GDP Is Good, Actually

One of the stranger facets of modern American economic discourse is the left-right agreement that gross domestic product (GDP) doesn’t matter—and, in fact, is something only a soulless, globalist might consider when crafting policy. Leftist academics have pushed “degrowth” for years, insisting that only a government-induced reduction in economic output can save the environment and ensure human flourishing. More recently, the populist right has adopted its own version of growth skepticism, arguing that free-market policies—especially more liberalized trade and immigration, but also various tax and deregulatory efforts—sacrifice communities, families, and culture for nothing more than a small boost in GDP. And both sides’ economic doomerism depends on dismissing decades of solid American GDP growth as tone-deaf, ivory tower, “line goes up” elitism.

To be sure, GDP is an imperfect metric that fails to capture everything we value, but it remains a pretty darn good baseline for evaluating living standards here and abroad—one that mirrors many of the nonmonetary things we do really care about. Overall, GDP turns out to be one of the most reliable indicators of human well-being that economists have ever devised, and dismissing it is more a sign of motivated reasoning than economic enlightenment. New research shows, in fact, that GDP’s biggest flaw is probably that it underestimates just how much things have improved over the last century—by a significant amount.

What GDP Is (and Isn’t)
As I’ve written before, GDP has real methodological quirks. It’s basically a clunky aggregation of several economic indicators—private consumption, gross private investment, government spending, and net exports—that, even in normal times, can produce misleading snapshots of national economies. Import surges and collapses driven by recent U.S. tariffs, for example, distorted quarterly GDP prints last year—to the upside and down—in ways that had little connection to the country’s underlying economic health. Furthermore, the metric fails to account for important activities like leisure and unpaid household work; it doesn’t consider inequality; and it has difficulty properly valuing environmental goods, government expenditures, and new innovations. As we’ve discussed, GDP can be gamed by authoritarian governments with a strong incentive to fudge the numbers. And it can be particularly distorted in a handful of economies that are driven by one type of economic activity (e.g., petrostates or tax havens).

Populist critiques of GDP, however, go much further than these common methodological concerns. On the right, economic nationalists routinely sneer at “libertarian” policies that “merely” boost GDP at the expense of—in their view—more important measures of well-being: native-born wages, mortality, family formation, culture, national security, and so on. On the left, meanwhile, “degrowth” theorists see GDP growth as an outright bad thing because it necessarily means environmental destruction and mistakes economic activity for human welfare. A truly rich society, they argue, maximizes health, happiness, and sustainability over the monetary value of production.

In theory, these critiques make some sense: An economy that grows only by embracing pollution or selling vice doesn’t make people better off in the long term. In reality, however, the anti-GDP coalition goes much further by mechanistically rejecting policies they don’t like because they “only” boost GDP. This gets things badly wrong in several ways.

What GDP Shows—and Predicts
For starters, humans do value the stuff that GDP measures, so the metric alone—usually adjusted for inflation and divided by a nation’s population (aka, real GDP per capita, or “RGDPpc”)—is a good starting point for measuring well-being. As Cato’s Jeff Miron explained a few years ago in my book on American workers:

RGDP is also useful because the calculation is widely used and standardized, easing comparisons over time and across countries. Typically, economists use real GDP to compare nations’ economic power and real GDP per capita—adjusted for purchasing power—to compare living standards (but the two tend to track each other). Disagreements surely still arise—like this current one involving Paul Krugman’s defense of European living standards—but GDP is still the standard baseline.

Humans, of course, are not merely consumers and producers and thus have lives beyond GDP. Yet a trove of international data shows that RDGDpc strongly correlates with a wide range of economic and non-economic things humans care deeply about: incomes, employment, life expectancy, caloric intake, infant mortality rates, educational attainment, environmental improvement, technological advancement, leisure time, reported life satisfaction (aka happiness), and more. Here’s one example:

RGDPpc also aligns with alternative measures of well-being, including ones meant to replace GDP.

Contra the degrowth narrative, moreover, GDP growth is good for the poor—incomes at the bottom historically rise in proportion to average (per capita) incomes—and global income inequality falls as previously poor countries (China, India, Vietnam, South Korea) experience strong increases in GDP. In short, the countries lifting most people out of extreme poverty have embraced markets and growth, not degrowth.

The connection between GDP and well-being holds at the subnational level, as well. For example, a recent study tracking European regions between 2008 and 2019 found that higher RGDPpc was linked with longer life expectancy. Economist Adam Ozimek did something similar for the United States last year, finding that metro areas with a higher cost-of-living adjusted GDP per capita enjoyed higher real incomes, more plentiful jobs, and fewer single-parent households:

Other careful research has found strong connections between per capita incomes in U.S. cities and both residents’ lifespans and local crime rates.

The relationship between GDP growth and well-being shows up consistently, across dozens of countries with wildly different politics and cultures. The linkage is so strong, in fact, that it’s become a nerdy joke among economists online:

The relationship also isn’t mere coincidence. Some of it is simply math—the things GDP measures also factor into other metrics—but it’s also common sense: As we’ve discussed, richer, more productive societies can afford more leisure and education, better hospitals, cleaner water, better food, and many other things that GDP doesn’t directly measure. Ozimek’s bottom line sums it up well: “GDP is an undeniably important and helpful indicator. It may not include everything that matters, but it is strongly related to many things that do.” Or, put another, more provocative way, money really does buy happiness—at least at the national level.

But GDP Does Err … to the Downside
In one sense, however, the anti-growthers are right that GDP doesn’t fully capture trends in actual human flourishing over time. The only problem is that they’re correcting in the wrong direction: Instead of overstating modern well-being, research increasingly finds that the GDP calculation does the exact opposite.

Cato’s Miron, for example, cites work by economist William Nordhaus showing that artificial light—measured by the number of work hours required to produce a given quantity of lumens—was approximately 300,000 times more expensive in early Babylonia than it is today. Nordhaus found that the same trend applies for computation: Between 1850 and 2006, the cost of performing a calculation, like adding or multiplying, fell by a factor of 73 trillion. The standard price indices on which GDP is based fail to capture cost reductions of this magnitude, which—as our AI moment indicates—continue today.

The modern U.S. economy’s digitization and servicification raise similar issues. The GDP calculation was designed to measure a world dominated by physical goods (crops, energy, manufactures, etc.), so it has difficulty capturing the true value of “free” and continually updated services. Economists have thus estimated that traditional GDP statistics might miss hundreds of billions of dollars in consumer surplus generated by the digital economy each year—real improvements in modern living standards that are especially important for lower-income households (and mostly missed by GDP).

A new working paper from Stanford economists Philip Trammell and Charles Jones goes even further. They start by noting a fundamental problem with how GDP measures actual living standards over time: It essentially values stuff that’s been around for a long time (corn, bicycles, whatever) the same as life-changing new things (antibiotics, the internet, smartphones, etc.). They open with the classic example of this measurement problem: Nathan Rothschild, the richest person in the world in the 1830s, died at age 58 from an infection that $10 of antibiotics would cure today. No amount of extra consumption in 1836—more candles, horses, food, etc.—could have saved him, even if doing so increased GDP. Thus, progress in human living standards comes mostly from the invention of new or higher-quality goods and services, not simply from consuming more of the old things. Yet GDP can’t really distinguish between the two and thus misses the real value of a new good or service that even billionaires find to be valuable, if not priceless.

To get around this and related issues with GDP, the economists propose a clever solution: measuring actual improvements in U.S. living standards over time by looking at the “value of a statistical life” (VSL), i.e., the price people place on their remaining years, as revealed through everyday risk-taking. The trade-off humans routinely make between money and the risk of dying (e.g., from working a more dangerous job), when aggregated across millions of decisions, implicitly quantifies how much we value our expected future life. Standard and widely used VSL figures, therefore, capture almost everything a person would want to stay alive to experience: better foods, new technologies, cleaner air, more freedom, etc. And the growth of VSL over time can provide a better proxy for how much living standards have actually improved, as compared to RGDPpc. Applying this alternative methodology, the economists’ results are striking: While GDP-based living standards in the United States have merely doubled since 1940 (still good!), the VSL-based measure has increased by five to seven times over the same period—and possibly even more.

The implication for the anti-GDP crowd is clear and uncomfortable: Far from overstating how well off we’ve become, GDP may be seriously undercounting it.

Summing It All Up
Despite some flaws, GDP remains a valuable way to measure economic activity and living standards, especially across countries and long periods of time. A century of evidence shows that societies growing richer, as measured by GDP, live longer, healthier, better-educated, and freer lives. And, contra the degrowth narrative, the people best positioned to pursue nonmaterial things—community, leisure, religion, environmental quality—are those wealthy enough to afford them. If anything, GDP probably understates the gains we’ve made, but that’s not a reason to abandon it.

Indeed, since GDP tracks material well-being and other, non-economic measures of human flourishing, policymakers can and should continue to give weight to the metric when evaluating whether certain economic policies have made (or will make) most Americans better off. Policies that improve growth deserve preferential treatment for this reason, not out of allegedly mindless fealty to “line go up.” None of this means that the government should only consider GDP. There are certainly policies that would raise GDP in the short run and are still morally objectionable or economically wrong-headed. And the measure is incomplete in important ways that demand scrutiny whenever a new data point is published (especially with U.S. trade policy right now). But there’s a huge chasm between “GDP is imperfect and should be considered alongside other indicators of human flourishing” and “GDP is meaningless” or “growth is actually bad.” The first position is sensible economics. The second is a surefire recipe for making Americans poorer and calling it a policy win.