In February 2008, French President Sarkozy appointed a commission of leading economists (you can see the problem already) to identify the limits of gross domestic products (GDP) as an indicator of economic performance and social progress. Now every economist knows that there are flaws in measuring GDP, just as there are serious gaps in measuring employment, unemployment and inflation rates. Cross country comparisons are made difficult because of these problems, different methodologies in measuring GDP, and the need to measure GDP in the same currency. Selecting the appropriate exchange rates is as an art in itlself.
I tell my students to focus on changes in the values of the key economic variables since the changes likely provide a better picture of what is happening in the economy.
Sarkozy’s commission reported to him on Monday, and concluded that GDP is an insufficient standard for determining economic health, and should be expanded to include measures of sustainability and human well-being.
No economist will ever say that GDP by itself provides a measure of the aggregate well-being of the people in a country. But measures such as GDP per capita, unemployment rates, inflation rates, productivity growth rates (only Luddite labour unions object to productivity growth), and the incidence of poverty collectively draw a very good picture of “human happiness”, despite the flaws in the data. At least there is an acceptable degree on objectivity in collecting and measuring these data.
The recommendations made by the commission to expand the measure of GDP are utter nonsense. Any measure of sustainability or human happiness (how would we define these to begin with?) would be arbitrary, subjective and would make the measurement of GDP look like pure science. Heaven forbid that the UN takes it upon itself to determine the rules for measuring sustainability and happiness.
The UN Development Progam’s human development index, which incorporates GDP as only one of a number of criteria, ranked Iceland, Norway and Canada in the top three spots in 2008. Iceland is a basket case today. Norway survives off its oil wealth (great for the environment). And Canada is viewed as a resource economy, with its massive oil sands reserves coming under increasing attack by environmentalists. But the Albertans are happy.
Then there is Bhutan which has decided to focus on “gross national happiness”. This decision likely was driven by the poverty of the country. In 2008, Bhutan’s GDP per capita was US$2,082. France by comparison had GDP per cpaita of US$46,016. Maybe Sarkozy is envious of all the “happiness” of the citizens of Bhutan. But I suspect that the French prefer their country to Bhutan.