Is GDP growth a poor measure of improving living standards?

Is GDP growth a poor measure of improving living standards?

The Economist is hosting a 10-day debate of the proposition:

This house believes that GDP growth is a poor measure of improving living standards.

Opening statements:

Rebuttals:

Featured guest: Enrico Giovanni, President, Italian Statistical Office

Featured guest: Michael Boskin, T.M. Friedman Professor of Economics; Senior Fellow, Hoover Institution, Stanford

Featured guest: Me

Closing statements:

Thanks to the Economist for including me in the debate.

On day 1 of the debate, 69% of voters agreed with the motion, 31% disagreed. Agree is now up to 72%. I don’t know whether that 70% range is primarily a function of the quality of the arguments or instead of the initial views of those who chose to vote.

Here is my statement.


Gross domestic product is of course an imperfect measure of improving living standards, primarily because it is incomplete. By excluding changes in non-market goods like clean air and water, GDP measures the market value of goods and services produced within a nation, but excludes many important outputs that are not owned, traded, or easily and objectively valued. The “P” stands for product, so GDP is an output measure, whereas living standards are in part a function of the goods and services we consume and of the income generated by those we produce.

GDP does not measure happiness, or well-being, or what economists call utility. As a gross measure, it aggregates data for a geographic area, ignoring important distributional questions and individual preferences. As a flow measure, it does not account for the value of a nation’s stock of assets and liabilities.

Andrew Oswald argues: “GDP is too narrow a measure of the things that truly matter to humans to be viewed as a valuable indicator in developed nations like ours in 2010.” I shudder to imagine who might assign themselves the role of determining what truly matters to all mankind. Yet the proposition is not whether GDP is a valuable indicator of “things that truly matter to humans”. The proposition is not limited to rich nations or to the present. The proposition is that GDP growth is a poor measure of improving living standards. I oppose that proposition.

Mr Oswald argues that we should measure well-being and include both subjective surveys and sustainability as components of that measurement. I have no quarrel with measuring well-being, but there is no reason to foul up a useful statistic in doing so. GDP is but one indicator that policymakers can and should use to analyse the economic health of a nation, and it is foolish either to use it for a purpose for which it was not intended, or to attempt to change it to suit one’s policy goals. A doctor who monitors only a patient’s pulse is not doing his job, but one who argues we should ask the patient how he feels and call that his “pulse” is outright dangerous.

A patient’s pulse is useful in part because it is an easily measurable and objective metric that is comparable over time and across patients. GDP is quantifiable – it is simply an accounting measure. GDP is objective – we can rely on the data even when personnel in the statistics office change or the party in power flips. GDP is, within limits, roughly comparable across nations and over time, allowing us to make imperfect but still useful policy comparisons and judgments. And since wealthier societies generally devote some of their increased resources to improving non-market attributes like clean air and water, GDP is only partially incomplete as a measure of the non-tradable aspects of improved living standards.

I would rather live in the Turks and Caicos Islands than in Iran, even though the latter has a higher per person GDP. But if you ask me in which of two unlabelled countries I want to live, and if I know only their per person GDP, I will choose the higher one because it probably has a higher standard of living. Similarly, if you tell me only that a country’s GDP has grown 10% and ask me if the standard of living has improved, I will almost always be right if I guess that it has. Higher GDP means more tradable resources for individuals and governments with which to improve standards of living. Economic growth is good, and more economic growth is better. Ask a family in a poor African nation whether they agree with Mr Oswald’s conclusion that man needs “to make fewer things rather than more”, and whether they need to value tranquil beauty more and a car less.

Money cannot buy happiness, and GDP cannot measure it. But as a measure of improving living standards, it is both adequate and superior to subjectively defined, internationally incomparable and time-inconsistent measures of happiness based on someone’s subjective decision about how you should measure your happiness.

(photo credit: JoA in an argument by Anders V)

7 responses

  1. Pingback: Tweets that mention My entry for The Economist's debate of the proposition:"GDP growth is a poor measure of improving living standards." -- Topsy.com

  2. Minor quibble. Utility is a micro concept and GDP is a macro concept. Demand curves are theoretically additions of individual preferences or utility. The problem here is that we must use a unit of account to represent the demand curve, so buried in the practical use of utility theory are the components of GDP.

    A preference such as a clean environment has a particular utility to an individual but that individual's preference for it might be expressed as a trade-off between lower consumption and higher Pigouvian type taxes. Voters express these preferences by electing those who might share their preferences. But the practical measure of these preferences is buried in the components of GDP.

    When we move away from unit of account measures we enter a fantasy world of opinion. So, I agree with your position.

  3. I agree with the sentiment behind the motion; however, in the end I have to agree with Mr. Hennessy for much the same reason. The sentiment of the motion is understandable because it recognizes that GDP is only one factor among many that needs to be taken into account in public policy decision making. Those in favor of the motion presumably want to mix up GDP with other largely subjective factors to arrive at a new standard of economic well-being. That would be a mistake. The problem with many modern-day (primarily left-leaning) economists is that they seek to infuse (confuse?) economics with their political biases and subjective value judgements. In the process, both economics and decision making suffer. Rather than mix economics, which should aspire to be objective and valueless, with other subjective value-based factors, economists, like good accountants, should stick to their numbers. Once the economic facts are put on the table, the other subjective factors should then come into play. I can't say this better than Mr; Hennessey, whose metaphor of the good physician seems very apt.

  4. Oswald states that the Easterlin Paradox is proved but there are many studies that show that wealth and happiness are positively correlated. Though Oswald concedes this point and that the data can be ambiguous his real point is that there is a limit to the correlation beyond which there is no statistically significant increase in happiness for a dollar increase in income or wealth. But this generally omits the fact that the wealthier are on average happier than those less well off which contradicts the Easterlin Paradox though it varies country to country. Some countries like Denmark have relatively constant happiness among different income levels others like the US show increasing happiness per dollar increase in income or wealth.

  5. What is particularly troubling is that Oswald enlists Wolfers and Stevenson in support of satiation of happiness when they actually say,

    "There appears to be a very strong relationship between subjective well-being and income, which holds forboth rich and poor countries, falsifying earlier claims of satiation point at which higher GDP per capita is not associated with greater well-being."

    Other than the fact that Oswald favors greater redistributional policies based largely on studies that contradict his main justification there is little consistency in his position other than some active hand waving about climate change and assertion of authority. Precious little for policymakers or the average joe who wants to be above average.

  6. Another sticking point for me is his assumption that someone else's success somehow has negative effects on me because of comparison. Again this contradicts the work of neuroscientists on mirror neurons which indicate that we elicit in others the same feelings we have. So, when one sees and understands another's success it is more likely that one will feel good not bad. Mirror neurons neatly explain altruistic acts which do not need government programs to elicit them. In short mirror neurons ensure that each of us has an internal moral compass and that they are the source of empathy.

  7. The UN has often tried to measure something else, seemingly in an attempt to make the US look bad, but there is only one other measure that seems as good as GDP for comparison between countries:
    net actual migration.
    But net migration isn't so helpful with year on year comparisons of one society to another.

    Those who think some other statistic are better, should be using it and advocating it — and comparing the policies they recommend because of it with those policies that seem to increase GDP the best. I know of no set of better policy recommendations in any detail.

    Health care, in particular, is subject to the Big Gov't is better idea with more socialization — but the long waits for care, and the numbers of sick people who die while waiting, don't seem to be highly valued in such value measures.

    Because of income inequality issues, changes in the bottom 20% percentile after tax income (or GDP per person at the bottom 20th percentile border) might result in a better target for policy, with the idea of increasing income to the poor is far more valuable than increasing income to the already above average.

Follow

Get every new post delivered to your Inbox.

Join 6,423 other followers