GDP and CPI: Terrible Measures of Well-Being

The world seems to believe that the economy and the stock market are performing well. Numerically, they aren’t wrong. The metrics are all at all-time highs, and paint a pretty rosy picture.

The DJIA is almost at 23,000 (I remember when they were hyping up it passing 20k). Unemployment rate is sitting at 4.1%, which is near all time lows. GDP is increasing. Everywhere we turn, people are proclaiming the greatness that the economy has become.

But is it really doing that well?

One of my favorite quotes is by Larry Wachtel in December of 1999, quoted from The Playbook: How to Think Like a Professional Trader by Mike Bellafiore. He said “Most of these stocks are reasonably priced. There’s no reason for them to correct violently in the year 2000.”

Or this one, also in 1999, by Joseph Battipaglia, a market analyst. “Some fear a burst Internet bubble, but our analysis shows that Internet companies … carry expected long-term growth rates twice other rapidly growing segments within tech.” (Courtesy of ktrotter79’s CAPS blog)

Then the tech bubble happened. The NASDAQ lost 78%.

I’m sure we will look at back at some of the things that people are saying today on TV and in magazine articles with the same sense of incredulousness.

But what’s really going on in the economy? Why aren’t things as good as they look?

My personal opinion is that despite the unprecedented growth that the market has experienced, consumers haven’t gotten the same reward.

We tend to use GDP as a measure of prosperity, as well as other easily measurable metrics like per capita income and total household wealth.

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All graphs courtesy of FRED

You can see in the two graphs that growth has occurred. Since 1980, we have more than doubled the GDP. But does that really mean that we are more than doubly better off?

I make the argument that we are not. After all, “we optimize what we measure… once a metric is selected as meaningful we strive to manage that metric to get the desired result” (

Basically, it’s like studying for the parts that you know are going to be on the test. Why would you study for things that don’t affect you immediately (but in the long run, are probably pretty important to your understanding of the subject)? It doesn’t directly reflect upon you. It’s all about short-term success.

That’s the problem with GDP. It is curated and refined to do well. And as well as it is doing, it doesn’t measure happiness. It doesn’t take into account how the environment is functioning, how secure people feel, or our overall well-being and health. It doesn’t measure community cohesion or hope in the government.

It measures how much we produce in a year.

So although the GDP has increased exponentially since 1980, a lot of people feel like consumer well-being hasn’t followed.

It’s been a struggle for the past few years for a lot of people.

Student loan debt is devouring the savings of hundreds of thousands of students, and crippling them at the time when they most need to be financially free. Trying to establish yourself as an adult is nearly impossible when you are $50k (or more) in debt.

fredgraph (2)

Courtesy of FRED

As we can see in the above graph, GDP isn’t the only thing that has been exponentially increasing. Since 2008, the student loan market has TRIPLED. 300% increase. Try to buy a house or maintain life on an entry level job salary with that weight on your shoulders.

fredgraph (3)

Courtesy of FRED

In the same time period, income has increased by about 3.5%.

There’s a few zeros missing behind that second number, if we ever want our graduates to have a chance to get out of debt. 3.5% increase in income vs 300% increase in student loan debt.

Seems a little bit off.

Not only are incomes decreasing, but things are getting more expensive.

I find it shocking that the Fed claims inflation isn’t rising, as it seems that things are steadily costing more and more.

To make it full circle, people are graduating college, entrenched in debt, getting jobs that have no wage growth, and are paying more for the same goods year over year.

And of course, inflation isn’t always a bad thing. Some claim that it means the economy is doing well. But the problem that I have is how it is measured.

There is something called hedonistic quality that is factored into the CPI, which is a measure that tracks the “improved utility” from a product. (

So when we get more for our money the price of the product is adjusted down to reflect that.

So when a TV that costs $300 had a 23-inch screen in the old days, and now has a 27-inch screen, the price of that TV is adjusted down from $300 to reflect the increase in hedonistic quality.

So the TV actually costs $300. You pay $300. But it’s reflected in the CPI as $275 because you’re getting a bigger TV. So although the price of the TV stays the same in the real world, it decreases when measuring inflation.

But I argue that most things don’t have this hedonistic quality, even though it’s factored into almost all goods. I think a lot of products and goods have had a significant decline in quality, service, and enjoyment.

Durability in technology is a good example. You are basically required to buy a new smartphone every 2-3 years because your old one is essentially phased out and stops working.

But that Nokia from 2006 probably still could make a call to your grandma in Alaska.

Also, going back to the college diploma – has that improved in utility? Has that become better quality and served a greater purpose?

It seems as though everything around us is increasing in price but decreasing in value.

I don’t like making posts like these because I generally like to have a sunny outlook on life.

But I am wholly concerned for our economy. I am worried about healthcare. I am worried about inflation. I am worried about war.

But worrying accomplishes nothing.

I hope that we can affect a change to fix things. That we can help move the financial statistics and consumer well-being in the same direction. That citizens will feel more secure, healthier, and wealthier  – because right now, they don’t.

One final graph to cement my point –  real growth has stagnated while debt is skyrocketing.


Image Courtesy of Acting Man

Something has to change.

Disclaimer: These views are not investment advice, and should not be interpreted as such. These views are my own, and do not represent my employer. Trading has risk. Big risk. Make sure that you can balance your risk/reward, and trade small, and trade often.

One response to “GDP and CPI: Terrible Measures of Well-Being”

  1. […] consumption or investment is, to an unsettling degree, a matter of convention. [read my article on CPI measurement for more about […]


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