GDP may be imperfect but don’t write it off yet

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When running for president in 1968, Robert Kennedy took aim at US economic statistics. Gross national product, he said, counted pollution, cigarette advertising, locks on doors and the destruction of forests among a long list of social evils. It failed to measure important things in society such as the joy of poetry or the strength of marriages. “It measures everything . . . except that which makes life worthwhile and it can tell everything about America except why we are proud we are Americans,” he said.

Though little noticed at the time, this short section of his campaign speech has now become the battle cry of many diverse campaign groups.

Some claim that GNP, or gross domestic product — the equivalent within a country’s borders — measure the wrong things because they put a value on the goods and services produced and purchased in an economy. This week’s Dasgupta Review of the economics of biodiversity said GDP is “wholly unsuitable . . . for identifying sustainable development”. Others claim that as this data stands at the pinnacle of economic statistics, it gets too much weight by government and society. As the saying goes, “what is measured, counts”.

Many argue both criticisms apply. Put aside the impossibility of finding an agreed single measure of societal progress, the question is whether these twin critiques hold water.

Jobs matter and wages matter. Multiply the two together and the result accounts for most of GDP. That total is also the amount of money available for governments to tax and pay for other things that matter, such as Covid-19 vaccines and care for the elderly.

Of course, everyone will have personal views on the relative value of journalists, tax lawyers or sex workers, but the beauty of GDP is that it just adds up their incomes, allowing people to argue whether the result is either morally right or wrong. It does not take an explicit view.

The past decade tells us that the measure is a reasonable indicator of society’s values. Imagine if a group of economists landed on earth at the start of 2020 and had to evaluate the world’s happiness using GDP. They would have noticed a slowdown in growth since 2008, and that China’s GDP overtook that of the US in 2014. They would have diagnosed general discontent and strife between the world’s two economic superpowers. They would have been correct.

The coronavirus crisis also taught us that we value information about jobs, incomes and profits so much that when GDP statistics are dangerously out of date, we will put huge efforts into finding real-time proxies to tell us about our living standards.

But is GDP too important? Contrary to Mr Kennedy’s assertions, the evidence suggests we still care about the environment, crime, identity and morality. In fact, when GDP goes head to head with these other issues, it tends to lose.

Often this is welcome. If Joe Biden fulfils his campaign pledge to set a net-zero carbon emissions target for the US by 2050, 80 per cent of the world’s economy will have set such a target. Net zero comes with a short-term GDP cost. When the vast majority of the world agrees voluntarily to take the hit, GDP is not the dominant force.

Less positively, bad arguments have tended to trounce GDP concerns of late. Mr Biden’s decision to strengthen his government’s “Buy American” provisions, his predecessor’s trade wars, the UK’s Brexit obsessions and Scottish nationalists’ fervour for independence all come with a large cost to GDP. But they have won or are winning domestic political debates.

Allegations that GDP is a terrible measure that is too important to decision makers are trotted out so often, they tend to get a free pass. But the evidence is flimsy, at best.

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