Gross Domestic Product (or GDP for short) has been a good blunt instrument since the 1930s for getting a quick reading of economic growth in an country. However, with every passing year, it has become waved around more and more as an accurate measurement of the economy, even as criticisms of its flaws mount. It’s become used for way more than it was ever intended, and that causes policy problems. David Moberg wrote a good piece last week for the newspaper In These Times, in which he laid out some of the major criticisms of GDP as a measurement and looked at some of the possible solutions people are developing. Here are some of the main problems:
Before the crash, GDP reports were just as out of sync with people’s experiences [as they are now with GDP growing again and jobs stagnating]. GDP rose throughout the Bush era, but people were largely unhappy with the economy. Most people’s real incomes weren’t growing, just those of the rich. It became clear that much of the GDP boom was an illusion. It was composed of a bubble of housing assets and funny-money financial derivatives. And since current growth is creating a climate crisis, it is also environmentally unsustainable.
One of the key problems with GDP as a measure of national welfare is that it treats “bad goods (and services)” the same as “good goods.” If it costs $100 million to clean up a toxic waste dump but only $1 million to avoid it, the clean-up directly contributes 100 times as much to the GDP as the prevention, making the country “wealthier.”
In other words, waste and inefficiency can make GDP bigger but leave people worse off. For example, healthcare expenditures rose rapidly in recent years, but overall care and health outcomes did not keep pace. A single-payer system could have provided better health at lower cost, but the GDP would have been smaller in the short term.
Also, the GDP does not distinguish between the long-term significance of different types of economic activity. (That fact didn’t bother Michael J. Boskin, chairman of President George H. W. Bush’s Council of Economic Advisers, who said that “it doesn’t make any difference whether a country makes potato chips or computer chips.”) Likewise, the GDP does not recognize the loss of value when a dead-end job replaces one with more meaning. And it does not distinguish between egalitarian societies and those, like the United States, where the rich have recently captured most of the GDP growth.
It’s a serious issue because policymakers need something simple and easy to understand when writing legislation… and GDP is both, but wildly inaccurate. The fact that — and this is hypothetical, though I’ve heard it proposed — knocking down and rebuilding a foreclosed neighborhood has more GDP value than trying to help people adjust their mortgages so they can stay and improve the neighborhood is deeply troubling to me. The similar example above about pollution cleanup having more GDP value than preventing the pollution is a classic scenario among critics.
Fortunately, according to the article, some big politicians (e.g. French President Nicolas Sarkozy) are pushing for a change, and there are some big name economists (Amartya Sen and Joseph Stiglitz) out there drafting alternatives to Gross Domestic Product. There are already some ideas floating around that haven’t caught on, including the Index of Sustainable Welfare:
Ecological economists Herman Daly and John Cobb developed an Index of Sustainable Welfare, which expanded the GDP to include indicators such as income distribution, natural resource depletion, environmental damage and the values of leisure. Their index showed that “sustainable welfare” tracked the GDP fairly closely in the United States until the late 1960s, then was flat or declined through the late 1980s, even as GDP grew.
There’s also the oft-mentioned “Gross National Happiness” measurement in use in Bhutan, but it wouldn’t export well. In any case, it’s unsustainable to keep using GDP, so there needs to be something better put into place fast if we want to operate a good society.
This post originally appeared on Starboard Broadside.