I Repeat: GDP is a Terrible Measure of True Wealth and Prosperity

 

“Gross domestic product (GDP)”: the total market value of the goods and services produced by a country’s economy during a specified period of time. It includes all final goods and services—that is, those that are produced by the economic agents located in that country regardless of their ownership and that are not resold in any form. It is used throughout the world as the main measure of output and economic activity. Encyclopedia Britanica

Huh? The biggest problem of using GDP statistics is that this is an aggregated averaging – meaning successful rich companies and people can tilt a negative reality for most people into a huge positive for the country – while also ignoring the costs associated with losses due to climate disasters as well as dwindling renewable and non-renewable natural resources. Because GDP is a “slice in time” and because it embraces metrics that exclude losses that have never been measured historically yet impact us all, it is a false summary. Example: in a sample of ten people, assume nine of whom earn $60,000/year and one of whom earns $1,000,000/year; the average earnings are thus $154,000/year, well over double what the supermajority in this sample earn. Thus, GDP overvalues the big numbers from the richest segments of society and undervalues the rest. Since that “rich” segment is a tiny minority, that is a huge distortion!

As hurricanes, floods, droughts, wildfires, searing heat, and rising seas (with concomitant coastal erosion) continue to wreak havoc with this planet’s resources – these represent trillion-dollar slams to almost every nation’s underlying aggregate value – we can watch as food costs and scarce resources soar in value and once arable farmland plunges. Why? Simply put, GDP is a metric from an earlier era and became ingrained as one of the key deciders is terms of national economic health and competitiveness. When people began using this artificial valuation criterion, the notions of man-created climate change, over harvesting, overfishing, excessive extraction of non-renewables and the resulting “natural disasters” weren’t even a glint in the eyes of the economists who embraced this statistic as the global standard of economic success or failure.

Politicians often tout GDP success as evidence of their successful policies. But this metric can be used to cut taxes for the rich, eliminate vital economic and ecological safeguards and allow for-profit mega-industries to embrace wasteful and severely harmful activities – costing the rest of us trillions of hard dollar damages – without paying remotely for what the losses their activities actually cost. Since an increasing number of business planners and economists are recognizing the underlying fallacy of using GDP numbers, what is a viable alternative metric that reflects these changes? For that, I turn to an October 22nd World Bank report (The Changing Wealth of Nations {CWON} 2024 report) as seen by the Yale University School of the Environment:

“‘GDP is just the income side of ledger. GDP also, in practice, has not done a good job of accounting for the maintenance costs or using up or degrading natural resources.’ [Eli Fenichel, Yale Professor of Natural Resource Economics and co-author of CWON]… Globally, real wealth per capita increased by about 21% between 1995 and 2020, the period examined in the report, with two-thirds of the 151 countries in the sample experiencing growth, and 27 countries experiencing declines or little change. (In contrast, real GDP per capita increased approximately 50% in all regions over the same period, the authors note.) The increase was driven largely by rapid urbanization and the growing number of women participating in the labor market, particularly in the Middle East, North Africa region, and Latin America and the Caribbean.

“While human capital and produced capital increased by 9% and 47% respectively over the past quarter century, renewable natural capital — which should be able to regenerate itself if managed sustainably — declined by more than 20% globally. While that figure is likely an underestimate due to the challenges and limitations of measuring and valuing renewable capital, Fenichel said many countries are getting better at measuring at least some forms of renewable capital.

“‘In the U.S., I think we are getting much better at accounting for water, for example (which is not presently included in CWON). At the global scale, it is harder to organize the data, but with some new remote sensing products, I’m optimistic we can get there soon. Then, there is the challenge of valuing changes in water, which can be heavily institution dependent. Indeed, many countries may act as if water has a negative value, which it might in flood prone areas,’ he said. ‘So, I suspect valuation to remain hard at the global scale but doable at the local scale for the foreseeable future, so we might be able to start adding up those local measures as they develop.’...

“CWON uses monetary estimates from the System of National Accounts and the System of Environmental-Economic Accounting to produce a wealth database that assesses trends in economic progress and sustainability that go beyond GDP — encompassing and tracking over time a broad portfolio of market and non-market assets. These assets fall into four general categories: produced capital, such as buildings and machines; renewable natural capital, such as agricultural land, forests, and fish stocks; non-renewable natural capital, such as oil, natural gas, and minerals; and human capital.

“‘The scope of what counts for GDP is pretty narrowly defined to address questions associated with things like the federal budget and how many taxes can be collected,’ Fenichel said. ‘The World Bank’s comprehensive wealth measure is intended to start going beyond that boundary to include other things people value like shoreline protection services and non-timber services from forests, as well as the value of investments in the labor force…. It seems like non-declining wealth should be a minimum requirement. What I think we want to see is income, production, and wealth all rising — and also to think about how that wealth is distributed across asset groups and among people.’” But since many of these criteria suggest policy failures, there will be massive resistance to altering GDP as the general measure of success, as seriously flawed as it is. Adopting a new worldwide standard may take decades, and what the relevant criteria and formulae should well be an international battle royal. Human beings are very good at lying or explaining away their shortcomings… even at a national level. Lying with statistics is clearly nothing new!

I’m Peter Dekom, and the accuracy and relevance of GDP stubbornly appears to begin to approach conspiracy theories as the major factor in determining global governmental monetary and fiscal policies.