However, the strongest argument for ditching GDP as the sole yardstick of economic progress has come from the spectacular collapse of the debt-fueled US and UK economies since 2007.
“The crisis gives salience to the work, in two ways,” Stiglitz said. “By looking at GDP, you didn’t know whether what was going on was sustainable — and it obviously wasn’t. The second point is that when you add apples and oranges to form GDP, you use prices, and they reflect the relative values that people put on apples and oranges.”
ILLUSION OF SUCCESS
The problem with this, he explains, is that when there is an almighty bubble in an economy, as there was in the US and the UK over the past decade, the prices of some assets — properties and shares, in this case — can move far out of line with reality, which in turn creates an illusion of economic success.
While the US financial sector created extraordinary profits from 2003 to 2007 — accounting for about one-third of total profits in the economy — the vast losses last year wiped them out.
Even on its own terms, then, as an objective, mathematical measure of an economy’s strength, GDP fails: It sends dangerously misleading signals to policymakers and the public about what’s really going on.
For example, British Prime Minister Gordon Brown turned on the public spending taps in 2001 when he was chancellor of the exchequer, safe in the knowledge that the economy was barreling along at a healthy pace and Britain’s financial sector was generating impressive profits — yet much of that has since proved illusory, exactly as Stiglitz describes.
“This crisis really highlights the importance of getting our statistical metrics right,” he said.
In the US, there were signs that the economy was not delivering for its population well before the crash — for those who knew where to look. While average GDP per capita looked relatively good, distorted by the lavish share taken by those at the very top, median income — the pay of the person in the middle — had actually been declining.
“Median income has been going down by half a percent a year for the last eight years. That means that all the increase went to a few at the top. Most Americans are worse off. If you’re grading an economic system, you have to say, if most people in society are worse off, you can’t give it an A,” Stiglitz said.
There is a thriving debate about what other criteria would better measure economic success: Equality? Health? Happiness? Experts have been working hard on this for years, and there have been several impressive recent attempts, including the “happy planet index” from a British think tank, the New Economics Foundation, to bring together measures of environmental damage, health and happiness with raw economic data.
The crisis of the past two years has already overturned great swathes of economic doctrine; many, including Stiglitz and Oswald, believe the time may finally be ripe for the dismal science to let in a bit of happiness.
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