Beyond the tyranny of GDP

Economists are fixated with what they can easily measure, but sometimes this means they can’t see the wood from the trees and focus on what is really important.

There are very good reasons why Gross Domestic Product, the sum of all goods and services produced for sale in an economy in a given time period, is the most widely watched economic indicator across the world. With adjustments for changes in prices over time and across countries, it is relatively easily comparable. When measured on a per capita basis, it is a useful – if far from perfect – proxy for the standard of living.

However, the intense focus on GDP numbers can distort public debate and political incentives as hitting growth targets becomes a holy grail. All growth is treated equally, no matter how broadly shared its benefits or how environmentally sustainable. People-centered priorities like jobs and incomes become secondary.

We have also seen develop a somewhat arbitrary definition of what constitutes a recession: two consecutive quarters of – what only an economist could call – ‘negative growth’. This has given rise in the recent low-growth era to bizarre instances of economists arguing over fractions of a percent like bald men arguing over a comb.

In the Irish case, the utility of GDP has long been questioned because of the size of the country’s multinational sector. There is a long-standing argument between economists as to whether Gross National Product – which nets off income generated by Irish assets abroad against the far greater income generated by foreign assets in Ireland – is the better measure in Ireland’s case. Whereas GDP and GNP are very similar in most countries, Irish GDP is more than a fifth larger than GNP, meaning that the conventional GDP per capita measure of living standards is a significant overstatement.

Whichever measure is used, the size of Ireland’s economy has essentially flatlined since 2009, after a steep fall. Growth has been minimal, and far lower than what is needed to maintain the living standards of a growing population, never mind improve them.

However, most people don’t really care about GDP and GNP, precisely because they are not in fact measures of living standards, only proxies of questionable utility. For example, the fact that Ireland’s vast pharmaceutical sector has been knocked back as some of the blockbuster drugs it produces have come off patent – becoming subject to competition from generic equivalents – has had a big impact on Irish export and GDP figures, but the real impact on peoples’ wallets is imperceptible. The pharma sector accounts for a much bigger share of GDP than it does of employment. Moreover, falling drug sales have not lead to the sort of mass job losses or pay cuts we have seen in other, lower margin sectors. So, even on the income front, GDP or GNP would not appear to be as good indicators of living standards as, for example, disposable income adjusted for inflation or the employment rate.

Of course, what human beings value in life cannot be reduced to what money can buy, or any single number. But, we can do better than GDP, and many have tried. Esteemed economists Amartya Sen, Joseph Stiglitz and Jean-Paul Fitoussi expended much brain power in 2008-2009 to come up with better measures while the UN has for long used its multi-dimensional Human Development Index. Even the EU has its own little heralded Beyond GDP initiative.

More recently, the OECD has developed what it calls the Better Life Index, which measures human well-being across 11 dimensions including not only income and jobs, but also indicators for community, environmental quality, life satisfaction and work-life balance. The Better Life Index even comes with a tool which allows people to weight the indicators according to how much value they place on them, recognizing that different national, cultural or even ideological viewpoints can be equally valid. Increasingly, it is being used to assess the distribution of well-being within countries, an analysis which looks beyond averages that hide more than they reveal and gives a far more holistic picture of inequality than pure income measures like the GINI index.

The OECD has just published the latest results of this initiative: How’s Life 2013? Interestingly, even in the midst of an economic slump, the Irish seem to be a relatively happy bunch, with better than average life satisfaction and work-life balance. Ireland also scores among the best when it comes to social and community networks. And while income inequality is relatively high, life satisfaction and electoral participation are more evenly distributed here than in many countries.

The moral of this story is not that one measure or index is better than another, but simply that we need to better focus on what really matters to people and how to improve it. Because that’s what social and economic policy should be about.