The Corner

Economy & Business

What GDP Growth Misses

(Ajay Verma/REUTERS)

In light of “the growth wars” — the ongoing intra-right debate over whether or not conservatives have been in the grip of an unseemly “GDP fetishism,” which prioritizes GDP growth over all else — I wonder if it’s worth considering the subject from a different, more prosaic angle. Even if we were to stipulate that what policymakers ought to care most about is material well-being, it is not obvious that GDP growth is the right target. For one, you should at the very least focus on growth in GDP per capita. Otherwise, robust work-force expansion coupled with stagnant or even declining productivity would create the illusion of progress, even if improvement in material living standards were stuck in reverse. And as Random Critical Analysis has explained at length, GDP per capita is itself a decreasingly reliable proxy for material living standards. To get a sense of the resources available to the average household, you’d be better off with a measure like actual individual consumption per capita or household net adjusted disposable income. In Luxembourg and Ireland, for example, GDP per capita is swelled by the fact that many multinationals park their profits in tax havens, but actual individual consumption per capita in both countries is markedly lower. (The economist Diane Coyle has much more on the idiosyncrasies of calculating GDP in her much-admired GDP: A Brief but Affectionate History.)

Further, one could argue that a sound assessment of the welfare of people in a given country is affected by other factors as well, such as life expectancy and leisure. This shouldn’t be too controversial. It’s not hard to see why one might prefer earning slightly less income over a much longer lifespan, or slightly less income while working far fewer hours. Granted, this does get us into subjective territory, which is always treacherous. But it’s possible to stick to plain-vanilla considerations to come up with a new summary statistic designed to capture living standards. That’s what the economists Charles Jones and Peter Klenow tried to do in a 2016 paper, and their findings are revealing. Viewed solely through the lens of GDP per capita, the French look much worse off than Americans. Once we adjust for life expectancy, leisure, and inequality — yes, I know this might strike you as awfully political, but a high average might conceal lackluster consumption for those in the middle of the pack — Americans are still better off, but the gap closes quite a bit. Most of the time, GDP per capita and Jones and Klenow’s consumption-equivalent welfare measure are highly correlated, as one would expect. However, the gap between living standards in the U.S. and Western Europe shrinks while the gap between the advanced market economies and most developing countries, including China, grows dramatically, in large part due to shorter life expectancies and more extreme inequality in the latter.

Perhaps the justification for prioritizing GDP growth is not that it’s the best way to capture material living standards, as there are another number of summary statistics that would do a better job of hitting that target, but rather that it’s a solid measure of aggregate national power. As the political scientist Michael Beckley argues in a recent issue of International Security, however, gross indicators, including GDP, “systematically exaggerate the wealth and military capabilities of poor, populous countries, because they tally countries’ resources without deducting the costs countries pay to police, protect, and serve their people.” Rather than rely on gross indicators, he recommends the use of net indicators. “In essence,” writes Beckley, “this process involves creating a balance sheet for each country: assets go on one side of the ledger; liabilities go on the other side; and net resources are calculated by subtracting the latter from the former.” To illustrate his point, Beckley points to the 19th century, when a rising British empire bested the decaying Chinese empire in a series of military conflicts. Britain did this despite the fact that China’s GDP was at the time substantially larger, owing to its much larger, but also far more impoverished, population. China, he notes, “had the largest GDP and military in the world until the 1890s, and the second largest GDP and military until the 1930s.” Yet the nineteenth and early twentieth centuries can hardly be characterized as an age of triumph for the Chinese people.

Drawing on the work of historian Paul Bairoch, Beckley uses a simple index that multiplies overall GDP by GDP per capita, the latter of which he uses as a proxy for economic and military efficiency. Doing so yields valuable lessons for understanding why the Britain prevailed over China in the nineteenth century and why the U.S. prevailed over the Soviet Union in the twentieth. Towards the end of his article, Beckley pours cold water on the notion that Chinese power will soon surpass that of the U.S.:

Obviously China is not as weak today as it was in the nineteenth century, but neither is it as powerful as its gross resources suggest. China may have the world’s biggest economy and military, but it also leads the world in debt; resource consumption; pollution; useless infrastructure and wasted industrial capacity; scientific fraud; internal security spending; border disputes; and populations of invalids, geriatrics, and pensioners. China also uses seven times the input to generate a given level of economic output as the United States and is surrounded by nineteen countries, most of which are hostile toward China, politically unstable, or both.

To return to the growth wars, there is no question that economic growth matters. Of course it does. But so does deploying our human resources more effectively. Judging by the decline in life expectancy in the U.S. and some other high-income countries, we could be doing better on that front.


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