This Is the One Economic Indicator That We Should Completely Ignore
What good is a super-sized economy if our society is not made better off? We should focus on measures of well-being, not overstuffed shopping carts.
By Todd Hirsch •
Opinions expressed by Entrepreneur contributors are their own.
"Well now, what seems to be the problem?," a doctor might ask a parent who has brought in his or her sick child. "Let's have her stand over here so I can measure her height. Yes, she's grown a full inch since her last visit. All is well. Off you go."
"But my daughter feels terrible! Can't you tell me any more about my daughter's health? Aren't there more tests or assessments you could do? Maybe a blood test or something?," implores the anxious parent.
The doctor scratches his chin. "Well, we could measure her height in both inches and centimeters. That might give you more complete information?"
Even without a medical degree, we all know there is more to physical health than a superficial measurement of the patient's height.
Sadly, economists can also be this superficial. We call it the GDP — the Gross Domestic Product — and judging by the big deal some economists make of it, you'd think it was the only economic indicator that matters. But in fact, we'd be better off if we completely ignored it.
Related: There Are No Shortcuts to Strengthening the Economy. It's a Long Game.
What GDP tracking tells us
To be fair, tracking of the GDP does tell us something: If the economy is growing in size, and by how much. Economists track GDP growth with religious obsession. Politicians have become hooked too, especially when it works in their favor ("The economy grew by 4% under our leadership!").
But what does the GDP really tell us about the health of the economy? Not much. It is the equivalent of the doctor telling you your child has grown an inch: It suggests that the economy is healthy, but it's not proof that the economy — or our society — is healthy.
The one main problem with this over reliance on the GDP as a measure of economic success is that it is also interpreted as a measure of social well-being. In their defense, economists have never said that a larger economy makes all of us better off (or at least they shouldn't have said something so nonsensical). The GDP is just a measure of the added value of all goods and services produced over a period of time.
How disasters impact the GDP
Generally speaking, a rising GDP has given rise to a higher standard of living for most citizens. Producing more wheat, more automobiles, more houses, more oil, more cell phones, more internet apps, etc., has generally led to higher employment. More jobs mean more income, which means a greater ability to buy even more stuff. It also means more revenue for the government to provide those things that the market doesn't naturally provide on its own, such as education and infrastructure.
But ultimately, is a super-charged economy of any value if it is not leading to a healthier society? Even young children can grasp the truth that more stuff crammed in your shopping cart doesn't necessarily make you better off or happier.
Here's a simple example: In 2006, the U.S. state with one of the fastest growing economies was Louisiana. Was it because of a tech giant moving into the state? Or a burst of production of agriculture? Maybe a reduction in corporate taxes that spurred business investment? It was none of these things. It was due entirely to Hurricane Katrina, which nearly wiped the state off the map in 2005. The growth spurt was due to the spending associated with rebuilding. But surely no one would envy the citizens of New Orleans for the boost to their GDP that year.
Related: Who Are the Real Drivers of the Economy?
Similar growth spurts were experienced in Japan following the Fukushima earthquake in March 2011 and the devastating forest fires in Fort McMurray, Alberta in May of 2016. In both of these cases — as in hundreds of other natural disasters — it's easy to measure a positive impact on the GDP in the months and years following the event. But society is clearly not better off.
In that respect, the spending on rebuilding after a disaster is not good spending. Preferably, all spending on goods and services in the economy would directly enrich the life of its citizens (eg. a new house) or benefit its citizens in the long-run (eg. a new school). Replacing the house washed away in a flood or the school destroyed by an earthquake counts as positive for the GPD, but it doesn't contribute to societal benefit. It just gets us back to where we were before the disaster.
More spending doesn't always equal societal well-being
Other kinds of spending in the economy run entirely against societal well-being. Consumer spending on gambling, tobacco, artery-clogging junk food and high-risk sports are all perfectly legal. And while consumers in our society are free to enjoy these activities, it's difficult to argue we are better off because of them.
Then there are economic activities associated with things we'd clearly like less of, like crime. Imagine if we could instantly rid ourselves of all illegal activity; society would be unambiguously better off. But think of the economic implications: Criminal law prosecutors, police officers, graffiti-removal services, window-replacement companies, alarm-system services and bylaw-enforcement personnel would be jobless. The lost economic activity would actually be staggering! The sad truth is that crime is great for the GDP.
Related: An Ant Colony Is the Perfect Metaphor for the Economy. Here's What Else You Need to Know.
In the end, the size of the economy and its growth rate matter only in a statistical sense. But it's dangerous to attach too great an emphasis on the GDP as a measure of societal well-being. For the vast majority of policy makers, educators, politicians and everyday citizens, we'd be better to ignore it. In its place, let's focus on indicators that really matter. Environmental health, mental wellness, social harmony and economic equity — these are the indicators that truly matter.
