Standing Up for GDP

Joseph Stiglitz is right. GDP per capita is an inadequate measure of a country's prevailing standard of living for many reasons. If you want one number, something like median real consumption would be better. But I'm willing to stand up for GDP per capita as a rough and ready indicator of well-being within the bounds of nation states. Why?

First, as an indicator of well-being, it doesn't get much intuitively wrong. That is, GDP per capita tends to correlate positively with most of the things most of us think are constituents or side effects of well-being and negatively or not at all with most of the things most of us think are corrosive to well-being. (I go through some of this data around p. 29 of my happiness paper [pdf].)

Moreover, alternative rankings such as the UN's Human Development Index, which accounts for things like health and education, correlate so closely with rankings of per capita GDP, it's pretty clear that income levels are doing most of the work. As Justin Wolfers put it:

For all the work that goes into the Human Development Index, it just doesn’t tell you much that you wouldn’t learn from simple comparisons of G.D.P. per capita.

And don't forget that the link between GDP per capita and self-reported happiness is positive and strong! Here's a reminder of what the relationship looks like this:

As you can see, the doubling in GDP per capita from $1000 to $2000 has about the same effect on average self-reported life satisfaction as the doubling from $16,00 to $32,00. It was this finding that led Daniel Kahneman last year to say:

The implied conclusion, that citizens of different countries do not adapt to their level of prosperity, flies against everything we thought we knew ten years ago.  We have been wrong and now we know it.  I suppose this means that there is a science of well-being, even if we are not doing it very well.

But I think the most neglected argument in favor of GDP per capita as a measure of well-being is its neutrality. Here's how I put it in my happiness paper:

Many people seem to think that a government’s emphasis on measurements like GDP indicate a kind of collective affirmation of materialist goals, encouraging a narrowly materialist attitude at war with more exalted values. But this is simply a mistake. The very function of money is to serve as a neutral medium of exchange. It is a shape-shifting embodiment of almost any value. The same $100 can be spent on a prostitute or donated to an HIV/AIDS clinic. The relative value neutrality of money is precisely why the measurement of per-capita wealth is well suited to pluralistic liberal societies; it doesn’t beg many questions about competing concep- tions of the good life. Money can’t be converted into  anything that someone might value, but it is of the nature of money to be convertible into a phenomenally broad range of values. Societies with high levels of average income and wealth are societies in which people have more resources at their disposal to achieve their aims, no matter what those aims might be, which is why it should be no surprise that, other things equal, people with more money are more satisfied. By measuring GDP, household wealth, and the like, government is not affirming one set of values over others. It is, in fact, embodying an ideal of liberal neutrality by measuring something that is valuable in varying degrees to all of us.

Because of their neutrality, economic measures are excellent inputs to public deliberation in pluralistic societies containing a great deal of disagreement about ultimate values. There are lots of candidates for alternative indicators or progress and well-being, but most are transparently motivated by ideological antagonism to the kinds of policies known successfully to promote income growth. These are obviously not very well-suited for use in public deliberation in pluralistic societies containing a great deal of disagreement about ultimate values.

The demand for alternatives to GDP resides predominantly in certain quarters of the environmental movement. It's easy to see why. Many environmentalists demand policies that, if implemented, would show up as unmitigated damage in economic measures like GDP per capita. I think it's difficult to overstate how huge an impediment this is to much of the environmental movement — especially since these measures do track the elements of well-being pretty well.

Some enviromentalists, like Thomas L. Friedman and Van Jones, go the congruence route and jump into the business of retailing fantasies about pro-growth green central planning. But this kind of “and a pony!” no tradeoffs stuff is a pretty hard sell. Anybody really serious about saving the world from the peril of a more livable Canada is going to have to argue for policies that will indeed gut-punch world income growth. That argument is a lot easier to make if you can first persuade governments and journalists to shelve standard economic measures and replace them with new figures that make a virtue of green-tinted impoverishment. It's hard to fail when you've redefined success.

That's why I'm ready to hold onto my wallet when luminaries of the left like Stiglitz say they're eagerly awaiting the September 14th publication of a report by Nikolas Sarkozy's Commission on the Measurement of Economic Performance and Social Progress. But it probably won't be that bad.

Here's my predication. Good ol' GDP per capita will be found (perhaps rather annoyingly to this congress of authors) to do better as a measure of social progress than one might have thought, for reasons similar to those detailed above. Chief among the problems with GDP-like measures will be that they fail to capture the value of environmental sustainability. Also, the value of economic equality. But not the value of economic liberty. That GDP fails to capture the value of, say, policies that reduce the probability of a future in which tens of millions die due to a massive flu pandemic, or due the availability of portable nuclear weapons, will go unmentioned. Less severe but equally indeterminate environmental threats will get many pages.

Surprise me Commission on the Measurement of Economic Performance and Social Progress!