GDP Is the Wrong Way To Measure America's Economic Strength | Opinion
Of all the current divides in American society, among the most far-reaching and historically significant is also the least discussed: the gap between the primary measure by which we officially gauge the health of the American economy— gross domestic product (GDP)—and the way in which Americans (and their counterparts across democratic nations) more intuitively measure it, via the purchasing power of our household budgets and savings.
This widening gulf not only underscores our inadequate grasp of the most powerful predictor of elections in the U.S. and overseas , but also underlies the growing obstacles to legitimacy and effectiveness for democracies throughout the world. The ruling elites and the governed are speaking different dialects regarding economic well-being, a Great Disconnect that crosses lines of party, culture, demographics, ideology, geography, and tradition across the globe.
Consistently over the past decade in the U.S., recurring crops of s reaffirm how unequivocally strong the American economy is, based largely on rip-roaring GDP growth and the stock market, while puzzling over Americans' much gloomier take in surveys. This gap has frequently become a chasm, particularly since the COVID-19 pandemic , ensuing from a divergence between the longstanding GDP-focused assessments and the "lived economy" Americans experience.
In this lived economy, GDP and macroeconomic growth are relative abstractions that often fail to capture an unsettling development: The purchasing power of Americans' dollars has fallen drastically, especially since the pandemic, and incomes and savings lag precariously behind. Heading into November 2024, in stark contrast with official reports, Americans across demographics expressed economic pessimism at levels paralleling those of the 2008 financial crisis .
Household debt is piling up and even basic needs (let alone discretionary luxuries) including food, transport, health care, education, senior and child care, and especially homes—both mortgages and rentals—are becoming unaffordable. In this context, rosy economic reports (released during various administrations, across party lines) provoke acute frustration for the American Main Street . Insistent proclamations of "an economy humming along" have the air of heedless pronouncements from those on the Titanic's upper deck, who wonder why passengers in steerage aren't marveling at the looming iceberg's picturesque quality.
Recent elections worldwide offer concrete manifestations of this disconnect. While polls, prediction markets, and even polling aggregates and models have significantly missed the mark over the past decade , one particular indicator has been uncannily on-target in forecasting election outcomes. In a groundbreaking study on political economics by economist Robert Gordon , "excess inflation" dramatically diminishes an incumbent party's performance, even with healthy GDP. More specifically, despite inflation falling close to the Federal Reserve target (2 percent) in 2024, cumulative inflation for Americans since the pandemic has seriously dented the affordability of nearly everything. Even such a net inflation figure doesn't fully represent Americans' cost of living struggles, however, since the Consumer Price Index measures housing costs somewhat indirectly .
To be fair, housing inflation is challenging to pin down due to the decades-long amortization of the typical mortgage. But this does not make it any less real to Americans who had patiently saved up for years, only to see the price-point goalposts shifted by market-distorting fiscal and monetary stimulus from the 2008 financial crisis and pandemic , which have yet to be properly reined in. Thus, despite vast sums spent on the 2024 campaign—along with massive polling operations, culture war distractions, and micro-analyses of one wedge issue after another—the election result was almost prosaically predictable based on the tangible loss of American purchasing power.
Why? Because elections are, by their very nature, a quantification of mass psychology, a concept implicitly understood even by the democracies in ancient Greece millennia before that field was officially formulated. Although often idealized as bastions of rationality and thoughtfully informed decision-making, elections in practice follow the more "semi-rational" rules of any collective psychological phenomenon. Accumulated stressors make for powerful ingredients in the cocktail of reason and emotion that drives voting decisions—including the option to not vote at all—particularly for national elections serving roughly as referenda for an incumbent party.
On a mass psychological scale, erosion of purchasing power is perhaps the most defining, commonly felt stressor driving election choice. Incumbent parties across the democratic world (even with a flawless campaign and candidacy) have faced steep uphill battles in its wake, regardless of GDP gains. We must of course be wary about overly reductionist explanations. Varied issues and candidate quality can clearly matter especially in close elections, and of course sharp GDP falls in recessions can also sharply reduce Americans' spending power. Yet purchasing power remains the best primary proxy metric and summary statistic we have of actual economic health and, in effect, electoral results. When severely eroded, it swamps out nearly every other electoral factor. Purchasing power thus succeeds where GDP falls short.
Somewhat surprisingly, pointed criticisms of GDP's over-application by numerous mainstream economists are nothing new. They stretch back to Simon Kuznets , one of GDP's formulators in the 1930s, and include figures such as Joseph Stiglitz , a Nobel laureate economist who has noted its core flaws and made repeated calls for reform .
Notwithstanding its initial value as a correlate of industrial capacity, production, and national development, GDP has since become decoupled from basic developmental metrics such as life expectancy, which has declined in the USA and fallen well below peer countries despite rising GDP. Still worse, GDP (particularly in the U.S.) is often perversely bolstered by cost increases that clearly undercut people's quality of life, such as spiraling health care, housing, and educational expenses.
The deeper issue, in any case, is that excessive focus on GDP (even adjusted calculations such as PPP GDP and per-capita measurements) has opened up a troubling communication gap between the people and elected representatives. A more focused spending-power yardstick, such as median non-debt discretionary purchasing power , may help to address this problem, but in any case it would be advantageous to begin the discussion sooner rather than later.
Wesley Ulm, MD, PhD is a physician-researcher and bioinformatic specialist with experience in health policy and economics.
The views expressed in this are the writer's own.
