Sunday, March 6, 2011

The Deceit Built Into 'GDP Per Capita'

In a review in the WSJ of Tom Geoghegan's very entertaining book Were You Born On The Wrong Continent, which tries to make the case for the superiority of the 'European Model', economist James Glassman writes:
Photo by Sarahbeth Lindquist
Europe's economic story in recent years—well before the current crisis—has been one of sluggish growth and high unemployment. As a result, a wide gap has opened up between Europe and the U.S. in the most revealing indicator of economic well-being, GDP per capita. For the U.S in 2008 (all statistics from the OECD), the figure was $47,200; for Germany, $35,400; France, $33,100; Italy, $31,252. In other words, the average American produces 43% more than the average Frenchman. The economist Mark Perry has noted on his blog Carpe Diem that citizens of America's poorest state, Mississippi, have a higher GDP than Italians; and Alabamans beat the Germans, French and Belgians.
Question: does anyone really believe the average citizen of Mississippi (with its numerous and very poor racial minorities) is better off than the average citizen of France or Germany?  I would say that is simply a crazy statement, written by a enthusiastic free-market economist trying to persuade his readers, against all the on-the-ground evidence, as to why the American economy is SO great and SO much better than Europe's social democracy.

The issue of course revolves around the question of 'GDP per capita', which Geoghegan addresses in his book, and which Jeremy Rifkin debunks in a detailed (and persuasive) way in his 2004 book The European Dream: How Europe's Vision of the Future is Quietly Eclipsing the American Dream.  Here are a few relevant paragraphs from the latter (p. 72):
Althought the EU economy is running almost head-to-head with the U.S. economy, the numbers don't tell the whole story. That's because the comparisons between the EU and the U.S. are being made by looking at their respective GDPs.  The problem with this approach is that GDP gives a false sense of real economic well-being....
The GDP was created by the U.S. Commerce Department at the height of the Depression in the 1930s and was used first as a gauge for measuring the nation's economic recovery and then to monitor wartime production capacity during World War II.  The fault with the GDP is that it doesn't discriminate between economic activity that really improves the standard of living of people and economic activity that does not....
GDP counts every economic activity as good.  So if crime rises because of unemployment and poverty, requiring an increase in police protection and enforcement, court costs, prison costs, and a beefing up of private surveillance and protection, the economic activity it engenders finds it way into the GDP....

The purchase of more missiles, airplanes, tanks, and bombs are all added to the GDP.  One would be hard-pressed to say that any of these activities actually result in a net improvement in our quality of life.  Here lies the rub.  So much of our GDP--and an increasing percentage of it every year--is made up of economic activity that clearly does not improve our well-being.
And then after a long description of his experiences in Europe, Rifkin makes this telling point:
The point is, there is a very real and demonstrable difference in "the quality of life" one experiences in much of Europe compared with that in most parts of the United States.
That corresponds with my experience at well, and as the crisis deepens in the United States, the difference becomes even greater. I'll tell you more in August, after my month in Europe this summer.

No comments:

Post a Comment