If Not GDP, What?

In my April 16^th blog, Is GDP Measurement Just Too Gross?, I pointed out that not only was the use of Gross Domestic Product a severely distorted “averaging” statistic but that using this number as a governmental success metric has produced all kinds of policies that have accelerated income inequality/polarization that is literally tearing apart the fabric of our American body politic. For example, if I had a passel of trillionaires in a country where 98% of that nation earned nothing, the GDP number might look terrific amidst a sea of economic misery and poverty.

Economists generally agree that while there is value to knowing what the GDP number is, the fact that this statistic ignores debt, does not factor the costs of resource depletion or the hard dollar losses that occur as a result of pollution and industrial as well as natural disasters, makes GDP at best a secondary success metric. If the well-being of most of those living in a particular country is the desired goal, GDP does little to reflect that reality.

Economists have been grappling with alternatives for decades. The notions of measuring the relevant wealth of the economic mean or median or reporting a modified statistic that reflects GDP “with an explanation” or perhaps a metric that is not a hard dollar measurement but a scale of lifestyle measurements have all been proposed and discussed by leaders and global economic think tanks. Yet economists, and the policy-makers who rely on their projections, resist anything that does not allow clear mathematical comparison, so they tend to prefer analyses measured in hard dollars.

One group favors a dollar-driven metric known as the Genuine Progress Indicator (GPI), which “starts with the same personal consumption data that the GDP is based on, but then makes some crucial distinctions. It adjusts for factors such as income distribution, adds factors such as the value of household and volunteer work, and subtracts factors such as the costs of crime and pollution.” Progress.org.

Fundamentally, GPI looks at hard dollar calculations that take the following into consideration: income distribution (noting that the poor benefit more than the rich from increases in earning power), housework-higher-education-volunteering, crime, resource depletion, pollution, long-term environmental damage, changes in leisure time, defensive expenditures (relating to things like insurance, medical costs, cost of commuting, repair costs, etc. and not military expenditures), lifespan of consumer durables & public infrastructure and dependence on foreign assets (effectively, global borrowings and national deficits).

England has developed a lifestyle scale as an alternative to a hard dollar measurement. “The measurement is composed of 40 indicator variables which are composed of both subjective and objective data. The subjective data includes surveys of British people’s life satisfaction in a variety of areas and how often they use green space. The objective data includes measurements on the economy, health, education, the environment, crime, and more.” Pachamama.org.

The U.K.’s Office for National Statistics (ONS) developed the standards based on this initial survey of the British public of what people considered to be priorities in their lives. Economists were less-than-thrilled with what is basically a “happiness index,” but the metric was released. “When the ONS embarked on its mission to ‘measure what matters,’ it carried out a national debate to find out what people consider important to their wellbeing. When asked ‘What things in life matter to you? What is wellbeing?’, among the top five responses was ‘present and future conditions of the environment’; the others were health, good connections with friends and family, job satisfaction and economic security.” The Guardian (UK, August 2^, 2012).

The challenge here is how to compare national success, a variable that impacts national credit ratings (hence borrowing rates), trade treaty negotiations, currency fluctuations, etc., among countries around the world. Various NGOs as well as governmental agencies have created their own lifestyle comparison statistics – such as the Happy Planet Index or the U.N.’s Human Development Index (HDI) – but no major commercial or economic agencies are willing to treat these measurements seriously or as reflective of any applicable economic value. This “lifestyle” approach simply does not create metrics that can easily be translated into hard dollar comparisons that provide the kind of tracking economists require.

“The HDI, now twenty years old, adds educational and health measures to the GDP. Educational measures include literacy and educational attainment, and health measures are based on life expectancy. However, the HDI leaves out key information related to debt, sustainability, climate change, carbon footprint, ‘happiness’ measures, and so on… The recognition of the limitations of GDP and even the HDI has led groups in some countries to try and develop a broad set of new measurements. 

“The U.S. administration under President Obama recognized this need and embedded in its recent healthcare legislation the creation of a new agency under the National Academy of Sciences (NAS) to develop a system of key national indicators. It appears that the State of the USA will become that agency. It aims to be officially launched sometime this summer and is developing about three-hundred different metrics.

“In Europe, the European Commission has also been creating an array of indices that will reflect societal well-being. Their plan is to first issue a ‘pilot version of a comprehensive environmental index.’ Unlike the U.S., the Europeans expect to integrate it into their present macro-economic statistical systems.

“Other potential GDP replacements are: the Calvert-Henderson Quality of Life Indicators; Canadian Index of Wellbeing; Genuine Progress Indicator (GPI) [discussed above], Index of Sustainable Economic Welfare (ISEW); and the National Accounts of Well-being.” Investingfor theSoul.com. July 28, 2010. But until a hard dollar measurement generates global acceptance, we will continue to limp along on the highly misleading GDP.

But as Joseph Stiglitz [Nobel Prize-winner in economics] has put it, “What we measure informs what we do. And if we’re measuring the wrong thing, we’re going to do the wrong thing.” We’ve been measuring the wrong thing for several generations, and what we’ve got is more poverty than ever before, a contracting middle class, and a massive accumulation of wealth in a very narrow segment at the top of the economic ladder at the expensive of everyone else in this country. It’s time to find a reliable international substitute for that GDP number, and for world leaders this has be a priority before even more people are damaged by policies created on the wrong metric.

I’m Peter Dekom, and to solve a problem, at least you need a reliable way of encouraging policy solutions and accurately measuring the results.