Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host David Stein. Today is episode 282. It’s titled, “Is GDP the Best Measure of Happiness and Well-Being?”

Rena, a listener to the show emailed me and sent a column by David Leonhardt of the New York Times. The column was titled, “Why You Shouldn’t Believe Those GDP Numbers.”

He wrote, “Americans are dissatisfied and have been for years, largely because the economy as most people experience it has not been booming. GDP, or Gross Domestic Product, the economy’s total output, keeps on rising, but it no longer tracks the well-being of most Americans. Instead, an outsized share of economic growth flows to the wealthy, and yet GDP is treated as a totemic measure of the country’s prosperity.”

Totemic means representative or symbolic of a particular quality or concept. What is it that GDP is measuring? He defines it. The total output of an economy, what is produced, the dollar value of the goods and services produced over a given period.

Leonhardt is saying that output number, GDP, is no longer tracking the well-being of most Americans. But is that what GDP was put in place to do, track the well-being or maybe more specifically, the economic well-being of a country’s citizens?

Rena asks, “If GDP does not measure a nation’s economic well-being, then what is the proper way to measure it?” We’re going to explore her question in today’s episode.

Unsatisfying indicators

Leonhardt continues in his column, “Consider the true picture: middle-class income growth has been sluggish for decades, the typical household is still poorer than it was before the financial crisis began in 2007, most alarming average life expectancy has recently been declining. No wonder polls show that a majority of American has been dissatisfied with the country’s direction for the past 15 years in a row, a period that encompasses the entirety of the current GDP expansion, the longest on record. So it’s time to stop wondering why Americans are unhappy and instead create a version of GDP that reflects reality, which may finally be on the verge of happening.”

Lagging income growth

Let’s look at the indicators that he mentions. First, “middle-class income growth has been sluggish for decades.” He included a chart in his column that showed from 1947–1980 that GDP per person generally tracked the incomes of the bottom 90%, this would be after-tax income including government benefits, adjusted for inflation, because the GDP number is the real GDP, and they tended to track a very similar line.

But since 1980 they’ve diverged. GDP per person, per capita, has grown faster than the incomes of the bottom 90%. Leonhardt also linked to another article that had a similar graph, but in this one, it was just since 1980, it showed how the top 1% of income, after-tax, had grown faster than real-per capita GDP, again all these income numbers are net of inflation, and that the middle 40% has lagged and the bottom 50% has also lagged.

So yes, income, for most individuals is not growing as fast as the rate of increase in the dollar value of output. Does that make us unhappy? Should it make us unhappy?

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