Things the Gross National Product gets wrong
(posted by jackson)
Jim Henley points out that the GNP, (and also the GDP), fails to account for losses to America’s asset stock. There are many other worthwhile criticisms of the GNP as a measure of human welfare and national well being. Robert Kennedy offered this criticism in 1968, right before he was killed:
We will find neither national purpose nor personal satisfaction in a mere continuation of economic progress, in an endless amassing of worldly goods. We cannot measure national spirit by the Dow-Jones average, nor national achievement by the gross national product. For the gross national product includes air pollution and advertising for cigarettes, and ambulances to clear our highways of carnage. It counts special locks for our doors, and jails for the people who break them. The gross national product includes the destruction of the redwoods, and the death of Lake Superior. It grows with the production of naplam and missles and nuclear warheads… It includes Whitman’s rifle and Speck’s knife, and the broadcasting of television programs which glorify violence to sell goods to our children. And if the gross national product includes all this, there is much that it does not comprehend. It does not allow for the health of our families, the quality of their education or the joy of their play. It is indifferent to the decency of our factories and the safety of our streets alike. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials… the gross national product measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile; and it can tell us everything about America - except whether we are proud to be Americans.
(I copied down this quote awhile ago, and I now forget my source on this, but I believe I copied that excerpt from Tom Hayden’s memoirs, Reunion. )
As with so many things, journalists probably exaggerate the weight that should be given to the GNP. I know that economists who I enjoy reading, such as Brad Delong, are usually careful to emphasize that the GNP is only a partial measure of human welfare, and, of course, it fails to capture the full richness of human happiness, nor does it capture the full tragedy of the kinds of losses that Henley just mentioned.
All the same, I do think the GNP (or GDP) is often used as a club in public debates, to silence critics of certain leaders (Reagan was awesome! Look how much the GDP went up while he was President!!!) and to exaggerate flaws of some other leaders (FDR sucked! He introduced socialism into America and look what happened!!!). So it bears repeating, again and again, that the GNP (or GDP) is a deeply flawed measurement of human welfare. It should only be used in a paragraph if it is surrounded by qualifiers.
June 30th, 2008 at 1:46 am
No, it should not be used at all.
1) Myself, most people I talk to, and most Americans, would like increased wealth to translate into more leisure time and a job with higher satisfaction. This would translate into a LOWER GDP, even though it represents a higher standard of living.
2) Almost all Americans have too much “stuff”. There is simply no quantity measure of the economy that I can envision going up substantially in the future. All improvements in quality of life will be in quality, not quantity. Quality is inherently subjective, and there’s simply no way you can put a number on it. It’s complete garbage in, garbage out.
3) A healthy economy is an economy that produces what people want. Because nearly every sector of the economy, from education to healthcare, from finance to housing, is so riddled with subsidies, tax credits, regulations, etc., it is impossible to tell if an increase in production was the result of the economy producing more of what people want, or because the regulatory state promoting such production in a welfare-negative way.
Use of GDP to guide policy decisions has dire consequences. The worst is that it pushes the government to lower interest rates and spend more money at the first sign of possible negative growth. Instead of allowing a natural productivity induced price deflation result in more leisure time and better jobs, the government creates asset price inflation that forces us all into debt that requires long hours to pay down.
June 30th, 2008 at 3:17 am
Libra wrote:
“There is simply no quantity measure of the economy that I can envision going up substantially in the future. ”
That’s a failure of imagination. There are metrics that offer insight into how the average citizen is doing, and the GDP is one of those metrics, but it is a profoundly flawed one. There are better metrics that can offer much greater insight how the average citizen is doing. No metric would ever be perfect, and certainly any average needs to be wrapped in the qualifier that important demographics might depart from the average. But there are certainly metrics that could be useful.
June 30th, 2008 at 7:17 am
I would think that productivity would be a pretty good measurement to consider, combined with the average amount of time a worker spends working versus leisure time. Other measurements, like how long/how many days the typical worker has to work to pay off certain basic needs (food for a year, housing costs, taxes) and then how much of the year is essentially working for luxury goods, would also be worth considering. Of course, this would vary a lot from region to region with cost of living.
June 30th, 2008 at 1:10 pm
FreeDem, I think your approach is right. We shouldn’t depend on one metric to summarize all of human happiness. A nation is a big complicated ship to steer, and one needs to steer it in the dark (one can’t really see the economy, the way one can see a shoreline). Many measurements should be used, and the debate should be more about how to balance those measures, rather than how to make one particular metric go upward, always upward.
June 30th, 2008 at 2:11 pm
Libra, your first point is right on. As I commented under Jim Henley’s post, all the input costs of producing a unit of consumption count toward GDP. So for two identical quantities of personal consumption, the least efficient and most wasteful system of producing them will result in the highest GDP. Anything that significantly reduces the cost and effort necessary to produce the existing standard of living will show up as a catastrophic implosion of GDP.
June 30th, 2008 at 7:57 pm
I am always amazed when a piece like this gets attention. Is anybody awake when they get the lecture in macroeconomic principles concerning what GDP does and does not measure, what it does and does not signify? Maybe actually taking a course in macroeconomics and paying attention might help. GDP is simply the measure of the market value of all final goods produced within a country within a given year. Period. It doesn’t include all economic activity, much less all market economic activity, nor does it include non-marketed goods, nor does it measure happiness. Nor does it measure wealth, but rather income.
July 1st, 2008 at 8:35 am
[...] Henley’s comments on the same, together with the very awesome RFK (no, really) quotation that AOTP’s Jackson comes up with. The only things I’d really like to add pertain to Lee’s discussion of the [...]
July 1st, 2008 at 11:00 am
GDP is worse even than the Generally Accepted Accounting Principals (GAAP) used by private companies, and even those have their flaws (not measuring resource depletion, externalities etc.).
GDP is as if you had an income statement WITHOUT showing ANY of the costs, and measured success solely by sales. That’s all GDP is after all, is sales. Insanity.
July 2nd, 2008 at 10:55 am
Thanks for this posting, Jackson. I wanted to make sure you know about the work of the Glaser Progress Foundation on measuring progress. There’s a video about a different version of RFK’s speech. The last line in this version has one word difference: “And it can tell us everything about America except WHY we are proud that we are Americans.”
http://www.youtube.com/watch?v=e51JnJPPY0E
Check it out.
July 3rd, 2008 at 8:45 am
Thanks, Colin. The speech was a campagin speech, so I imagine there were minor variations to it every time RFK delivered, which probably would have been several times a week, during the campaign season. I am aware of the Glaser Progress Foundation. I think it’s healthy that there are efforts out there to develop alternative measures of national prosperity, measures that attempt to create a more accurate picture of the actual level of affluence in the country.
September 11th, 2008 at 6:01 pm
The link Colin supplied to the video of RFK’s speech on the GDP has changed. The same video is now found here:
http://www.youtube.com/watch?v=77IdKFqXbUY