One of the disadvantages of GDP is that it does not tell us how wealth or economic growth is distributed among a country’s population; nonetheless, along with other economic indicators, it is used to develop economic policy intended to improve the lives of people living in the United States. The problem with this practice? Short term GDP can be manipulated by programs such as “Cash for Clunkers” which can generate a short term increase in GDP but cannot generate long term sustainable economic growth nor lasting industrial production and employment.
A better measure of economic growth to set economic policy in the US would be the ratio of middle class real income growth to real GDP growth and its trend over time (by real I mean adjusted for inflation). If this ratio were greater than 1, we could expect inflation; but as the number gets closer to 0, we could anticipate hard economic times ahead as the middle class income growth won’t be able to support or absorb increases in GDP.
In addition, we could also use such economic measure to evaluate the effectiveness of economic policy and could hold government officials to higher standards to make sure taxpayers’ money is managed in a way that generates not only short term increases in GDP, but also, long term economic growth for the middle class. As the middle class income grows, employment will also grow due to consumer spending and everyone -individuals, business, government and non-profit organizations- will benefit because the invisible hand takes over.
Of course, the challenge for US elected officials is to develop economic policy that has less to do with political ideologies and more with generating long term sustainable economic growth that can directly benefit US taxpayers. Can you think of ways to generate long term sustainable economic growth using economic policy?
