telling us something that maybe we’re missing as we measure progress only with income,” says Carol Graham, a senior fellow at the Brookings Institution and author of “The Pursuit of Happiness: An Economy of Well-Being.” “That doesn’t mean that we don’t need income measures – we surely do. They’re tried and true. But they’re measuring one element of well-being.”

To further that goal, the United Nations held a “high level meeting” on Monday titled, “Happiness and Well Being: Defining a New Economic Paradigm.” It was hosted by the tiny South Asian kingdom of Bhutan, where per capita gross national income is around $1,870 a year and per capita GDP is just under $2,100, according to the World Bank.

Bhutan in 2008 introduced a Gross National Happiness (GNH) index to measure economic progress. (The index is built around nine overarching factors: psychological well-being, health, time use, education, cultural diversity and resilience, good governance, community vitality, ecological diversity and resilience, living standards.) And Monday’s U.N. meeting follows the adoption last year by the organization’s General Assembly of resolution 65/309, which recognizes “that the gross domestic product indicator by nature was not designed to and does not adequately reflect the happiness and well-being of people in a country.”

Well, sure, that’s the U.N. you might scoff. But economists have long acknowledged the flaws and limitations of measurements of gross national product and gross domestic product. Even the economist who was tasked with devising a comprehensive measurement of national output of goods and services to help effectively gauge the depths of the Depression admitted that it was flawed.

“The welfare of a nation can scarcely be inferred from a measurement of national income,” Nobel Prize-winning economist Simon Kuznets, who coordinated the GDP development work of researchers at the Commerce Department and the National Bureau of Economic Research, once told Congress.

A host of prominent modern-day economists have also questioned the real-world value of measuring GDP – and suggested that we need to develop a different measure that better reflects the well-being of individuals and families. Nobel laureates Amartya Sen and Joseph Stiglitz headed up a Commission on the Measurement of Economic Performance and Social Progress created by French President Nicolas Sarkozy.

“There is a certain absurdity to the obsession with maximizing long-term average income growth in perpetuity, to the neglect of other risks and considerations.”

Economist Jeffrey Sachs, director of the Earth Institute at Columbia University, was among the featured speakers at the U.N. meeting this week. In an introduction to a “World Happiness Report” commissioned for the U.N. conference, Sachs writes that it makes sense “to pursue policies to raise the public’s happiness as much as it does to raise the public’s national income. Bhutan is on to something path breaking and deeply insightful. And the world is increasingly taking notice.”  And in a piece titled “Rethinking the Growth Imperative” published earlier this year, Harvard economist Kenneth Rogoff, formerly the chief economist at the International Monetary Fund, highlighted some shortcomings of modern growth theory.

“Modern macroeconomics often seems to treat rapid and stable economic growth as the be-all and end-all of policy,” Rogoff wrote. “There is a certain absurdity to the obsession with maximizing long-term average income growth in perpetuity, to the neglect of other risks and considerations.”

There is a consensus of sorts building around the idea that current economic measures, particularly GDP, are inadequate as true measures of societal well-being, says Haque. “You will see a lot of the greatest economists in the world now beginning to agree,” he says. “Rogoff and Stiglitz do not agree on much, right? They are opposite ends of the spectrum. But one thing that they do seem to have reached a soft consensus on now is that our measures of human welfare are inappropriate for the 21st century. They are too crude, they are too unsophisticated, they are too limiting.”

Other countries have also already taken steps to modify their growth measures to make them better reflect factors like environmental impact and the happiness of residents. But developing a more comprehensive economic measure for use in the U.S. and worldwide won’t be an easy task, and plenty of new acronyms have already been created in pursuit of the goal. Besides gross national happiness (GNH), there’s also a Your Better Life Index developed by the Organisation for Economic Co-operation and Development, a Happy Planet Index (HPI), a Human Development Index (HDI) and a Genuine Progress Indicator (GPI) or Index of Sustainable Economic Welfare (ISEW).

Graham suggests that one comprehensive statistic might not work. “Most people who are seriously involved in the development of the metrics don’t think we have any kind of agreement on what would be in the one indicator,” she says. Instead, she points to a series of four questions that the British Office of National Statistics has incorporated into its household surveys:

  • Overall, how satisfied are you with your life nowadays?
  • Overall, to what extent do you feel the things in your life are worthwhile? 
  • Overall, how happy did you feel yesterday? 
  • Overall, how anxious did you feel yesterday?

Together, those questions allow surveyors to get a better sense of both day-to-day satisfaction and broader sense of life meaning. “There’s obviously a lot of interest in having one measure, because it’s more tractable for policymakers and the media,” Graham says. “But it wouldn’t actually be a very useful measure.”

Still, if nations like the U.K., China, India and others are further along in developing measures of Gross National Happiness or other alternative versions of GDP, the U.S. is at least inching down the path. Princeton economist Alan Krueger, who now chairs President Obama’s Council of Economic Advisors, co-authored a paper published in 2009 that proposed “a new approach for measuring features of society’s subjective well-being.”

And the National Academy of Sciences in December convened the first meeting of a panel to review and evaluate methods of measuring subjective well-being. The panel, sponsored by the Department of Health and Human Services, the National Institute on Aging, and the U.K. Economic and Social Research Council, was tasked with developing a framework modeled on gross domestic product and gross domestic income for including well-being measurements into our economic analysis.  

Yet challenges – and skeptics – remain. In a presentation prepared for the National Academy of Science panel, Steve Landefeld, the director of the Bureau of Economic Analysis, noted that the field of subjective well-being is an “endlessly fascinating and timely subject matter for study.” But, Landesfeld noted, government statisticians have “other low hanging fruit” to deal with before getting to these kinds of measures. As his presentation noted, “Pressing measurement issues revealed by the recent financial crisis are first priority.”

Happiness may have to wait.