Don't be obsessed with the GDP

For years, lefties have complained about the preoccupation with the Gross Domestic Product (GDP).  About how, for instance, how hiring more police officers adds to the GDP, when this is something that should actually warn us that there are some serious problems in society--instead of addressing those problems, we are hiring police officers, with the perverse effect of increasing the GDP!  That is merely one example of what is screwed up with the GDP.

Such thinking, more so when it came to poorer countries that were trying to figure out solutions to a slew of problems, led to alternative measures of how well countries are doing.  Thus was born, for example, the Human Development Report and its Human Development Index.  The king of Bhutan went one step more and called for Gross National Happiness.  I appreciated his idea, but thought it was a contradition of sorts to have the word "gross" in it :-)

Now, we are in a worldwide economic recession that seems to be getting deeper and deeper with every passing day.  A recession is, of course, by definition tied to the GDP--a contraction in the GDP for at least two consecutive quarters.  So, now once again people are thinking about whether GDP is a good measure .... Including the Financial Times!  It recognizes some of the shortfalls, such as:

GDP was never meant to be an overall measure of how well a society is doing. It is a measure of production not even designed to capture all economic output. GDP is blind to non-monetised production – it includes care given in crèches and old people’s homes but not the same care given by family members for free. And a country that whittles down its non-renewable resources may record high GDP growth while really just using up its wealth.

And then the paper points out, correctly, that governments have a restricted role in making decisions on tradeoffs:

In spite of this, GDP remains, fetish like, the yardstick for economic performance. Attempts to improve on it must distinguish the technical question of how to measure what we care about from the political question of whatwe (and governments) should care about. We can measure economic production better and Mr Sarkozy has recruited some of the world’s best economists to tackle the technical part.

But we should not pretend to engineer a figure that will tell us how important economic production and wealth are relative to other values. We ought to resist turning “happiness” – which one of the commission’s working groups is looking at – into a new fetish for governments. Instead, elevate other objective indicators of human well-being (such as already existing health, education and environmental sustainability measures) to the status now enjoyed by GDP.

Material wealth remains crucial; most of the world has too little of it. It is governments’ duty to promote growth while securing non-material values voters hold dear. Better statistics can help voters force politicians to make the best trade-offs. They cannot choose on their behalf