To GDP or Not To GDP

Looking for something relevant to today's turmoil in Washington, I came across a month-old article from the New York Times talking about the relevance of GDP as a measure of well-being. Unsurprisingly the article by Louis Uchitelle grabbed onto many previous critical commentaries and pointed to fairly obvious flaws in the standard accounting system used to calculate GDP. This is just another example that shows how existing economic models and theories fail badly to track reality. I got the sense today that those working out the solution were engaged in a dialogue of the deaf and looking for the solution in a politically convenient place rather than facing the underlying roots. Uchitelle points to the fallacies and danger in adhering to political and economic ideologies.

While the G.D.P. has continued to rise, wages have stagnated, pensions have shrunk or disappeared and income inequality has increased. Other shortcomings have become apparent. The boom in prison construction, for example, has added greatly to the G.D.P., but the damage from the crimes that made the prisons necessary is not subtracted. Neither is environmental damage nor depleted forests, although lumbering shows up in government statistics as value added. So does health care, which is measured by the money spent, not by improvements in people’s health. Obesity is on the rise in America, undermining health, but that is not subtracted.

The thrust of the article is that we can do much better by reforming the accounting system to more accurately credit the goods and debit the bads. But, although we would get a better picture of how we spend our money, we would not understand the state of well-being one whit more clearly. The problem is not in the structure of the accounting system. It lies in the economist's fundamental presumption that well-being and wealth are inherently linked. It should not take a long time for us non-economists to put the lie to this. Surely money is important, but what matters in life are the quality of our relationships to other human beings and to the Planet we live on. The same article noted that the issue is not just limited to the US.

“We may be in the early stages in the United States of recognizing that the gross domestic product is very misleading and something must be done to get better measures of well-being,” said Amartya Sen, a Nobel laureate in economics at Harvard. Professor Sen and Joseph Stiglitz, a Nobel laureate at Columbia, are co-chairmen of a commission recently appointed by Nicolas Sarkozy, the French president, to come up with a better measure for France. While Mr. Sarkozy’s goal is to showcase a “quality of life” at odds with the country’s weak G.D.P., the high-profile effort might yield dividends here as well as abroad.

Granted it is virtually impossible to measure this in quantitative terms, it is a grave mistake to grab onto a metric simply because we can compute some value. It is the difference between capturing the magnificence of the Mona Lisa while standing in front of it and trying to reproduce it with a paint-by-the-numbers kit. In recent years alternative measures have been invented. Gross National Happiness (GNH) was coined by the King of Bhutan who was trying to point out that a people with low GDP could be happy relative to those with much higher GDP levels. This approach was instantly criticized as being built on subjective measures and possibly being bent to the political purposes. Perhaps but at least something like this has the possibility of capturing what is truly important to one's quality of life whereas GNP, no matter how precisely defined, hasn't a chance.