Joseph Stiglitz at the Guardian:
Eighteen months ago, French president Nicolas Sarkozy established the international Commission on the Measurement of Economic Performance and Social Progress, owing to his dissatisfaction – and that of many others – with the current state of statistical information about the economy and society. On 14 September, the commission will issue its long-awaited report.
The big question concerns whether GDP provides a good measure of living standards. In many cases, GDP statistics seem to suggest that the economy is doing far better than most citizens’ own perceptions. Moreover, the focus on GDP creates conflicts: political leaders are told to maximise it, but citizens also demand that attention be paid to enhancing security, reducing air, water, and noise pollution, and so forth – all of which might lower GDP growth.
The fact that GDP may be a poor measure of well-being, or even of market activity, has, of course, long been recognised. But changes in society and the economy may have heightened the problems, at the same time that advances in economics and statistical techniques may have provided opportunities to improve our metrics.
For example, while GDP is supposed to measure the value of output of goods and services, in one key sector – government – we typically have no way of doing it, so we often measure the output simply by the inputs. If government spends more – even if inefficiently – output goes up. In the last 60 years, the share of government output in GDP has increased from 21.4% to 38.6% in the US, from 27.6% to 52.7% in France, from 34.2% to 47.6% in the UK, and from 30.4% to 44.0% in Germany. So what was a relatively minor problem has now become a major one.
All his points are well-taken and I have no problem with devising supplementary measures of well-being. We already have a number including the poverty rate, the Gini index and so on. I just want to make one point: we have 75 years of experience with the GDP (and its predecessor, GNP) and thousands upon thousands of economic studies relating GDP to the money supply, business cycles and every other economic indicator one can think of. If GDP were radically restructured, those studies and whatever wisdom we have gleaned from them would be worthless.
It’s important to remember that GDP was developed to measure economic transactions and not as a measure of well-being. The fact that numbers like GDP per capita came to be used as a measure of well-being is a case of a figure developed for one purpose being used for a completely different one. Now Stiglitz is attacking the alternate use. This is like attacking aspirin for not curing the common cold.
The problem with a true measure of well being is that so much of what really matters cannot be valued in monetary terms. What would one pay for true love? In the end, GDP simply measures what it measures and it serves its purpose reasonably well. The problems Stiglitz identifies are ultimately unfair because he is criticizing it for being something it’s not and never was intended to be.
But whether GDP was supposed to be the all-powerful metric by which we measured progress or not, the fact of the matter is that it currently serves that role, or at least comes close to it. We speak about global warming entirely in terms of the impact the solutions will have on GDP, and we refer to the early years of the decade as a period of good growth even though median Americans saw virtually no increase in their wages. “This is like attacking aspirin for not curing the common cold,” continues Bartlett, but if people were using aspirin under the assumption that it cured the common cold, it would be important to disabuse them of that notion.
Stiglitz, happily, is involved in a French project to come up with a successor to GDP. But there have been many of these projects in the past and many alternatives proposed. The question isn’t developing these measures. It’s popularizing them.
In the meantime, however, I propose that instead of obsessing over GDP growth, we obsess over real median income growth. It’s simple and easy to popularize, and it’s available quarterly, just like GDP. Here’s my hypothesis: If RMI is growing at a healthy clip, then the economy is almost certainly doing fine. If it’s not, then most people are going to be unhappy regardless of what GDP figures show.
I should note that I’m willing to accept any reasonable definition of “income” as part of the official RMI calculation. Regardless of what you include, the bottom line is that if we paid more attention to RMI, we’d all be a whole lot better off than we are now.
Caitlin Kenney at NPR
Vivian Norris de Montaigu at Huffington Post
UPDATE: Will Wilkinson