Revamping the Way We Measure Economic Prosperity

As economic inequality grows, perhaps G.D.P is no longer the right metric to focus on to determine the financial well being of regular, middle- to lower-class households.

GDP measures do not adequately represent the financial standing of middle class households. To summarize the data in a sentence stated by Neil Irwin, a New York Times economics correspondent: “You can’t feed a family with GDP.” Photo courtesy of Teton Pines Financial.

Written by Aldo Gonzalez

If you are susceptible to the whims of our contemporary, hyper-partisan political climate then your interpretation of the economy’s health depends on whether the president flaunts a ‘D’ or a ‘R’ and who controls Congress. Regardless of political perspective, there is logic to the argument that the election result was a reflection of the economic pain and stagnancy encumbering millions of Americans who do not benefit from the advantages of a globalized economy. Surely, middle-class families have enjoyed the fruits of globalized trade through cheaper goods and service, but wages remain stagnant.

Such stagnancy contributes to the astonishing gap between rich and poor, with the top one percent captured 91 percent of income gains. Emmanuel Saez, prominent Berkeley economist, and his data show a sunnier picture for middle-class families as time continues to pass since the onset of the 2008 recession. Indeed, this past September, median household income rose by 5.2 percent to $56,516 in 2015, signaling the growing strength of the job market and giving the Federal Reserve another reason to look at rate hikes.

But in the proper context, this increase is rather unremarkable. Median household income reaching $56,516 is the highest level seen since the recession, when adjusting for inflation. However, median household income still fails to reach the pre-recession 2007 level of $57,423.

It is important to be honest in assessing the measurement utility of median household income, as it is a far-from-perfect barometer of middle class progress. Median household income neglects government and tax benefits such as food stamps and Earned Income Tax Credits. Additionally, the measure does not take into account income derived from business operations or demographic differences in standard of living. Yet the other side of the coin, revering GDP measures as the magic eight-ball of financial well-being leads to delusion as well.

According to a 2014 report by the Bureau of Economic Analysis, economic growth, measured in GDP per capita, has  typically been associated with growth in income for the American middle class. This trend changed in 1999 as GDP per capita and median household income diverged, with the latter falling off into the stagnancy we experience today and the former continuing to rise despite  economic hardship. This divergence has also expanded beyond American borders.

In a 2016 study from Oxford economists, 23 out of 27 wealthy economies, ranging from the United States to Israel, experienced GDP growth that outpaced median household income growth. Specifically, the average across the 27 countries showcased how GDP per capita increased by 2.17 percent while median income increased by 1.6 percent. Ultimately, the average divergence stood at .57 percent. By contrast, the divergence measure for the United States checked in at 1.27 percent.

Like most developed countries, the United States relies on GDP per capita as a benchmark for corroborating indications of economic health. Yet, as previously established, GDP measures do not adequately represent the financial standing of middle class households. To summarize the data in a sentence stated by Neil Irwin, a New York Times economics correspondent: “You can’t feed a family with GDP.”

With this in mind, one can sympathize with the anger and confusion that arise when people are told by experts and politicians that the economy is in exceptional condition. Such an assertion is countered by distrust and contention that manifest themselves in the political arena. Some political actors that spawn thrive upon such chaos only further contribute to the decline by blaming ‘unfettered’ immigration and globalization, tapping into the fears of voters whose root is financial insecurity. In reality, rising inequality and bunkered stagnancy result from a combination of factors like skills-biased technological changes, specific tax policies, private union decline, and globalization; but these political outcomes accentuate the notion that the economy is only a piece of the mosaic. When actions are executed after unrelenting analysis of a single economic metric, their implications affect every delicate facet of society—including the wallet of a middle-class household.

To avoid the ascension of far-right political movements, it may be in the interest of policymakers and economic advisers to adopt a more comprehensive approach to measuring economic health.

Even considering newer economic metrics such as genuine progress indicator (GPI), which factors in traditional GDP components while accounting for figures that represent the cost of negative effects to economic activity, could go a long way in providing a fuller economic picture. As an example, the state of Colorado employed the methodology in 2013 to find that while GDP tripled from 1960 to 2011, GPI fell behind considerably.

Of course, the way we measure economic growth is merely a supplement to how to solve real economic grievances like rising inequality—but it is important to paint the picture accurately.

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