We Need New Ways to Measure the Economic and Social Success of a Country
GDP Isn’t Good Enough
I think it’s safe to say that many Americans are in a difficult position right now and do not feel positively about the direction of our country. In fact, recent poll found that 8 out of 10 Americans feel that the country is headed in the wrong direction.
This is striking considering the fact that less than six months ago, the US had the “greatest economy in the history of the world,” according to President Trump.
Obviously, much has happened in recent months, a global pandemic, shutdowns of businesses across the country, civil unrest, and an increasingly divisive election season. Still, are these not challenges that could have been weathered by the greatest economy in history?
Indeed, by many traditional ways of measuring economic strength, GDP, stock market growth, and unemployment numbers, the US was in an excellent position coming into 2020. Whether this was attributable to Donald Trump and his policies is another story (all three of these positive trends began under President Obama), however unemployment was at its lowest level in 50 years and both the GDP and stock market were at all-time highs.
But does it make sense that a country that really does have the best economy in the history of the world really be in such a bad place after four months of reduced consumer spending? After all, if a healthy business or household is in the red for a few months, they normally wouldn’t be going broke.
This all seems to indicate that perhaps our traditional ways of measuring the economic and social performance of the country are inadequate. The stock market has actually performed well overall this year, despite millions of people losing their jobs and the US being one of the countries hit the hardest by COVID-19.
Former 2020 Presidential Candidate Andrew Yang speaks a lot about the need for new ways to measure the success of our country. Yang, a Democrat, made the argument that we should create an “ American Scorecard “ using an entirely new set of metrics to assess the performance of our leaders.
I decided to take a look at the historical performance of the United States using some of these metrics to see how they compared to the performance under the GDP and the stock market.
Based on traditional metrics like GDP, unemployment rate, and the price of the stock market, life has kept getting better in the United States, following a fairly consistent upward trajectory.
GDP is a clear example of this. With few exceptions, such as the 2008–2009 Financial Crisis and the current pandemic-related economic crisis, the American GDP has steadily increased over time.
Data from US Department of Economic Analysis
According to economics blog The Balance, GDP is the best measure of economic growth and “Economic growth creates more profit for businesses. As a result, stock prices rise. That gives companies capital to invest and hire more employees. As more jobs are created, incomes rise. Consumers have more money to buy additional products and services. Purchases drive higher economic growth. For this reason, all countries want positive economic growth. This makes economic growth the most-watched economic indicator.”
However, this assertion about the GDP’s link to stock prices is clearly disputed by the current situation. In Q2 2020, stock prices in the US posted their best quarterly results in 20 years. At the same time, the US GDP had a historic drop-off of 32.9% in the same quarter. The unemployment rate has bounced up and down due to uncertainty with businesses opening and closing.
This could perhaps have a logical explanation. Maybe the market is due for a drop and is a lagging indicator, or the big drop in Q1 priced in an expected decrease in GDP.
But there are other indicators that tell a different story, that perhaps despite the historic level of the GDP coming in to 2020, the economy, and life for the average American, was not as rosy as it seemed.
Why GDP is Not Necessarily the Best Measure of Economic Strength
I wanted to title this section, “Why GDP is Not Necessarily the Best Measure of Economic Strength, and Why a Strong Economy Doesn’t Necessarily Mean Life is Good for Most Americans”, but that’s way too long.
It is true, however, that not only is GDP not reflective of the economy as a whole but a country can have a ton of money and life can still be pretty tough for most citizens. See Saudi Arabia.
The concept that GDP growth equates to economic success ignores the distribution of wealth. As quoted previously, the assumption is that more profit for businesses equals an increase in stock price which leads to job growth and rising incomes. Essentially saying that corporate profits trickle down to the average person.
You’d think we’d have realized Trickle Down Economics is a bogus theory by now, but some people are still beating that drum.
GDP is calculated by looking at spending: Consumer + Government + Corporate Investment + Net Exports. Therefore, one of these categories could be significantly higher than others and it would increase the total GDP.
Indeed, there has been a sustained decline in corporate investment that has been offset by an increase in consumer spending that causes GDP to continue to grow. Is this a good thing for the average person?
Increased consumer spending could have to do with rising prices. For example, if essential costs like housing and healthcare continue to rise, which they have been, consumers could cut other areas of their budget and keep spending the same. Or, they could cut down on the amount they are saving to buy a home or for retirement. GDP doesn’t indicate which of those things people are doing, it just reflects increased spending and overall growth.
GDP and other economic indicators are often touted as shorthand for more than just the financial success of a country, but the overall success of the country as well. However, this fails to measure many other attributes that make a country successful.
Are people happy? Does the country have good health outcomes? Is a country safe? Is there good infrastructure? Is there economic mobility? Is there an environment conducive to innovation?
It’s assumed that all of these things naturally follow economic growth. Is that truly a safe assumption? Many of us would gladly sacrifice a portion of our salary to have access to more affordable healthcare, better roads and schools, and an overall better quality of life.
But that begs the question, if GDP is not the best way to measure the success of a country, what is?
GDP is often paired with stock market growth and unemployment rate.
I won’t spend much time on the stock market as a great indicator of economic health. At the height of a pandemic, with over 10% of the country unemployed and millions of businesses, large and small, disrupted by the havoc Covid-19 has wreaked on the country, the Nasdaq is higher than it’s ever been.
Unemployment rate is certainly a better way of determining how the country is faring — after all, people need jobs to pay their bills, and if people cannot meet their basic economic requirements, that’s bad.
A high unemployment rate is bad, but is a low unemployment rate necessarily good? There are basic things the unemployment rate doesn’t take into account, specifically people who have given up on looking for jobs, people who are under-employed (gig economy and part-time workers), and people who are flat out underpaid.
A country could have 0% unemployment, but the vast majority of workers could be making minimum wage, have nothing in their bank accounts and barely be able to afford to make rent.
So what are the alternatives?
Alternative Measures of Economic and Social Success
I took a look at several of the measures put forth by Andrew Yang to compare the success of the country over the last several decades in order to compare them to more traditional measures like GDP.
In order to narrow the focus, I looked at the following measures proposed by Yang in his American Scorecard: Affordability, Income Inequality, Economic Mobility, Substance Abuse and Related Deaths, and Happiness/Well Being.
Specifically, I used affordability of housing to measure affordability.
According to the US Census Bureau, the median price of a house has gone from $62,700 in 1990 to $217,000 as of January 2019. Rent has also steadily increased during that time, going from $317 median monthly rent in 1990 to $1,005 in 2019.
Obviously, prices have gone up, but is this merely due to inflation?
Prices have roughly doubled since 1990, while housing costs have more than tripled.
But what about wages, have they increased as well to allow people to afford these increased housing costs?
The short answer is no.
In 1990, the median cost of renting an apartment was about 12.7% of the median annual household salary. As of 2018, that number jumped to roughly 19%.
Healthcare has also become less affordable. According to an index published in the Journal of the American Medical Association, healthcare costs increased from under 15% of median income in 1999 to over 30% as of 2015.
Vital expenses like housing and healthcare have gotten less affordable in recent decades.
Some might argue that income inequality, in and of itself, isn’t bad. After all, a country with very low wages overall might have low levels of inequality whereas a country with high wages overall might have greater inequality. Theoretically, low-wage earners in a country with high wages overall could work hard, build skills, and one day earn a higher wage, whereas those in a country with universally low wages would not have that option.
However, this assumes that higher wage earners don’t have historic advantages that stem from familial wealth, racial and geographical privilege, and lack of economic mobility for many.
It’s not enough to only look at income inequality, becomes incomes change. One has to examine wealth inequality to truly see how unequal a country is.
Over time, the US has become more unequal. Take a look at this chart from Inequality.org and you will see that the wealth of the top 1% (and even more, the top .1%) has continued to rise while the wealth of the bottom 40% has remained stagnant.
And inequality can have a substantial negative impact on a society. Not only does money provide food, shelter and comfort, but it provides influence, education, visibility. The vast majority of true influencers, people who are household names across the country, belong to that 5%.
Inequality can lead to unequal opportunities according to the World Bank, which perpetuates the cycle of poverty and keeps those without wealth at the bottom.
Income inequality is only truly bad if there is a lack of economic mobility. The US is known as a place where an immigrant can show up with two nickels in their pocket and build a life for themselves, where there is near-limitless opportunity for those who are just willing to roll up their sleeves and work hard. But is that really the case?
According to a 2016 study performed by OpportunityInsights.org, it is not. In fact, economic mobility has been steadily declining over the decades, beginning with children born after the 1940's.
The study measured the percentage of children who earned more than their parents did. While this percentage has declined overall over the decades, the sharpest decline is among those whose parents earn in the lower percentiles.
As you can see from the above chart, children whose parents are in the top 5% of earners still have about an 80% chance of earning more than their parents, although this has declined from a roughly 95% chance in previous decades.
Children whose parents are in the bottom 40% of earners are about half as likely to earn higher wages. And children whose parents are in the bottom 5% have about a 25% chance to earn more, down from the 85% chance that children on the bottom rungs of society who were born in the 1940’s had.
From this chart alone, you can see a brutal decline in the American Dream.
Substance Abuse and Related Deaths, Happiness/Well Being
The fallout from the decline of the American Dream impacts the lives of the average American in many ways. Two particularly clear ways are the rise of substance abuse and the decline in happiness and well-being.
According the US government, deaths from drug overdose have steadily risen over the last two decades, as illustrated in the chart below.
The term “deaths of despair” has been coined to describe this phenomenon. The argument is that the erosion of the American working class, the lack of opportunity in communities where college degrees are not common and blue-collar jobs have declined, are driving these deaths.
People who self-report as being happy is also on the decline in the US over the last couple of decades.
The fact that happiness is on the decline and the number of despair-related deaths is on the rise is very concerning for those who care about the future welfare of this country.
The Wrong Focus
Our leaders are focused on the wrong things. All that seems to matter to many of those who presume to manage the direction of our country is the GDP, the performance of the stock market, and perhaps the percentage of those who are employed.
I have to believe that if we were laser-focused on turning around some of these other metrics, decreasing inequality, increasing affordability, making sure that social mobility was high, our country would be a happier, safer place to live with a better quality of life.