Tuesday, September 15, 2009

It Is Time To End GDP Fetishism



Most common discussions, by all kinds of media outlets all over the world, of the concept of social welfare of a particular society never fail to mention the state of the Gross Domestic Product, the GDP. This all popular macroeconomic variable has grown, despite its enormous shortcomings, to become a metric of what it was not designed to be in the first place. Very simply stated, the GDP is a money measure of the value of final goods and services that are produced by a particular society. Note that the concept does not pretend to say anything about the level of welfare but is only the summation of all what is produced without even deducting the damage that ensue from such levels of production and consumption . A simple common example might help illustrate this absurdity. If during a particular year, the number of expensive medical procedures undertaken in a state increases then the overall size of its GDP increases also. So if the GDP is such a good indicator of the social level of welfare then why not promote cigarette smoking in order to increase the incidence of lung cancer which will keep the surgeons busy and lead to a large rate of growth in the GDP? Of course such a policy would be rejected by all. But isn’t this exactly what we do when we allow firms to dump their toxic wastes into rivers and when we encourage workers to commute long distances from where they reside to their place of work. The concept is rife with problems that are too many to list and that economists and environmentalists have been pointing out for decades chief among them is the inability of GDP per capita to say anything about the all important income distribution. Wouldn’t it be more important to learn who had access to the increased output rather than to just say that output went up? It has often been the case that the all the growth in the GDP accrues to a small group of privileged economic class when ¾ of the population has in reality lost ground.
Environmentalists in general and environmental economists in particular have been in the forefront of an unremitting attack on the method of assembling national income statistics and in particular the GDP. These efforts have been helped over two decades ago by the work of Amartya Sen, the Noble laureate in Economics, through his pioneering work on how to measure poverty and social well being. His work has led, among other things, to the increasingly popular Human Development Index by the United Nations. The HDI ranks countries by creating an index that takes into consideration the level of GDP per capita but combines that with measures of literacy and life expectancy. As a result it becomes possible to rank a country with high literacy rate and a high life expectancy above one that enjoys a higher GDP per capita but lags in the other two indicators.
Two days ago Joseph Stiglitz, another Noble laureate in Economics, a Professor of Economics at Columbia University and an ex Chief Economist of the world Bank has joined ranks with the above group of advocates for a change in National Income Accounting. He called, in his capacity as a member of a group advising president Sarkozy of France, upon world economic leaders to “avoid GDP fetishism and… to stay away from that.” What a welcome message during these perilous economic times in a world that is clearly not sustainable. Bravo Dr. Stiglitz.
So what are the implications of such a change? You tell me. Is a growing GDP, accompanied by a growing poverty rate, inequitable distribution of income , larger public debt, higher unemployment, less electric power, a construction boom for the super wealthy, privatized public beaches, low minimum wage, environmental degradation in all fields and rampant corruption a sign of social justice and better social welfare?

10 comments:

Dan Trimarchi said...

We live in an ever changing world where we're constantly making advancements and gaining more knowledge to make our scientific study of the way people produce, distribute, and consume goods and services more accurate. As we learn more about what makes an economy tick, we're able to measure it in new ways. Just as the GNP was more or less replaced by the GDP as the measure of a nations economy, I do not think it is unreasonable to believe that in such an important economic time, that there should and will be a more accurate way to measure the strength of a nations economy.

Jim said...

I believe that a high GDP proves nothing, especially now in the US where there are obvious signs of increasing poverty, lower income, and increasing unemployment. The GDP would be a better indicator if the wealth coming into this country was not going to only a certain group. After reading about the HDI,I think, in times such as these that this index would be a much better indicator.

Johnathan Corvino said...

I believe the GDP is a good thing because it shows us the increase and decrease of something. For example, in the article it says if we increase cigarrets smoking it will increase lung cancer. If lung cancer is increased then more doctors will be needed for the cancer. But, if we decrease the GDP then cancer will be decreased. The GDP in my opinion is also a good way to stay up to date with the current changes in the overall econonomic conditions in the U.S.A, and the rest of the world so we will be able to know if we are becoming better or worse in every possible condition.

Albert said...

I believe that the GDP is a good thing to have. If we didn't have the GDP we wouldn't know the amount of goods produced in a society. The reason why the GDP is important is becuase when something happens with the economy we could keep track on how products are doing.

Brian Keegan said...

I feel that we should be careful not to read too much into what Stiglitz said. He didn't say to abandon the idea of the GDP and I feel that we shouldn't. The GDP is a valuable tool to evaluate a nation's productivity on an international scale and as such should not be disregarded. What Stiglitz said was a warning against "GDP Fetishism". What this means is that we should not be obsessed with the GDP or assume that a high GDP means a stable and strong economy.
I also don't think that HDI is necessarily a perfect replacement for GDP as a tool for evaluating a country's success or economic strength. While HDI is a very good indicator of improvement in a developing country (as is suggested by the word development), it is not as successful in indicating decline in a struggling country. The other major flaw in the idea of HDI is the inclusion of life expectancy as a major factor. Life expectancy is only an estimate based on living conditions and the predicted impact of numerous factors. A better indicator would be an analysis in the change of the income at the low end of the spectrum along with some kind of measure of quality of life. Despite it's flaws we should definitely support HDI as substitute for GDP as an overall indicator of national well being.

Steven DeNully said...

The GDP of a country has been used for decades now so that people could see the economic growth in their country. Now if the GDP is falling behind and is less accurate about the economic welfare of a country as a whole because it is only taking into account the upper class of a country,the HDI seems like a more reasonable measurement until there is one solid irrefutable measurement that will always tell the exact standing of a country and their economy at any given time.

Khari Linton said...

In some ways I believe that GDP is a good way to prove if a country's economy is improving or not. But proven in the article, health hazards and hazardous environmental destruction are causing the US GDP to improve or stay steady. Therefore I believe that GDP should not be so heavily relied on because concepts such as war, toxic dumps, and military spending is a positive in GDP whereas it should not.

Justyna Sokol said...

I'm not going to say that the GDP is a bad or good thing. Sure economists will look at the different perspectives and say that it is either good or bad. However, its not just one or the other; it's both. The GDP is a great way to measure the nation's economy. It is a great indicator of the example of the cigarettes. It's 100% correct when it states that if we increase smoking, it'll lead to an increase in lung cancer, which in turn will need more doctors. However, like almost everything now a days, it has it's flaws. Everything in time comes out of style and is replaced by something better. Times like these call for a different kind of indicator such as the HDI. After reading about the HDI I believe that it is a better indicator of the wealth and income of a nation and where this income is being dispersed.

TK said...

I believe that GDP is somewhat important to the economy. It acts as a marker to let the government know how well its economy did that year, and the government compares the result with the results from the previous years. However, GDP should also contain some material on its specific factors. Especially during a recession, the government should be more interested in the category that's lowering the overall GDP.

Richard De Nardo said...

GDP obviously proves nothing about the welfare of the economy and to base the progress of an economy on it is absurd. With increasing poverty, decreasing minimum wage, and an increasing unemployment rate, the GDP still rises. Does this mean that our economy is getting better? Of course not. The GDP is only a stat of a country's production and not a means of a country's well being.