Question the significance of the “gross domestic product” (GDP)

July 20, 2008 | By | Reply More

I just finished reading a terrifically clear and concise article on measuring “the economy” by Jonathan Rowe, published by Harpers. It is entitled “Our Phony Economy.”

Please allow me to set the scene. Haven’t you wondered why politicians and the news media so often obsess about the rising and falling of the Gross Domestic Product (GDP)? After all, this simple-looking number measure rises with sad expenses, such as the need to put ailing Grandma into a nursing home and useless expenses, such as your neighbor recently getting addicted to gambling. When such sad or useless events occur, the GDP goes up and the media and the politicians react by applauding as though a good thing happened when, really, a bad thing happened.

Further, when we learn to save money by gardening in our own back yard or by making our homes more energy efficient, the GDP goes down–it looks like a bad thing happened when, really, a very good thing happened.

Bottom line is that the media and politicians have this fetish for an economic measure (the GDP) that is always misleading and often nonsensical. How is it that our media and government leaders ever started touting the GDP as a meaningful measure of anything? I’ve often wondered this. Why do our leaders continue to rely on the GPD? Jonathan Rowe wonders about this.

If you only read one article on economics this year, make Rowe’s article the one. Reading it will only take you about 10 minutes. If you’re like me, Rowe’s revelations will be make you wonder how so many economic “experts” can be so ignorant and misguided. It will make you wonder about the other fundamental ways in which politicians and economists have totally mischaracterized the basics regarding this country’s financial health (actually here are some). Here’s a sample of Rowe’s writing, but really, go read the whole thing. You’ll find yourself nodding in agreement the whole way through:

That term “the economy”: what it means, in practice, is the Gross Domestic Product–a big statistical pot that includes all the money spent in a given period of time. If the pot is bigger than it was the previous quarter, or year, then you cheer. If it isn’t bigger, or bigger enough, then you call Federal Reserve Chairman Ben Bernanke up here and ask him to do some explaining. The what of the economy makes no difference in these councils. It never seems to come up. The money in the big pot could be going to cancer treatments or casinos, violent video games or usurious credit-card rates. It could go toward the $9 billion or so that Americans spend on gas they burn while they sit in traffic, or the billion plus that goes to such drugs as Ritalin and Prozac that schools are stuffing into kids to keep them quiet in class. The money could be the $20 billion or so that Americans spend on divorce lawyers each year, or the $41 billion on pets, or the $5 billion on identity theft, or the billions more spent to repair property damage caused by environmental pollution. The money in the pot could betoken social and environmental breakdown–misery and distress of all kinds. It makes no difference. You don’t ask. All you want to know is the total amount, which is the GDP. So long as it is growing then everything is fine.

I am not talking about an obscure technical measure. This is not stuff for the folks in the back room. I am talking about what you mean when you use that term “the economy.” Few words induce such a reverential hush in these halls.

Apply Rowe’s wisdom to the use of fossil fuels for a big eye-opener:

It sounds incredible, but when this nation drills its oil and mines its coal, the national accounts treat this as an addition to the national wealth rather than a subtraction from it. The result is like a car with a gas gauge that goes up as the fuel tank empties.

After reading even this much, are you now confident that an increasing GDP is highly ambiguous? So am I.

Thinking of people who insist on relying on the GDP reminds me about the old joke about the drunk who is looking for his lost keys under the streetlight, even though he lost them elsewhere.   When asked why he persisted in looking under the streetlight, he replied, “because it’s easier to see over here.”

GDP gives us an easy number, but it’s far from meaningful.  It would make much more sense to rely on an economic indicated that measured progress, not merely money exchanging hands.   One of those measures is the GPI, the Genuine Progress Indicator. Another measure is the subjective well-being indicator (SWB).

What if we measured the economy accurately?  What would it do for us.   According to Democracy Cell Project, “If as Americans we could measure well-being as a basis for success, rather than just size of the economy, there would be more support for reforms that we really desperately need.”

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Category: American Culture, Economy, ignorance, Politics, Statistics

About the Author ()

Erich Vieth is an attorney focusing on consumer law litigation and appellate practice. He is also a working musician and a writer, having founded Dangerous Intersection in 2006. Erich lives in the Shaw Neighborhood of St. Louis, Missouri, where he lives half-time with his two extraordinary daughters.

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