GDP Poor Measure of Nation's Economic Health, Says Ludwig Institute Report

Median household income grew less than half per capita GDP rate, study finds

WASHINGTON, Nov. 21, 2024 /PRNewswire/ -- While U.S. Gross Domestic Product (GDP) growth has been robust in recent years, the average American has experienced a far more modest increase in income—less than half that of per capita GDP—an indication GDP may not be the best indicator of the nation's economic health, according to a new report by the Ludwig Institute for Shared Economic Prosperity (LISEP).

LISEP's new white paper Unmasking GDP: A Closer Look at the Illusion of National Prosperity reveals a stark disconnect between national economic growth and individual prosperity. While the U.S. economy surged 118% (67% per capita) after adjusting for inflation between 1992 and 2023, the median American household experienced a mere 31% increase in income. As the nation's go-to metric for assessing the health of the economy, relying solely on GDP to produce an accurate economic picture can lead to misplaced economic policy, according to LISEP Chairman Gene Ludwig.

"While the GDP provides a broad measure of economic output, it is less effective at capturing the nuances of economic well-being, particularly for individuals and households," Ludwig said. "GDP was developed nearly a century ago, and while its framework is periodically updated, it still may not fully capture the complexities of today's economy."

Ludwig noted that examples of the shortcomings of GDP as a measure of economic health include overlooking uneven growth across income distributions and geographies, overreliance on market prices to assess value of economic production, and limitations in valuing the economic impact associated with the data economy. For instance, LISEP's analysis reveals significant regional disparities in economic growth. While the national GDP increased by 45.4% between 2001 and 2021, the experiences in different regions varied significantly—San Francisco's GDP grew 87.4%, while the New Orleans economy contracted 5.2%.

In addition, GDP's reliance on market prices to measure the value of economic production can also distort understanding of economic activity, providing policymakers with an inaccurate perception of sources of economic growth. For example, unpaid work like childcare, cooking, and gardening is excluded from GDP calculations, while the value of investments in education is only partially accounted for in the short-term.

The emergence of the data economy further exacerbates GDP's limitations by underestimating the economic impact of data and information. Consumers increasingly exchange personal data for free or discounted services, a transaction that is often undervalued or overlooked in traditional economic measures like GDP, which rely on monetary transactions.

"Policymakers need focused, accurate data to make informed decisions about economic policy," Ludwig said. "Unfortunately, GDP, a single metric designed for a bygone era, is not up to the task. It's time to rethink our approach to economic measurement and consider alternative metrics that better reflect the well-being of working Americans and society overall."

About LISEP
The Ludwig Institute for Shared Economic Prosperity (LISEP) was created in 2019 by Ludwig and his wife, Dr. Carol Ludwig. The mission of LISEP is to improve the economic well-being of middle- and lower-income Americans through research and education. LISEP's original economic research includes new indicators for unemployment, earnings, and cost of living. These metrics aim to provide policymakers and the public with a more transparent view of the economic situation of all Americans, particularly low- and middle-income households, compared with misleading headline statistics. On X: @LISEP_org.

About Gene Ludwig
In addition to his role as LISEP chair, Gene Ludwig is a managing partner of Canapi LLC, a financial technology venture fund. He is the founder and CEO of Ludwig Advisors, which counsels financial firms on critical matters. Ludwig is also the founder of the Promontory family of companies. He is the former vice chairman and senior control officer of Bankers Trust New York Corp. and served as the U.S. Comptroller of the Currency from 1993 to 1998. He is also author of the book The Vanishing American Dream, which investigates the economic challenges facing low- and middle-income Americans. On X (formerly Twitter): @geneludwig.

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SOURCE Ludwig Institute for Shared Economic Prosperity