UK: Deloitte Monday Briefing: GDP vs. Happiness

Last Updated: 12 August 2013
Article by Ian Stewart

* Gross Domestic Product (GDP) is the basic unit of economic measurement. Ubiquitous and universally accepted, GDP has been the key measure of output since the middle of the twentieth century.

* Before measures of GDP existed, policymakers assessed the state of the economy using partial and fragmentary data. In the US, the Great Depression highlighted the problems of trying to steer the economy using such sketchy data as railway freight volumes, stock market indices and incomplete measures of industrial production. The resulting search for a comprehensive measure of national income led to the development of today's quarterly measures of GDP.

* Nobel Laureate Paul Samuelson explained the value of GDP in the following terms - "Much like a satellite in space can survey the weather across an entire continent so can the GDP give an overall picture of the state of the economy... Without measures of economic aggregates like GDP, policymakers would be adrift in a sea of unorganized data".

* Yet GDP has its detractors. Many argue that it is not a reliable measure of a nation's welfare. If GDP tracked welfare, how could it be that US incomes have risen sharply in the last 70 years, yet the average reported level of happiness has remained almost flat?

* In 1968, Robert Kennedy articulated the shortcomings of GDP: "... the gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country. It measures everything in short, except that which makes life worthwhile."

* One country, Bhutan, has taken such criticisms to heart. For the last 40 years its government has steered policy on the basis of 'gross national happiness' or GNH.

* Interest amongst economists and policymakers in the determinants of happiness has soared in in the last ten years. In 2011, the OECD launched its Better Life Initiative designed to measure where, when and for whom life is getting better. In the UK, David Cameron has championed alternative measures of welfare to inform how the government can 'really improve lives'.

* But what should be included in a measure of happiness?

* The UK economist, (Lord) Richard Layard, writes in his book, Happiness, of the "big seven" factors affecting happiness: family relationships, financial situation, work, community and friends, health, personal freedom and personal values.

* Some contemporary philosophers regard the current, transient emotional state as the only real gauge of happiness. But this raises problems of its own. How good are we at understanding our own happiness?

* One study found that stress was higher in people who had worked for three hours in a simulated office with low-intensity noise than those in a quiet office. Those who spent the time in the noisier office showed elevated adrenaline levels and were markedly less persistent in efforts to solve difficult puzzles afterwards. Yet the researchers were surprised to find no differences in reports of perceived stress. The group that had been stressed did not seem to know it.

* Happiness-drive policy-making is certainly no panacea. The new Prime Minister of Bhutan, Tshering Tobgay, has recently said his country's 40-year focus on GNH has masked problems with chronic unemployment, poverty and corruption. Paternalistic policies designed to raise happiness, including a legally enforced dress code and, until recently, the prohibition of television, raise fundamental questions about freedom.

* At an extreme, a focus on happiness can acquire a totalitarian hue. The dystopian extreme is Aldous Huxley's Brave New World, where the state ensures a mind controlled happiness for all.

* For all its shortcomings, there is a lot to be said for GDP. It can never achieve the degree of acceptance or permanence that the measurement of time or distance command, but in the shifting world of the social sciences it has done pretty well.

* GDP has wide currency across political, national and class divides. Contrary to what its detractors sometimes imply, GDP does not purport to be a measure of national welfare. Nothing has come close to supplanting it as a comprehensive measure of output. The fact that economic issues can be debated on the basis of an agreed measure of output contributes to the quality of economic policy and to the robustness of the political system.    

* The quest to understand and measure happiness is a noble one. But it is hard to imagine any one measure of happiness enjoying the same widespread acceptance that GDP does today.

* GDP does a pretty good job of achieving what it aims to. For those engaged in the eternal search for happiness, it is worth bearing in mind that the single-minded pursuit of happiness can lead to unhappiness. Sometimes it really does pay not to try too hard.


UK's FTSE 100 fell 0.9% last week.

Here are some recent news stories that caught our eye as reflecting key economic themes:


* The Bank of England announced that it would maintain its record-low interest rate until unemployment drops to 7%.
* The US trade deficit hit a three-and-a-half-year low in the second quarter.
* UK services activity grew at its fastest pace in 7 years in July.
* The EU narrowly avoided a trade war with China after a dispute regarding the dumping of solar panels was settled.
* The IMF has warned that Greece may need a €10.9 billion loan in addition to the €240 billion received in bailout loans since 2010.
* founder Jeff Bezos bought the family-owned Washington post newspaper for $250m, a sum making up only 1% of Bezos's personal wealth.
* 65.1% of American homes are under ownership, the lowest home-ownership rate in 16 years as rentals become more popular in the US.
* Chinese imports grew faster than expected in July.
* UK industrial production rose at its fastest pace in 2 years in June.
* Sales of cut-price Chinese smartphones now make up 20% of global branded phone sales.
* Former IMF chief economist, Raghuram Rajan, has been chosen to head the Indian central bank as India faces a sharp slowdown in growth.
* According to the British Retail Consortium, July's warm weather has contributed to a 2.2% rise in the UK's retail sales - the best figure for July in 7 years.
* The period between mid-2011 and mid-2012 has seen the highest number of births in the UK in 40 years.
* Updating the US measure of GDP to include investments in R&D has raised 2012's output estimate by 3.6%.
* According to HSBC, business activity in the BRIC economies contracted for the first time in 4 years in July.
* The number of trips made on foot in London has risen by 12% between 2001 and 2011 as the rapid rise in London's population leads to overcrowding in Tube trains.
* The Australian central bank cut its interest rate to a 50-year low anticipating weaker mining activity as a result of the Chinese slowdown.
* The corporate treasury department of oil major Total is moving to London in an effort to raise its profile with investors.
* Fitch has said that the UK government's 'Help to Buy' could push up house prices and taxpayer liabilities while doing little to increase supply of homes.
* UK government figures show that less than 10% of workers are choosing to opt out of auto-enrolment in pension schemes.
* Non-alcoholic beer has seen a sharp rise in popularity in the Middle East, which now accounts for a third of total worldwide consumption.
* Bradford City football club's rotund "City Gent" mascot of 19 years has been replaced after losing 100lbs and therefore no longer representing the character's "original concept"
– ungentlemanly conduct

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