GDP Is Overrated

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Gross Domestic Product, or GDP, has been hailed as the be-all end-all indicator of a country’s economic health, offering a single number that can sum up whether or not a country is prospering. Investopedia defines GDP as “the monetary value of all the finished goods and services produced within a country’s borders in a specific time period”. Condensing every aspect of a country’s economic output into a single number allows for quick, easy conclusions about economic prosperity.

But can the GDP hint at anything more than a country’s economic health? Three percent is the generally-accepted benchmark for annual GDP growth in the United States, and the impact of economic policies and agendas are often judged against this benchmark. While a strong GDP growth certainly indicates balanced productivity and employment, GDP is too often used as if it is an end in itself. GDP purists seem to ignore that the time period in the last 50 years with the greatest stagnation in wealth inequality, 2006-2013, was concurrent with an average annual GDP growth of around 1.2%.

Conversely, the United States saw a considerable widening in the gap between the rich and the poor from 1991 to 1999. The average GDP growth during this time period? 2.88%. Correlation, of course, does not equal causation, but the rising income inequality at least illustrates that economic prosperity is more likely to benefit the rich than the poor.

Graph and Data via Urban Institute

Ever-rising income inequality and the declining probability of individual economic mobility are evidence that the rich have been taking their economic prosperity and hoarding it. The opportunities that they enjoy—private colleges, pricey suburban homes in strong school districts and low crime areas, and unhindered access to healthcare—are clearly not equally distributed among the population. Thus, the main focus of economic policy should not be raw economic growth if it’s only going to benefit a minority of the population.

The United States, nonetheless, has the highest GDP in the world. What it doesn’t have, embarrassingly, is universal healthcare, paid maternity leave, or affordable college. Economic mobility should be the principal metric of economic prosperity. So as long as GDP remains the main indicator of economic health, the rich will be able to line their pockets with impunity. It’s time for a new economic indicator, and it must reach deeper than GDP. Among its variables should be not only economic output but also access to healthcare, likelihood of economic mobility, and access to education.

Such an indicator (let’s call it indicator X) would give politicians and economists a new number to use to gauge economic prosperity. And because indicator X would take into account variables other than solely economic output, it could, unlike GDP, be an end goal in itself. A GDP growth of 3% demonstrates nothing more than economic prosperity, but a growth in indicator X could evidence an improving quality of life. Finally, using indicator X would encourage politicians to enact policies that promote economic equality and economic growth.

Unfortunately, among many conservative politicians, economic inequality is not a cause for concern. Implementing something like indicator X would require a redefinition of the term “economic prosperity”. Still, however, the international community has adopted indicators that consider factors besides economic output. The Human Development Index, or HDI, takes into account life expectancy, gross national income, and expected years of schooling. Bhutan, a tiny kingdom in the Himalayan mountains, uses the Gross National Happiness Index. The GNHI takes a holistic approach, including the factors of psychological wellbeing, health, education, time use, cultural diversity and resilience, good governance, community vitality, ecological diversity and resilience, and living standards.

Economic growth as defined by GDP is often necessary to achieve the goals enumerated by Gross National Happiness. But as evidenced by the rising economic inequality in the United States, GDP growth does not necessitate en masse improvement in quality of life. Thus, a new indicator that maintains the current benefits of GDP but also includes factors relating to equality will better estimate economic prosperity and potentially help to assuage the scourge of income inequality.

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About the author

Matt Walsh is a VI Form day student from Southborough, Massachusetts. He leads Openly Secular, plays trumpet and French horn, and leads the young Democrats club. His academic interests include public policy, political science, and chemistry, and he plays baseball and runs cross country. In his free time, he curates Spotify playlists and pets his dog, Portia. Matt hopes that The Parkman Post can be a hub for intellectual thought, ideological diversity and meaningful debate.

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