Is GDP Still Important?

By Jabulani Leffall on 2 September 2010 6 comments

Every pundit, politician, and economic forecaster (even smarmy financial dilettantes such as myself) have remarked that the recent recession was the worst economic calamity since the great depression.

It's a very dramatic, historic and urgent thing to say — something that you want to have on record that you said — if for nothing else than to be part of history.

Yeah, except it's dead wrong, in a manner of speaking. How would we know whether this past recession is actually the worst recession since the Great Depression? The measure of what is or isn't recession, Gross Domestic Product (GDP), wasn't even invented and implemented until after 1941. And wouldn't you compare it to other recessions, and not to the Great Depression, when there was no SEC, no Social Security, no FDIC no HUD, etc. back then?

So why is GDP so important? Or is it even important anymore? One critic of GDP, Alan Atkisson, even goes so far as to call GDP the "Manhattan Project of Economics."

I wouldn't resort to nuclear and apocalyptic allusions, but I will say that perhaps it's time to reevaluate how we measure economic growth and how we psychologically mind-bomb people by telling them that if there is no GDP growth they have to get scared.

In a nutshell, GDP measures economic growth based on production and consumption of goods and services, or to be more accurate, it is a measurement of "final goods and services officially made" quarter by quarter through a full calendar year.

I asked a friend, a former investment banker for Goldman Sachs and other institions, what he thinks of GDP. He said, "Ask yourself what we're 'officially making' in this country right now and you have my answer."

Elaborating further, he said the formula for GDP is flawed and has outlived its usefulness: Private consumption + Government Spending + (Exports-Imports).

What does that equal? Well in typical I-banker vernacular which I won't repeat here, he said the country, based on this formula of measuring economic health, is headed for the same fate as a nut or bolt twisted and fastened to a wall.

Alternative Measurements

Since I'm a solutions-oriented man, I won't spend the whole post whining. In that vein, there are three upstarts that could, should, or might make a run at the shiny title belt GDP now holds around its bloated consumption-dependent waist.

  1. The Index of Sustainable Economic Welfare: Expenditures balance against mutually-assured environmental destruction.
  2. The Genuine Progress Indicator (GPI): Production growth that actually demonstrates the betterment of human beings.
  3. The Happy Planet Index (HPI): Are we happy with our stuff? Is killing the planet and contributing to standard of living inequities actually fulfilling in the long run?
  4. Gross Personal Product (GPP): All of the stuff that we buy: plastics, deliberate obsolescence polymers, and really gross food packages that aren't biodegradable. Oh, and the sticky oil from the Gulf of Mexico — ewww, grosssss.

OK, so the "GPP" is something that you saw here first and exclusively (maybe) — I made it up. But doesn't it start with our personal attitudes? Are you tired of having your homeland measured by cold, impersonal, flawed statistical comparisons? What makes you happy: what you produce or what you consume?

I now leave you with the words of Simon Kuznet, commissioned by the State Department to study political economy in the late 1930s and early '40s and often considered the inventor of GDP. (Ironically, he then essentially said in the 1960s, "don't use this measure.")

Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what.

With pressing environmental concerns and an unsustainable economy based more than 70% on the consumption of stuff — more than 90% of which we basically don' t need — those "distinctions" that Kuznet spoke of are what we have to figure out as individuals and as a nation.

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Guest's picture

Is this some kind of joke? None of these alternatives have anything to do with the health of the economy. That is why the GDP has stuck around. It is the best measure for checking our economy.

You can use the others to measure how we are "killing the planet", but they have nothing to do with the health of the economy. Well other than the fact that if we were to switch to them, regardless of what the indicators actually indicate, the economy would be in the toilet for good.

Jabulani Leffall's picture

Well the "GPP" is certainly a joke but these other three indexes have in the past and are currently being proposed by some serious economists as measurements to complement, augment and perhaps replace GDP growth as a measurement of Economic Health. GDP is still a great barometer for activity but my point was that GDP Growth as a statement on our progress is sort of a misnomer. Plus there are a lot of things, and this may warrant a follow up post, that make GDP flawed as an index to determine our standard of living and quality of life. For instance, GDP doesn't include volunteer work that produces tangible results, it doesn't include the multi-billion dollar underground economy of garage sales, one-off cash transactions on used goods between private citizens, drugs and other black market goods and services, it doesn't include bartering. It doesn't include innovation computers are less expensive and more powerful than mainframe ancestors but GDP makes no allowance for this improvement in quality it just measures the monetary value, which is marked up.

Also and this is the most important point I'm trying to make GDP can't project or predict future economic activity. There is only so much oil and only so many trees and only so much fresh water and I apologize for that.

Lastly, GDP tends to overstate economic progress by not factoring in externalized costs. When you use 250 gallons of fresh water in the production of a T-Shirt you aren't going to get all 250 gallons of that water back and the T-Shirt is going into a landfill.

All the polymers in these Ipads and computers and hot new cell phones are going into landfills, it's gonna take energy to clean that up store it, dispose of it, which means more oil and water.

GDP as a measure of true progress is becoming increasingly outdated and unsustainable.

Guest's picture

I never said that the GDP is perfect, because it isn't. But the examples above are not replacements for the GDP. They are simply liberal propaganda. They probably started out as a joke and some hippies jumped all over it. If the GDP is broken, tweak it.

Switching the GDP to one of the jokes above would be like taking your car to a mechanic because your brakes are squealing, and they tell you the brakes have a mechanical issue, so they are replacing them with windshield wipers.

Guest's picture

Resources are limited and no economy can grow forever. So measuring growth with GDP is completely meaningless. Our society doesn't need to grow wealthier, it just needs to grow up.

Guest's picture

The HPI was developed by economist and has been thoroughly research throughout the world. It is absolutely becoming a very possible replacement for the GDP.

The GDP is outdated and disproportionately represents measurements of "wealth" and "progress" throughout the world, here are a few reasons:

-The GDP is out of touch with the great environmental and social needs that are growing in the planet because the GDP does not register distribution of resources, inequities, and declines in well being as their representation of progress. Meaning, that the GDP fails to account for depletion of human and natural capital.

-Again, to build on the point that has been made throughout this article and comments; The GDP measures high levels of consumption, however, higher consumption that is detrimental to people's health and the environment is not a step towards development. (progress)

-MORE IMPORTANTLY the GDP does not represent the entire population of a country. For example, in 2005 in the United States PER CAPITA INCOME soared by 9 percent. The increase was attributed to the wealthiest 10 percent of the population. The bottom 90 percent experience a 0.6 percent decline. From 2000 to 2005 in Sudan the GDP has risen 23 percent, however, 600 000 people were at risk of acute famine from prolonged drought in 2001.

To be honest, I think it's a bit silly to dismiss these very real (in the sense that they apply to the real world) metrics that are picking up the slack of the shortcomings of traditional metrics.

Guest's picture
E Rick

First, I am not an economist but here is my thought. It seems to me that if you were to put GDP on a personal level, you would essentially be measuring how many toys you have purchased and comparing that to how many toys other people have. That is not a true measure of health in my opinion. Others have alluded to the fact that infinite growth is not possible for many reasons: natural resources are finite; money 'should' be finite; needs 'should' be finite however what are truly wants many times are misconstrued at needs. Wealth does not equal happiness. Things don't equal happiness. Making a buck at the expense of others doesn't make happiness. Wealth and happiness appear to be linked but they are really not. So what is the purpose of GDP? Why are people who have a lot of stuff not happy? What is more important stuff or happiness? I think measures like this just further the consumer mentality and actually cause harm to the people in the nation. We become dogs constantly chasing our tail in order to get more stuff and support our economy (to do our part as an American citizen). Where is that getting us anyway???