The End of the GDP Consensus?

In 1934 the acting U.S. Secretary of Commerce released a 261-page report that would change the world. In it, statistical economist Simon Kuznets laid out the first estimate of what he called “National Income” and what many of us know today as “Gross Domestic Product” or “GDP.” Kuznets developed the metric in response to the Great Depression’s unprecedented fall in economic activity. He hoped that it could help future governments assure their citizens of robust economic growth.

When World War II ended in 1945, Western countries turned to GDP as a way to show the superiority of capitalism over communism. Led by the United States, those that remained in the capitalist bloc were told that they would experience prosperity or “rising GDP.” This soon became the consensus view in Western politics. 

Technocratic Democrats, like those that served under President Kennedy, attempted to come up with clever interventionist policies to boost GDP growth. During this period, dissenting free market economists led by Milton Friedman tried to shape a more laissez-faire narrative. They argued that less government intervention would lead to higher GDP growth. This would soon become the dominant economic narrative among Republicans. By the time Reagan was elected president in 1980, Democrats and Republicans had developed different approaches to economic policies. But both parties took it for granted that the goal was higher GDP growth.

In the interim, Western culture changed beyond recognition. Increasingly, the two sides of the political aisle began to clash over just about every issue, from abortion to the traditional family. Democrats and Republicans drifted further and further apart. Issue after issue became politicized as the culture wars heated up and the nation began to split into two groups. But Kuznets’s GDP remained a shared metric. Economic growth would hold the nation together.

Recent years have seen criticism of GDP. The left notes that GDP abstracts from income distribution. Many on the left have also said that GDP may be a bad thing, not a good thing, as increasing GDP may lead to rising C02 emissions, which they believe produces climate change. On the right, many have started to notice that the breakdown of the family seems to accompany increasing GDP growth. A society geared toward production and consumption seems to prefer workers and consumers with no family ties and few personal and geographical commitments. Feminism has moved out of the radical fringes and into corporate boardrooms, where women are told to ignore family commitments and “lean in.”

Some of these critiques have something to them. Nevertheless, for better or for worse, we have centered our societies on commerce for almost a century. When we neglect GDP growth, the disruption is profound. People have been taught, in a sense, to order their lives toward GDP growth—toward production and consumption. When GDP falters, people’s lives go into a tailspin. We can see the results in the opioid epidemic in de-industrialized regions. 

But the most striking thing about the lockdown policies enacted this year is the extent to which GDP has been ignored. At the time of writing, the U.S. economy is contracting at a rate not seen since the Great Depression. The result could well make the financial crisis of 2008-09 seem like a minor inconvenience. The lockdown policies appear to be at once destroying and reshaping the economy in profound ways. Extrapolating recent trends forward do not paint a rosy picture. We may be looking at a huge loss in wealth and permanent unemployment for many. Small businesses may become a thing of the past and those lucky enough to have jobs may be at the mercy of monopolies.

Yet as this happens, policymakers, economists, and financiers remain fixated on metrics related to COVID-19. We may be entering an era in which GDP falls by the wayside and no longer has pride of place in the eyes of politicians and technocrats. Now that we have voluntarily destroyed our economies, with almost no resistance from any quarter, there seems to be nothing to prevent politicians and technocrats from coming up with ever-new target metrics that will supposedly help us better society. Given the timbre of the political culture, these are likely to be highly politicized.

Only last year, most of the wacky schemes that entered political debate could be held in check by pointing out that they would massively damage the economy’s capacity to grow. People should not underestimate how much of a check this appeal to GDP growth placed on public policy. This check and balance now seems to have taken a backseat in the public policy debate. The gloves are off on highly partisan attempts at policy innovation. The lockdowns have reorganized the economy in a way that favors online shopping and the big tech monopolies, and basically destroys the high street and small service businesses. Now that we have allowed policymakers to experiment with such reorganization, it seems likely that they will continue to meddle. Soon we could be seeing our leaders set new cultural targets that massively disrupt normal economic activity. Since the focus on GDP has waned, as people lose their wealth, their jobs, and their livelihoods, policymakers may simply chalk this disruption up to collateral damage in pursuit of the new targets.

Perhaps it was time to re-examine our societies’ tendency to worship the GDP metric. But in doing so we needed to tread carefully, recognizing how successful targeting GDP has been in the past. GDP still needs a prominent seat at the public policy table. This seems unlikely to be the case in future. The lockdown policies have been so all-encompassing that it is not hard to imagine ambitious and naïve technocrats cooking up schemes to foist on the public in the coming years. Add to this the destruction of the shared consensus around GDP growth, and what we see emerging is concerning indeed.

John William O'Sullivan writes from Dublin, Ireland. 

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