Economic Metrics

Are we working for the economy, or is the economy working for us?

Economic growth as a social benefit is one of the most universally agreed upon narratives in modern society. Politicians harp on it, investors rely on it, and citizens routinely rank it as one of the most important political issues during election season. Growth is, of course, necessary to sustain capitalist economies. But what is too often missing is a discussion of how economies grow, and how that growth actually delivers economic resources and opportunity across a population. 

It is important to remember that while growth is one (important) thing, prosperity is another. Economic growth is critical because it theoretically means more resources and opportunity should become accessible throughout a population. In reality, however, as inequality grows, and an increasingly large proportion of new wealth is accessible only to the super rich, we have to ask ourselves whether, although the economy is indeed growing, we have an economic system that is functioning in the way that it was intended. 

Fig. 1-2. The left graph illustrates the drastic rise in CEO compensation compared to worker compensation since the 1980s. The right graph shows the failure of the minimum wage to keep pace with economic productivity during the same time period.

When we consider whether the US economy is performing effectively, we should not only ask whether it is growing. We should ask whether Americans, on a broad scale, are being allowed to genuinely thrive. And in order to answer that question, we need to understand how we most often measure economic success and how that needs to change moving forward. 

Two of the most commonly cited economic metrics are gross domestic product (GDP) and job growth. These metrics each tell us something specific about the economy but are deeply flawed when used to explain the economy as a whole. We can understand both the value and the shortcomings of each metric by understanding exactly what they tell us. 

First, GDP: this metric tells us the monetary value of all final goods and services produced in a country in a given period of time. For reference, this number for the US was 22.4 trillion in 2019. Essentially, this is the total monetary value of all economic activity involving goods and services based in the US in 2019. This figure tells us the total size of the US economy; it also tells us nothing about how income and wealth are distributed across the US population. The 2020 GDP will tell us how much the economy grew this year, but it will tell us nothing about how that growth actually impacted people’s lives. 

Second, job growth: like GDP, the importance of this metric is obvious. For the economy to work, people need money. For people to have money, they need jobs. Job growth is a critical indicator of economic success; however, like GDP, it is flawed as a standalone metric. Using the raw number of jobs created in a given time period excludes crucial details like wage gains, full-time versus part-time work, access to benefits, labor representation, and a host of other details that are important for quality of life. If 1,000 full-time, union jobs with retirement benefits are lost during a recession and are replaced by 1,200 hourly jobs that pay minimum wage without benefits, using job growth as evidence of economic recovery would be misleading. Although more jobs exist post-recovery in this scenario, these jobs would not provide the same opportunity for prosperity as the jobs that existed prior to the recession. 

Fig 3. Since the 1980s, the cumulative change in income grew exponentially for the top 1% and 0.1% of the income distribution, while only growing minimally for the bottom 50% on average. Job growth has continued over this time period, though it has slowed over the last two decades.

This thought experiment begs the question: what would the ideal indicator of economic success be? There are alternative economic metrics that account for internal factors like inequality (Gini Coefficient), happiness (World Happiness Report), and quality of life (Human Development Index). Like the GDP and job growth, these metrics are useful but generally fall short as singular indicators of a society’s economic health.

This last point is critical: none of these indicators stand alone as objective, holistic economic indicators. The reason for this is that, although we like to view the economy as a sector with objective metrics and indicators, our interpretations of economic progress are value-laden and subject to our social priorities.

The indicators we use to evaluate economic success reveal our collective priorities and expectations of what the economy should deliver. What does it look like if we measure our desired outcomes and use our financial systems as a tool to achieve those outcomes? What would happen if we shifted our goals to measure well being instead of to measure growth?

Given the impossibility of “objective” economic metrics, we must ask the question of what, and for whom, we want the economy to provide. If we want an economy that produces equitable outcomes for all Americans, including those who have historically lacked access to economic opportunity, then we need to shift our economic narratives to emphasize metrics that prioritize and measure these outcomes.

Fig 4. Hourly median wage growth has not kept pace with productivity since the 1980s. This problem has been especially significant for people of color compared to their white counterparts.

At LifeCity, we believe in flipping this narrative. Instead of asking if the economy is thriving and making that our goal, we ask whether our community is thriving and how we can leverage the economy as a tool to achieve that outcome. That’s why we offer a place-based approach, in which “thriving” can be defined locally to ensure that the focus remains on the impact needs of specific communities, and tools like quality jobs, benefits, living wages, cost savings, and more can be measured.

American journalist Ellen Goodman says it well:

Normal is getting dressed in clothes that you buy for work and driving through traffic in a car that you are still paying for in order to get to the job that you need to pay for the clothes and the car and the house that you leave vacant all day so you can afford to live in it.

In 2020, our eyes were opened to what we believed is “normal.” We now know that we can work from home and meet virtually, leading to incredible social and environmental benefits including increased air quality, reduced GHG emissions, and reduced water pollution. And these changes can’t help but force us to ask: is the car working for us, or are we working for the car? 

It has been said that vision without action is only a dream. Action without vision just passes the time. And vision with action can change the world. 

As we look to a New Year, it’s time to offer a new vision for 2021. What will be your vision? Together, we can change the world. Join us at LifeCity!

Image source (all images): https://www.epi.org/publication/the-top-charts-of-2016-13-charts-that-show-the-difference-between-the-economy-we-have-now-and-the-economy-we-could-have/