Liberals, for their part, have long objected that many expenditures included in G.D.P. reflect reductions, not increases, in our standard of living. When crime rates increase, people spend more on burglar alarms, purchases that clearly do not signal improved living standards. A similar objection applies when tasks once performed at home are now more often bought in the marketplace  as when time-pressed parents substitute meals at fast-food restaurants for home-cooked meals.

Image Credit... David G. Klein

The bias that results from the inclusion of such expenditures in G.D.P. works in the opposite direction from the bias caused by inaccurate inflation adjustment. For all anyone knows, the two distortions may roughly offset each other.

But there is a much bigger problem, one that challenges the very foundation of the presumed link between per-capita G.D.P. and economic welfare. That’s the assumption, traditional in economic models, that absolute income levels are the primary determinant of individual well-being.

This assumption is contradicted by consistent survey findings that when everyone’s income grows at about the same rate, average levels of happiness remain the same. Yet at any given moment, the pattern is that wealthy people are happier, on average, than poor people. Together, these findings suggest that relative income is a much better predictor of well-being than absolute income.

In the three decades after World War II, the relationship between well-being and income distribution was not a big issue, because incomes were growing at about the same rate for all income groups. Since the mid-1970s, however, income growth has been confined almost entirely to top earners. Changes in per-capita G.D.P., which track only changes in average income, are completely silent about the effects of this shift.

When measuring the economic welfare of the typical family, the natural focus is on median, or 50th percentile, family earnings. Per-capita G.D.P. has grown by more than 85 percent since 1973, while median family earnings have grown by less than one-fifth that amount. Changing patterns of income growth have thus caused per-capita G.D.P. growth to vastly overstate the increase in the typical family’s standard of living during the past three decades.

Some economists have advanced an even stronger claim  that there is no link, at least in developed countries, between absolute spending and well-being. Recent work suggests that this is especially true for spending categories in which the link between well-being and relative consumption is strongest. For instance, when the rich spend more on larger mansions or more elaborate coming-of-age parties for their children, the apparent effect is merely to redefine what counts as adequate.