Why GDP Is Beneficial: Rethinking the Value of Economic Growth

Would you like to continue receiving our Dispatch Markets newsletter straight to your inbox every week? Sign up here.

One of the more peculiar aspects of contemporary American economic dialogue is the bipartisan stance that GDP—gross domestic product—doesn’t matter, or at least isn’t something policy should be guided by. On the left, academics have long pushed “degrowth,” arguing that only a government‑led contraction in output can protect the environment and promote human flourishing. More recently, a populist right has embraced its own brand of growth skepticism, contending that free‑market reforms—especially more open trade and immigration, but also various tax reforms and deregulation—undermine communities, families, and cultural foundations for barely a marginal GDP gain. And both camps’ doomsaying about the economy rests on dismissing decades of solid U.S. GDP growth as tone‑deaf, ivory‑tower chatter about “the line going up.”

To be fair, GDP is an imperfect yardstick that omits many things we value, yet it remains a remarkably solid baseline for judging living standards at home and abroad—mirror to many of the nonmonetary aspects we genuinely care about. On balance, GDP stands out as one of the most dependable measures of human welfare economists have ever devised, and treating it as irrelevant tends to signal motivated reasoning rather than economic clarity. Emerging research indicates, in fact, that GDP’s principal flaw may be underestimating just how much progress has occurred over the past century—by a considerable margin.

As I’ve noted before, GDP carries genuine methodological quirks. It is essentially a cumbersome sum of several indicators—private consumption, gross private investment, government outlays, and net exports—that, even in normal times, can yield misleading snapshots of a nation’s economic health. Recent U.S. tariffs created import surges and collapses that distorted quarterly GDP readings—both up and down—in ways that bore little relation to the underlying economy. Moreover, the metric omits important activities such as leisure and unpaid household work; it ignores inequality; and it finds it hard to value environmental goods, public spending, and new innovations. As discussed, GDP can be manipulated by authoritarian regimes with incentives to fiddle with numbers. It can also be distorted in economies dominated by a single activity (for example, petroleum‑based economies or tax havens).

Critiques from the populist right and left go further than these standard concerns. On the right, economic nationalism often mocks “libertarian” policies that merely lift GDP at the expense of what these critics see as more meaningful welfare measures: native wages, life expectancy, family formation, culture, national security, and so forth. On the left, “degrowth” proponents view GDP expansion as inherently detrimental because it supposedly equates economic activity with environmental harm and human welfare. They argue that a truly prosperous society would prioritize health, happiness, and sustainability over the monetary value of production.

In principle, these critiques contain some logic: an economy that grows by means of polluting or by peddling vice does not deliver enduring prosperity. In practice, however, the anti‑GDP coalition goes too far by mechanically rejecting policies simply because they “only” raise GDP. This stance gets several things badly wrong.

First, people do value the things GDP measures, so the metric in itself—usually adjusted for inflation and divided by a nation’s population (often called real GDP per capita, or RGDPpc)—serves as a reasonable starting point for gauging well-being. As Cato’s Jeff Miron explained a few years ago in my book about American workers:

RGDP also proves useful because its calculation is widespread and standardized, which eases comparisons across time and borders. Economists commonly use real GDP to compare a nation’s economic power and real GDP per capita—adjusted for purchasing power—to compare living standards (though these metrics tend to move in tandem). Disagreements certainly persist—such as debates over Paul Krugman’s defense of European living standards—but GDP remains the conventional baseline.

People, naturally, are more than mere buyers and sellers; they live lives that extend beyond GDP. Yet a wealth of international data shows a strong link between RGDPpc and a broad array of economic and non‑economic outcomes that matter to people: incomes, job opportunities, life expectancy, caloric intake, infant mortality, education levels, environmental progress, technological advancement, leisure time, and measures of happiness, among others. Here is a single illustration:

RGDPpc also aligns with alternative metrics of well-being, including ones proposed as potential replacements for GDP.

Contrary to the degrowth view,GDP growth benefits the poor—historically, bottom‑end incomes rise in step with average income—and global inequality declines as previously impoverished regions (China, India, Vietnam, South Korea) experience strong GDP gains. In short, nations lifting the most people out of extreme poverty have embraced markets and growth, not degrowth.

The link between GDP growth and well‑being also shows up at the subnational level. For instance, a recent study of European regions from 2008 to 2019 found that higher RGDPpc correlated with longer life expectancy. In the United States last year, economist Adam Ozimek reached a similar conclusion, noting that metro areas with higher cost‑of‑living adjusted GDP per capita enjoyed higher real incomes, more plentiful employment opportunities, and fewer single‑parent households:

Other careful analyses have identified strong associations between city‑level per capita incomes and residents’ lifespans as well as local crime rates.

The connection between GDP growth and well‑being remains strong across dozens of countries with contrasting political systems and cultural norms. It’s so robust that it’s become a running joke among economists online:

The relationship isn’t mere coincidence. Some of it is arithmetic—GDP’s components feed into other metrics—but it also makes common sense: richer, more productive societies can afford more leisure time and education, better healthcare, cleaner water, healthier food, and many other things not directly captured by GDP. Ozimek’s bottom line sums it up: “GDP is an undeniably important and useful indicator. It may not capture everything that matters, but it is strongly linked to many things that do.” Or, in a bolder formulation, money really does buy happiness—at least when viewed from the national perspective.

In one sense, the anti‑growth camp is right that GDP doesn’t fully capture trends in genuine human flourishing over time. The problem is they’re correcting in the wrong direction: rather than overstating well‑being, recent research indicates the opposite—that GDP may be undercounting progress.

Cato’s Miron, for instance, cites work by economist William Nordhaus showing that artificial light—measured by the hours of work needed to produce a given quantity of light—was roughly 300,000 times more costly in early Babylonia than it is today. Nordhaus also found that the same pattern applies to computation: from 1850 to 2006, the expense of performing a calculation—adding or multiplying—fell by roughly 73 trillion times. The standard price indices underlying GDP fail to capture price declines of this magnitude, which—like today’s AI frontier—are ongoing.

The digitization and service‑oriented shift of the modern U.S. economy raise similar questions. GDP was designed to quantify a world dominated by tangible goods (crops, energy, manufactured products, etc.), so it struggles to capture the true value of “free” and continually updated services. Economists have estimated that traditional GDP measures miss hundreds of billions of dollars in consumer surplus created by the digital economy every year—real improvements in living standards that particularly help lower‑income households and are largely invisible in GDP.

A recent working paper from Stanford economists Philip Trammell and Charles Jones pushes this further. They begin by pointing to a fundamental flaw in how GDP gauges living standards over time: it tends to value long‑standing goods (corn, bicycles, etc.) the same as transformative new goods (antibiotics, the internet, smartphones, etc.). They illustrate this with a classic example: Nathan Rothschild, the era’s wealthiest man in the 1830s, died at 58 from an infection that would be cured today by about $10 worth of antibiotics. No extra consumption in 1836—more candles, horses, food, etc.—could have saved him, even if it raised GDP. Thus, progress in living standards comes largely from new or higher‑quality goods and services, not merely more of the old ones. Yet GDP cannot consistently distinguish between these two, thereby missing the true value of a new product or service even billionaires recognize as valuable, if not priceless.

To tackle this and related GDP shortcomings, the economists propose a clever workaround: assess actual improvements in U.S. living standards over time by examining the “value of a statistical life” (VSL), i.e., what people are willing to pay for the remainder of their lives as revealed by everyday risk choices. The trade‑offs people make between money and the risk of death—such as taking on more dangerous work—when aggregated across millions of decisions, implicitly quantify how much we value our expected future life. Established VSL figures thus capture nearly everything a person would want to preserve to stay alive for future experiences: better food, new technologies, cleaner air, expanded freedom, and so on. The growth of VSL over time can provide a more accurate proxy for actual living standards than RGDPpc. When applying this alternative method, the researchers’ results are striking: GDP‑based living standards in the United States have merely doubled since 1940 (still respectable), whereas the VSL‑based measure has risen by five to seven times over the same period—and perhaps more.

The upshot for the anti‑GDP camp is plain and challenging: GDP may be undercounting how well off we’ve become, not overcounting it.

Even with its flaws, GDP remains a valuable gauge of economic activity and living standards, particularly when comparing countries and looking across long stretches of time. A century’s worth of evidence shows that societies that accumulate wealth, as captured by GDP, enjoy longer, healthier, better‑educated, and more open lives. And counter to the degrowth narrative, those best positioned to pursue nonmaterial goals—community, leisure, spirituality, environmental quality—are typically the ones with enough wealth to afford them. If anything, GDP probably understates the gains we’ve achieved, but that is not a reason to discard it.

In fact, because GDP tracks material well‑being alongside non‑economic indicators of human flourishing, policy makers should continue to weigh the metric when judging whether a given policy has improved the welfare of most Americans. Growth‑oriented policies deserve favorable consideration for this reason, not out of blind devotion to a monotone “line up” mantra. This does not mean government should rely solely on GDP. There are certainly policies that could lift GDP in the near term while remaining morally questionable or economically misguided. And the measure is incomplete in meaningful ways that warrant scrutiny whenever new data emerge (especially amid current U.S. trade policy). Yet there is a vast gulf between “GDP is imperfect and should be assessed alongside other indicators of well‑being” and “GDP is meaningless” or “growth is actually harmful.” The first stance is prudent economics. The second would be a formula for making Americans poorer and calling it policy success.

Cato has launched a new interactive map tracking shipments carried on foreign-flagged vessels within U.S. waters since President Trump waived the Jones Act for certain goods amid the Strait of Hormuz disruption. Here’s a telling tidbit:

Here is the reason prices for crude aren’t climbing even higher.

Yikes.

With AI, virtually anyone can be the boss.