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Beyond GDP

from David Ruccio

The idea that GDP numbers don’t tell us a great deal about what is really going on in the world is becoming increasingly widespread.


David Leonhardt, in reflecting the emerging view, has argued that GDP doesn’t “track the well-being of most Americans.”

Now, we’d expect that someone like socialist Democratic candidate Bernie Sanders would question the extent to which the low unemployment numbers, associated with economic growth, hardly tells the whole story about the condition of the American working-class.

Unemployment is low but wages are terribly low in this country. And many people are struggling to get the health care they need to take care of their basic needs.

But even centrist candidates Joe Biden and Pete Buttigieg are making the case that the headline numbers, such as Gross Domestic Product and stock indices, hide the fact “that a very different reality exists for many Americans who have not seen much improvement in their own bottom lines.”

And one of the last people you’d expect to question the shared gains from economic growth, Robert Samuelson, thinks that “something momentous is clearly occurring.”

economic inequality continues to rise at a steady pace; the further you go up the income scale, the larger the income gains, both relatively and absolutely. . .

The great danger here is social and political. It is the creation, or the expansion, of a multi-tiered society where the largest income gains are enjoyed by relatively small groups of people near the top of the economic distribution.

So, let’s step back a bit and see what these numbers reveal—and what they mostly hide.


First, as is clear from the chart immediately above, the growth in the value of U.S. stock markets (as measured by the S&P 500 Index, the red line) doesn’t tell us much about actual economic growth (as indicated by the value of Gross Domestic Product, the blue line). For example, between 2010 and 2019, the stock market increased by 163 percent, while GDP grew by only 46 percent.

Second, neither number alone indicates what is happening to the vast majority of Americans. For example, as I argued back in 2017, ownership of stocks in the United States is grotesquely unequal: while about half of U.S. households hold stocks in publicly traded companies (directly or indirectly), the bottom 90 percent of U.S. households own only 18.6 percent of all corporate stock. The rest (81.4 percent) is in the hands of the top 10 percent.

Well, then, what about GDP?

fredgraph (1)

It’s obvious from this chart that the increases in all the indicators of average income in the United States—real median personal income (the red line), real mean personal income (green), and real median household income (purple)—are much lower than the increase in real (inflation-adjusted) GDP. Those discrepancies reveal the fact that the average person or household is benefiting much less than they otherwise would from economic growth. And, of course, the gap increases over time, as in every year people fall further and further behind.

So, all that the GDP numbers indicate is that the monetary value of final goods and services produced and sold in the United States—the “immense accumulation of commodities” that represents the wealth of a capitalist society—is growing. But it doesn’t tell us anything about who gets what, that is, how the incomes generated during the course of producing those commodities are distributed. In other words, GDP numbers are a poor indicator of people’s well-being.

So, what would tell us something about how Americans are faring in the midst of the so-called recovery from the Second Great Depression?

Leonhardt’s view is that “distributional accounts”—that is, estimates of income shares for every decile of the income distribution, as well as for the top 1 percent—will change the national discussion whenever GDP numbers are released.

I don’t know if they’ll change the terms of debate but they will certainly challenge the presumption that GDP (and other headline numbers, such as stock market indices) accurately the economic and social health of the nation.


Thus, for example, as Emmanuel Saez (pdf) has shown, by 2017, real incomes of the bottom 99 percent had still not recovered from the losses experienced during the initial years of the Second Great Depression (from 2007 to 2009), while families in the top 1 percent families captured almost half (49 percent) of total real income growth per family from 2009 to 2017. And, as a result of growing inequality, the 50.6 percent top 10 percent income share in 2017 (with capital gains) is virtually as high as the absolute peak of 50.6 percent reached in 2012.


Moreover, according to the Congressional Budget Office (pdf), income before transfers and taxes is projected to be more unequally distributed in 2021 than it was in 2016. And while means-tested transfers and federal taxes serve to reduce income inequality, the reduction in inequality stemming from transfers and taxes is actually projected to be smaller in 2021 than it was in 2016.

All of these distributional effects of the current mode of production in the United States are hidden from view by the usual headline economic numbers.

But there’s one more step that can and should be taken. The distributional accounts that have been used to change the discussion focus on the size distribution of income, that is, the distribution of income to groups of individuals (and individual households) that make up the population. What is missing, then, is the factor or class distribution of income.


In the chart above, I have illustrated the changing ratio of corporate profits to workers’ wages in the United States from 1968 to 2018.* Two things are remarkable about the trajectory of this ratio. First, beginning in 2001, the ratio more than doubled, from a low of 0.31 to a high of 0.70 (in 2006). And, second, even though the ratio has fallen in recent years, it still remains as of 2018 much higher (at 0.52) than during the pre-2001 period.**

However inequality is measured—in terms of the size or class distribution of income—it is obvious that most Americans are not sharing in the growth of national income (or, for that matter, the stock-market gains) in recent years.

The focus on GDP (and stock indices, unemployment rates, and the like) serves merely to hide from view what the American workers clearly understand: they’re being left behind.


*This is the ratio of, in the numerator, corporate profits before tax (without IVA and CCAdj) and, in the denominator, the total wages paid to production and nonsupervisory workers (assuming a work year of 50 weeks). It is clearly similar to but different from the Marxian rate of exploitation, surplus-value divided by the value of labor power—since, among things, it does not include distributions of the surplus to members of the top 10 percent in the numerator.

**A third observation is also relevant: the ratio of profits to wages has fallen prior to every recession since 1968. The recent decline in the ratio (since 2013) therefore portends another recession in the near future. However, I’m no more keen on making predictions than on coming up with New Year’s resolutions. It was John Kenneth Galbraith who wisely wrote, “There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.”


  1. January 3, 2020 at 4:04 am
  2. Ahmed Fares
    January 3, 2020 at 6:54 am

    “In the chart above, I have illustrated the changing ratio of corporate profits to workers’ wages in the United States from 1968 to 2018.”

    This ratio is misleading because it records the increased corporate profits due to foreign operations, which have increased with globalization, without including the foreign labor associated with those profits. I’ll let Tim Worstall weigh in here:

    These are not profits being made in the US economy, but they are profits that accrue to American companies. So it’s not really correct to think of this as being an increase in the profits being made out of the US economy.

    Somewhere at the back of my mind is also the idea that comparing this measure of corporate profits to GDP is actually wrong in itself. It should be to GNP (or perhaps even the difference between Gross National Income and Gross Domestic Income?). One of the differences between GDP and GNP being that we do in fact adjust our profits measure for those foreign made profits between the two measures. However, as far as I can see BEA doesn’t actually produce a purely domestic profits number but I’d obviously welcome direction from those who know these statistics better than I do.

    The bottom line of this particular method of measuring the rise in corporate profits as a percentage of GDP is that a goodly part of it, at least 1 percentage point of GDP (and I’d probably argue higher than that, 1.5 to 2% but without much evidence), is simply that globalisation means that American based companies are earning greater profits abroad.
    [end quote]

    • campos_69_@hotmail.com
      January 3, 2020 at 4:16 pm

      No is bad, is correct. You compare the profits that the people and firms receives with the wages that the people receive, all correct!

      Is stupid if you compare the profits with the internal wages or internal profits with the incomes of wages. Don´t exist the internal profits, because the internal firms have operations in the external world.

      • postkeynesian spain
        January 3, 2020 at 4:17 pm

        No is bad, is correct. You compare the profits that the people and firms receives with the wages that the people receive, all correct!

        Is stupid if you compare the profits with the internal wages or internal profits with the incomes of wages. Don´t exist the internal profits, because the internal firms have operations in the external world.

    • postkeynesian spain
      January 4, 2020 at 9:34 pm

      you are bad, the graphic is correct.

      The profits are being made in US economy. If for example ford have a secundary firm in Spain, the profits from Spain will going to US because the assets (share) is in US.

      And compare with wages is correct, because the wages are the receives for employees (for examples wages from external firms if the employees from US provides services), both are national, wages and profits.

      Domestic profits don´t exist in a open economy, is a fiction, because the domestic firms have external shares of others firms.

      • Ahmed Fares
        January 4, 2020 at 11:18 pm

        postkeynesian spain,

        You obviously did not understand my comment so I’ll repeat it here. It just so happens that I have an example using autos from “Philosophical Economics”, who has done much research in this area:

        General Motors (GM) operates numerous plants in China. Suppose that one of these plants produces and sells one extra car. The profit will be added to CPATAX–a U.S. resident corporation, through its foreign affiliate, has earned money. But the wages and salaries paid to the workers and supervisors at the plant, and the compensation paid to the domestic suppliers, advertisers, contractors, and so on, will not be added to GDP, because the activities did not take place inside the United States. They took place in China, and therefore they belong to Chinese GDP. So, in effect, CPATAX/GDP will increase as if the sale entailed a 100% profit margin–actually, an infinite profit margin. Positive profit on a revenue of zero.
        [end quote]

        Hope that makes it clear.

      • postkeynesian spain
        January 5, 2020 at 2:11 am

        Was a error with the comments …

        You didn’t understand my example and I understand all, and I sorry but “Philosophical Economics” not is exactly a expert in this …

        A enginer works for GM in China, the enginer have a wage for design services, now:

        GDP in US: Increase 0
        Wages in US: Increase equal to external wage

        Comparsion profits with wages is corret, because the wages are international like the profits.

        You and “Philosophical Economics” are bad if think that profits are a component of GDP…

        If you search the profits in Z1 of FED, you can look this with the wages in “F3: Distribution of National Income”, the wages aren´t a component of “F2: Distribution of Gross Domestic Product”.

        Is basic, fuck!

      • postkeynesian spain
        January 5, 2020 at 2:15 am

        You said:

        “This ratio is misleading because it records the increased corporate profits due to foreign operations, which have increased with globalization, without including the foreign labor associated with those profits. I’ll let Tim Worstall weigh in here:”

        HAHAHAHA, no!

        The ratio show that the firms in US have more success with the globalization than the workers.

    • postkeynesian spain
      January 5, 2020 at 2:15 am

      You said:

      “This ratio is misleading because it records the increased corporate profits due to foreign operations, which have increased with globalization, without including the foreign labor associated with those profits. I’ll let Tim Worstall weigh in here:”

      HAHAHAHA, no!

      The ratio show that the firms in US have more success with the globalization than the workers.

  3. Ken Zimmerman
    January 4, 2020 at 11:37 am

    New York senator Robert Kennedy called on Americans to rethink their metrics of success and demanded a new way to measure the collective good. In a campaign speech at the University of Kansas in March [1968], he was unsparing in his critique:
    “Too much and too long, we seem to have surrendered community excellence and community values in the mere accumulation of material things. Our gross national product . . . if we should judge America by that, counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for those who break them. It counts the destruction of our redwoods and the loss of our natural wonder in chaotic sprawl. It counts napalm and the cost of a nuclear warhead, and armored cars for police who fight riots in our streets. It counts Whitman’s rifle and Speck’s knife, and the television programs which glorify violence in order to sell toys to our children.
    Yet 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. And it tells us everything about America except why we are proud that we are Americans.”

    Dismal assessment of GDP. Not much has changed since 1968, it seems.

    • Meta Capitalism
      January 5, 2020 at 12:41 am

      New York senator Robert Kennedy called on Americans to rethink their metrics of success and demanded a new way to measure the collective good. ~ Ken’s Timely and Relevant Citation

      Great citation Ken. That is a keeper.

      • January 5, 2020 at 9:30 am

        Agreed. I’ve just copied it off to my MP.

  4. Ahmed Fares
    January 5, 2020 at 12:38 am

    Another error in this article is that Mr. Ruccio compares GDP, which is a flow variable, to the S&P 500, which is a stock variable. So much for stock-flow consistency.

    Apples and oranges.

    Rising stock prices do not make people richer. They pull forward future returns. Mr. Ruccio could have plotted GDP against the S&P Dividend Yield, which is a flow variable. He would have seen them diverging instead of converging:

    As of June 2019, the dividend yield for the S&P 500 was 1.85%. This is below the historical average of 4.41%. —Investopedia
    [end quote]

    • postkeynesian spain
      January 5, 2020 at 2:22 am

      This is correct if you understand the meaning, but obviously you cannot understand anything.

    • Ahmed Fares
      January 5, 2020 at 2:56 am

      Further to my comment and in the interest of clarity…

      The correct thing to compare to GDP is not the S&P 500 Dividend Yield, which as a ratio is a pure number, but rather the dividends themselves.

      As for postkeynesian spain, stop being a troll.

  5. postkeynesian spain
    January 5, 2020 at 4:07 am

    “The chart shows the market value of all publicly traded securities as a percentage of the country’s business–that is, as a percentage of GNP. The ratio has certain limitations in telling you what you need to know. Still, it is probably the best single measure of where valuations stand at any given moment.”

    Warren Buffet.

    I suppose that Warren Buffet is a troll also, but you and “Philosophical economic” know the true…


    • Ahmed Fares
      January 5, 2020 at 6:08 am

      postkeynesian spain,

      What you’re describing is the Buffet Indicator. Buffett wasn’t comparing the stock market to GDP, he was comparing the ratio of the stock market to GDP at one point in time to the ratio of the stock market to GDP at another point in time, and using GDP to normalize the data.

      Because GDP is in the denominators of both ratios, it cancels out leaving just the growth rate of GDP in the final ratio, thus removing that distortion from the final ratio. This is not the problem I was describing, i.e., comparing a stock variable to a flow variable.

      No, what Buffett is doing is comparing a normalized stock variable to a normalized stock variable.

      Try to keep up.

  6. postkeynesian spain
    January 5, 2020 at 1:41 pm

    But is so similar, because the ratio go to top or down if one growth more than other, and It isn’t change if both growth same.

  7. ghholtham
    January 5, 2020 at 7:14 pm

    If GDP is measured consistently, it includes the profits generated on US soil by foreign corporations and excludes the profits made by US-owned corpoations generated outside the US. It is defined as the economic production generated within the US, irrespective of ownership. The main difference between GDP and GNP is the net difference between US corporates’ profits earned abroad (which are in GNP not GDP) and foreign-owned profits earned in the US. (which are in GDP not GNP). Wages are recorded as part of the GDP in the country where they are earned, irrespective of the nationality of the wage earner. In principle, therefore, the ratio of profit to GDP is not affected by profits earned abroad.

    If we define income as a change in wealth, a change in stock market valuations is a form of income. The owner could sell shares equal to the increase in value and enjoy the proceeds while still having the same wealth stock as he/she had at the beginning of the period in question. If you want to compare such holding gains to other forms of income, it makes sense. Note though that if you want to compare the growth of GDP to something, that has to be the growth in the change of stock market valuations, ie the second difference of the index, not the first. For that reason the graph shown is uninformative

    • postkeynesian spain
      January 5, 2020 at 8:54 pm

      Other crazy with all bad, mother of god…

      Is joke, but are you philosophic economic? Hahaha

  8. David F. Ruccio
    January 5, 2020 at 8:47 pm

    Thanks, as always, for all the comments, criticisms, and suggestions. A couple of quick responses:

    1. On the GDP/S&P comparison. I understand the difference between stock and flow but that doesn’t matter here. Both numbers indicate a level of economic activity: the monetary value of the value of goods and services produced and exchanged (GDP) and an index of the value of corporate equities (S&P 500). For my purposes, all that mattered was the percentage change in the two measures from 2010 to 2019 and, because of the difference, that neither told us what was happening with the other.

    2. On profits and wages. This is another case where GDP (and, for that matter, GNP) are limited indicators, for two reasons: U.S. corporations can make profits on foreign operations and foreign corporations can make profits on U.S. operations. Plus, both groups of corporations can make profits not only by extracting surplus from their workers, but also by capturing surplus extracted by other corporations (both inside and outside the U.S.). So, the profit-wage ratio I used is limited to corporate profits inside the U.S. (so, it excludes the foreign profits of U.S. corporations but includes the U.S. profits of foreign corporations) in comparison to workers’ wages inside the U.S. (and so excludes the wages of workers outside the U.S. whence a share of U.S. corporate profits derives). In my mind, it still serves as indicator, albeit limited, of the factor/class distribution of income in the United States.

    Let the discussion continue. . .

    • Ahmed Fares
      January 5, 2020 at 9:42 pm

      Mr. Ruccio,

      As regards the first point, John Cochrane has a timely article that addresses this exact point. Here is a slice:

      A lot of the rise in “wealth,” and “wealth inequality,” even properly defined and measured as the market value of net assets, consists of higher market prices for the same underlying physical assets. In turn, higher asset prices stem almost entirely from lower real interest rates and lower risk premiums, not from higher expectations of economic growth.

      This raises a deep “why do we care” question. Suppose Bob owns a company, giving him $100,000 a year income. Bob also spends $100,000 a year. The discount rate is 10%, so his company is worth $1,000,000. The interest rate goes down to 1%, and the stock market booms. Bob’s company is now worth $10,000,000. Hooray for Bob!

      But wait a minute. Bob still gets $100,000 a year income, and he still spends $100,000 a year. Absolutely nothing has changed for Bob! The value of his company is “paper wealth.”

      We compare Bob to Sally, who earns $100,000 per year wages and has no assets. The distribution of income and of consumption is entirely flat. But the distribution of wealth was already concentrated: Bob had $1,000,000 of wealth, because we ignored Sally’s human wealth, the present value of her salary. Now wealth inequality is 10 times worse, because we also ignore the higher capitalized value of Sally’s human wealth.
      [end quote]

      link to article: https://johnhcochrane.blogspot.com/2020/01/wealth-and-taxes-part-ii.html

      (The above is a link to a two-part article. You can find a link to the first article in the above article.)

      As for the second point, I do understand that if there was an equal amount of investment between countries, then the distortions in the ratios would cancel out. But as I understand it, this is not the case and the US also earns higher returns on its foreign investments than foreigners earn on their US investments.

    • postkeynesian spain
      January 14, 2020 at 9:35 pm

      Sorry David, but that compaison don’t have sense…

      Wages of peoples from US with profits that Will gone to China or other countries…

  9. ghholtham
    January 6, 2020 at 12:33 pm

    As a practical matter Bob can more easily adjust his spending over time than Sally can. Borrowing against future wage income without collateral is a usually a good deal more expensive than selling shares. When the interest rate drops to 1 per cent, Bob can sell, say, one tenth of his shares for $1 million or ten year’s income. True, his annual dividend receipts will fall to $90,000 because of his reduced holding in the company. Bob may well decide this is a good deal. He may not live much longer than ten years anyway. And if interest rates rise again he can buy the shares back for less than he sold them if he doesn’t spend the money.
    Sally will not find it easy to borrow ten years’ income unless she has an asset to mortgage.. Essentially Bob can trade shares whenever the interest rate differs substantially from his rate of time preference. Sally is unlikely to enjoy that facility.
    Bottom line: paper wealth is wealth in a very convenient form. When comparing relative wealth it isn’t obvious either we should include Sally’s “human capital” because in this model we haven’t been told the status of Bob’s human capital. Is he an idle rentier of his company or does he work in it? If he does I bet he pays himself a salary quite apart from his dividends. He has human capital too.

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