Joseph Stiglitz - Problems with GDP as an Economic Barometer

Summary

The speaker discusses the limitations of GDP as a measure of economic performance and societal well-being, highlighting its inability to reflect the experiences of the average citizen, particularly in the face of growing inequality. The script also addresses the sustainability issue, noting that GDP does not account for environmental degradation or resource depletion. Alternative measures such as green GDP and the difference between GDP and GNP are proposed to provide a more accurate picture of a country's economic health. The speaker emphasizes the importance of focusing on metrics that truly reflect societal well-being, such as health, leisure, and environmental sustainability.

Takeaways

• 📈 GDP as a measure of success can drive behavior and policy decisions, but it may not always reflect societal well-being.
• 🌳 The rise of GDP does not necessarily correlate with the well-being of the average citizen, especially in the face of increasing inequality.
• 🌿 Traditional GDP calculations do not account for environmental degradation and resource depletion, which are critical for sustainability.
• 💼 The shift from GNP to GDP in the 1990s changed the focus from the income of citizens to the output within a country, which can misrepresent economic health.
• 🌱 Green GDP, which factors in environmental costs, can provide a more accurate picture of economic growth, especially for developing countries.
• 💡 There's resistance from special interest groups, like the coal industry, to alternative economic measures that might not favor their interests.
• 🏛️ High incarceration rates in the U.S. contribute to GDP through spending on prisons, but this is not indicative of societal well-being.
• 🏥 The U.S. spends more on healthcare relative to GDP compared to other countries, yet health outcomes are not proportionally better, questioning the effectiveness of healthcare spending.
• 🏦 The construction of prisons in some states rivals spending on universities, highlighting misplaced priorities that contribute to GDP but not societal well-being.
• 🌐 There's a need for a global conversation and development of alternative economic frameworks that better reflect the true state of societies.

Q & A

What is one of the reasons the speaker has an interest in accounting frameworks?

The speaker is interested in accounting frameworks because they affect behavior. They illustrate this by referencing how bad accounting practices in the United States during the 90s influenced people's actions.

How does the speaker suggest that information about success influences what people strive for?

The speaker implies that if GDP is considered a measure of success, people will strive to increase GDP. This includes political leaders who use GDP growth as a metric of their success in office.

What is one issue the speaker identifies with GDP as a measure of economic performance?

The speaker points out that GDP does not reflect what happens to the typical citizen, especially in the context of growing inequality. They give an example where GDP may be increasing, but median income and the well-being of the majority are deteriorating.

Why did the speaker attempt to focus on green GDP during his time at the Council of Economic Advisers?

The speaker tried to focus on green GDP to account for environmental degradation and resource depletion, which are particularly important in developing countries where economic growth might come at the cost of depleting natural resources.

What was the coal industry's reaction to the proposal of green GDP, according to the speaker?

The coal industry opposed the proposal of green GDP by threatening to pass a proviso to defund any research supporting alternative measures, as they knew green GDP would not favor their industry.

What is the difference between GDP and GNP, as mentioned in the script?

GDP looks at the output within a country, while GNP looks at the income of the people in the country. The speaker suggests that the switch from GNP to GDP in 1990 has significant implications for many countries, especially in the context of privatization and income distribution.

How does the speaker relate the high number of prisoners in the United States to GDP?

The speaker notes that the high number of prisoners in the United States contributes to GDP because of the money spent on incarceration. However, he argues that this is not a positive contribution to societal well-being.

What is the speaker's view on the efficiency of the U.S. healthcare system in relation to GDP?

The speaker criticizes the U.S. healthcare system for spending more on healthcare than any other country as a percentage of GDP, yet having lower health outcomes. He suggests that if the system were more efficient, the GDP could decrease, indicating that the current focus on GDP is misguided.

What does the speaker suggest as an alternative to GDP for a more accurate measure of societal well-being?

The speaker suggests considering other measures such as green GDP, which accounts for environmental degradation and resource depletion, and focusing on metrics that reflect the well-being of the median citizen rather than just overall economic output.

Why is the speaker critical of the focus on GDP as the sole measure of economic success?

The speaker is critical of the focus on GDP because it does not account for sustainability, environmental impact, income inequality, or the well-being of the average citizen. He argues for a more comprehensive accounting framework that includes these factors.

Outlines

00:00

📈 The Impact of Accounting Frameworks on Behavior and Policy

The speaker discusses the influence of accounting frameworks on behavior, citing the example of the United States in the 1990s where poor accounting practices affected people's actions. They argue that the information we gather and how we define success, such as GDP, shapes our goals and aspirations. The speaker critiques the reliance on GDP as a measure of success, pointing out its inability to reflect the well-being of the average citizen, especially in the face of growing inequality. They also mention the need for a more comprehensive accounting framework that includes environmental sustainability, as traditional GDP does not account for resource depletion or environmental degradation. The speaker shares their experience from the Council of Economic Advisers, where they attempted to shift focus towards green GDP, but faced opposition from industries like coal, which would be negatively impacted by such measures. The conversation highlights the importance of considering alternative measures of economic performance and societal well-being.

05:00

🌿 Critiquing GDP: The Case for Alternative Economic Indicators

In this paragraph, the speaker continues the critique of GDP as a sole economic indicator, emphasizing its limitations in reflecting societal well-being. They discuss the difference between GDP and GNP, explaining that while GDP measures output within a country, GNP measures the income of the country's people. The speaker uses the example of privatization, where economic activity may increase GDP but the income from that activity goes to foreign entities, leaving the local population worse off. They also touch on the issues of environmental degradation and the sustainability of economic growth, as traditional GDP does not consider the depletion of natural resources. The speaker provides examples of how focusing on GDP can lead to policies that are not in the long-term interest of society, such as the overemphasis on incarceration and healthcare spending in the United States, which contribute to GDP but are indicative of societal problems. The paragraph concludes with a call for a broader perspective on societal success that includes health, leisure, and other aspects beyond mere economic output.

Keywords

💡Accounting Frameworks

Accounting frameworks refer to the systems and standards used to record, report, and interpret financial data. In the context of the video, they are discussed as influential factors that can shape behavior and decision-making. The speaker points out that poor accounting practices in the United States during the 90s had behavioral repercussions, suggesting that how we account for and present financial information can significantly affect economic actions and policies.

💡Behavior

Behavior, in this video, is used to describe the actions and reactions of individuals or entities in response to information, such as accounting data. The speaker argues that information, including financial reports, can influence behavior, implying that the way economic performance is measured and communicated can drive certain types of actions, whether it's striving for GDP growth or focusing on sustainability.

💡GDP

Gross Domestic Product (GDP) is a standard economic measure of a country's economic output. The video critiques GDP as a sole measure of success, as it does not account for factors like income inequality, environmental degradation, or sustainability. The speaker uses GDP as an example of how focusing on a narrow metric can lead to policies that may not reflect the well-being of the average citizen or the long-term health of the economy.

💡Inequality

Inequality refers to the unequal distribution of resources, income, or wealth among a population. The video discusses how growing inequality can coexist with a rising GDP, indicating that the average citizen might not benefit from economic growth. This highlights the limitation of GDP as a measure, as it does not capture the distribution of economic gains and can mask the struggles of a significant portion of the population.

💡Sustainability

Sustainability in the video is discussed in the context of economic growth that does not deplete natural resources or degrade the environment. The speaker argues that traditional GDP measurements do not account for the long-term sustainability of growth, which is crucial for developing countries that might be growing at the expense of their natural resources, thus undermining their future economic prospects.

💡Green GDP

Green GDP is a proposed economic measure that adjusts GDP to account for environmental degradation and resource depletion. The video suggests that traditional GDP measurements can be misleading if they do not consider the environmental costs of economic activities. The speaker gives an example of China, where accounting for environmental factors would significantly lower the perceived growth rate, providing a more accurate picture of economic performance.

💡Special Interest

Special interest refers to groups or individuals that advocate for or against particular policies based on their specific interests. In the video, the speaker mentions how the coal industry opposed the development of green GDP measures because it would not favor their industry. This example illustrates how special interests can influence policy discussions and potentially hinder the adoption of more comprehensive and accurate economic metrics.

💡GNP

Gross National Product (GNP) is an economic measure that focuses on the income of a country's residents, rather than the output within its borders. The video contrasts GNP with GDP to highlight the difference between economic activity occurring within a country and the income that actually accrues to its citizens. The speaker suggests that the shift from GNP to GDP in the 1990s might have been influenced by political and economic contexts, affecting how national performance is perceived.

💡Healthcare

Healthcare is discussed in the video as an area where the United States spends a disproportionate amount relative to other countries, yet does not achieve better health outcomes. The speaker uses this as an example to critique the GDP as a measure of societal well-being, arguing that high spending on healthcare contributes to GDP but does not necessarily translate into better health for the population, indicating a need for more nuanced economic indicators.

💡Prison Population

The prison population is mentioned as a component of GDP because of the costs associated with incarceration. The video points out that the high number of people in prison in the United States contributes to GDP but is not a positive social indicator. This example is used to argue that GDP can include elements that are detrimental to societal well-being, suggesting the need for alternative measures that better reflect the health of a society.

Highlights

Accounting frameworks affect behavior, as seen in the 90s with the United States' financial scandals.

Information and metrics used to describe success influence what people strive for.

GDP is often used as a measure of success, but it has limitations in reflecting societal well-being.

GDP does not account for the well-being of the typical citizen, especially in societies with growing inequality.

The focus on GDP can lead to policies that increase it without necessarily improving citizens' lives.

Green GDP is proposed to account for environmental degradation and resource depletion.

Sustainable growth is not reflected in GDP, as seen with deforestation in developing countries.

Special interests, like the coal industry, can influence the adoption of alternative economic measures.

GDP vs. GNP: A shift in focus from the income of people to the output within a country.

Privatization can lead to economic activity within a country but income going to people outside the country.

The United States' high incarceration rate contributes to GDP but is a sign of societal dysfunction.

Healthcare spending in the U.S. is high, but health outcomes are not proportionally better, questioning the GDP's effectiveness as a measure.

Efforts to measure societal well-being more accurately are needed beyond traditional economic indicators.

The need for a global conversation about alternative measures to GDP for a more comprehensive view of societal health.

The role of political rhetoric in shaping economic policies and the focus on GDP.

The importance of considering sustainability, health, leisure, and other aspects of well-being in economic measurements.

Transcripts

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thinking one of the reasons for for my

interest in this subject is uh

accounting Frameworks uh do

affect

Behavior Uh you know we saw that in the

United States in the 90s where people

have bad accounting and that affected

their behavior uh some of what we're

going on now is a reflection of

accounting so more generally uh

information affects behavior and so what

we gather our information about and how

we how we describe success affects what

we strive for if GDP is what we think is

Success people will strive for GDP and

political leaders all the time say you

know uh look at what we've done I've I

you know they always put it you know

I've succeeded in getting the economy to

grow up at 6% now what he did is hard to

figure out but that's that's the the

politician uh does that you know I've

created x million jobs so that's part of

the political rhetoric the question is

by doing that they focus policies on

things that will increase

GDP uh there's actually um informing the

commission we've we've identifyed a

large number of ways in which GDP is not

a good measure of economic performance

or societal well-being and so what we're

trying to do is is partly to focus the

global conversation about these other

measures but also come up with with some

summary counting framework statistics

let me just mention a couple of them uh

one of them I've already alluded to

which is GDP doesn't tell you about what

happens to the typical

Citizen and this is an increasing

problem because uh when you have growing

inequality in society you can have GDP

going up as it has been in the United

States but most people getting worse off

not just poverty going up but the median

income 50% or more of people getting

worse off so that's one example of a

metric the focusing we ought to know

what's happening to the media in person

it's very hard to find statistics of

that about that uh cross countries uh

one of the things that I tried to uh

when I was at the Council of economic

advisers tried to gener rate uh was a

focus on green

GDP uh that is to say to take account of

environmental uh degradation and

resource depletion uh this is

particularly important in developing

countries that may be growing by cutting

down their Force but you know once they

cut down the force there's nothing there

and so unless they do something uh it's

not sustainable GDP tells you nothing

about

sustainability another example is GDP

measures IMF thought the Argentina was

doing great in the early

90s uh I happen to look at the data in a

more fine grain way and we said this is

not

sustainable if you only looked at GDP

you would not have realized that so uh

in the first context uh there are ways

that you can uh uh take out for

depletion of natural resources and

degradation of the environment if you do

that China's growth gets significantly

lowered it's still doing well but it is

much lower than it otherwise would have

been interesting story about about um

the role of special interest uh when uh

we try to push for this and people in

the Department of Commerce were excited

about doing

this uh the coal industry uh basically

passed a Proviso or threatened to pass a

Proviso to take away funding for any

research that would support these

alternative

measures uh because they knew that green

GDP would not be good for the coal

industry so you know it to me that

reinforced my

belief why it's important to measure

these these things uh another example

just just uh to you know is is um uh the

difference between GDP and

GNP uh those of you who are older uh

when you went to school you talked about

GNP and um about 1990 they switched to

GDP

well everybody said oh just a little bit

of difference well it turns out that it

makes a great deal of difference for

many countries and there's a little bit

of I'm sure somebody is going to write

an article about whether there is a

political context to the switch GDP

looks at the output within the country

GNP looks at the income of the people in

the

country well when you started

privatizing a great

deal you had economic activity within

the country but the income from that

economic activity more and more going to

people outside the country

so you have a mine somebody taking a

mine in the country leaving behind

environmental degradation royalties in

some cases of 1 or

2% so almost none of the income from the

mine goes to the people in the country

so GDP is going up but any measure of

green GMP would show the country getting

going down and some really dramatic

examples like in POA n guini where where

where this actually uh is true

um so there are other aspects of Health

Leisure

um uh the fact just to give you two

other ex dramatic examples uh United

States as you you know may know has

about 10 times as many people per capita

in prison as other Advanced industrial

countries uh that contributes to our GDP

because we have to spend money

incarcerating them uh and some Stakes

now are spending as much on prisons

construction of Prisons as they are in

universities well that's good for GDP

but any measure of society well-being

says it's not good to have so many

people in prison and it's a symptom of

something dysfunctional you know we can

have a long discussion about what it is

that's dysfunctional but it's not

positive another example is we spend

more on healthc

care than uh any other country

as a percentage of GDP and our health

outcomes are much lower than in other

Advanced industrial countries and

actually lower than many developing

countries well the extra money that we

spent on Health Care shows up as a

contribution to

GDP if we got more

efficient our GDP could go down well

that's clearly not you know you you

don't want to uh you're looking at the

wrong thing and so I think this is will

provide a good form for thinking a lot

more about uh the strengths and

weaknesses of each of our societies

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