GDP: A Misleading Measure of Prosperity

Here is a post from the NYTimes criticizing GDP as an inaccurate measure of well-being/prosperity. I am going to pick out a few interesting writings from this article. The full text of this article is available here:

This article raises several fundamental questions:

• Is growth and development the same thing?
• Is it valid to use GDP, a measure of economic output, to measure well-being?
• What are the best indicators beyond GDP?
• What is the goal of a society?
• How do we create measures on alteration of climate system, loss of species, consequences of man-made disasters (the recent oil spill in the gulf comes to mind)?
• How to measure social and emotional lives?
  

"The G.D.P. ... has not only failed to capture the well-being of a 21st-century society but has also skewed global political objectives toward the single-minded pursuit of economic growth"

"With easy access to national information, Hoenig told me optimistically, Americans might soon be able “to shift the debate from opinions to more evidence-based discussions to ideally a discussion about what solutions are and are not working.”

"Those involved with the self-defined indicators movement ... argue that achieving a sustainable economy, and a sustainable society, may prove impossible without new ways to evaluate national progress"

Another good question is where did GDP come from?

"G.D.P. — the antecedents of which were developed in the early 1930s by an economist named Simon Kuznets at the federal government’s request"

Do you want to be a high-GDP person or a low-GDP person? This is my adaptation from the article:

High-GDP person's life:

• Has a long commute to work
• Drives an automobile that gets poor gas mileage, forcing her to spend a lot on fuel.
  
• Replaces her car every few years due to the morning traffic and its stresses
  
• Has problems with her cardiovascular health due to stress. She treats the conditions with expensive pharmaceuticals and medical procedures
• Gets in shape by joining a member-only gym club
  
• Overall, high-GDP person works hard and spends money. She loves going to bars and restaurants, likes her flat-screen televisions and adores her big house, which she keeps at 71 degrees year round and protects with a state-of-the-art security system. High-GDP family pays for a sitter (for their kids) and a nursing home (for their aging parents).
  
• Employs a full-time housekeeper because they do not have much time

Low-GDP person's life:

• Busy with cooking, cleaning, and home care
• Walks to work
  
• Grows vegetable in the garden instead of buying pre-wash salad mix from a grocery store
• Read books borrowed from a public library instead of buying them
• Gets in shape by running in the neighborhood

So from an economic point of view, a high-GDP person is more valuable to a country's economy. But the important question is "Does she have a better life?"

Stiglitz, a Nobel laureate in Economics said "Americans would have had a much clearer picture of our progress over the past decade if we had focused on median income rather than G.D.P. per capita, which is distorted by top earners and corporate profits. When you have increasing inequality, median and average behave differently. Real median household income has actually dipped since 2000. But G.D.P. per capita, he noted, has gone up."

"Stiglitz and his fellow academics ultimately concluded that assessing a population’s quality of life will require metrics from at least seven categories: health, education, environment, employment, material well-being, interpersonal connectedness and political engagement. They also decided that any nation that was serious about progress should start measuring its equity — that is, the distribution of material wealth and other social goods — as well as its economic and environmental sustainability."

“You might say, If we have unemployment, don’t worry, we’ll just compensate the person. But that doesn’t fully compensate them. Stiglitz pointed to the work of the Harvard professor Robert Putnam, who served on the Stiglitz-Sen-Fitoussi commission, which suggests that losing a job can have repercussions that affect a person’s social connections (one main driver of human happiness, regardless of country) for many years afterward."

Putnam from Princeton said “damage to this country’s social fabric from this economic crisis must have been huge, huge, huge. And yet, he noted, we have plenty of numbers about the economic consequences but none of the numbers about the social consequences.”

Here is his argument that is very interesting: “People will get sick and die, because they don’t know their neighbors,” Putnam told me. “And the health effects of social isolation are of the same magnitude as people smoking. If we can care about people smoking, because that reduces their life expectancy, then why not think about social isolation too?”

Here is a list of new measures proposed in various countries:

• Canadian index of well-being
• State of the USA
• United Nations' Human Development Index
  

Here is a list of people who have been working/supporting new measures of well-being:

• Alex Michalos, Canada
• Chris Hoenig, State of the USA
• Commission on the Measurement of Economic Performance and Social Progress (a.k.a. The Stiglitz-Sen-Fitoussi commision)
• Daniel Kahneman on Emotional well-being
• Angus Deaton, collaborative work with Kahneman

Here is a short list of articles by Deaton and Kahneman:

• Income, aging, health and well being around the world: Evidence from the Gallup World Poll