Using GDP to assess wellbeing is a flawed view which has led us to narrow, short-term decision-making
Gross domestic product as a measure of welfare is like exam results as a measure of intelligence. Neither is especially good. However both are widely cited and heavily relied upon.
Why? They’re not great – but they’re the best we’ve got.
GDP is effectively an accounting measure. There are three ways it can be calculated – as how much we produce, how much we spend, or how much we earn. The net result is the same; a dollar value of everything we produce for use.
Like other accounting measures, there are well established rules on how it should be calculated and disclosed. Great bedtime reading.
Prescriptiveness provides consistency, which allows comparison. Naplan scores can be compared across schools and time. GDP figures, likewise, can be compared over time (accounting for inflation) and across countries (accounting for currency differences).
This means we can say that Australia’s economy is larger than New Zealand’s, as well as being bigger today than it was a decade ago. It also provides relativity – we know not just that California’s economy is bigger than Australia’s, but that it’s almost triple the size.
These features are precisely why, like exam results, we are so fond of GDP as a measure.
Fine. Until we start thinking GDP is something it’s not.
Too often, politicians and pundits interpret GDP as a measure of welfare. Somehow, we’ve started assuming that GDP per capita is a great way of assessing how well-off we are.
Official GDP figures say that we managed the “V” recovery, and are well and truly back on track. Sure, fewer year 9 students are meeting minimum national standards on literacy and numeracy, gambling has skyrocketed, 14% of young people feel lonely most or all of the time, and we have more hazardous waste than ever before.
There’s a lot which goes in to making the GDP sausage, and behind the curtain, the process isn’t pretty
But we have more GDP per person today than we did before Covid. So we’re objectively better off, right?
GDP as a measure of welfare is flawed for a number of reasons. Perhaps the biggest one is the implication that things mean happiness. Since when was the monetary value of the stuff we consume equivalent to the fullness of our lives?
It’s a dangerous view which has led us to narrow, short-term decision-making. If you need evidence, look no further than Cop26. Despite decades of science from international experts, the world is currently not on track to limit global warming to 1.5 degrees. Why?
Well, we’re busy trying to fuel the economy by encouraging more production and consumption of things. Printer ink, as an example, is often more expensive than printers themselves. With instant asset write-offs, small businesses are better off buying a new printer every time the ink runs dry, and throwing out the old one.
While we’re at it, how about encouraging some more traffic jams? Traffic jams mean using more petrol, which means spending more money – which may be good for GDP in the short-term. Except that nobody would argue that time stuck on the road is good for our wellbeing. It’s also bad for productivity – less time is available to spend on creating and consuming. It certainly doesn’t help global warming.
Even if you do believe that the consumption of things is a good measure of our wellbeing, GDP has flaws. There’s a lot which goes in to making the GDP sausage, and behind the curtain, the process isn’t pretty.
It doesn’t account, for example, for changes in quality. Today, you can buy a bigger, better and more energy efficient TV for less than you would have spent on a TV five years ago. Clearly this is good for welfare. Yet GDP would have been larger if we had spent more money buying worse TVs.
It also doesn’t include things which have value, but not prices. If you pay someone to mow your lawn (and they declare the income), that value is included in GDP. If you mow it yourself, it is not. Likewise, caring for children or the elderly only counts if you outsource.
The decisions that policy makers and individuals make depend on what we measure, how good our measurements are, and how well we interpret them.
We should not give up on GDP – but it’s important to acknowledge its limitations. Economics is the study of trade-offs, and a single-minded focus on increasing GDP risks undermining the long-term wellbeing and welfare that we truly seek.
Jessica Mizrahi is an economic consultant and commentator. She has taught, researched and applied economics for over a decade