Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Since World War II, most countries around the world have come to use gross domestic product, or GDP, as the core metric for prosperity. The

Since World War II, most countries around the world have come to use gross domestic product, or GDP, as the core metric for prosperity. The GDP measures market output: the monetary value of all the goods and services produced in an economy during a given period, usually a year. Governments can fail if this number fallsand so, not surprisingly, governments strive to make it climb. But striving to grow GDP is not the same as ensuring the well-being of a society.

In truth, "GDP measures everything," as Senator Robert Kennedy famously said, "except that which makes life worthwhile." The number does not measure health, education, equality of opportunity, the state of the environment or many other indicators of the quality of life. It does not even measure crucial aspects of the economy such as its sustainability: whether or not it is headed for a crash. What we measure matters, though, because it guides what we do. Americans got an inkling of this causal connection during the Vietnam War, with the military's emphasis on "body counts": the weekly tabulation of the number of enemy soldiers killed. Reliance on this morbid metric led U.S. forces to undertake operations that had no purpose except to raise the body count. Like a drunk looking for his keys under the lamppost (because that is where the light is), the emphasis on body counts kept us from understanding the bigger picture: the slaughter was inducing more Vietnamese people to join the Viet Cong than U.S. forces were killing.

Now a different body countthat from COVID-19is proving to be a horribly good measure of societal performance. It has little correlation with GDP. The U.S. is the richest country in the world, with a GDP of more than $20 trillion in 2019, a figure that suggested we had a highly efficient economic engine, a racing car that could outperform any other. But the U.S. has recorded more than 600,000 deaths, whereas Vietnam, with a GDP of $262 billion (and a mere 4 percent of U.S. GDP per capita), has had fewer than 500 to date. In the race to save lives, this less prosperous country has beaten us handily.

In fact, the American economy is more like an ordinary car whose owner saved on gas by removing the spare tire, which was fine until he got a flat. And what I call "GDP thinking"seeking to boost GDP in the misplaced expectation that that alone would enhance well-beingled us to this predicament. An economy that uses its resources more efficiently in the short term has higher GDP in that quarter or year. Seeking to maximize that macroeconomic measure translates, at a microeconomic level, to each business cutting costs to achieve the highest possible short-term profits. But such a myopic focus necessarily compromises the performance of the economy and society in the long term.

The U.S. health care sector, for example, took pride in using hospital beds efficiently: no bed was left unused. In consequence, when SARS-CoV-2 reached America there were only 2.8 hospital beds per 1,000 peoplefar fewer than in other advanced countriesand the system could not absorb the sudden surge in patients. Doing without paid sick leave in meat-packing plants increased profits in the short run, which also increased GDP. But workers could not afford to stay home when sick; instead they came to work and spread the infection. Similarly, China made protective masks cheaper than the U.S. could, so importing them increased economic efficiency and GDP. That meant, however, that when the pandemic hit and China needed far more masks than usual, hospital staff in the U.S. could not get enough. In sum, the relentless drive to maximize short-term GDP worsened health care, caused financial and physical insecurity, and reduced economic sustainability and resilience, leaving Americans more vulnerable to shocks than the citizens of other countries.

The shallowness of GDP thinking had already become evident in the 2000s. In preceding decades, European economists, seeing the success of the U.S. in increasing GDP, had encouraged their leaders to follow American-style economic policies. But as signs of distress in the U.S. banking system mounted in 2007, France's President Nicolas Sarkozy realized that any politician who single-mindedly sought to push up GDP to the neglect of other indicators of the quality of life risked losing the confidence of the public. In January 2008 he asked me to chair an international commission on the Measurement of Economic Performance and Social Progress. A panel of experts was to answer the question: How can nations improve their metrics? Measuring that which makes life worthwhile, Sarkozy reasoned, was an essential first step toward enhancing it.

Coincidentally, our initial report in 2009, provocatively entitledMismeasuring Our Lives: Why GDP Doesn't Add Up, was published right after the global financial crisis had demonstrated the necessity of revisiting the core tenets of economic orthodoxy. It met with such positive resonance that the Organization for Economic Co-operation and Development (OECD)a think tank that serves 38 advanced countriesdecided to follow up with an expert group. After six years of consultation and deliberation, we reinforced and amplified our earlier conclusion: GDP should be dethroned. In its place, each nation should select a "dashboard"a limited set of metrics that would help steer it toward the future its citizens desired. In addition to GDP itself, as a measure for market activity (and no more) the dashboard would include metrics for health, sustainability and any other values that the people of a nation aspired to, as well as for inequality, insecurity and other harms that they sought to diminish.

These documents have helped crystallize a global movement toward improved measures of social and economic health. The OECD has adopted the approach in its Better Life Initiative, which recommends 11 indicatorsand provides citizens with a way to weigh these for their own country, relative to others, to generate an index that measures their performance on the things they care about. The World Bank and the International Monetary Fund (IMF), traditionally strong advocates of GDP thinking, are now also paying attention to environment, inequality and sustainability of the economy.

A few countries have even incorporated this approach into their policy-making frameworks. New Zealand, for instance, embedded "well-being" indicators in the country's budgetary process in 2019. As the country's finance minister, Grant Robertson, put it: "Success is about making New Zealand both a great place to make a living and a great place to make a life." This emphasis on well-being may partly explain the nation's triumph over COVID-19, which appears to have been limited to roughly 3,000 cases and 26 deaths in a total population of nearly five million.

APPLES AND ARMAMENTS

Necessity is the mother of invention. Just as the dashboard emerged from a dire needthe inadequacy of the GDP as an indicator of well-being, as revealed by the Great Recession of 2008so did the GDP. During the Great Depression, U.S. officials could barely quantify the problem. The government did not collect statistics on either inflation or unemployment, which would have helped them steer the economy. So the Department of Commerce charged economist Simon Kuznets of the National Bureau of Economic Research with creating a set of national statistics on income. Kuznets went on to construct the GDP in the 1940s as a simple metric that could be calculated from the exceedingly limited market data then available. An aggregate of (the dollar value of) the goods and services produced in the country, it was equivalent to the sum of everyone's incomewages, profits, rents and taxes. For this and other work, he received the Nobel Memorial Prize in Economic Sciences in 1971. (Economist Richard Stone, who created similar statistical systems for the U.K., received the prize in 1984.)

Kuznets repeatedly warned, however, that the GDP only measured market activity and should not be mistaken for a metric of social or even economic well-being. The figure included many goods and services that were harmful (including, he believed, armaments) or useless (financial speculation) and excluded many essential ones that were free (such as caregiving by homemakers). A core difficulty with constructing such an aggregate is that there is no natural unit for adding the value of even apples and oranges, let alone of such disparate things as armaments, financial speculation and caregiving. Thus, economists use their prices as a proxy for valuein the belief that, in a competitive market, prices reflect how much people value apples, oranges, armaments, speculation or caregiving relative to one another.

This profoundly problematic assumptionthat price measures relative valuemade the GDP quite easy to calculate. As the U.S. recovered from the Depression by ramping up the production and consumption of material goods (in particular, armaments during World War II), GDP grew rapidly. The World Bank and the IMF began to fund development programs in former colonies around the world, gauging their success almost exclusively in terms of GDP growth.

Over time, as economists focused on the intricacies of comparing GDP in different eras and across diverse countries and constructing complex economic models that predicted and explained changes in GDP, they lost sight of the metric's shaky foundations. Students seldom studied the assumptions that went into constructing the measureand what these assumptions meant for the reliability of any inferences they made. Instead the objective of economic analysis became to explain the movements of this artificial entity. GDP became hegemonic across the globe: good economic policy was taken to be whatever increased GDP the most.

In 1980, following a period of seemingly poor economic performancestagflation, marked by slow growth and rising pricesPresident Ronald Reagan assumed office on the promise of ramping up the economy. He deregulated the financial sector and cut taxes for the better-off, arguing that the benefits would "trickle down" to those less fortunate. Although GDP grew somewhat (albeit at a rate markedly lower than in the decades after World War II), inequality rose precipitously. Well aware that metrics matter, some members of the administration reportedly argued for stopping the collection of statistics on inequality. If Americans did not know how bad inequality was, presumably we would not worry about it.

The Reagan administration also unleashed unprecedented assaults on the environment, issuing leases for fossil-fuel extraction on millions of acres of public lands, for example. In 1995 I joined the Council of Economic Advisers for President Bill Clinton. Worrying that our metrics paid too little attention to resource depletion and environmental degradation, we worked with the Department of Commerce to develop a measure of "green" GDP, which would take such losses into account. When the congressional representatives from the coal states got wind of this, however, they threatened to cut off our funding unless we stopped our work, which we were obliged to. The politicians knew that if Americans understood how bad coal was for our economycorrectly measured, then they would seek the elimination of the hidden subsidies that the coal industry receives. They might even seek to move more quickly to renewables. Although our efforts to broaden our metrics were stymied, the fact that these representatives were willing to spend so much political capital on stopping us convinced me we were on to something important. (It also meant that when, a decade later, Sarkozy approached me about heading an international panel to examine better ways of measuring "economic performance and social progress," I leaped at the chance.)

I left the Council of Economic Advisers in 1997, and in the ensuing years the deregulatory fervor of the Reagan era came to grip the Clinton administration. The financial sector of the U.S. economy was ballooning, driving up GDP. As it turned out, many of the profits that gave that sector such heft were, in a sense, phony. Bankers' lending practices had generated a real-estate bubble that had artificially enhanced profitsand, with their pay being linked to profits, had increased their bonuses. In the ideal free-market economy, an increase in profits is supposed to reflect an increase in societal well-being, but the bankers' takings put the lie to that notion. Much of their profits resulted from making othersworse off, such as when they engaged in abusive credit-card practices or manipulated LIBOR (for London Interbank Offered Rate of interest for international banks lending to one another) to enhance their earnings.

OPIOIDS, HURRICANES

The bubble burst in 2008. Banks had been issuing mortgages indiscriminately, on the assumption that real-estate prices would continue to rise. When the housing bubble broke, so did the economy, falling more than it had since the immediate aftermath of World War II. After the U.S. government rescued the banks (just one firm, AIG, received a government bailout of $130 billion), GDP improved, persuading President Barack Obama and the Federal Reserve to announce that we were well on the way to recovery. But with 91 percent of the gains in income in 2009 to 2012 going to the top 1 percent, the majority of Americans experienced none.

As the country slowly emerged from the financial crisis, others commanded attention: the inequality crisis, the climate crisis and an opioid crisis. Even as GDP continued to rise, life expectancy and other broader measures of health worsened. Food companies were developing and marketing, with great ingenuity, addictive sugar-rich foods, augmenting GDP but precipitating an epidemic of childhood diabetes. Addictive opioids led to an epidemic of drug deaths, but the profits of Purdue Pharma and the other villains in that drama added to GDP. Indeed, the medical expenditures resulting from these health crises also boosted GDP. Americans were spending twice as much per person on health care than the French but had lower life expectancy. So, too, coal mining seemingly boosted the economy, and although it helped to drive climate change, worsening the impact of hurricanes such as Harvey, the efforts to rebuild again added to GDP. The GDP number provided an optimistic gloss to the worst of events.

These examples illustrate the disjuncture between GDP and societal well-being and the many ways that GDP fails to be a good measure of economic performance. The growth in GDP before 2008 was not sustainable, and it was not sustained. The increase in bank profits that seemed to fuel GDP in the years before the crisis were not only at the expense of the well-being of the many people whom the financial sector exploited but also at the expense of GDP in later years. The increase in inequality was by any measure hurting our society, but GDP was celebrating the banks' successes. If there ever was an event that drove home the need for new ways of measuring economic performance and societal progress, the 2008 crisis was it.

THE DASHBOARD

The commission, led by three economists (Amartya Sen of Harvard University, Jean-Paul Fitoussi of the Paris Institute of Political Studies and me), published its first report in 2009, just after the U.S. financial system imploded. We pointed out that measuring something as simple as the fraction of Americans who might have difficulty refinancing their mortgages would have illuminated the smoke and mirrors underpinning the heady economic growth preceding the crisis and possibly enabled policy makers to fend it off. More important, building and paying attention to a broad set of metrics for present-day well-being and its sustainabilitywhether good times are durablewould help buffer societies against future shocks.

STEERING THROUGH STORMS

Since we began our work on well-being indicators some dozen years ago, I have been amazed at the resonance that it has achieved. A focus on many of the elements of the dashboard has permeated policy making everywhere. Every three years the OECD hosts an international conference of nongovernmental organizations, national statisticians, government officials and academics furthering the "well-being" agenda, the most recent being in Korea in November 2018, with thousands of participants.

Read and summarize the content of the articles below. Use critical thinking when completing your summary. Include the title and source of the article.

Step by Step Solution

3.31 Rating (160 Votes )

There are 3 Steps involved in it

Step: 1

Title Rethinking GDP Why Measuring Economic Success Needs a New Approach Source Scientific American ... blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Economics Today The Micro View

Authors: Roger LeRoy Miller

20th Edition

0135888123, 9780135888124

Students also viewed these Economics questions

Question

Where does the person work?

Answered: 1 week ago