Stop Using GDP, the U.S. is Not Really No. 1

In the second quarter of 2011, U.S. GDP grew by an estimated 1.3%, up from 0.4% in the first half of the year. Paul Krugman of The New York Times calls those numbers “ugly,” naming the U.S. the “Stagnation Nation.”

Krugman’s willingness to put tremendous weight on GDP is a common practice in the world of economics, but it neglects many other factors that are equally as important. 

GDP is commonly used on a per capita basis, intended to determine the average income of each citizen within a country. Since its creation in 1934, GDP has become a widely used indicator of economic success and standard of living.

Equating GDP with standard of living has become more and more innacurate. According to researchers at the Gallop World Poll, Denmark is the happiest country in the world. However, the International Monetary Fund puts the country at 31st in terms of GDP.

The method of calculation for GDP also makes it an inaccurate figure. GDP essentially takes into account all transactions, going up every time money changes hands. It is completely blind to where the money will go or what effect it has. It also neglects class differential and if the money was borrowed or not. 

Thus, going out and bouncing checks on various items you do not need will boost GDP, while being responsible and cutting back does not. Smoking and buying drinks at a bar helps GDP. The parents who feed their children fast food every night are GDP heroes, while the parents who cook nice healthy meals for their kids do little to inflate our stats.

The U.S. GDP increased from all the money that was spent in the wake of the BP oil spill. The destruction of the ozone layer and the extermination of all life in the Gulf of Mexico may have horrific consequences, but we could have done nothing better for GDP.

In short, GDP does not measure negative actions. Lincoln Anderson, former economist for Fidelity Investments, says of GDP: "The nation's brightest economists maintain our national accounting system with a calculator that has a plus key but no minus key."

GDP is also completely blind to many other important factors that contribute to a country's success, such as quality of education, research and development, and innovation. As Robert F. Kennedy explained two months before he was assassinated, GDP “measures everything ... except that which makes life worthwhile.”

One comprehensive alternative to GDP does exist and is too often ignored. The Human Development Index (HDI) rates countries based on standard of living, literacy rates, life expectancy, and education. By that measure, the U.S. is no longer first, and Denmark is 12 spots ahead of where the U.S. is in terms of GDP. China, which is second in GDP, is 91st in HDI.

The UN Development Programme created HDI about 20 years ago "to shift the focus of development economics from national income accounting to people centered policies."

China executes over 2,000 of its own citizens each year and censors the internet, and yet it is still regarded as one of the best nations on earth because of its rising GDP. Denmark has the happiest people on the planet, with affordable education and health care for all, but it is not on anyone's radar because it is 31st in GDP.

Our parents were right: Money really isn't everything.

Photo Credit: franciscocellini