The United States leads the world in per capita GDP in any apples to apples measure, despite our economic woes. But, the time has come after sixty years of a relentless consensus agreement on growing per capita GDP as the primary goal for U.S. economic policy to rethink our priorities.
The gap between per capita GDP and other measures of national affluence has grown sufficiently wide that per capita GDP is no longer a suitable central focus of U.S. economic policy. New metrics for national affluence that the U.S. should use to guide its economic policy going forward need to (1) consider the value that productive activity imparts, rather than merely the cost of what is produced, particularly in areas like health care and national defense spending, (2) recognize that leisure, in addition to goods and services, has economic value, (3) recognize that the distribution of wealth is not irrelevant to a nation's affluence, (4) recognize that intangibles like democracy, equality in the distribution of power, and freedom may have intrinsic economic value to people as well as serving as means to other ends. None of these factors is captured by per capita GDP, the longstanding, current, bipartisan pole star of U.S. economic policy.
I review the central role that the per capita GDP metric has in U.S. economic thought, how the U.S. compares on that measure to the rest of the world, and the limitations of that metric in measuring national affluence, in the post below.
Per Capita GDP As The Leading U.S. Policy Measure Of Affluence
If you asked U.S. economists and economic policy makers what single number they viewed as the single most important one for comparing the economic success and prosperity of different countries and subdivisions of countries, they would likely pick per capita gross domestic product or gross national product (the differences between the two are slight in all but exceptional cases). This measures the total output of country (GDP/GNP) over a year divided by its census population for that year and measures the amount of economic output in a country that is available to the average person in the country without favoring any particular distribution of income.
Economists use GDP growth and decline are the determinant of whether we are in an expansion or a recession. When economists and politicians talk about wanting to encourage economic growth, they are generally talking about GDP growth and if you probed a little further, they would generally agree that GDP per capita growth matters more than GDP growth in absolute terms. A country with population growth greater than GDP growth is suffering a Malthusian creep towards poverty.
The political consensus in favor of per capita GDP as the measure of economic success in the U.S. is a wide one, shared by the lion's share of Republicans and pretty much all Democratic elected officials more moderate in their liberalism than the members of the Progressive Caucus in Congress (where concerns about income distribution and skepticism of the validity of GDP as a true measure of prosperity heightens).
While the average American cares more about the interactions of the median personal income, the consumer price index, and unemployment rates, Wall Street and most of the powerful economic policy makers in Washington care more about per capita GDP.
For the last sixty years or so, the be all and end all of U.S. economic policy in almost every political administration at both the state and the federal level, and in academia evaluating economic policies, and in financial circles and among big business groups setting their economic policy objectives, has been to maximize GDP. For the most part, the economic policy making elite in elected official, among key government officials, in leading think tanks, in universities, in political party platforms, among most lobbyists, and in the punditocracy have crafted economic policies on international trade, regulations of the economy per se like minimum wage laws and antitrust laws (as opposed to regulation of the economy for non-economic reasons like national security or the environment), intellectual property, social welfare policy, and more to the goal of maximizing GDP.
These elites haven't necessarily always agreed on the best way of achieving this goal - conservatives have tended to be more skeptical that government can play a positive role through regulation, investment in the economy and redistribution of wealth than the evidence suggests and have unreasonably doubted the economic benefits of immigration; liberals have sometimes been unjustiably of the economic gains associated with international trade than is justified. But, the consensus view has been that GDP growth in the economy as a whole will generally provide less than 100% of the growth to a narrow elite that runs the enterprises that create it, thereby increasing the well being of the average American, that the best way to minimize unemployment over the long run is with long term GDP growth, and that apart from extreme situations like slavery, threats to U.S. health and safety, national security concerns, and humanitarian catastrophes, that economic policy show have GDP maximization as its goal.
More than half of century of consensus on the goal of maximizing GDP without regard to other priorities, the relatively moderate amount of harm suffered by the U.S. in World War II relative to countries in Europe and Asia that were devastated by the conflict, technological advancement, and the benefits of the immense economic scale made possible by an American empire have worked together to make great progress on that goal.
Mission Accomplished
In 2010, even near the bottom of the worst economic slump since the Great Depression that followed the financial crisis, the returns on our relentless pursuit of per capita GDP are apparent. In any really apples to apples comparison between the U.S. economy and other economies around the world, the U.S. leads the world in per capita GDP, even though eight small countries, which are compared in an apples to apples way to comparable parts of the U.S. economy, have higher per capita GDPs than the United States as a whole.
The U.S. ranks 9th in the world in per capita GDP at $47,200.
How do the other eight economies with higher per capita GDPs (and other countries with GDPs in the top twenty) do it?
Oil Rich Monarchy Microstates
Four of the nations with higher per capita GDPs (Qatar, Brunei, United Arab Emirates, and Kuwait), and one more of the countries in the top twenty for per capita GDP (Bahrain) are geographically tiny monarchies with small populations, vast oil reserves, and immense stockpiles of oil proceeds converted into sovereign wealth funds.
Spread over the entire population of the United States, the U.S. can't hope to match that model. But we do have U.S. states, like Alaska and Wyoming, with similar fossil fuel dominated economies with state per capita GDPs ($69,155 in Alaska and $68,262 in Wyoming) exceed the per capita GDPs of comparable oil rich economies in Brunei ($51,600), UAE ($49,600), Kuwait ($48,900), Bahrain ($40,300), and many modest population oil rich countries like Oman, Saudi Arabia and Libya that don't even make the top twenty for per capita GDP, although no U.S. state with a mineral based economy in the United States matches Qatar's $179,000 of per capita GDP for its 1,850,000 people that flows from crude oil reserves of 13,730 barrels of oil per capita and additional natural gas and other kinds of fossil fuel reserves, as well as the benefits it can secure from jurisdictional arbitrage as a tiny nation with the perks of sovereignty available to those willing to pay for them.
These economies are unsustainable, however. Their mineral reserves that they base their economy upon are dwindling, and a fair amount of the extracted wealth is used to sustain current consumption rather than long term investments in their nation's economic productivity. Their populations are growing (not nearly as much as they did a few decades ago, but still growing) without corresponding increases in economic productivity. These nations are benefiting from rising oil prices accruing from declining oil supplies relative to demand as the world approaches (or has entering into) a peak oil era. But, peak oil for these individual countries is in sight, and even if some technological fix in oil exploration or production can allow the world economy to come up with new oil resources that will avert peak oil in the global oil market (and unlikely, but not impossible scenario), those developments are unlikely to solve the problems these individual countries face when they run out of oil.
International Financial and Commercial Centers
In addition to the four economies with higher GDPs than the U.S. due to oil wealth (which, of course, is a non-sustainable source of wealth as their supplies will eventually run out), two more are tiny countries which owe their wealth to cherry picking affluent pockets of the European Union's financial sector into microstates and providing tax havens for hot assets.
Liechtenstein, with a population of just 36,000 people has a per capita GDP of $141,100 (not also that this is a 2008 figure, the most recent available, that may not fully reflect the effects of a recession and European sovereign debt crisis through 2010). This is the second highest per capita GDP in the world, but if confined to a country with a population which is a third of the population of a lower Manhattan city block, or a typical suburban city in an affluent U.S. metropolitan area.
Luxembourg's 503,000 people who enjoy the third highest per capita GDP (482,600) in the world after Qatar and Liechtenstein, has the population of a typical urban U.S. county or small U.S. state. This is indeed affluent, particularly given Luxembourg's lack of mineral wealth.
The United States has neighborhoods, cities and zip codes with similar populations that are at least as affluent, without the benefits of serving as tax shelters, but these pockets of great wealth are diluted statistically by less affluent neighboring areas. The per capita GDP of Washington D.C. (which is higher than that of any U.S. state) is $171,595, despite the large share of its population that lives in pretty deep poverty, and the special legal status it enjoys is in many ways comparable to the benefits that Liechtenstein and Luxembourg, Andorra (10th in per capita GDP at $46,700, just after the U.S., with population 85,000) and Switzerland (11th in per capita GDP at $42,600 with population 7,640,000).
Two other affluent counties in the U.S. have per capita GDPs a little bit greater than Washington D.C. (and hence greater than Liechtenstein, which is #2 in per capita GDP and Luxembourg which is #3 in per capita GDP) and populations on the same order of magnitude of Luxembourg or greater: New York County (i.e. Manhattan) in New York State, and Santa Clara, California (i.e. the epicenter of Silicon Valley). Santa Clara County and Manhattan rival Qatar in per capita GDP despite their absence of vast oil wealth or the perks of sovereignty that would permit them to craft laws that can be tailored to lure in outside "hot" investment.
The city-state of Singapore, which is fourth in the world in per capita GDP at $62,100 with a 5,250,000 people, relies on an international commerce based strategy similar to that of Luxembourg, Switzerland and Liechtenstein. This is less than the per capita GDPs of Delaware ($69,375, population 898,000) and Connecticut ($66,396, population 3,574,000), and probably less than the five county City of New York (exact per capita GDP unavailable, population about 7 million; New York state has a population of 19.4 million and a per capita GDP of $59,768, but New York City proper and the New York City metro area are both more affluent than upstate New York which drags down the average). A similar analysis would apply to Hong Kong if it was a nation-state instead of a dependency of China.
Colorado, with a per capita GDP of $51,213 and a population of 5,030,000 in 2010, is a bit more affluent than the national average by the per capita GDP measure in a result for a population large enough to representative. Colorado, considered on its own, has a higher per capita GDP than all but six countries (Qatar, Liechtenstein, Luxembourg, Singapore, Norway and Brunei). At least eight states and the District of Columbia have higher per capita GDPs than Colorado, while many other U.S. states are considerably less affluent than Colorado.
Modern Economies Which Also Have Oil Wealth
Two countries in the top twenty for per capita GDP, number five Norway ($54,600, population 4,690,000) and Canada ($39,400, population 34,000,000) have mixed economic production strategies. They have modern industrial/post-industrial economies shared with other affluent nations in the top twenty for per capita GDP like the USA, Canada, Australia, Austria, the Netherlands, Sweden, Iceland, Belgium and Ireland. But, both Norway and Canada also have considerable oil wealth.
Norway has about a third of the crude oil reserves per capita of Brunei, about a tenth that of Qatar and about fifteen times as much as the United States. Canada has about one and a half times as great crude oil reserves per capita as Brunei, about a third as much as Qatar, and about 79 times as much as the United States. Without oil wealth, the per capita GDP of Norway would be closer to that of its Nordic neighbors Sweden and Iceland, and probably less than that of the United States. Similarly, the per capita GDP of Canada, which is already about 1/6th lower than that of the United States, would be below that of Australia and Ireland and probably close to that of New Zealand.
Norway also benefits in per capita GDP comparisons with the U.S. from cherry picking (i.e. singling out an affluent subset of a larger European economic area for individualized statistical treatment). A number of U.S. states with populations greater than Norway's 4,690,000 people have per capita GDPs greater than that of Norway ($54,600). For example, New Jersey ($55,438, population 8,790,000), Massachusetts ($57,817, population 6,550,000), and New York State ($59,768, population 19,400,000).
Conversely, the only large political jurisdiction with a comparable population and level of affluence to the United States, which is the European Union (whether or not narrowed to the Eurozone or expanded to include the European Free Trade Area), as a whole, as a lower per capita GDP than the United States.
Data Source
This analysis is based on the latest year that consistent international statistics are easily available to me (2010) and is sourced mostly from the World Almanac 2012. The figures involved can have technical discrepencies, for example, related to international currency translations, but none of those considerations would materially impact this analysis or the analysis below, although it might slightly reshuffle some of the rankings on the per capita GDP chart.
Beyond Per Capita GDP
It would be easy to stop this analysis with the observation that the U.S. rocks and that we shouldn't change anything. And, it is correct to observe that despite widespread waning confidence about the prospects of the U.S. economy, that the small number of countries that exceed the U.S. in our own yardstick of choice for measuring economic success are outlier anomalies that don't withstand scrutiny when adjusted for the statistical limitations that arise when you compare economies of very different sizes created by gerrymandered international borders, and when you distinguish between unsustainable mineral wealth economies, vulnerable jurisdictional arbitrage economies, and more fundamentally sound broad based economies that include tens of millions and hundreds of millions of people.
The trouble is, that here at the top of the per capita GDP range in the world, it is clear that while per capita GDP is a pretty good crude indicator of national affluence, that within the high end of the per capita GDP range, that disconnects between true measures of affluence and crude per capita GDP are material.
Lots of our economic rivals are comparable to the United States in productivity per hour worked in a wide variety of industries, but have lower per capita GDP because they have made a societal choice to work less and as a result consume less, in exchange for more leisure time. The average American works longer hours each year than the average citizen of any other country in the world and our labor force participation rate is very high, particularly for those who are beyond college age. Yet, it is elementary and intuitively obvious, that at any given level of annual productivity, the individual who produces that amount while also having more leisure time, is the more affluent individual. Similarly, while few people would aggressively argue that a woman's place is in the home raising children, as Republican Presidential candidate Rick Santorum has argued, a per capita GDP measure that assigned considerable economic value to third party provision of child care in a day care center, but none to homemaking activities is clearly imperfectly accounting for the way we create value in our society. Yet, outside a few relatively obscure treatises in the simplicity movement and U.N. social welfare bodies that Americans tend to ignore, there isn't a great deal of consideration in academic economics, or U.S. economic policy, given to how we can strike the optimal balance of work and leisure as a society, and a never ending quest to maximize our nation's per capita GDP won't get us to that optimal balance.
Also, GDP turns out to be a quite inaccurate measure of the value created by economic activity in sectors like health care, where American per capita GDP values are artificially inflated because we pay more for the same or inferior health care services. Since GDP values goods and services at market cost, if prices are artificially inflated in the United States for locally provided services like health care, where prices cannot be equalized by international trade as easily as they can via trade in goods or "good-like" services like packaged software, GDP overvalues the amount of affluence that accrues to us from this spending.
In the same vein, in a classic guns v. butter conflict, the United States spends a larger share of its economy on the military than almost all of its first world neighbors, in exchange for a global security benefit upon which our allies (and even our enemies to some extent) can free ride upon, at a cost of reducing the benefit that our nation's high per capita GDP provides to us in the affluence sense.
There is also reason to question whether GDP does a very good job of capturing the costs and benefits found in other economic sectors where there is large government involvement for non-GDP related reasons, such as the criminal justice system. Americans are exceptional here as well, with the highest incarceration rate in the world, and spending on guards and prisons, on its face, increases GDP in an amount based on the amount paid for those activities, without regard to whether the benefits that accrue from that activity are good, bad or indifferent.
Finally, per capita GDP is indifferent to the distribution of wealth and income. Yet, it is widely known that the U.S. has distributions of wealth and income that are skewed to the affluent to degrees usually seen only in third world countries and on the eve of economic collapses, even after the financial crisis, while providing a much meaner existence to its less affluent citizens than almost any other first world country in the world.
The United States is clearly one of the very best places in the world to be rich. But, for those who are not in the 1%, the affluence edge that the United States has over other first world economies is not as clear. This problem, moreover, is not a temporary one. An extremely large share of our economic growth over the last few decades has accrued to the very affluent, breaking with the trend of shared gains from economic growth seen in the first half of the post-World War II economy in the United States.
And, the whole concept of an economy in which continual large amounts of economic growth on a percentage basis is necessary is itself unsustainable. At the top of the per capita GDP range, the only way to create economic growth is through original invention of more productive ways to generate economic value. Further down the rankings, for example, in developing economies in the processing of modernizing their means of production and economic structures like China, India and Latin America, it is possible to simply imitate and adapt what already developed economies have done, with capital provided by outside investors, which makes far higher and far more predictable economic growth possible.
Not entirely unrelated to the question of income distribution as it relates to national affluence is the issue of how we value democracy and freedom and distributions of power (for which distributions of income and wealth are to some extent merely a proxy), which are absent to a great extent in monarchies in oil rich microsates and also often lead to grossly unequal distributions of wealth.
So, while the United States has accomplished the economic mission which has been its top priority for the last sixty years and left us with a very worthwhile result in terms of our national affluence as a result, the time has come to pause and reassess the metrics we use to measure affluence and the quality of the economic goals we set for our nation with our revised metrics rather than continuing a blind effort to maximize per capita GDP without regard to the limitations inherent in that goal which has become apparent now that we have achieved it. We have reached a "be careful what you wish for" moment in our economic history and need to adjust our economic policies accordingly.
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