Is GDP a Good Metric for Gauging Economic Health?

BY busadmin  August 20, 2009 at 9:54 AM EST

world map; via Flickr

Question: Do you consider GDP a realistic metric for gauging economic health and prosperity? I have some skepticism because two of the three main factors are consumer and government spending, and both can be artificially manipulated or stimulated by borrowing and spending.

Paul Solman: Doing an Internet search for a study by Tobin and Nordhaus that I remember, I came upon the following, posted a few years ago by the well-credentialed Gernot Wagner. I hope you find it as intriguing as I did.

“Among the first to ask this question [YOUR question, Joseph] were two Yale economists, Bill Nordhaus and the late James Tobin, in a paper titled “Is growth obsolete?” in 1973. They developed the Measure of Economic Welfare, which used GDP (or more accurately NNP, net national product) as the starting point and made some imputations for the value of leisure and the depreciation of natural capital, among others. It turned out that GDP tracked the MEW pretty closely. Their conclusion: ‘Is growth obsolete? We think not.’

Next came Daly, Cobb and Cobb in 1989 with the Index of Sustainable Economic Welfare. They made some further adjustments and concluded that ‘empirical evidence that GDP growth has increased welfare is very weak.’

In the 1990s, Redefining Progress entered the picture. They developed the Genuine Progress Indicator, which makes the most far-reaching adjustments to GDP. They conclude that the growth of well-being has not kept pace with that of economic output. ‘GPI started declining around 1975, while GDP keeps increasing.’”

But Wagner also argues against replacing GDP with some sort of more subjective “happiness” measure.