13 March 2015

We are better off than GDP suggests


By excessively relying on the economic statistics, media pundits and political leaders tend to give a biased  image of where we really stand in Western democracies. Doomsday predictions are actually based on irrelevant figures. True enough, predicting the worse and regretting the good old days are part of Western culture: one cannot prevent politicians struggling for office or public intellectuals looking for an audience to rehash ancient fears. Doomsday feelings however do not mirror the current reality and neither do statistics.

Let us start with GDP and GDP per capita which are the most widely used synthetic indexes to describe our situation. When they were created, after World War II, these measurements proved extremely useful to track economic progress and orient policy choices. By contrast, during the 1930s Great Depression, no one had a clue about the size of the economy, and the scale of unemployment. Thus ,GDP made a lot of sense 70 years ago. But it is now less and less relevant because it is merely a quantitative production index which does not describe our quality of life.

Let us consider some examples. In the 1950s, it was essential to measure the annual production of steel or coal, as these were the fundamentals powering the European economy. The Soviets inflated their statistics, trying to show the superiority of socialism over capitalism. Today, GDP does not convey the fact that, for example, all of us have access to drinking water at the faucet, cleaner air than in the 1960s (remember the London fog, or Paris’s darkened façades), medical treatment which did not exist ten or twenty years ago, affordable vacations at any exotic destination, and longer life expectation. Also, one century ago, most of us would spend 80% of their income to buy basic living necessities like food and clothing. Today, based on US statistics, the middle class is able to spend half of its income on products and services of their choice.

Let us consider another most trivial but seminal example: the cell phone. Twenty years ago, it did not exist, but today everyone –  even the poor – can afford to possess one. Any cell phone, as we know, is a more powerful computer than the giant mainframes of the 60s. Moreover, from one year to the next, new cell phones offer more services at a declining price. It is rarely or never noticed that, due to price decline and new innovations, our standing of living improves when GDP remains stagnant. GDP does not just reflect better quality of life, more freedom of choice and enhanced purchasing power due to falling prices.

As frequently observed by the Anglo-Bengali economist Amartya Sen, the economics profession tends to overlook the non quantitative dimensions of our life, like freedom of speech or gender equality. GDP also does not include the grey market which can wildly distort official figures. Adding the grey market production of Germany and Italy represents the equivalent of the total Austrian GDP. In Estonia, the grey market makes 24% of the official GDP. Grey markets can actually be indirectly quantified, through energy consumption for example.

Should then GDP be replaced with a more sophisticated index, to get a more precise picture of our economic environment? Many alternatives are already available but none is totally convincing, nor resists what Karl Popper called the “falsifiability test”: what is scientific can be proven wrong, what is ideological or magical cannot be debated. A well-known and usually well regarded substitute to GDP is the United Nations Human Development Index (HDI), which incorporates education, life expectation, social equality as measured by the Gini coefficient. The HDI shows that wealthy countries tend to provide better education and more social equality than poor countries.

Democratic capitalist countries are found near the top, and statist economies nearer the bottom. China, which is the second largest economy measured by GDP, ranks 91st in human development.

More recently, left wing antiglobalization economists led by Joseph Stiglitz have tried to replace GDP with a more qualitative index. These economists draw part of their inspiration from the so-called Bhutan “Happiness” index. In reality, Bhutan, a dirt poor and authoritarian country, abandoned its happiness index many years ago. As Milton and Rose Friedman explained in Free to Choose, growth can improve our freedom of choice – this can be measured – but happiness is not at all an economic parameter. Stiglitz and others are actually pursuing a more political than economic agenda: by including more common goods in a new index, they try to show the superiority of a regulated economy versus a free choice society. To no avail, so far.

At the end of the day, the good old GDP measurement may be imperfect but remains less imperfect than its alternatives: it is not politicized, it is global and it allows comparisons throughout time and countries. We only need to keep in mind that it describes a small and declining part of the economic reality: we are actually growing faster than GDP suggests.

Guy Sorman is an economist at the University of Paris and author of many books on classical liberalism including: The American Heart, In Praise of Giving, 2014. He is also publisher of France Amerique and founder of Action against Hunger.

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