In defence of GDP

It’s increasingly popular to criticise GDP as a measure of the success of an economy. Indeed, New Zealand’s ‘Wellbeing Budget’ of 2019 was widely praised as a ‘world first’ for its emphasis on a range of other metrics. It wouldn’t surprise me if Rishi Sunak is encouraged to adopt similar language in his first Budget in the UK. But a closer look reveals this is often far more about presentation than substance.

To recap, Gross Domestic Product (GDP) is the total market value of all goods and services produced in a country in a given period, usually one year. This is (or should be) broadly equivalent to the total income of the people living in that country, and to the amount of money they spend there. GDP is therefore the single best measure of overall economic activity.

Of course, GDP has its limitations, even on its own terms. It has traditionally only counted activity that is priced and sold and officially recorded, therefore excluding most forms of volunteering and unpaid work, and clandestine activities in the ‘shadow economy’.

Statisticians have also struggled to keep up with technological change. Indeed, an independent review led by Charlie Bean suggested that if the digital economy was fully captured in the UK data, it could add between 1/3 and 2/3 of a percent to GDP growth.

Nonetheless, experts are already working hard to correct for these problems. The UK GDP numbers now famously include more data on clandestine activities, such as prostitution and dealing in illegal drugs. There is also plenty of work being done on allocating a monetary value to unpaid activities, based on what it might cost to pay someone else to do them.

But criticisms of GDP (mainly from the Left) go well beyond this. It is often argued that in prioritising economic growth, politicians are ignoring other things that matter more – including the environment and inequality, and wider measures of wellbeing or happiness. These criticisms are overdone, too.

For a start, the claim that politicians are putting too much weight on economic growth simply does not hold water. When was the last time you heard any policy being promoted on the basis that it would boost GDP by so many percentage points, rather than in terms of some loftier ambition to make our lives better or address some burning injustice?

It is also rarely, if ever, a case of either/or, such as straight choice between increasing GDP or protecting the environment. For example, the UK’s greenhouse gas emissions have fallen by around 40% since 1990, despite economic growth of more than 70% over this period. As Andrew McAfee has demonstrated, technological change is allowing rich countries to continue growing while making ‘more from less’.

Similarly, it is often claimed that higher levels of inequality are associated with an increased number of economic and social problems, so much so that it might even be worth prioritising a reduction on inequality over an increase in GDP. Again, the evidence here is remarkably thin, as shown by Chris Snowdon in his comprehensive debunking of ‘The Spirit Level’.

So, what about that New Zealand ‘Wellbeing Budget’? If you actually read it, you’ll find it was not as ground-breaking as many would like to think. Indeed, the term ‘GDP’ still appeared no fewer than 114 times. Digging down into the Budget’s five priorities, two of them were standard fare (‘building a productive nation’ and ‘transforming the economy’), while the other three (‘supporting mental health’, ‘improving child wellbeing’ and ‘supporting Māori and Pasifika Aspirations’) could be found in any fiscal statement anywhere in the world, with local variations.

What’s more, almost all countries now publish a wide range of more subjective indicators of wellbeing, including (in the UK) life satisfaction, happiness and anxiety levels. This is on top of a huge amount of more conventional economic data, such as hours worked, levels of debt, income inequality and absolute poverty, all of which may also be relevant.

In summary, GDP is not the only way to measure the success of an economy, but it is generally the most useful, and easy to supplement with other numbers. It is also the best guide to the capacity of an economy to finance debt or to raise taxes to pay for public services, or tackle environmental and social problems.

Put another way, money might not always buy you happiness, but it can certainly help.

This piece was first published by CapX

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