Why Should We Care About GDP?

Bruce Bartlett argues that there are perhaps better indicators than GDP to evaluate the state of a nation.

IMHO the real problem is not that GDP is relied upon too much, but rather that it is under appreciated. I think of it like a Honda Accord. It is pretty good at most things (but perhaps not best at any one thing). If you want to go off-road, it’s not the car for you. To stretch the analogy, it seems like too many people are wanting to go off-road these days. They say GDP is antiquated or it is too focused on “money” or comment on any number of other perceived shortcomings.

GDP is not the one and only measure we ever need in evaluation. But it is positively correlated with many, many things we care about. To mention only a few:

Self-reported well-being/happiness (here is a good report on well-being)
Literacy
Infant mortality
Child death
Life expectancy
Education: 8th grade math achievementyears of schooling for femaleschildren attending primary school, to mention just three indicators we might care about.
Poverty reduction
Sanitation
Malnutrition
Access to computers and cell phones
Paved roads for easy transportation
Available leisure time (here you have to hit “play” to see the gradual decline in working hours as GDP increases). Here is a US-specific report about increases in leisure time: “The main empirical finding in this paper is that leisure time – measured in a variety of ways – has increased significantly in the United States between 1965 and 2003.” This usually surprises people who assume we are working harder and have less free time.

Economists, of course, know about these correlations. I’m not sure most other people do. The direction of causation and policy implementation to get from “here” to “there” is another matter. There are also concerns about the quality of data coming out of many poorer nations, but are these shortcomings enough to greatly reduce the significance of the relationships? Probably not. Lastly, the relationship between GDP and the indicators above holds only generally — that is, the country with the highest GDP will not be ranked number one in every category. But as a first pass, aiming for increased GDP growth can’t be a bad goal (again, how to get there is another question).

The two most common issues that people want to append to discussions of GDP are inequality and the environment.

Sure, maybe we are concerned about inequality in addition to GDP. There are many kinds of inequality, but we most often hear about inequality of income. On this front there seems to be no relationship to GDP from a casual glance at the data. However, note that almost by definition the absolute standard of living increases for all citizens along with gains in GDP even if the relative gains are not evenly distributed. But it is the relative gains people seem to care about most.

There is also the question of which channel monetary inequality uses to create discontent. One argument is psychological (think: envy), but more often it is assumed inequality allows the wealthy to assert their will through the political system. Certainly, corporations and unions donate heavily during elections and have continued influence outside of them through regulatory capture (note, however, that just as often as they are lobbied by business, legislators seek out corporations to help write “smart” regulations). Income inequality might affect who gets elected, but I don’t see it having a direct channel to shaping policy once officials are in office (I could be wrong). But maybe the rich, through campaign donations, can assure that low-tax, pro-business politicians fill our government. This is often asserted as fact rather than demonstrated with evidence. Steven Levitt found in one of  his studies that campaign spending has an “extremely small” impact on election outcomes (at least at the level of the US House of Representatives). Joseph Stiglitz, meanwhile, argues that income inequality is indeed one of the most important political problems of our time in his new book.

The environment is another issue; but this too is complex. Gross tons of carbon tend to increase along with GDP. Emission rates might be a different story. US emission rates, for example, have been decreasing even before the financial crisis. But carbon isn’t all we care about. Since 1980, US GDP increased 128%, but emissions of the Six Common Pollutants have decreased 63% (you can see the EPA data here). This provides a little bit of hope. These less appreciated forms of pollution are especially important for the world’s poor. For instance, smoke inhalation is a deadly threat in developing countries, and more immediate than climate change. Development may also help protect against natural disasters. Since 1975 the number of people killed worldwide from natural disasters has decreased even as the reported number of disasters has increased drasticallyThis report talks about the complex relationship between growth and the environment. Overall, the relationship between growth and the environment depends very much on how we define “the environment” and over what time horizon we examine. If we are most concerned about “the environment” as meaning the area where women cook food in poor countries and our time horizon is the present, strong GDP growth starts to look like a pretty good solution. If we are more concerned about “the environment” as defined more broadly by the global effects of continued carbon emissions several decades from now, continued GDP growth may be a problem. If we are concerned about both, which we probably are, then we have ourselves a dilemma, which we probably do.

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