Can we really measure GDP?

Annual Prosperity Report : Is GDP Still the Right Measure?

The German economy is growing. For this year, the federal government is predicting an increase of 1.8 percent. So Germany is doing well. At least that is how many economists and politicians interpret this percentage. For them, the increase in gross domestic product (GDP) is synonymous with more prosperity, more success, more participation. If the economy grows, so the theory goes, everyone benefits: entrepreneurs, consumers, employees. But is that so? Is Germany really still doing as well as the economic data suggests?

The Greens at least question that. For the third time, they have now presented their Annual Prosperity Report. They want to shed light on those aspects that they lack in the government's economic report. "It is not just the economy that determines our quality of life and our well-being," says the Greens report.

"Prosperity is not the same as growth"

The authors examined eight categories from the areas of economy, ecology and social affairs and rated them using a traffic light system. The results also include, for example, how biodiversity is developing in nature or how much the state invests in education. After all, just because the economy is growing does not automatically mean that the individual or the environment is doing well. "Prosperity is not the same as growth," says Kerstin Andreae, spokeswoman for the Green parliamentary group in the Bundestag.

The picture that the authors of the Prosperity Report paint of Germany is then also quite pessimistic. Hardly anything has improved since its last evaluation in 2017. Seven of the eight traffic lights in their analysis are yellow or red. Only when it comes to the rule of law is Germany in good shape. Green politician Andreae therefore speaks of an "illusory prosperity" that lulls us in this country into a false sense of security. She criticizes the fact that the federal government is still aligning its policy far too strongly with this one key figure: the gross domestic product.

GDP does not measure how people are doing

The GDP is probably the best-known measure for the development of the economy. In 2018 it was 3.39 trillion euros in Germany. This is how much all the goods and services that were created in this country in the past year were worth. This key figure was invented in the 1930s by the American economist Simon Kuznets, who later received the Nobel Prize for Economics. Even then, Kuznets himself pointed out that this value should not be overinterpreted. So this number says nothing about how people are actually doing.

To make this clear, economics professors like to cite the example of the car accident in their lectures. If a particularly large number of drivers have an accident, theoretically, economic output increases. Ultimately, the wagons then have to go to the workshop, which in this way receives more orders and can employ more people. That makes the GDP rise. At the same time, however, one thing is of course clear: it is neither desirable for those affected nor for society that a particularly high number of car accidents occur.

Consequences for the environment are left out

It is similar with the effects on the environment. If a farmer applies a particularly large amount of fertilizer on his field, he can end up harvesting more grain - economic output increases. At the same time, however, the fact that it damages the environment because phosphorus gets into the groundwater with the fertilizer is not reflected in the statistics. The same goes for social aspects. When more people find a job, they also contribute to economic performance. But that says nothing about how fairly income is distributed within the country. That is precisely why the Greens want a new measure of prosperity.

This problem has been known for a long time. Between 2010 and 2013, the Bundestag even asked a commission of inquiry how to measure prosperity differently. The result was almost 1,000 pages of analyzes - but no alternative to GDP. The report contained almost 50 separate votes, that is how disagreed the experts were.

The value of records is difficult to quantify

The question of how we will measure prosperity in the future is becoming more and more urgent. Because not only ecological consequences are left out of the GDP. Digitization is also only included to a limited extent. After all, the main measure of GDP is how many goods such as cars or steel are produced. In contrast to such physical objects, however, the value of data records is difficult to quantify. The Federal Statistical Office therefore makes do with the figures that the tax offices transmit to them via the tech companies.

However, much remains unconsidered. For example, if Wikipedia makes its online lexicon available free of charge, that does not count towards the bill - even though it does help people. The same applies to the use of search engines such as Google or social networks such as Facebook, Instagram or Youtube. MIT professor Erik Brynjolfsson has calculated that all of this increases the wealth of Americans by 100 billion dollars a year - without it showing up in any official statistics. In other words: From an economic point of view, the achievements of digitization are extremely underestimated. The Hamburg economist Thomas Straubhaar writes: "This is why the GDP and its measurement methods are less meaningful than ever."

This is a problem because economists have so far simply not found an alternative to GDP. US presidential candidate Robert F. Kennedy already knew: "The gross domestic product measures everything except that which makes life worth living."

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