America's Go-To Economic Indicator Is Blunt and Obsolete

America's Go-To Economic Indicator Is Blunt and Obsolete

The Atlantic: Business
Robert F. Bukaty / AP

The concept of the GDP, initially termed the “gross national product,” was invented by the economist Simon Kuznets during the Great Depression. It was designed to provide information on whether or not the American economy, then characterized by widespread bankruptcies and mass unemployment, was improving. Kuznets, who later won a Nobel Prize in economics, eventually modified the figure so that it didn’t include returns from foreign investments, and promptly renamed it the GDP. In time, quarterly and annual reports about the GDP gained prime importance as broad indicators of how well the economy was faring.

Ninety years after the GDP’s conception, its fluctuations are increasingly deficient indications of the performance of the American economy. What was useful in depicting titanic economic shifts in the 1930s is far from a sufficiently revealing measure of today’s much more complex American economy. It fails to measure many experiences and consequences of change that affect the well-being of Americans.

America’s economy today is not the same as America’s economy yesterday, and over the years, the nation has come to recognize that some goals—protecting the environment, or working toward racial and gender inequality—are a lot more important than it once thought, and are tied up with questions of economic growth. A lone percentage indicating how much the GDP has moved up or down quarterly or annually is an inadequate reflection of the performance of the present-day economy, and as early as 1934, Kuznets was aware of the statistic’s limits. That year, he told the U.S. Senate: “The welfare of a nation can scarcely be inferred from a measure of national income.”

While GDP does not alone determine policy, too often analyses and prescriptions fixated on the GDP are often narrow and misleading. Nonetheless, this single measurement is too frequently used as the standard report on the state of America’s complicated economy. Shifts in the GDP shape policies and politics of both governments and businesses. Key economic decisions, such as on interest rates and budget spending, are made by politicians, the Federal Reserve Bank, financial institutions, and other companies on the basis of the GDP.

It’s important for a number of reasons not to put too much emphasis on GDP. For one thing, shifts in GDP are no indication of which parts of the economy are growing or shrinking, and how that might affect the economy overall. For example, if the advertising industry contributed 19 percent to the GDP in 2014, is that a positive or negative sign about the prospects for the general economy?

New criteria for evaluating U.S. economic performance are becoming increasingly important, since the sectors that are flourishing or declining affect the economic conditions and futures of many people. For example, quarterly and annual GDP reports should be accompanied by data on the condition of such aspects as the environment, inequality, poverty, race and ethnicity, and gender equality, so the public receives a more comprehensive report on how the economy is doing. Data describing these aspects does already exist, but the Bureau of Economic Analysis does not present it alongside the GDP—which implies that they are secondary issues.

Many economists have raised questions about the inadequacies of GDP. For example, last year, Dirk Phillips wrote The Little Big Number: How GDP Came to Rule the World and What to Do About It. As Phillips lays out, a major criticism of GDP is that a single gross percentage change of the overall economy does not highlight important shifts in the composition of the output of the economy and their longer-term consequences.

Perhaps the most notable issue neglected by the GDP is the impact of markets on the environment. Recognition of the deterioration of the environment and the ensuing health hazards is crucial, making the expansion or decline of the output of industries that produce environmental externalities highly relevant.

Similarly, changes in the rate of unemployment are an insufficient indication of the health of the economy. They don’t suggest whether employment is declining because fewer prospective workers are seeking employment due to the scarcity of jobs or due to the availability of only low-wage employment. And they don’t leave room for important questions: Does “employment” mean a secure job at a livable wage? Does “employment” offer prospects of advancement rather than a dead-end job with little chance of improving one’s situation over the years?

Moreover, especially important today for gaining a more comprehensive appraisal of the economy is information about the economic and educational differences experienced by people of color. Since non-white people make up a growing percentage of Americans, the state of racial differences in economic and social well-being is an increasingly significant measure of the performance of the economy as a whole. Assessing the economic differences between men and women is also an important marker of how well the economy is performing. With the later age of marriage and the high percentage of single-parent (mainly female) households, income differences between genders is a significant indicator that will only become more significant.

Similarly, statistics about inequality are a particularly good candidate for inclusion in GDP-like indicator. Whether the 1 percent or the 0.1 percent of top-income households increases its share of the national wealth is an important indicator of economic well-being. The public has grown interested in countries’ Gini coefficients, or how CEOs’ earnings compare to those of the front-line workers they lead. These figures are out there, but government bureaus have chosen not to elevate them to the status of major indicators.

GDP, the blunt measurement tool that was useful in depicting the economy in the 1930s, is no longer a revealing measure of our current economy. Other alternatives are hovering in the wings: Bhutan has created an index measuring national happiness. The UN has developed the Human Development Index, which is based on the idea that economic growth isn’t the be-all end-all. It reflects the degree to which individuals live “a long and healthy life, are knowledgeable and have a decent standard of living.” Similarly, China has toyed with the idea of calculating its “Green GDP,” which would account for the environmental damage that has come with its swift economic growth.

Here’s to hoping that a 21st-century Kuznets will develop a socioeconomic measure that will more adequately indicate economic and social changes taking place throughout the economy.

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