The Gross Domestic Product, our most-quoted economic indicator, keeps growing ... things must be getting better, right? As the song goes, 'it ain't necessarily so.'
by Peter Montague
hen Bill Clinton promised to "keep growth going" and Bob Dole promised to "get the economy moving," they both were vowing to increase Gross Domestic Product, or GDP. GDP is the standard measure of the nation's total economic activity, and it is assumed to translate directly into well being. If GDP rises rapidly (say, 4 percent per year), things are assumed to be getting much better. If GDP rises slowly (say, 1.5 percent per year), things are not so good. Government officials first began measuring national economic activity this way in 1932; ever since then, the nation's main goal has been to increase GDP. (Actually, up until 1991, we measured GNP, or Gross NATIONAL Product. In 1991 we shifted to measuring Gross DOMESTIC Product. GNP and GDP are quite similar measures, unless you live in a developing country, in which case they definitely are NOT the same).
Simply put, GDP is a measure of all market activity, all money that changes hands in a country during a year. GDP measures total output, the dollar value of all finished goods and services.
Now some economists are asking whether the GDP is an adequate measure of the nation's well being. When GDP goes up, are the American people necessarily better off? They point out, for example, that real wages have declined nearly 14 percent since 1973 while GDP has risen 55 percent during the same period. GDP seems to be missing what's actually going on. GDP says we are better off, but are we really? It's a fair question.
A number of economists are rejecting GDP as the basic measure of the nation's well being, and are proposing an alternative measure, which they call GPI (genuine progress indicator). Three economists in particular (Clifford Cobb, Ted Halstead, and Jonathan Rowe) point to at least 3 major problems with GDP:
1. GDP only counts money transactions, so it leaves out many "goods" that people provide for each other free.
Major parts of the household economy are ignored. Examples: care for the elderly and for children, home maintenance and cleaning, food preparation, and voluntary service for neighborhood, church and civic groups. GDP assigns all these activities a value of zero. This can lead to distorted public policies. For example, if the "Family Leave Act" is criticized because it reduces GDP, such a criticism is inaccurate because it fails to reflect the increases in many household economies that the Act initiates.
2. GDP treats all transactions as positive.
Crime, divorce, pollution, and depletion of natural resources are all treated as gains. Thus GDP treats the breakdown of the social structure and the natural environment as gains. If someone buys a car, GDP goes up. If the car gets into an accident and requires major repair, GDP goes up. If the driver is hospitalized, GDP goes up. If a lawsuit follows, GDP goes up again. GDP makes no distinction between activities that contribute to well being and those that diminish it. It's like keeping accounts using a calculator that has an "add" function but no "subtract" function. So long as money changes hands, GDP increases. Any business that kept its accounts this way would never know where it stood. Such a business would have an exceedingly rosy picture of its condition, but it would be a false picture. So it is with countries that rely on GDP to measure well being.
3. GDP treats depletion of natural capital (assets) as current income - an obvious violation of good accounting principles.
If a forest is converted to lumber, or farmland is turned into parking lots, GDP treats all the money involved as current income and none of it as capital depreciation. Again, any business that kept its accounts this way - treating depletion of assets as current income - would have a very rosy picture of its financial condition, but the picture would be quite wrong. So it is with countries that rely on GDP to measure well being.
Much of GDP is made up of three things:
1. Fixing mistakes and social failures from the past.
Superfund sites are an example. Such cleanups just get us back to where we once were; they are not real progress. The prison system is another example. Prisons are a response to earlier failures to help young people gain a valued place in the economy and society. Superfund sites and prisons are not progress, yet the GDP treats them as if they represented real gains in well being.
2. Borrowing resources from the future.
Agricultural output grows each year because of enormous chemical use, but this occurs at the expense of depleted natural capital (fertile soil and clean water). This represents a borrowing from our children. It imposes real costs on future generations. GDP treats these costs as zero or, even worse, as positive contributions to the nation's well being. Obviously, this is an inappropriate accounting practice.
3. Shifting functions from the traditional household and community to the monetary economy.
In each of these cases, free services (free in the sense of not being compensated by money) have disappeared; in their place, a monetary relationship has been established. In many instances, this represents an INCREASE in GDP but a DECREASE in the strength of the social fabric that holds communities and families together.
New measures of progress are needed. The GDP is giving us a false sense of well being. GDP makes no distinction between the secure skilled worker in a high-paying job and the recently-laid-off worker who is holding down two jobs without benefits just to make ends meet. Clearly, their incomes do not represent equivalent levels of well being. GDP treats pollution as a double positive - it is counted as a gain when it is first created as a by-product of some other activity, and it is counted as a gain again when society pays to clean it up. Several new measures of well being have been established. The one we like best is called the Genuine Progress Indicator, or GPI, developed by an organization called Redefining Progress in San Francisco.
The GPI starts with the same data that underlies the GDP, but then it is modified by both additions and subtractions.
The GPI is "conservative" in the sense that it does not go as far as it could in subtracting negative factors. For example, loss of species is omitted entirely because the authors couldn't put a dollar value on species lost. Likewise, many Americans regret much of their consumption and this could be subtracted from GDP because it represents a "negative" in many peoples' lives. For example, half of all Americans believe they are overweight from eating too much, and 70 percent of cigarette smokers wish they could quit. Clearly such "addictive consumption" could be subtracted from GDP, but GPI does not go this far.
In sum, GPI is an important and reasonable new attempt to measure well being. It tries to take into account real factors that GDP ignores - real positives (such as household work) and real negatives (such as time spent commuting to work) - to give a better overall measure of the economy as people actually experience it. Figure 1 shows the result: when social and environmental costs are take into account, the overall health of the U.S. economy has steadily declined since the mid-1970s.
Peter Montague, National Writers Union, UAW Local 1981/AFL-CIO. Reprinted from Rachel's Environment & Health Weekly #516, Environmental Research Foundation, P.O. Box 5036, Annapolis, MD 21403-7036, Internet: erfrachel.clark.net.