Towards Mindful Growth and Genuine Measurement

Allie Smith, Economics and Environmental Studies '15 April 3, 2014 Domestic 1
 

Wikipedia Commons

Wikipedia Commons

In 1968, Robert Kennedy made history with the bold statement that: “[the Gross Domestic Product] measures everything, in short, except that which makes life worthwhile. And it can tell us everything about America except why we are proud that we are Americans.”

Over 40 years later, Kennedy’s words fall on still-deaf ears, as the GDP remains a prevalent metric used in analysis of the national welfare. The problem is not with GDP itself, but rather the maximalist approach that policy makers, the public, and the American news media take towards using it as a proxy for well being  — a purpose for which it was not designed. Understanding the volume of market activity occurring in a given time period is the limited use the GDP can provide, though it is more often unsuitably used to indicate the health of the economy, make international comparisons, and estimate overall prosperity.

As taught in every ECON 101 class, GDP is an estimate of market throughput, adding together the value of all final goods and services that are produced and traded for money within a given period of time, in a given economy. It is usually measured in one of three ways: firstly, on an expenditure basis, or how much money total was spent; secondly, on an output basis: how many goods and services were sold; or thirdly, on an income basis: how much total profit was earned.[1] Many vital economic activities are left out of the GDP’s simplified equations. For example, those hours volunteered helping a friend move apartments? The economic and social benefits a family receives when a parent stays at home? Money earned or spent on under-the-table labor, like a babysitter? Since they are not officially bought or sold on the market, the associated value added to the economy by these activities is nonexistent.

The authority given to GDP in most discussions conceals a variety of other problems with the metric from the average observer. For instance, there are a number of objectionable ways to “grow the economy” every day; car crashes, natural disasters, easily broken electronics, and massive oil spills all contribute positively to the GDP since their responses result in further spending. For example, the associated costs of cleanup from the BP oil spill in 2010 contributed a significant $20 billion to economic growth, when measured by the GDP.[2]

How can such a seemingly illogical measurement still be conventional in the world’s most advanced economic era? One of GDP’s principal functions is to remove value judgments from any and all spending.[3] The market is blind, counting every dollar spent identically, whether it’s to pay for a child’s school materials or to fuel a vehicle involved in an armed burglary.

Separating ethics from analysis, as the GDP succeeds in doing, can continue to serve economic analysis. The problem with GDP isn’t its existence. The crux of the problem is that its accepted relevancy extends into a sphere in which it has no pertinence: social welfare.

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Despite its narrow capabilities to do so, GDP is still one of the most widely cited metrics used to compare the relative success of different countries. The national fixation with monitoring the growth of China’s GDP (which, at its current estimated growth rate of 7 to 10 percent per year, will likely overtake the US by 2017 at the latest) alludes to this illogical convention. A study conducted by YouGov in 2012 suggests that about half of Americans see it important that the US’ GDP stay in front of China’s.[4] Being “the best” at GDP is a point of national pride, when it is far from one of the most capable indicators of measuring things that truly matter to people. China’s soaring GDP, for example, will also be accompanied by heavily restrained civil and political rights, nearly unlivable urban air quality, and immense poverty; despite this, a significant proportion of national discussion is dedicated to international comparison of this one limited indicator.

We’ve been trained — perhaps brainwashed — to equate any sort of numeric growth, regardless of its positive or negative societal or environmental impacts, as an indicator of advancement.

This way of thinking is like using energy consumption in a factory as a proxy for worker well being; certainly, some fixtures that use energy will add to the comfort of employees. Heating, lighting, and making a kitchen available for lunch hour all use energy and will lead to greater worker satisfaction. But to encourage relentless, rapid amplification of energy usage – leaving the lights on in the building after the work day is over, unnecessary elevator use, and blasting the temperature controls – will lead to environmental damage and unhealthy, unhappy workers. The policy conscription for rapid economic growth that has dominated the last century is just as spurious as this ostensibly ineffective management strategy.

 

Assessing Damage, Moving Forward

Basing a century of policy decisions on limitless growth has come with grave environmental and social consequences. The global drive towards growth that rewards expansion of the fossil fuel energy sector is leading the planet towards irreversible climate change. The heaviest impacts are likely to be felt by those already in poverty, living in the places most vulnerable to sea level rise and changes in rainfall patterns. Striving towards the highest achievable economic growth, not the most sensible or favorable to a majority of society, has exacerbated problems of wealth inequality and overall poverty. According to the Pew Research Center, income inequality in the United States is now the highest it has been since 1928.[5]

Furthermore, in 2013, the “rising tide” of continued economic growth has left almost 50 million Americans still living in poverty according to the US Census Bureau.[6]

It is unquestionable that the policy conscription for heedless growth, and the limited metrics that come with measuring it, must be augmented. To move away from growth as the primary indicator of national well-being, one must consider indicators of success that extend beyond pure economic measures.

One such alternative indicator is the National Happiness Index, created by the Kingdom of Bhutan, which takes a more holistic view of its national success by measuring the spiritual, environmental, physical, and social health of its citizens.[7] The Human Development Index, published by the United Nations in 1990 to measure how human progress is improving, calculates “longevity, knowledge and living standards” as proxies for national success. And the Ecological Footprint calculates society’s environmental impact by determining the area of “biologically productive land and water an individual, population or activity requires to produce all the resources it consumes and to absorb the waste it generates”.[8]

These and other nonfinancial indicators can serve as useful supplementary metrics that help contextualize social and economic growth. Individually, they provide insight into important but distinct aspects of development, though none provide a holistic picture of progress. Another lineage of indicators attempts to combine all aspects of environmental, social, and economic development, providing one comprehensive metric — these indicators seek to totally replace GDP rather than supplement it.

 

Measuring Genuine Progress

In the offices of the Maryland Department of Natural Resources, data analysts work to update the annual publication of the Genuine Progress Indicator, one of the most prominent holistic indicators. The GPI builds off of GDP (or in Maryland’s circumstance, Gross State Product) as a foundation.  Its crucial distinction is the adjustments it makes to subtract for income inequality, costs of crime, environmental degradation, and loss of leisure; and incorporate public services as well as the benefits of volunteering and housework and a range of other indicators — 26 in total.[9]

When Maryland first measured GPI in 2009, researchers identified a two-fold decrease in measured economic progress from GDP to the measured “genuine” progress made by the state in the measured time period.  The drastic change is attributable to the traditional measure’s propensity to ignore environmental and social costs. For example, converting coastal wetlands into housing developments is explicitly counted as an economic benefit in the GDP. Its ultimate ecological costs (increased hurricane damage, species loss) that society will pay down the road are ignored. Genuine Progress Indicator incorporates these overlooked externalities.[10]

Professor Matthias Ruth led the initiative as director of the University of Maryland’s Center for Integrative Environmental Research (CIER) when the state began calculating GPI. Ruth is now a professor in the School of Public Policy and Urban Affairs and the Department of Civil and Environmental Engineering at Northeastern University, where he teaches a class on Ecological Economics. “There are a host of alternative approaches we could have chosen for Maryland,” he said. “At the end, we settled on GPI because (a) others have done so as well with it, [like Vermont and Utah], and (b) because the data needs could be readily met with the official statistics that the state already collects.” Thus, ”on the data front, there was little extra effort”.

The initiative has not been without its challenges, however. “The basic challenge we have faced is that people are not yet familiar with the concept,” noted David Hart, the Field Director of the Institute for Policy Studies’ Genuine Progress Project, which works to promote the GPI as the measurement tool in the shift to a new economic system where human values precede economic growth. “Most people – wherever they stand on the political spectrum – understand the GPI’s value when they are introduced to it,” Hart affirmed. It’s getting past the foreign nature of the idea that presents issues.

Some economists and policy makers, with good reason, fear there is unavoidable risk when flawed human beings assign ethical values to quantitative models. Determining what is objectively good and bad for society will not be as straightforward as accounting for all items bought and sold on the market, but the potential good it can bring is worth the endeavor.

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With growing sincerity, some economists are calling for more extreme action than just transitioning to new measurements. Economic “degrowth” policy reasons that humanity’s impact has expanded past the earth’s carrying capacity: economists reason that if we are to sustain impending environmental and population crises, we must create policy that will concertedly shrink the GDP, reducing consumption, and therefore alleviate pressure on the environment. Though reducing environmental impact is an imperative, prioritizing degrowth as a policy further feeds the assumption that growth is an appropriate benchmark for determining social welfare.

Instead of assuming that economic growth in either direction results in improvement in welfare, we should explicitly track indicators that measure the outcomes we seek to achieve. This demands a policy of “agrowth,” wherein overall economic growth is restricted to a secondary measurement after targeted outcomes, like creating jobs, lowering poverty levels, and reducing environmental harm are achieved.

Herman Daly, an ecological economist, describes the mistakes of the past century metaphorically: “Economists have focused too much on the economy’s circulatory system and have neglected to study its digestive tract. Throughput growth means pushing more of the same food through an ever larger digestive tract; development means eating better food and digesting it more thoroughly.”[11]

The GDP was born out of the early 20th century, when rapid growth was the answer to a world torn by war and economic distress. Our economic system has matured significantly since then, and we have new problems to solve: environmental crises loom ahead, and unevenly distributed wealth still leaves over half the world living on less than a dollar a day. We cannot grow our way out of these problems the way we did in the earlier half of the century — to face these challenges, we need new tools and a new paradigm for progress. Reevaluating GDP and the global mandate for unbridled growth is imperative to the continued relevancy of the field of economics.

 

Allie Smith

Economics and Environmental Studies ’15

 

References:

[1] “Black Market & Illicit Trade Statistics.” Statistic Brain RSS. http://www.statisticbrain.com/black-market-illicit-trade-statistics/ (accessed March 18, 2014).

[2] Faul, Michael. “IPS Blog.” Institute for Policy Studies: Blog. http://www.ips-dc.org/blog?q=Tag%3Agpi (accessed March 18, 2014).

[3] Philipsen, Dirk. “Rethinking GDP: Why We Must Broaden Our Measures of Economic Success | The Nation.” The Nation. http://www.thenation.com/article/161214/rethinking-gdp-why-we-must-broaden-our-measures-economic-success (accessed March 18, 2014).

[4] Kenny, Charles. “America is slipping to No. 2. Don’t panic..” Washington Post. http://www.washingtonpost.com/opinions/america-is-no-2-and-thats-great-news/2014/01/17/09c10f50-7c97-11e3-9556-4a4bf7bcbd84_story.html (accessed March 18, 2014).

[5] Desilver, Drew. “U.S. income inequality, on rise for decades, is now highest since 1928.” Pew Research Center RSS. http://www.pewresearch.org/fact-tank/2013/12/05/u-s-income-inequality-on-rise-for-decades-is-now-highest-since-1928/ (accessed March 16, 2014).

[6] US Census Bureau. “Newsroom.” Supplemental Measure of Poverty Remains Unchanged. http://www.census.gov/newsroom/releases/archives/poverty/cb13-183.html (accessed March 18, 2014).

[7]Kelly, Annie, and S Subbuswamy. “Gross national happiness in Bhutan: the big idea from a tiny state that could change the world.” The Observer. http://www.theguardian.com/world/2012/dec/01/bhutan-wealth-happiness-counts (accessed March 16, 2014).

[8] “Glossary.” Footprint Network. http://www.footprintnetwork.org/en/index.php/gfn/page/glossary/ (accessed March 18, 2014).

[9] “Genuine Progress Indicator.” Genuine Progress. http://genuineprogress.net/genuine-progress-indicator/ (accessed March 17, 2014).

[10] Tickner, Neil. “Main St.’ Economic Conditions Misread by GDP.” UMD News Desk. http://www.newsdesk.umd.edu/archive/print.cfm?articleID=2082 (accessed March 18, 2014).

[11]Costanza, Robert, Maureen Hart, Stephen Posner, and John Halberth. “Beyond GDP:The Need for New Measures of Progress.” The Pardee Papers 4 (2009). http://www.bu.edu/pardee/files/documents/PP-004-GDP.pdf (accessed March 18, 2014).

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