For the last 80 years, the primary measure of every nation's well-being has been its Gross Domestic Product, or GDP. "Strong GDP growth in Q4," the headline reads, and everything looks rosy. Or, "3Q GDP growth falls to 2% as consumers pull back," and the world looks grim. Two consecutive quarters of negative GDP growth and we're in a recession. A major, sustained fall in GDP and we're suffering a depression.
Much of what governments do is aimed at keeping the GDP growing. Interests rates are set and reset, taxes are cut (for the rich), laws are passed to boost business and development, entitlements are distributed, all to keep the GDP growing.
Unfortunately, the GDP has several major flaws as a measure of a nation's well-being and as a guide to policy.
The first is that indefinite growth is not sustainable on our finite planet. Human activities have already breached five of the nine planetary boundaries thought to be crucial to a stable climate, biosphere and society. The atmosphere's carbon dioxide load is at a record high and growing. The last time CO2 levels were this high, our species didn't exist, the planet was 3 degrees C (5.4 degrees F) warmer, and sea levels were 30 meters (98 feet) higher than they are now. Plastic waste has polluted the oceans; it's expected to outweigh all the fish in the sea by mid-century. The 300,000 novel chemicals spewed into the biosphere by our industries have triggered the fifth planetary boundary to be crossed. Scientists are now warning that human activities are causing the sixth mass extinction in Earth's history.
As Cambridge economist Partha Dasgupta has shown, when natural resources and ecosystem services are properly valued, nations can appear richer as their GDP rises yet actually be making themselves poorer by churning through their natural resources.
At both the national and global level, chasing the grail of endless GDP growth has become dangerously self-defeating.
The second major flaw is that above a certain level of income, increases in GDP do not translate into increases in happiness or well-being. It's true that in a given time and place, well-off people typically rate their happiness or life satisfaction higher than poorer people do, and a sharp economic downturn drives happiness ratings down. It's also true that in poor countries, economic development can lift millions of people out of poverty and increase their levels of well-being or satisfaction. But as far back as 1974, Richard Easterlin, an economist at the University of Southern California, found that the correlation between GDP growth and well-being doesn't hold up in the long run.
Easterlin found that despite 25 years of economic growth in the US between 1946 and 1970, people's ratings of their satisfaction with life remained unchanged. This became known as the Easterlin Paradox, and has since been replicated over different time spans in a variety of countries, including Japan, China and India. In all three of those countries GDP increased by more than a factor of four over several decades, yet produced no increase in happiness. Recently, as a matter of fact, in India, Japan and the US, happiness has actually decreased as GDP has risen.
Further research has shown that in highly developed countries income and happiness simply decouple. Above yearly incomes of $60,000 to $90,000, further increases in income do not correlate with happiness or life satisfaction.
So if GDP growth is not sustainable and higher incomes don't produce happiness, what should governments and policy-makers look to for guidance?
For an answer we might take a look at the happiest countries. Here are the current top 10, from the 2021 World Happiness Report: Finland, Iceland, Denmark, Switzerland, Netherlands, Sweden, Germany, Norway, New Zealand and Austria. What do they have in common?
Researchers have identified three crucial factors--low levels of inequality, high levels of trust in fellow citizens and the government, and an effective welfare state. These three factors tend to reinforce each other, leading to a social, governmental and economic milieu in which people feel connected to each other--often referred to as social capital--confident about themselves and their government, and healthy and secure, all of which lead to greater happiness and life satisfaction.
My wife and I experienced this firsthand when we were in Denmark a few years ago, when it rather than Finland was rated number one in happiness (it's currently number 3). We asked several people if they thought the rating was accurate, and what contributed to it. A taxi driver we spoke to was typical. He started with trust, pointing out that he and other Danes trusted each other and trusted that the government was looking out for their interests. He pointed to a bicycle leaning against a fence and told us that we could come by a week later and find that nobody had touched it. "We trust each other." He also explained that although he and other citizens paid high taxes, they received great benefits in return--free health care, unemployment insurance, support for retirees and free education including for university students. "We also trust the government," he said.
A few countries have taken note of the futility of blindly chasing GDP growth and the desirability of focusing on the health, well-being and happiness of their citizens. The Kingdom of Bhutan was the bellwether, when the king declared in 1979 that Gross National Happiness is more important than Gross National Product. They measure Gross National Happiness based on nine factors including physical and emotional health, community cohesiveness and the quality of the natural environment, and shape their policies accordingly. Since then they have made remarkable progress in terms of health, education, employment, the environment and--you guessed it--happiness.
In addition to Bhutan's measure of Gross National Happiness, several other related measures have been developed and are starting to be used. Those include the UN's Human Development Index, the OECD's Better Life Index and the New Economics Foundation Happy Planet Index, which accounts for both human and environmental health.
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