GDP: Not All It’s Cracked Up to Be?

The headline reads “U.S. Climate Bill Could Cut GDP 3.5 Percent by 2050.” Should we care?

The gross domestic product or GDP is the sum total of all the goods and services sold (i.e., produced) in an economy over a 12-month period. (A nice exposition of the genesis of the GDP can be found here. Also, I wrote about GDP on Monday in the context of that headline quoted above.)

GDP is generally viewed as the end-all and be-all of economic diagnosis. Are we still in a recession? Is the economy healthy? Check the GDP. If it is rising, all is well. If it’s rising really fast, even better. If it’s falling, watch out — bad news. But is our obsession with the monetary value of all goods and services exchanged in our economy well placed?

That there are flaws in the GDP metric is well-known. We are all familiar with the fact that U.S. GDP rose over most of the 1990s and early 2000s but wages did not. If our GDP is rising because Americans are working longer hours without seeing any benefit, is our economy really improving? And what about unpaid work that benefits our society, like child-rearing, homemaking, and volunteer work? Such typically unpaid jobs do not add to the GDP, but don’t they add to our national well-being?

The Problem With GDP: What It Neglects to Factor In

From the environmental side, consider the razing of a forest.

The sale of the fallen trees for timber adds to the GDP, but what is not accounted in the GDP equation is the loss of highly valuable ecosystem services like clean water and carbon sequestration as a result of the forest’s destruction. If those services are worth more than the timber — and they often are (see here) — our national wealth will have actually decreased even though the GDP metric says we are better off.

The same can be said for overfishing the ocean, poisoning our waterways with fertilizers, and drawing down water in aquifers to keep our lawns green.

Attempts at a Better Metric Have So Far Failed

Over the years attempts to correct these deficiencies have failed. Such efforts reached a zenith in the 1990s, when economists such as Peter Bartelmus of the Bergische Universität Wuppertal in Germany began to propose alternate measures — like the “Green GDP” or the Environmentally-Adjusted Domestic Product (EDP) — that factor in environmental assets and services into the overall equation.

In 1992, the U.S. Bureau of Economic Analysis began work on a more inclusive accounting system called the Integrated Environmental and Economic Accounts. But just three years later, this attempt to revise GDP was effectively dead — killed by an amendment that Democratic Representative Alan Mollohan of West Virginia attached to the House appropriations bill cutting off funding. Some have speculated that coal interests played a role in killing the initiative, perhaps because a Green GDP would downgrade the economic value of mining and burning coal. Since then, no serious attempt has been made to revise U.S. GDP to get a more accurate reflection of the economy.

In 2004, after receiving much criticism from the United Nations and other international bodies for its environmental policy, China took up the mantle, announcing that it would replace its conventional GDP index with a Green GDP. In 2006 the first report to use a partial Green GDP accounting method showed a three percent drop in overall productivity. That turned out to be China’s first and last Green GDP assessment. It’s a safe bet that the program was scrapped because the Chinese powers that be demand continuous economic growth and such growth is not always possible in modern-day China if environmental assets are included.

The Untied States has a much better environmental record than China, but in the final analysis, wasn’t the political imperative to have a growing economy also at the heart of the Congressional decision to scrap our own attempt at a Green GDP?

New Report Marks New Effort to Find Better Measure of Economy

Now into the fray steps the Commission on the Measurement of Economic Performance and Social Progress, chaired by the Nobel Prize-winning economist Joseph Stiglitz of Columbia University. The report, issued last week, suggests, that as a measure, GDP is failing us because it does not capture what we really want it to measure: quality of life. Further, if GDP is a poor indicator of current well-being, it not only affects present economic assessments but is probably skewing our future choices as well — like whether a 3.5 percent drop in GDP is worth avoiding dangerous climate change (see my post) or whether decreasing the fish catch is worth keeping fisheries sustainable over the long haul.

Will the Stiglitz report spark a renewed attempt to incorporate broader metrics for assessing the state of the U.S. economy and well-being of Americans? It’s hard to say. Already some are attempting to dismiss the report because it was commissioned by French President Nicolas Sarkozy. In the meantime we can look forward to many more headlines (see here and here) about the ups and downs of the GDP.

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