Is it Time to Use A Different Measure of Economic Well -Being?
“[Gross domestic product] does not allow for the health of our children, the quality of their education, or the joy of their play. 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. It measures neither our courage, nor our wisdom, nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile…” – Robert Kennedy
The United States has the largest economy in the world when measured by gross domestic product (GDP). The World Bank lists the total US GDP at $22.9 trillion, followed by China, $17.7 trillion, and Japan $4.9 trillion. The country’s rank falls to eighth place when we look at GDP per capita. The US has a GDP per capita of just over $69 thousand which is fairly distant from Luxembourg’s $135 thousand or Ireland’s $99 thousand.1 On the surface these numbers don’t seem all that bad but having a $22.9 trillion dollar economy doesn’t mean that the wealth, and its benefits, are distributed equally or fairly.
Life expectancy has dropped two years in row in the United States with a decline of 1.8 years for 2019-2020 and 1.9 years for 2020-2021.2 While much of this is attributed to the Covid-19 pandemic, heart disease, liver disease, and suicide also contributed to the decrease. This decline was not seen in all countries around the world. New Zealand, Taiwan, and Norway all had increases in life expectancy despite the pandemic, and Denmark, Iceland, and North Korea had no change at all during this same time period. 3 With 1 in 10 adults in the US carrying medical debt and many Americans being one injury or illness away from bankruptcy, it comes as no surprise that many people delay needed healthcare out of fear of the cost which likely also contributed to the decline.4
When we look at other measures of wellbeing the US continues to perform poorly. The US infant mortality rate of 5.9 deaths per 1,000 births is higher than similarly wealthy countries such as France and the UK at 3.8. The US also ranks poorly when measuring income inequality coming in with the 46th highest rate of income inequality out of 162 countries ranked with the Gini index. If you looked at the Gini index more closely, you’d see the US is alongside countries we consider to be a part of the developing world.5 With all of these other indicators pointing towards things not being as rosy as they could be, why is the GDP often seen as the primary measure of a country’s wellbeing?
The first question we should probably answer is, “What exactly is GDP and what does it measure?” GDP measures the total value of goods and services produced in a particular country over a particular period of time. If a good or service can be bought or sold and those funds can be accounted for, it can be counted as part of GDP. 6 GDP does not count unpaid labor or economic activity that takes place on underground markets. One example used to demonstrate this is childcare. The time a stay-at-home parent spends caring for their children would not be counted; however if that same parent paid a daycare to care for their child, the funds spent on childcare would be counted. If they paid their teenage neighbor cash to watch their children and those funds are not accounted for in some way, it would also not be counted as part of GDP.
GDP only measures economic activity without indication as to the source of that activity. For example, if looking at the costs associated with cleaning up a chemical spill at a manufacturing plant, the labor of those working on the cleanup, any equipment purchased, and the money spent on healthcare treatment for those injured by the spill will be measured as economic activity, without indication as to the cause of that activity. In many cases the costs of such a cleanup may make it appear that there has been an increase in overall economic activity. GDP would not include intangible losses like soil degradation, loss of wildlife species, or decreased quality of life.
Back to our initial question, if GDP doesn’t measure wellbeing, why is it so often held up as a measure of it?
Well, an economist would tell you that it doesn’t measure wellbeing and that it is not meant to but, however those that tally the numbers may intend the figures to be used, this is not how it plays out in the real world. News reporters and politicians will still use GDP as a measure because it is available and most people have at least a vague idea that it measures economic activity. In addition, numbers that are continually increasing are easy to point to as a measure of things doing well. Finally, there is an assumption that the wealthier a country is the more funds the country has available to spend on things like healthcare, childcare, food, housing, and other things that contribute to the general well-being of the people in a society. But, if we look at the measures above, that is not how these funds are actually used.
If GDP is not a reliable measure of wellbeing, is there a different measure that would give people a better understanding of just how well a country is doing in taking care of the people who live in it?
Two well known, and actually used, measures are the Human Development Index (HDI) developed by the United Nations, and the Social Progress Index (SPI), created by the Social Progress Initiative and based on the work of Amartya Sen, Douglass North, and Joseph Stiglitz.7, 8
The HDI uses human longevity (life expectancy), education, and income (using the GINI index), to measure the well-being of a country. Using this measure the United States ranked 21st out of 191 countries in 2021.
The SPI incorporates a total of 53 social and environmental indicators. It is unique in that it uses only non-economic measures to assess wellbeing. In 2016 the European Union published the first EU Social Progress Index ranking all member countries of the EU, and the Social Progress Initiative published their most recent global rankings in 2021. The measures used include things such as nutrition and basic medical care, water and sanitation access, health and wellness, access to opportunity, human rights, access to education, and other measures. The United States SPI rank is 24th out of 78 countries assessed in 2021.
Both HDI and SPI have their criticisms, the primary one being that some of the measures are seen as too subjective, but when looking at what GDP excludes, which is basically everything outside of economic activity, they both provide a better picture of human wellbeing than GDP alone.
GDP has its place if we are solely looking at economic activity, but we can no longer continue to assume that a country’s high level of overall wealth translates into a higher level of wellbeing for its citizens. If that economic prosperity is not used to increase the health and wellbeing of a population other measures must be used to give a more accurate picture of a nation’s ability and willingness to care for and uplift the people who live in it.
Post by Joie Grandbois
Addendum to this post by Rachel Lyn Rumson:
In a recent Resources Radio podcast with Margaret Walls called “Integrating Nature into US Economic Statistics, with Eli Fenichel” (Margaret Walls, Oct, 2022, #206). The show’s guest Eli Fenichel is the Assistant Director for Natural Resource Economics and Accounting in the Office of Science and Technology Policy. He explained that earlier this year the Biden-Harris Administration started a natural capital accounting system that can be folded into the national income and product accounts in the future. We found it refreshing to hear the guest on this podcast say that GDP is problematic on two counts. First, “it does not measure wellbeing” and second, “nature is missing entirely”. Why this is a good step, Fenichel says, is that “now, as we think about making new investments in infrastructure and in nature-based solutions to combat climate change, if we invest in nature, we want it to show up somewhere. Otherwise, it looks like we’re just spending our money, and we’re not.” This new accounting will be annual rather than quarterly and it will roll out in phases over 15 years, the assistant director reported.
For more information on the actions of the Biden Administration see:
[1] https://data.worldbank.org
[2] https://www.cdc.gov/nchs/pressroom/nchs_press_releases/2022/20220831.htm
[3] https://jamanetwork.com/journals/jama/fullarticle/2788128
[5] https://www.indexmundi.com/facts/indicators/SI.POV.GINI/rankings
[6] https://www.imf.org/external/pubs/ft/fandd/basics/gdp.htm
[7] https://hdr.undp.org/data-center/human-development-index#/indicies/HDI
