Monday, January 16, 2006

If the economy's so hot, why aren't we happier?

This is a really interesting piece about how an indicator, GDP, with its own unique, WWII roots has gotten distorted. It's a misleading indicator because it fails to account for non-market exchanges outside of the formal economy. It also assumes a tight correlation between the number of transactions/exchanges and well being. Bad things that happen to us, like Hurricane Katrina, and this is "good" for GDP. Pain and suffering are unfortunate by-products. Depleting the environment follows the same pattern of being "good" because it contributes to GDP.

Indicators that are omitted from GDP are quality-of-life indicators like literacy, employment, leisure, health, etc. Professor Senchak describes important revisions to this thinking below.


Senchack: If the economy's so hot, why aren't we happier?
Monday, January 16, 2006
The stock market is at its highest point in 4 1/2 years, and the most recent figures for the nation's Gross Domestic Product (GDP) showed a robust growth of 4.1 percent. Add a sharp drop in inflation, increasingly tight labor markets and record consumer spending, and everyone should be feeling great this new year.

So why do Americans continue to express less-than-sunny sentiments while living in one of the richest, most prosperous countries in the world? Perhaps it's because wage increases continue to lag inflation. Perhaps. But a more likely candidate is that economic statistics, such as GDP, don't truly measure how well off we are.

GDP has its roots in the 1930s. During World War II, it was redesigned to track wartime production. Today, it measures total annual consumption (and production) within our borders, and it is the world's foremost indicator of economic progress.

However, GDP was never intended to be a direct measure of economic health or well-being. Our policy-makers, economists and the media bestowed that role on it.

Their logic seems reasonable. The more a nation produces and consumes, the wealthier it is. This also means the higher its standard of living becomes. Hence, its citizens should be better off or happier. But there is a disconnect here. Being wealthier simply does not translate into being happier. Many a study shows the United States to be no happier than it was 50 years ago. We are no happier than when we were poorer.

So why doesn't GDP tell us how well-off we are? First, it is misleading because only exchanges with a price tag get tabulated — that is, only products and services that are bought and sold with money. Many crucial economic functions outside the money economy contribute to well-being, such as house work, child care and voluntary church or civic services. These are ignored, however, because they are given no dollar value.

GDP also assumes every transaction can only add to well-being. This means negative events that reduce well-being, such as last year's Gulf Coast hurricanes, actually increase GDP. The huge medical expenses and rebuilding costs are treated as income. The pain and suffering are ignored. Other transactions, like crime and divorce, have a similar impact on GDP. No distinction is made between activities that generate well-being and those that diminish it. When both wealth and "illth" are created, only wealth creation gets counted.

Another critical omission from GDP is social or quality-of-life indicators such as family, literacy, employment, leisure time and sense of community. All of these affect well-being and overall satisfaction, but they aren't captured in the statistics.

Finally, the depletion of our natural resources adds to income and, thus, GDP, even if they are nonrenewable. The degradation of our natural environment also does not receive any accounting in our economic statistics.

Fortunately, steps are being taken to right this situation. International institutions such as the United Nations and World Bank have devised more inclusive indices that account for such factors as human and environmental capital, education and life expectancy. Perhaps the measure that comes closest to measuring national well-being is the "Genuine Progress Indicator" created by Redefining Progress, an organization working to shift the economy and public policy toward sustainability. Its indicator starts with GDP and then adjusts for income distribution and leisure time, adds household and volunteer work and subtracts the costs of crime, family breakdown and pollution.

But more needs to be done. People's well-being should take precedent, regardless of how difficult that may be to measure in practice. We need to end our society's fixation on GDP and begin incorporating measures of national well-being into, for example, a Gross National Well-being index. Let's start accounting for what makes life worthwhile, and not just on what economists and politicians can conveniently count.

Senchack holds the Lucy King Brown Chair in International Business at Southwestern University in Georgetown. He is coordinating the Brown Symposium XXVII, titled "GNP or Gross National Well-being?" Feb. 9-10 at Southwestern. (

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