It is an odd confession to make about a statistic, I realize, but then again, I am an economist, so I am just going to go ahead: I love GDP. There. I said it.
GDP—gross domestic product, the total market value of all final goods and services produced within a county’s borders—is in many ways the ideal economic statistic, both for what it measures and what it represents. It is a single number that captures so much information, with a scope and history unmatched by almost any other measure. I am unapologetic in my desire to see it grow.
And yet GDP has so many haters, many of them on the left. They want more emphasis placed on any negative externalities from growth or greater value put on equality. Some make the point that there is more to life than income, which is certainly true but in no way invalidates GDP.
And now America’s Vice-President J.D. Vance has taken on GDP too. In his latest book, he has a long riff on the weaknesses of the statistic and writes, half-jokingly, that “maybe economics is just fake.”
No surprise there. As economic populism becomes bipartisan in the US, expect more GDP bashers. It’s their worst enemy—because it holds leaders accountable.
Any statistical estimate is by definition imperfect and incomplete. What it includes and how it measures, for example, are both choices. And some statistics are better than others. Obviously, a statistic needs to tell you something useful, but it is also important that it can be estimated consistently, is transparent and can be replicated.
By these standards, GDP may be the best statistic we’ve got. It does not capture everything that matters in an economy, but it is highly correlated with about 90% of the things that do: health, employment, life expectancy, sanitation, opportunity and education. It can be compared to that of other countries and across time. Used this way, it shows the stunning increase in GDP in countries that offer their citizens a higher quality of life.
GDP does not, as Vance points out, capture the fact that strawberries are prettier in Japan or that peaches taste better in France. It is merely a measure of economic output within a country’s borders—but that reveals a lot.
There are adjustments for new technology and product quality, though they do not capture everything and require some human judgement. GDP also does not capture inequality, the worth of leisure or the value of unpaid housework.
To address some of those weaknesses, the UN recently convened a commission to come up with something better. The commission proposed “a dashboard of 31 indicators structured around four components,” which was almost immediately criticized for being a waste of time.
For one, 31 metrics do not deliver the single objective statistic that we need. This approach would also let countries and politicians pick how they are judged. The exercise proves why GDP can’t be beaten, even if it is not perfect and does not capture everything everyone cares about.
In fact, GDP sceptics have never come up with anything better. And while they make some valid points, occasionally their aversion to GDP reflects an underlying scepticism of economic growth itself. French economist Thomas Piketty, another GDP critic, recently admitted that, yes, less growth is the point.
Expect more scepticism from politicians too. The US, like a lot of other nations, faces many economic challenges: a large debt burden, an ageing population and a major technological transformation. How it manages these tests will show up in its GDP. It can tell us not only how much the economy is growing, but what the nation can afford and if it really is more productive.
It also can show how the US compares to other countries—making it easier for Americans to hold their leaders accountable for the policy choices they make.
Many European countries, for example, have stagnant GDP growth. Their politicians might argue that this doesn’t matter, since they have other priorities such as maximizing leisure time or reducing carbon emissions. These may be legitimate objectives, but they come with trade-offs in terms of lower living standards. Low GDP growth forces Europe’s elected officials to reckon with that.
For Vance, bashing GDP also creates an opening to evade accountability for his preferred economic policies of reviving low-skill manufacturing, industrial policy and less trade. These policies would reduce GDP growth, making the Chinese economy look more successful by comparison. If you believe GDP is not important, you can claim the number do not matter.
But breaking a thermometer does not cure a fever. If the US enters a period of low growth and falling living standards, people will notice—regardless of what political leaders think of GDP. ©Bloomberg
The author is a Bloomberg Opinion columnist covering economics.