GDP No Gauge For Living Standards

Wednesday, July 06, 2005

In order to measure a country's properity the GDP figure has become the predominant marker. But scholars are beginning to dispute this gauge as it is heavily distorted by the wealth of the top 10-percent decile who have accumulated most wealth in all countries of the world. While US GDP has advanced at a healthy 3-percent rate in 2003 the number of people living in poverty has actually increased 1.3 million to 35.9 million people. Reuters has done an informative story highlighting the problems that measuring a nation's prosperity by GDP-per-capita brings with it.
Economic growth is often equated with better living standards, but critics argue that expansion alone may not always lead to greater prosperity.
Per capita gross domestic product, one of the broadest measures of economic output, often measures the wrong thing, some analysts say. It also completely misses the issue of how wealth is distributed, painting a misleading picture of national well-being.
In the United States, for instance, GDP increased at a solid 3.8 percent clip in the first quarter, according to a report published last week.
Yet two years of robust growth have failed to bring the sort of employment and wage gains associated with past economic recoveries, preventing many from reaping its benefits.
"GDP per capita is a bad measure, because it leaves out the whole question of distribution," said Anwar Shaikh, a professor of economics at New York's New School University.
Most economists know this, but they argue that GDP represents the most comprehensive data available, and therefore must be relied upon as a broad gauge regardless of its flaws.
"It's all we've got," said Mark Weisbrot, economist and co-director at the Center for Economic Policy Research in Washington, D.C.
Genuine Progress Indicator (GPI)
But some economists insist GDP's mismeasurement is too egregious to be ignored, since it ends up suggesting the bulk of Americans are doing better than they actually are.
This group sees the need for a new indicator that might better distinguish social well-being from mere output growth.
Redefining Progress, a public policy institute in Oakland, California, has developed what it calls the "genuine progress indicator," or GPI, which it offers as a broader, more descriptive alternative to GDP.
The GPI looks to redress what its creators perceive as GDP's inadequacies - to subtract the bad stuff that is normally tallied as a plus and add the life-enhancing factors that GDP tends to miss.
The positives include things like household and volunteer work, caring for the elderly and having free time. Crime, pollution and family breakdown, in contrast, are revised away from the data. The results yield a very different picture.
GPI Flattened Out Since 1975
"GDP has grown rather consistently since 1950, except for periods of recession," said Cliff Cobb, a senior fellow at Redefining Progress. "The GPI rose at about the same rate between 1950 and 1975, but since then it has flattened out."
The problems with extrapolating better living standards from GDP growth are not hard to fathom.
If the U.S. government buys a multibillion dollar aircraft carrier, for instance, it makes a huge contribution to GDP even though most Americans might not benefit directly from the purchase.
Similarly, a productive factory that dumps pollutants into local rivers is bumping up GDP, as is a hurricane that sweeps through town and fuels the need for reconstruction in its wake.
"The way we measure things, if there's more cancer, that adds to GDP. Because if you treat it, then health services get a boost," said Weisbrot.
GDP Masks Sharp Internal Disparities
Apart from measuring the wrong things, analysts note that national economic performance frequently masks sharp internal disparities between rich and poor, old and young, male and female.
These differences matter, the experts say, because the political weight of GDP has surged over the past 20 years. As this happened, the number took on a life of its own, speaking to the very core of a country's sense of itself.
It wasn't always that way. When it was first compiled, what was then known as the Gross National Product represented an effort to estimate production capacity during World War II.
Not until the 1960s, when John F. Kennedy ran for president and accused the Republicans of failing to spur growth, did the number begin to take on its current political significance.
Nowadays, the global might of the United States is predicated on its success as the fastest-growing industrialized nation, and its economic policies are determined by how well they suit and further that goal.
Yet a closer look at the economic situation of Americans yields a different picture.
US: Biggest Income Inequality
In 2003, the last year for which data are available, 1.3 million Americans slipped under the poverty line, bringing to 35.9 million the total number of poor. The country also has the worst record of income inequality of any developed state, according to the United Nations Human Development report.
This makes the attempt to add a social dimension to economic indicators all the more pressing, said the New School's Shaikh.
Vast Majority Index
He is currently putting together a "vast majority" index that would exclude the very rich from the data to get a better pulse of how most people are faring.
"If this is what 80 or 90 percent of the population is feeling, then it would be misleading not to start with this measure," said Shaikh.
Such an index might prove even more useful in developing countries, he said, since their monster gaps in wealth and income consistently skew the benefits of economic prosperity toward the very rich.
Noting that record corporate profits go hand in hand with record unemployment in Europe and no employment growth in the US' private sector in the current economic upturn The Prudent Investor is inclined to use either the GPI or the Vast Majority Index as the better measure for a populations prosperity. I hope this data will soon be available for the bigger economies.
A look at GDP-per-capita from selected countries shows that the average figure deviates widely from what one can actually see in those countries.
US: 37,800 dollars. Try to live on that in New York.
Bermuda: 36,000 dollars. Cheeseburgers 5 dollars, average rent for a 1-bedroom apartment 1,500 dollars, single bus fare 4 dollars.
Austria: 30,000 dollars. Cheap lunch 10 dollars, average rent for a 1-bedroom apartment 800 dollars.
UK: 27,700 dollars. Try to live on that in London.
Germany: 27,600 dollars. Unemployment rate close to 12 percent.
Monaco: 27,000 dollars. Yeah, and lunch will set you back 250 dollars.
Saudi Arabia: 11,800 dollars. This includes the wealth of the oil sheiks. Not much left for the rest.
World: 8,200 dollars. Includes Bill Gates who has more money than the poorest 20 countries together.
China: 5,000 dollars. Biggest car market of the world.
Zimbabwe: 1,900 dollars. And why is half the population depending on foreign aid?
Somalia: 500 dollars. Most of it spent by warlords on weapons. Life expectancy: Depending on the fortification of your residence. DATA: World Facts and Figures.
Note that all these figures are GDP and not per-capita-incomes which are still lower due to taxes and social security payments.

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