On GDP and policy

Excellent article over at Aeon (we linked to earlier in the week, but it deserves its own post), I’d suggest you head over and give it a read.  To quote one passage:

Kuznets lost the argument about measuring social welfare over economic activity back in the 1930s. Now it’s time to put these two concepts in the balance again, not least because so many critics of GDP fault it for not measuring well-being. It was never meant to. Yet while we have always known this, economists have routinely used GDP growth as shorthand for well-being. And while this has a sound rationale, there are good reasons for thinking that the gap between social welfare and economic activity, as measured by GDP, is widening.

The article also mentions the usefulness, and shortcomings, of social indicators – such as the one Statistics New Zealand has put together (related discussion from Donal, Shamubeel, and me).  I think the article puts into perspective how careful we have to be with measurable goals, and why we need to be a little clearer on the limits of our knowledge and what this means for policy – both about trade-offs and how these translate into welfare.

I would recommend the entire article, there is really too much in it for me to fairly summarise anything :)

Update:  This piece on Partha Dasgupta at MR University is also relevant.

  • Shamubeel Eaqub

    I had a refreshing chat about this with someone from government last night. They urged caution against ‘hype’ around GDP growth. There are still areas of work to be done, particularly in persistent poverty.

    • http://tvhe.co.nz/ Matt Nolan

      I am really impressed with the direction the public service has gone in recent years – a lot more discussion about trade-offs in public.

      New Zealand is actually a pretty great country for discussing these sorts of issues, given the lack of firm partisan fighting.

    • Carl

      Treasury’s Living Standards framework goes some way to highlight different capitals, trading off between them intragenerationally and intergenerationally: http://www.treasury.govt.nz/publications/research-policy/tp/higherlivingstandards

      • http://tvhe.co.nz/ Matt Nolan

        Indeed, and we’ve been pretty supportive of that on this blog. Ultimately, the idea is about trying to understand, measure, and articulate trade-offs that exist – the sort of thing every economist dreams about!

  • Carl

    The best summation I have seen going beyond the discussion of limits of GDP (as its applied to wellbeing): http://www.nature.com/news/development-time-to-leave-gdp-behind-1.14499

    • http://tvhe.co.nz/ Matt Nolan

      Nice, however there are a couple of things I think are a touch underplayed:

      1) GDP is an incredibly useful indicator in the right circumstances when answering the right question. GDP and unemployment should be seen as providing us a useful set of information when trying to understand matters such as the economic cycle. Furthermore, the measures embody in GDP to give us a relatively objective way of initially framing trade-offs – which are the factors we will then want to consider when actually considering social welfare.

      2) I fear the idea that we need to pursue a measurable alternative to GDP leads us simply down the same path as GDP fetishism. Combined with the view that any such measure is something we should target, or maximise, this can lead analysts and policy makers to underplay the important of articulating the trade-offs of individual policies, and underinvesting in trying to understand those trade-offs. Aggregate measures have significant shortcomings when considering a policy, as they will always have a loose functional relationship with social welfare!

      Of course, the point I raise are simply words of caution – definitely not a disagreement with the idea of considering ways we can represent aggregates, value judgments, and even trade-offs, in an accessible way.