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Prior to the actual Great Depression of the 1930s, no one was concerned about measuring the state of the economy. But when President Roosevelt launched the New Deal, it became important to calculate what impact those government programs were having on the economy, to gauge effectiveness.
In 1934 Simon Kuznets came up with Gross National Product (GNP), to measure national “aggregate production and aggregate demand.” Under the Marshall Plan, with major European economies destroyed during WW II, the US gave loans to Europe for rebuilding. To monitor the effectiveness of the money given, the US required the Europeans to use GDP (which is related to GNP) to measure economic progress.
This is why GDP has become synonymous with prosperity and is now used globally.
GDP is the total market value of all the goods and services produced in a country in a given period, adjusted for imports and exports (measured monthly, quarterly and annually).
But Kuznets warned that, “The welfare of a nation can scarcely be inferred from the measurement of national income.”
And Robert Kennedy said this in 1968, as he ran for the Presidency:
“For too long, we have surrendered personal excellence and community value in the mere accumulation of material things. Our Gross National Product now is over 800 billion dollars a year, but that Gross National Product counts air pollution, and cigarette advertising, and ambulances to clear our highways of carnage.
It counts special locks for our doors and jails for the people who break them. It counts the destruction of the redwoods and the loss of our natural wonder in chaotic sprawl. It counts napalm, and it counts nuclear warheads, and armoured cars for the police to fight riots in our streets. It counts Whitman’s rifles and Speck’s knives and the television programs that glorify violence in order to sell toys to our children.
Yet, the Gross National Product does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit or our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country.
It measures everything in short except that which makes life worthwhile. And it can tell us everything about America except why we are proud to be American.”
In December 1999, at a press conference, the US Commerce Department declared that the US government’s achievement of the century was the invention of GDP. Commerce Secretary William Daley said it had a very positive effect on America’s wellbeing, “Gone are the bank runs, the financial panic, the deep and drawn-out recessions.” This was just before the dot.com bubble burst and Nasdaq declined by 78%.
And then 2008 happened, and the global economy only survived because governments around the world ran up massive amounts of sovereign debt to bail out a crisis generated by elevated levels of consumer and corporate debt. When the 2008 crisis happened, total global debt was US$ 140 trillion. This had now grown to $315 trillion by May 2024, according to the Institute of International Finance, with few lessons learnt from the 2008 crisis.
There are two main branches of economic study, microeconomics and macroeconomics.
In microeconomics (studying economics at an individual or single business level), there is a when-to-stop rule, which is reached when the marginal cost of producing an extra unit is higher than the marginal benefit of producing that unit. Just as a 3-year-old may want an endless number of ice-creams until they become sick, by the time we reach adulthood, we generally know when to stop.
But in macroeconomics (the study of the entire economy), there is no concept of any such limit. Because GDP does not count the true cost of growth in terms of environmental degradation, income inequality, human development, societal well-being, etc., there are no limits to growth, as in microeconomics. Materialism has imposed a huge cost on community, so much so that the UK has created a Ministry of Loneliness, to help their seniors.
A desire for economic growth is now the norm, regardless of societal and environmental costs, because policy makers downplay the importance of broader measures of economic growth such as the Human Development Report (which measures health, knowledge and standard of living) or the Gini index (which measure income inequality).
For example, while the US ranks 7th in GDP per capita (and accounts for 25% of global GDP), it ranks 20th in the Human Development Index rankings.
The Gini index measures income inequality (from 0-1, with 0 reflecting prefect equality). Here the US ranks as the worst of the G7 countries, and it lies between Peru and Morocco in global rankings. In 1989, the top ten percent of Americans owned 61 percent of US wealth, by Q1 2024, according to Statista, they now own 67%.
The top 1%, according to Federal Reserve, owns over 16% of all US wealth. The bottom 50% own just 2.5%.
In 2022, according to Statista, the global top 10% owned 76% of global wealth while the bottom 50% owned 1.9%.
Excessive inequality can erode social cohesion, lead to political polarization, and lower economic growth, according to the International Monetary Fund. Which is what we are seeing in the US and many other countries, as this has become a global issue.
According to the World Inequality Report 2022 (Paris School of Economics) and which is quoted by the IMF in its Finance And Development magazine, the top 10% globally get 52% of all income, while the poorest 50% get 8.5%. In wealth terms, the top 1% owns 38% of all global wealth, while the bottom 50% own less than 2%.
How does US GDP compare to the G7 as well as Global GDP?
And how does G7 GDP compare to the BRICS
