Economists are considered to be an elite breed of professionals – intelligent, sophisticated, and well-educated. When I think of an economist, I envision an old man with white hair, wearing a turtleneck and smoking a pipe, lecturing to a group of enamored subjects at a cocktail party about the future of the world. Although I can’t speak for everyone, I’d be willing to bet that many people harbor a similar mental image. If this is the stereotype, if economists are supposed to be so clever, then why are they always wrong?
Thirty years ago, economists were preaching that Japan would have the largest economy in the world by the 21st century. During the 1990s, many believed that the stock market would rise to 25,000 by the year 2010. And in the 2000s, economists said we would never again experience another major recession because of advances made in the theory of monetary policy. Although the reasons why economists make mistakes are undoubtedly numerous and complicated, many of their inaccuracies may stem from the fact that the GDP, the main economic indicator used by economists all over the world, does not accurately measure economic growth.
For starters, the GDP does not measure the economic value of unpaid labor. Housework, unpaid internships, and volunteer work do not factor into the GDP, yet it cannot be disputed that a society would suffer if it lost these services. As the saying goes, “when a man marries his maid, GDP goes down.” Moreover, women who leave the workforce to raise children cause the GDP to fall, but having babies should not be considered a drag on economic growth. If anything, babies stimulate economic growth by creating a need for healthcare, consumption, education, etc. Eventually, babies grow up, become part of the labor force, and add value to society as factors of production.
The GDP also doesn’t consider pollution or other costs of economic growth. When the resources of the wetlands or forests are destroyed by economic activity, the GDP views these events favorably. China’s GDP, for example, is growing at a rate of 10% per year, but what are the economic costs of the pollution that growth creates? Considering that industries also get paid for cleaning up their mess, economic activity affects the GDP twice. An accurate economic indicator would subtract the negative effects of pollution from the positive effects of production. The GDP also fails to account for global warming, nuclear waste storage, and other long-term consequences of economic growth.
Perhaps the biggest problem with the GDP as an economic indicator is that it doesn’t distinguish between different types of spending. For example, crime, natural disasters, and defense expenditures all cause GDP to go up. The events of Hurricane Katrina and the Vietnam War, as measured by the GDP, were hugely beneficial to the economy. Moreover, the GDP fails to distinguish between efficient and inefficient expenditures. Infrastructure projects that facilitate growth and provide long-lasting benefits to society are viewed in the same light as money spent on wasteful projects and programs.
Another limit of the GDP is that it fails to take income distribution into account. A rise in GDP that increases the wage gap between the rich and the poor directly benefits just a small segment of the population (the rich), whereas if a greater percentage of the increase in wages that came from an increase in GDP went to the poor, the majority of society would benefit. It can be argued, of course, that what benefits the rich benefits everyone, as rich people are far more likely to save money, which leads to higher rates of national investment and future growth. Still, many experts believe that the GDP is a poor indicator because it doesn’t measure income distribution.
The point is that economists should not rely so heavily on the GDP. As globalization proceeds and countries continue to develop, accurate economic predictions will become increasingly necessary and relevant. Economists would do well to look beyond their traditional yardsticks and either develop new indicators or conduct more thorough analyses of the countries, events, and trends that they study.
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