Don’t be fooled by Australia’s GDP growth – buying more stuff is not a good measure of our well-being | Jessica mizrahi
Gross domestic product as a measure of well-being is like test scores as a measure of intelligence. Neither is particularly good. However, both are widely cited and widely relied on.
Why? They aren’t great, but they are the best we have.
GDP is indeed an accounting measure. There are three ways to calculate it: how much we produce, how much we spend or how much we earn. The net result is the same; a dollar value of everything we produce for use.
Like other accounting measures, there are well-established rules on how it should be calculated and disclosed. Have a good bedtime read.
The normative character ensures consistency, which allows for comparison. Naplan scores can be compared between schools and time. Likewise, GDP figures can be compared over time (taking into account inflation) and between countries (taking into account exchange rate differences).
This means that we can say that Australia’s economy is larger than New Zealand’s, while being bigger today than it was ten years ago. It also provides relativity – we not only know California’s economy is bigger than Australia’s, it’s almost three times the size.
These characteristics are precisely the reason why, like the results of exams, we like GDP as a measure so much.
Fine. Until we start to think that GDP is something it is not.
Too often, politicians and experts interpret GDP as a measure of well-being. Somehow we started to assume that GDP per capita is a great way to gauge how well off we are.
Official GDP figures show that we have managed the âVâ recovery and that we are well and truly back on track. Of course, fewer 9th graders are meet minimum national standards on literacy and numeracy, the game has skyrockets, 14% of young people feeling lonely most or all of the time, and we have more hazardous waste than ever before.
But we have more GDP per person today than before Covid. So we are objectively better off, right?
GDP as a measure of well-being is flawed for a number of reasons. Perhaps most important is the implication that things mean happiness. Since when has the monetary value of the things we consume equal the fullness of our lives?
It is a dangerous view that has led us to close, short-term decision making. If you need proof look no further than Cop26. Despite decades of science international experts, the world is currently not on the right track limit global warming to 1.5 degrees. Why?
Well, we’re busy trying to fuel the economy by encouraging more production and consumption of things. Printer ink, for example, is often more expensive than the printers themselves. With instant asset write-offs, small businesses have an incentive to buy a new printer every time the ink dries up and throw away the old one.
While we’re at it, how about encouraging traffic jams even more? Traffic jams mean using more gasoline, which means spending more money – which can be good for GDP short term. Except no one would say that the time spent on the road is good for our well-being. It’s also bad for productivity – less time is available to create and consume. It certainly does not contribute to global warming.
Even if you think that consuming things is a good measure of our well-being, GDP has flaws. There are a lot of things that go into making GDP sausage, and behind the curtain, the process isn’t pretty.
It does not take into account, for example, quality changes. Today, you can buy a bigger, better, and more energy efficient TV for less than you would have spent on a TV five years ago. It’s clearly good for well-being. Still, the GDP would have been bigger if we had spent more money on worse TVs.
It also doesn’t include things that have value, but not the prices. If you pay someone to mow your lawn (and they report the income), that value is included in GDP. If you mow it yourself, it doesn’t. Likewise, caring for children or the elderly only matters if you are outsourcing.
The decisions that policymakers and individuals make depend on what we measure, the quality of our measurements, and the quality of our interpretation.
We must not give up on GDP, but it is important to recognize its limits. Economics is the study of trade-offs and a focus on increasing GDP that risks compromising the long-term well-being and well-being that we truly seek.