The GDP Myth

One thing that most Americans, regardless of political inclinations, can agree on is the importance of the USA’s economic health. Whether you are of the belief that public investment spurs economic growth, or that economic growth begets higher levels of public investment, there is no denying that economic prosperity is a critical part of the equation. What is interesting, however, is the limited view society tends to take when measuring economic growth. Since the middle of the Great Depression, when economic accounting methods became more modernized, GDP has morphed from an openly flawed measure of national accounts into a proxy for economic prosperity. Want to know how well average people are doing? Just check GDP!

But the issues with this oversimplification of the way we view our economy has troubling impacts. First and foremost, the fact that people can take an economy that is as complicated and massive as the United States’ and use just one number to assess its health speaks more to the ebbing tide of curiosity in our country more than it does anything else. Additionally, it is worth noting that not all growth is created equal. To see how to consider the following example:

It is a well-known fact that healthcare costs have been rising for years in the United States. While Democrats and Republicans both disagree on how to fix it, they both agree that it is an issue. In fact, most Americans would probably consider rising health care costs as a “bad” thing, and they’d be right. However, these increases in health care costs are added into the GDP equation and reflected as a net positive for the economy, since they technically add to economic growth.

This dynamic is not limited to healthcare, it can be applied to the soaring costs of college tuition, or overly-expensive airline tickets. When countries go to war with one another and gas prices shoot up, GDP also goes up, which is therefore considered a net benefit to the economy, but are any of these things actually good for society?

This question gets to the heart of the GDP Myth and forces us to ask why we rely on GDP so heavily. In fact, let’s play the logic out:

We must have higher GDP growth because a higher GDP growth means the economy is growing. If the economy is growing, then everybody in it is getting richer, therefore, we need to make sure we have a higher GDP growth.

But the idea that higher GDP inherently means more prosperity for everybody is patently false. If you don’t believe me, take a look at the chart below, which shows wages and salaries as a percentage of GDP. As you’ll see, this number has fallen continually since 1970.  Additionally, as the examples above point out, pursuing a “growth at all cost” policy agenda does not inherently mean that people are going to be better off. Who is better off when the cost of their prescription drug increases by 20% in one year? The drug manufacturer that makes the drug, and their shareholders perhaps, but certainly not the general public. However, GDP would count the precipitous increase of prescription drugs as a positive. This speaks to a fundamental flaw in the way we view GDP, and the flaw is that GDP is not a measure of economic prosperity, and was never intended to be. In fact, the “inventor” of GDP, Simon Kuznets, explicitly warned the US Congress not to use GDP as a measure of economic welfare in 1934. Unfortunately, that is the only thing we use it for today.

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In the end, the GDP Myth isn’t really about GDP. In fact, GDP Instead, the GDP Myth is about how we’ve perverted its meaning. Rather than referring to GDP for what it is (a measure of all the goods bought in a given year), we’ve begun using GDP as the sole measuring stick for the health of our nation’s economy and the people in it.

The United States is a very, very wealthy country. So long as our economic growth outpaces population growth and inflation, we are going to be just fine. Rather than pursuing policies that increase GDP growth, it should be the focus of policymakers to enact policies that broaden the benefits of GDP growth to working families, not just the owners of capital. Yes, lowering the costs of college tuition, prescription drugs, and renewable energy will be a detriment to GDP, but as we’ve seen here, that doesn’t mean that those things are bad for society as a whole.

We do not exist on this earth to serve a GDP God, and it is probably time to create policies that reflect that reality.

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