Aug 22, 2022·edited Aug 22, 2022Liked by Noah Smith
The big adjustor I think that is needed for GDP/capita is some measure of inequality, whether it's Gini index or something more sophisticated. If you want to understand the typical standard of living and so on, *median* income is a good proxy for that; *mean* income, not so much. The issue is worse with PPP/capita: in a highly unequal society, high PPP/capita can end up meaning something like "the rich can employ lots of servants, because servants are cheap", which is a terrible model of economic development. Also, inequality is a very persistent feature of societies, perhaps more so than poverty as captured by aggregate measures like GDP; governments can redistribute to a greater or lesser extent, but it's not a trivial task to do so in the face of elite resistance (including in democracies, where elites can still resist redistribution through propaganda and lobbying).
There's also an argument that GDP from exporting more or less raw natural resources, especially oil, is "fake GDP" in the sense that its contribution to overall economic development is much, much less than the raw dollar amount would suggest. So maybe we need a measure of labour-productivity-based GDP that excludes oil and mining, and then the resource money can be counted separately. Again, in theory the government or whoever controls the resource money can reinvest the profits into general economic development, but in practice few do so in an efficient way; on a spectrum from Norway to Equatorial Guinea, most oil-rich countries resemble the latter more than the former.
It is important to hold the line on standard definitions and uses.
I wondered if those opposed to the use of GDP were degrowthers. The link in the NYT certainly is. It is quite base to try and remove something like GDP from relevance and consideration when you want to destroy what is in it and people know what is in it. But they probably are not all degrowthers.
Still it is for similar reasons some say we are not to concern ourselves with inflation or debt because their policies are going to cause large inflation and debt.
It is like Argentina of old who stopped publishing inflation figures when they became so bad. If you are going to degrow an economy then you will need to hide the collapse of gdp and the recessionary definitions too.
The common argument that GDP is bad, is some kind of Yarvin-esque critique of hedonics, and that "wellbeing" should be prioritized. GDP relative to median income could be a better predictor, and Peter Turchin used it here https://peterturchin.com/age-of-discord/
Why are older liberals so often Malthusians? The Times comment section on that article is full of them. It's not just that they want less growth and less things, but also less people. Climate change seems to play the secular role of cosmic curse against humanity in their minds, our Tower of Babel, punishing us for Doin' Too Much, and so we deserve all the bad things that will happen to us because of it.
Good piece, Noah. I’m just curious where you stand on the GDP nominal vs. PPP debate. I notice you mainly showed PPP statistics in this post, do you think it’s generally superior or that there are situations where nominal makes more sense to talk about?
"GDP leaves out some things that are very important to human well-being — for example, leisure time, baseline health, inequality, natural habitats, and the value of unpaid housework and child care. "
Now add in the externality that is climate change. I imagine that will lower GDP, and the resulting happiness, over time as crops fail, previously livable habitats will no longer be and the resulting suffering and social unrest caused by tens of millions of climate migrants. But it is likely correct that the GDP numbers will reflect that, absent inflation.
It is worth noting that even the guy who created the GDP metric, Simon Kuznets, urged that is not be used as the sole means of measuring the progress of a nation. He noted that we needed to ask growth of what and for what? We have not done a good job of that. There is an absolute correlation between growth in GDP, loss of species, increase in plastic pollution, increase in global greenhouse gas emissions and those things are not reflected as losses in the GDP metric. Growth for the sake of growth is the ideology of cancer.
By the way, "A lot of people think that education is a good thing for a society to have, and when people have the time and resources to send their kids to school it’s generally a good sign. "
I certainly don't hold the same view... The millennials and Gen Z [I am born in 1993 btw] are rightfully angered by the fact that it was possible to get a real job and buy a home with a high school diploma back in the 50s and 60s while they need a master's degree from a "good" school to achieve the same today.
It's not like learning calculus, computer science and organic chemistry will magically make the millennials and Gen Z able to afford a vacation home. Thus it is really hard to say in a straight face that GDP is a good measure of human well-being, given the fact that GDP per capita today is an order of magnitude higher than in 1962,
[Another bit of rant: Given that America had the luxury of being founded on free land, unlike the Old World countries in Europe and Asia, it is simply criminal that housing is not free in this country, and the home price and rent are more expensive than most of Europe, as if the Native Americans died for nothing.]
I think the author is missing the point here slightly. Whilst there is a populist argument about GDP, there is also an economists argument about it which is what we should be focusing on. Some of this, around inequality for instance, has been covered in the article and in other comments, but there are more substantial discussions to be had. A few points to note on this:
****************************
1. Nobody actually knows what the GDP truly is, and this is important. One of the reasons that arguments over China's GDP rings so hollow is that actually nobody has accurate numbers - and were we to have accurate numbers we would probably be taking different public policy decisions. Hence basing public policy on GDP carries an inherent risk of trying to be too scientific about something which, at the end of the day, even in the OECD is an art.
2. It is natural for us to try and find short cuts, and real GDP growth has come to be that single short hand for how an economy is doing. However what is also true is that we are losing sight of things like nominal GDP which is also very important - if you are a company for instance, your own numbers are nominal, not real, and nominal growth is more important to your top line than real growth is. Additionally, a few years ago people finally came round to the absurdity of the deflator, its centrality to GDP and hence economics, and its limitations. For instance, when China ended up using a negative deflator in 2016, complaits abounded - but using logic, a negative deflator is perfectly normal if a world of flat CPI and negative PPI. The net effect, though, is silly.
3. The most important reason for GDP to be a more and more limited reference point, however, is that the shift in balance globally between income and assets renders the income approach - on earnings, on GDP, on national power, much less important. Actually, of course, if one were to measure national power, it would be far more informative to consider the balance sheet rather than the P&L of the country: every retired engineer, every mothballed factory, every piece of IP combines to help you win a war. Since we have so nonchalantly sleep-walked into a world where assets outperform income and are so disproportionately powerful, GDP has correspondingly declined and particularly so in the popular mind since experts are telling us one thing ("we are growing at 2.5%, don't worry!") whilst life is telling them something completely different ("I will never be able to buy a house for my children").
****************************
So I think that as with all these things, there is a balance to be struck. What is surely correct, however, is that since c. 1980 we have laboured under the tyranny of real GDP growth numbers and this has distorted public discourse. The search for that short-hand has allowed people who know nothing about economics (ie almost all politicians) to weaponise this random, made up number and give them a tool to serve their own ends. Of course, one may argue that *any* popular economic term might do the same - GNP was popular before GDP as we know - but there can never in history been *such* an emphasis on just one very faulty measure. This is something we should rectify.
If you are taking requests, can you write something about why GDP growth is really important for raising living standards and solving climate change. How a proper focus on specific items within GDP growth could lead to energy transition as well as GDP growth.
Is life in Nicaragua more similar to life in Kazakhstan, where the mean income is supposedly the same even though the GDP/capita is 4.5 times greater, or is life in Nicaragua more like life in Nigeria, which has the same GDP/capita but a mean income that's 4.3 times less? How can there even be such large variation (from country to country) in one variable when the other is held fixed?
"GDP is a measure of the total amount of economic value produced in a country."
That seems to cover both sides of the argument. The GDP is about overall potential. It's about everything a nation can produce. It's a useful benchmark because it gives a sense of possibility. A nation with a $10T GDP could probably afford a $2T railroad system but a nation with a $500B GDP probably could not. It's a good metric for the level of national development, at least up to a certain point.
The problem is that the GDP has been turned into a fetish object rather than a useful metric. Rising GDP can indicate some kind of improvement, but, as we have seen for the last forty years in the US, it is not an improvement that has a lot of impact on people's lives. Just because a nation has sufficient GDP to provide every resident a comfortable house, it doesn't mean that every resident actually has a comfortable house to live in.
At a certain point, the problem isn't raising the GDP. We are really good at raising the GDP, but we are bad at providing medical care, housing people, building new transportation systems, educating people and a host of other things, and there is no evidence that increasing the GDP is going to help with this. What would happen if our GDP doubled? Would people still avoid getting health care in fear of bankruptcy? Would young adults be able to afford safe, comfortable housing? Would we have better roads, airlines and railroads? Would people still have to take out massive loans for a college education? What if our GDP tripled? Everyone here knows what would happen. We'd have a lot of ten-billionaires and everyone else barely scraping by.
The GDP was developed as a metric when the nation was enduring the economic collapse of the Great Depression. It was helpful in measuring the depth of that depression and in tracking the recovery. It was useful into the 1980s when the economy was massively restructured. Every year starting in the 1980s, workers at all but the highest levels have been able to claim smaller and smaller shares of it. The GDP is no longer useful in measuring our economic problems and in how well we are dealing with them. The GDP, as defined and measured, implies that we have the capacity to do all sorts of things, but none of those things are being done.
I agree that the GDP is a useful number. It is necessary, but it is far from sufficient.
The big adjustor I think that is needed for GDP/capita is some measure of inequality, whether it's Gini index or something more sophisticated. If you want to understand the typical standard of living and so on, *median* income is a good proxy for that; *mean* income, not so much. The issue is worse with PPP/capita: in a highly unequal society, high PPP/capita can end up meaning something like "the rich can employ lots of servants, because servants are cheap", which is a terrible model of economic development. Also, inequality is a very persistent feature of societies, perhaps more so than poverty as captured by aggregate measures like GDP; governments can redistribute to a greater or lesser extent, but it's not a trivial task to do so in the face of elite resistance (including in democracies, where elites can still resist redistribution through propaganda and lobbying).
There's also an argument that GDP from exporting more or less raw natural resources, especially oil, is "fake GDP" in the sense that its contribution to overall economic development is much, much less than the raw dollar amount would suggest. So maybe we need a measure of labour-productivity-based GDP that excludes oil and mining, and then the resource money can be counted separately. Again, in theory the government or whoever controls the resource money can reinvest the profits into general economic development, but in practice few do so in an efficient way; on a spectrum from Norway to Equatorial Guinea, most oil-rich countries resemble the latter more than the former.
It is important to hold the line on standard definitions and uses.
I wondered if those opposed to the use of GDP were degrowthers. The link in the NYT certainly is. It is quite base to try and remove something like GDP from relevance and consideration when you want to destroy what is in it and people know what is in it. But they probably are not all degrowthers.
Still it is for similar reasons some say we are not to concern ourselves with inflation or debt because their policies are going to cause large inflation and debt.
It is like Argentina of old who stopped publishing inflation figures when they became so bad. If you are going to degrow an economy then you will need to hide the collapse of gdp and the recessionary definitions too.
The common argument that GDP is bad, is some kind of Yarvin-esque critique of hedonics, and that "wellbeing" should be prioritized. GDP relative to median income could be a better predictor, and Peter Turchin used it here https://peterturchin.com/age-of-discord/
Why are older liberals so often Malthusians? The Times comment section on that article is full of them. It's not just that they want less growth and less things, but also less people. Climate change seems to play the secular role of cosmic curse against humanity in their minds, our Tower of Babel, punishing us for Doin' Too Much, and so we deserve all the bad things that will happen to us because of it.
Good piece, Noah. I’m just curious where you stand on the GDP nominal vs. PPP debate. I notice you mainly showed PPP statistics in this post, do you think it’s generally superior or that there are situations where nominal makes more sense to talk about?
"GDP leaves out some things that are very important to human well-being — for example, leisure time, baseline health, inequality, natural habitats, and the value of unpaid housework and child care. "
Now add in the externality that is climate change. I imagine that will lower GDP, and the resulting happiness, over time as crops fail, previously livable habitats will no longer be and the resulting suffering and social unrest caused by tens of millions of climate migrants. But it is likely correct that the GDP numbers will reflect that, absent inflation.
Total GDP is a good proxy for overall economic power for a country, no disagreement there.
A great TIL should be added to Wikipedia.
Great read! You should think about collecting all your economic concept-related posts and publish them in a book. I know would buy one for my boy!
Great piece
It is worth noting that even the guy who created the GDP metric, Simon Kuznets, urged that is not be used as the sole means of measuring the progress of a nation. He noted that we needed to ask growth of what and for what? We have not done a good job of that. There is an absolute correlation between growth in GDP, loss of species, increase in plastic pollution, increase in global greenhouse gas emissions and those things are not reflected as losses in the GDP metric. Growth for the sake of growth is the ideology of cancer.
By the way, "A lot of people think that education is a good thing for a society to have, and when people have the time and resources to send their kids to school it’s generally a good sign. "
I certainly don't hold the same view... The millennials and Gen Z [I am born in 1993 btw] are rightfully angered by the fact that it was possible to get a real job and buy a home with a high school diploma back in the 50s and 60s while they need a master's degree from a "good" school to achieve the same today.
It's not like learning calculus, computer science and organic chemistry will magically make the millennials and Gen Z able to afford a vacation home. Thus it is really hard to say in a straight face that GDP is a good measure of human well-being, given the fact that GDP per capita today is an order of magnitude higher than in 1962,
[Another bit of rant: Given that America had the luxury of being founded on free land, unlike the Old World countries in Europe and Asia, it is simply criminal that housing is not free in this country, and the home price and rent are more expensive than most of Europe, as if the Native Americans died for nothing.]
I think the author is missing the point here slightly. Whilst there is a populist argument about GDP, there is also an economists argument about it which is what we should be focusing on. Some of this, around inequality for instance, has been covered in the article and in other comments, but there are more substantial discussions to be had. A few points to note on this:
****************************
1. Nobody actually knows what the GDP truly is, and this is important. One of the reasons that arguments over China's GDP rings so hollow is that actually nobody has accurate numbers - and were we to have accurate numbers we would probably be taking different public policy decisions. Hence basing public policy on GDP carries an inherent risk of trying to be too scientific about something which, at the end of the day, even in the OECD is an art.
2. It is natural for us to try and find short cuts, and real GDP growth has come to be that single short hand for how an economy is doing. However what is also true is that we are losing sight of things like nominal GDP which is also very important - if you are a company for instance, your own numbers are nominal, not real, and nominal growth is more important to your top line than real growth is. Additionally, a few years ago people finally came round to the absurdity of the deflator, its centrality to GDP and hence economics, and its limitations. For instance, when China ended up using a negative deflator in 2016, complaits abounded - but using logic, a negative deflator is perfectly normal if a world of flat CPI and negative PPI. The net effect, though, is silly.
3. The most important reason for GDP to be a more and more limited reference point, however, is that the shift in balance globally between income and assets renders the income approach - on earnings, on GDP, on national power, much less important. Actually, of course, if one were to measure national power, it would be far more informative to consider the balance sheet rather than the P&L of the country: every retired engineer, every mothballed factory, every piece of IP combines to help you win a war. Since we have so nonchalantly sleep-walked into a world where assets outperform income and are so disproportionately powerful, GDP has correspondingly declined and particularly so in the popular mind since experts are telling us one thing ("we are growing at 2.5%, don't worry!") whilst life is telling them something completely different ("I will never be able to buy a house for my children").
****************************
So I think that as with all these things, there is a balance to be struck. What is surely correct, however, is that since c. 1980 we have laboured under the tyranny of real GDP growth numbers and this has distorted public discourse. The search for that short-hand has allowed people who know nothing about economics (ie almost all politicians) to weaponise this random, made up number and give them a tool to serve their own ends. Of course, one may argue that *any* popular economic term might do the same - GNP was popular before GDP as we know - but there can never in history been *such* an emphasis on just one very faulty measure. This is something we should rectify.
If you are taking requests, can you write something about why GDP growth is really important for raising living standards and solving climate change. How a proper focus on specific items within GDP growth could lead to energy transition as well as GDP growth.
What confuses me is the dispersion on a plot of GDP per capita vs. average income: https://ourworldindata.org/grapher/mean-daily-per-capita-expenditure-vs-gdp-per-capita?xScale=log&yScale=log
Is life in Nicaragua more similar to life in Kazakhstan, where the mean income is supposedly the same even though the GDP/capita is 4.5 times greater, or is life in Nicaragua more like life in Nigeria, which has the same GDP/capita but a mean income that's 4.3 times less? How can there even be such large variation (from country to country) in one variable when the other is held fixed?
"GDP is a measure of the total amount of economic value produced in a country."
That seems to cover both sides of the argument. The GDP is about overall potential. It's about everything a nation can produce. It's a useful benchmark because it gives a sense of possibility. A nation with a $10T GDP could probably afford a $2T railroad system but a nation with a $500B GDP probably could not. It's a good metric for the level of national development, at least up to a certain point.
The problem is that the GDP has been turned into a fetish object rather than a useful metric. Rising GDP can indicate some kind of improvement, but, as we have seen for the last forty years in the US, it is not an improvement that has a lot of impact on people's lives. Just because a nation has sufficient GDP to provide every resident a comfortable house, it doesn't mean that every resident actually has a comfortable house to live in.
At a certain point, the problem isn't raising the GDP. We are really good at raising the GDP, but we are bad at providing medical care, housing people, building new transportation systems, educating people and a host of other things, and there is no evidence that increasing the GDP is going to help with this. What would happen if our GDP doubled? Would people still avoid getting health care in fear of bankruptcy? Would young adults be able to afford safe, comfortable housing? Would we have better roads, airlines and railroads? Would people still have to take out massive loans for a college education? What if our GDP tripled? Everyone here knows what would happen. We'd have a lot of ten-billionaires and everyone else barely scraping by.
The GDP was developed as a metric when the nation was enduring the economic collapse of the Great Depression. It was helpful in measuring the depth of that depression and in tracking the recovery. It was useful into the 1980s when the economy was massively restructured. Every year starting in the 1980s, workers at all but the highest levels have been able to claim smaller and smaller shares of it. The GDP is no longer useful in measuring our economic problems and in how well we are dealing with them. The GDP, as defined and measured, implies that we have the capacity to do all sorts of things, but none of those things are being done.
I agree that the GDP is a useful number. It is necessary, but it is far from sufficient.