GDP Grew Last Quarter. Does it Matter?

The question of how the U.S. economy as a whole fared during the second quarter of 2008 has been answered...supposedly. GDP, which is the sum total of all goods and services produced within our borders, adjusted to avoid counting added value twice, for trade deficits, and quite possibly for the number of daily riders on "it's a small world after all," managed to grow 3.3%.

Economists were thrilled, and no doubt whoever runs the McCain campaign cracked a smile. Justifiably or not, McCain is seen by a sizable fraction of the electorate to be a successor to Bush, so whatever reflects well on Bush will give him a boost, too.

However, 3.3% really isn't that high a rate of growth, not by historical standards. It's not terrible. It puts a comfortable distance between the economy and that dreaded "R" word, at least for now. If the GDP report had been a golf stroke, the crowd would break out in polite but not particularly enthusiastic applause. At this juncture, since expectations had been a half to full percentage-point lower, 3.3% fills that proverbial square for the heirs-apparent to current politicians: the economy isn't great, but it wasn't as bad as we were all afraid it would be.

However, I see two problems with using GDP as a tool to measure the economy.

First, citing GDP growth as evidence that Things Are Getting Better carries with it an implicit but very real assumption that everybody's economy is growing 3.3%. The Powers that Be want us to believe that Richie Rich, CEO of Whatever, Inc. took home an extra 3.3%, and that his middle managers also took home 3.3% more, and that the rank and file at the factory took home 3.3% more, and the drivers of company trucks got 3.3%, and that overall everything is peachy-keen.

However, as you might imagine, that's quite an oversimplification. If we take a look at this past decade, we can see plainly that a rising tide has not, in fact, lifted all boats. So a simple increase in GDP is not a guarantee, nor even a reliable indicator of, an increase in our standard of living.

So how can we measure standard of living? The simplest method is to divide GDP by population, but this still just measures an average, saying nothing about distribution. So, several economists are trying out complete rethinks of the GDP statistic, factoring in equality of income, life expectancy, vacation time, and other variables which also impact quality of life. The theory goes that someone who makes, say, $35,000 a year but enjoys a good education and transportation system,
a low crime rate, substantial freedoms, paid vacation and a clean environment might well be happier than someone making $50,000 but with no social safety net, failing schools, no time off, a corrupt and dictatorial government, and polluted air and water. More wealth is not always better.

For some examples of alternative systems, check out
Genuine Progress Indicator
Human Development Index
Happy Planet Index
f

The second problem I have with reading too much into that 3.3% growth was that the number was skewed by the tax rebate ("economic stimulus") checks being sent out. The money is borrowed money, and so the resultant increase in income is no more genuine than a guy who gets a $300 cash advance on his MasterCard claiming his income went up $300. It didn't; he just borrowed the money. So some of that 3.3%, we borrowed. How much? No one can determine with certainty, but it's safe to say some of it.

So, aside from a new generation of economic indicators, how can we know the economy is really improving? Some indicators to watch for: a reduction of inflation (inflation having a corrosive effect on the buying power of consumers) and increases in personal income and employment. These indicators, more than raw GDP, would show a nation on the mend.