I see that Brookings is finally coming around to the realization that gross domestic product is a pretty crude measure of economic well-being:
In a new working paper, Karen Dynan of Harvard University and the Peterson Institute for International Economics and the Hutchins Center’s Louise Sheiner conclude that changes in real Gross Domestic Product (GDP) do a reasonable job in capturing changes in a nation’s economic well-being with one important exception. They argue that the exclusion of non-market activities that increase economic well-being merits more attention, particularly given the growing importance of such activities.
They cite several areas where measurement falls short of the conceptual ideal. First, the national accounts may mismeasure nominal GDP arising from the digital economy and the operation of multinational corporations. Second, deflators used to separate GDP into nominal GDP and real GDP may produce a biased measure of inflation. For goods and services that do not change in quality over time, current deflator methods work reasonably well. For new goods and services, or goods and services that are changing in quality, current methods may not capture consumer surplus well.
I actually think it’s easier than that to recognize the limitations of GDP. A simple thought experiment will do. What if the entirety of the increase of GDP resulted from increases in the value of a single stock? That’s not too big a stretch. That’s actually happened and the company was Microsoft. Did that result in the United States being better? There’s simply no way to tell—that requires you to do what economists call “comparing utility functions”.
I would submit that the rise of importance of GDP in policy considerations was largely a post-war phenomenon that took place during a period of American history that was very different from today when incomes were much more equal than they are and an assumption of relative equality is built into the notion. I would further submit that the rise in importance was accelerated in the 1970s when econometrics came to rule the roost in economics. There’s nothing like a pseudo-empirical measure like GDP to capture the imagination of people who aren’t particularly good mathematics and who would like to appear empirical without actually being empirical.