is it time to abandon the gdp as a measure of economic success?
According to modern financial wisdom, an economy is booming when its gross domestic product, or GDP, grows by so much in a given year and if that growth ever stops, or turns into a decline, it’s time to sound the alarms. It’s a powerful number and we base a lot of decisions about how to run entire nations and international trading blocs based on it and how much it changed in a given period of time, much like we do with FICO scores before deciding whether to lend anyone money. But just like there are problems with determining FICO scores, and how problematic misusing them can be, there are major concerns about the use of GDPs as the true north of economic metrics. And while we won’t see its use fall out of favor anytime soon, open challenges to this numbers’ supremacy in policy making are starting to appear.
One such challenge comes from the country of New Zealand, which wants to use something it calls the Happiness Index instead, arguing that the GDP doesn’t capture living standards and access to basic services and necessary products adequately. Another was issued by American economist and Nobel laureate Joseph Stiglitz, who sees it as a grossly simplistic measure that sweeps potentially catastrophic problems like yawning income inequality, unsustainable debt, human rights abuses, and environmental degradation and pollution under the rug. It’s more or less the sum total of policies which see the end as justifying the means, only the end is to take a relatively big number and try to make it bigger in three months or a year, forever.
Sure, it’s great that in the last decade, the GDP of the United States grew by 48.6% to $21.44 trillion. What’s a lot less great is that its debt now exceeds $23 trillion, inflation-adjusted wages stayed almost flat for the last 30 years, 8 in 10 Americans are living paycheck to paycheck, and half of them have negative net worth while the top quintile owns 93% of everything. It’s also not great that while the global GDP is around $80 trillion and grew by 27% in the last decade, global debt loads hit $253 trillion last year. In other words, we owe each other almost three and a third more times than the total worth of all the goods and services we create despite creating an extra $17 trillion worth of goods and ideas in the span of ten years. Though to be fair, quite a bit of that debt won’t need to be fully repaid for decades, and is actively used to grow GDPs.
the ugly truth behind today’s gdp growth
What is a much more pressing issue, however, is the fact that much of that GDP is fueled by enthusiastic borrowing by both businesses and individuals, and consumer spending. As more and more consumers feel the pinch of inequality and mounting debt payments, the less likely they are to keep spending, and the more likely that consumption will fall, hurting businesses borrowing to make products and provide services, which in turn will lay off many of their employees, who’ll also spend less, thus lowering the GDP in what economists are calling doom loops. And according to just about every analysis, the precarious balance of consumption, stock market values, and debt, are making us more and more vulnerable to such doom loops.
On top of all that, the majority of the world’s workforce being tuned out and working for the sake of work so economists can properly tally up GDP movements rather than because their work is necessary for the world to function, and are acutely aware of that fact, can’t be good news in the long term either. In the most pessimistic summation, the roaring global economy we say we enjoy today is like a prop skyscraper. On the outside, it looks sleek, gleaming, and always going upwards thanks to a façade of GDP numbers. Inside, it’s hollow, with large cracks in its support beams, and swaying a little too much every time there’s a strong gust. At some point, bad things will happen to it, and there’s only so many times we can fill the cracks and only so much material to keep building higher and higher on a shoddy foundation.
This is why it’s ultimately impossible to keep trying to create constant GDP growth and use it as one of the most important factors of how a nation’s economy is doing for both politicians and economists. Keep trying to prop it up and you get desperate, accruing more debt, creating more bubbles, and relying on cutting interest rates to get people to borrow and shop more until the whole thing blows up in your face like it did in 2008, except the next time will be even worse as most of the mechanisms used to blunt the Great Recession from becoming a depression have already been deployed. Almost nothing’s left in the arsenal except taking on even more debt, then trying to spend our way out of the next financial calamity.
what should we use instead of the gdp?
So, are those calling for dethroning the GDP in favor of a different metric right? It is a useful number to keep in mind and knowing the sum total of what an economy generates is pretty important to both economists and policy makers, so it’s unlikely it will ever go away. And if we formally declare that today’s obsession with GDPs should be considered a relic of the past, is there another shorthand barometer of economic prowess we can use? We could do what New Zealand is trying with its Happiness Index and focus on how well off the population is, but that doesn’t actually tell us very much about what the economy is actually doing, only how its spoils are being distributed throughout the population.
A better idea may be to develop a more comprehensive metric. Consider the aforementioned FICO score. It’s not simply the sum total of all your credit lines, it’s a balance between how well and consistently your make payments on your debt, how long you’ve borrowed and for what, how much debt and of what kind you have, and a few other quirks which seem a bit bizarre and irrelevant to the subject matter. The point is, it’s attempting to be a nuanced representation of one’s ability to handle credit and appreciates that borrowing to buy a house and simply paying the minimum on your mounting credit card debt, and inconsistently at that, are two very, very different situations and tries to reflect that. Whatever we use instead of the GDP should be a nuanced summation of important metrics as well.
It would need to consider debt loads, general economic welfare, distribution of wealth and social mobility, and people’s access to basic services and necessities. Rather than a number we have to keep growing or else, imagine a sort of economic score we should focus on improving and maintaining, much like we do with ones judging our creditworthiness. This way, you don’t have an incentive to add a trillion in debt just to boost a number by a few percentage points but plenty to figure out a way to pay down debt and address the massive, wasteful, and shameful misallocation of resources in the labor market, as well as make sure your citizens’ standard of living steadily improves.
Just as our world is becoming more complex and dynamic, so should the way we measure what we do in it and how. Judging how well off we are just by adding up how much stuff we can crank out of factories and sell, or how many people will pay for something we’ll help them do, then focusing solely on making that number bigger, is like trying to lose weight and caring only about the number on the scale, ignoring that eating disorders are going to be a lot worse for than a healthy diet and regular exercise even if you hit your goal. It’s true that many economists consider far more metrics than the GDP, but it’s far from clear if politicians and pundits do. And focusing on a new, more nuanced, and healthier indicator of economic health and power could change national conversations — as well as politicians’ priorities — for the better.