by Chris Kulczycki
Thu Nov 3rd, 2005 at 02:07:51 PM EST
There was a request to put this in the debate box, but since there is room for two only, will keep this close to top of recent diaries for a time ~ whataboutbob. (Actually, if it starts life as a diary it can't be moved to the debates box - Colman)
NOTE: The following was written for an American audience, but I think European Tribute readers will find that it also applies in certain European countries.
The GDP index is a dangerous thing; we should consider banning it. It does more damage than drugs, or guns, or hurricanes combined.
Neo-cons are particularly enamored of the GDP. "The GDP is up; great; we can afford to cut taxes for corporations and the rich" or "the GDP is down; darn; we'd better cut taxes on corporations and the rich to stimulate growth." They use the GDP as measures of national success.
GDP, or Gross Domestic Product, is the total value of final goods and services produced within a country's borders in a year. That's a stupid way to judge how a country is doing. It's not even a particularly good way to measure the strength of an economy.
Using this broad economic indicator as the main measure of national well-being results in a ridiculous and harmful distortion of priorities. It results in bankruptcy legislation that aims to help credit card companies, energy bills to aid big oil, prescription aid for the benefit of drug companies, conservation legislation for timber companies, and environmental bills for the sake of big industry.
The GDP is up this year; growth was at 3.8% last quarter. Are you happy, feeling optimistic about our country, want to stay the course, confident in your children's future? No? I didn't think so. So what is wrong with the GDP? Here is a good summary from Redefining Progress. I've added few notes in [brackets].
Since its introduction during World War II as a measure of wartime production capacity, the Gross National Product (since changed to Gross Domestic Product -- GDP) has become the nation's foremost indicator of economic progress. It is now widely used by policy makers, economists, international agencies and the media as the primary scorecard of a nation's economic health and well- being.
Yet the GDP was never intended for this role. It is merely a gross tally of products and services bought and sold, with no distinctions between transactions that add to well-being, and those that diminish it. Instead of separating costs from benefits, and productive activities from destructive ones, the GDP assumes that every monetary transaction adds to well-being, by definition. It is as if a business tried to assess its financial condition by simply adding up all "business activity," thereby lumping together income and expenses, assets and liabilities.
On top of this, the GDP ignores everything that happens outside the realm of monetized exchange, regardless of its importance to well-being. The crucial economic functions performed in the household and volunteer sectors go entirely ignored. The contributions of the natural habitat in providing the resources that sustain us go unreckoned as well. As a result, the GDP not only masks the breakdown of the social structure and natural habitat; worse, it actually portrays such breakdown as economic gain.
GDP treats crime, divorce and natural disasters as economic gain:
Since the GDP records every monetary transaction as positive, the costs of social decay and natural disasters are tallied as economic advance. Crime adds billions of dollars to the GDP due to the need for locks and other security measures, increased police protection, property damage, and medical costs. Divorce adds billions of dollars more through lawyer's fees, the need to establish second households and so forth. Hurricane Andrew was a disaster for Southern Florida. But the GDP recorded it as a boon to the economy of well over $15 billion.
GDP ignores the non-market economy of household and community. [This includes barter and unreported income]:
The crucial functions of childcare, elder care, other home-based tasks, and volunteer work in the community go completely unreckoned in the GDP because no money changes hands. As the non-market economy declines, and its functions shift to the monetized service sector, the GDP portrays this process as economic advance. The GDP also adds the cost of prisons, social work, drug abuse and psychological counseling that arise from the neglect of the non-market realm.
GDP treats the depletion of natural capital as income.
The GDP violates basic accounting principles and common sense by treating the depletion of natural capital as income, rather than as the depreciation of an asset. The Bush Administration made this point in the 1992 report of the Council on Environmental Quality. "Accounting systems used to estimate GDP" the report said, "do not reflect depletion or degradation of the natural resources used to produce goods and services." As a result, the more the nation depletes its natural resources, the more the GDP goes up. [For example, pumping oil is treated as income, but since the oil can never be replaced, it should be treated as capital depletion]
GDP increases with polluting activities and then again with clean-ups.
Superfund clean-up of toxic sites is slated to cost hundreds of billions of dollars over the next thirty years, which gets added to the GDP. Since the GDP first added the economic activity that generated that waste, it creates the illusion that pollution is a double benefit for the economy. This is how the Exxon Valdez oil spill led to an increase in the GDP.
GDP takes no account of income distribution. [this is a huge problem] :
By ignoring the distribution of income, the GDP hides the fact that a rising tide does not lift all boats. From 1973 to 1993, while GDP rose by over 50 percent, wages suffered a decline of almost 14 percent. Meanwhile, during the 1980s alone, the top 5 percent of households increased their real income by almost 20 percent. Yet the GDP presents this enormous gain at the top as a bounty to all. GDP ignores the drawbacks of living on foreign assets.
In recent years, consumers and government alike have increased their spending by borrowing from abroad. This raises the GDP temporarily, but the need to repay this debt becomes a growing burden on our national economy. To the extent that Americans borrow for consumption rather than for capital investment, they are living beyond their means and incurring a debt that eventually must be repaid. This downside of borrowing from abroad is completely ignored in the GDP.
In short, the more we spend, the better off the country must be.
Fortunately, there are several alternative ways of measuring how we're doing. But first, just for a comparison, here are the top 10 economies by nominal GDP in millions according to the IMF:
1. European Union $12,865,602
2. United States $11,734,300
3. Japan $4,671,198
4. Germany $2,754,727
5. United Kingdom $2,133,019
6. France $2,046,292
7. Italy $1,680,112
8. People's Republic of China $1,653,686
9. Spain $1,041,338
10. Canada $993,443
11. South Korea $680,409
Of course things look a little different if we look at GDP (PPP) per capita. PPP is purchasing power parity. The PPP measures how much a currency can buy in terms of an international measure (usually dollars), since goods and services have different prices in some countries than in others. This is probably a better measure of how we're doing, thought still not very good. Here is the top ten in USD according to the IMF (except for San Marino, which is from our friends at the CIA):
1. Luxembourg 66,821
2. Norway 41,941
3. United States 41,557
4. Republic of Ireland 40,003
5. Iceland 35,686
6. Denmark 34,718
7. San Marino 34,600
8. Canada 34,444
9. Switzerland 33,168
10. Austria 32,962
One of the problems with GDP is that it does not take into account income inequality. The magnitude of this problem cannot be over stated. Imagine a tiny country that has 100 billionaires and 100,000 people living on $2 a day (as about half the world's population does). This imaginary country would be the richest in the world by GDP per capita.
Here is a list of the top 10 countries by income inequality (using the Gini coefficient for you economists). By the way, if you're looking for the US, it's number 74.
5. Czech Republic
8. Bosnia and Herzegovina
If we really wanted to know how we were doing as a country, we might use the United Nations Human Development index (HDI). The HDI measures the average achievements in a country in three basic dimensions of human development:
1. A long and healthy life, as measured by life expectancy at birth.
2. Knowledge, as measured by the adult literacy rate (with two-thirds weight) and the combined primary, secondary and tertiary gross enrollment ratio (with one-third weight).
3. A decent standard of living, as measured by gross domestic product (GDP) per capita at purchasing power parity (PPP) in USD.
Here is the link to the whole UN report; it's a very very long pdf document. And here is how we do in the HDI:
Another way is to use the Genuine Progress Indicator (GPI). This is like an extended version of the GDP that takes into account factors such as:
· Cost of resource depletion
· Cost of crime
· Cost of ozone depletion
· Cost of family breakdown
· Cost of air, water, and noise pollution
· Loss of farmland
· Loss of wetlands.
· Life span of consumer durables & public infrastructure.
· Dependence on foreign assets.
· Defensive expenditures.
· And several others
This shows our growth by GPI and GDP:
Another possible method is to use survey that was prepared for the Economist's "World in 2005" publication. They wanted to find out, "Where will be the best place to live in 2005?" Here are the factors they took into consideration:
· Material well: being-gdp per person, at ppp in $. Health-Life expectancy at birth: years.
· Political stability and security: Political stability and security ratings
· Family life: Divorce rate (per 1,000 population), converted into index of 1 (lowest divorce rates) to 5 (highest).
· Community life: Dummy variable taking value 1 if country has either high rate of church attendance or trade-union membership; zero otherwise.
· Climate and geography: Latitude, to distinguish between warmer and colder climes.
· Job security: Unemployment rate, %.
· Political freedom: Average of indices of political and civil liberties. Scale of 1 (completely free) to 7 (unfree).
· Gender equality: Ratio of average male and female earnings, latest available data.
Here is a link to the study; it's very interesting and well done. The top 10 countries are listed below; the US is 13th:
Finally, my favorite method is Gross National Happiness (GNH), a contribution from the little Himalayan kingdom of Bhutan. GNH does not attempt to quantify happiness. It assumes that well-being is more relevant and important than consumption. GNH depends on a series of subjective judgments about moral values rather than quantitative data. Here's some background from GrossInterationalHappiness.org .
The term Gross National Happiness was first expressed by the King of Bhutan His Majesty Jigme Singye Wangchuck. It is rooted in the Buddhist notion that the ultimate purpose of life is inner happiness. Bhutan being a Buddhist country, Bhutan's King felt the responsibility to define development in terms of happiness of its people, rather than in terms of an abstract economic measurement such as GNP.
Bhutan's minister Dasho Meghraj Gurung put the Bhutanese philosophy succinctly: "The ideology of GNH connects Bhutan's development goals with the pursuit of happiness. This means that the ideology reflects Bhutan's vision on the purpose of human life, a vision that puts the individual's self-cultivation at the center of the nation's developmental goals, a primary priority for Bhutanese society as a whole as well as for the individual concerned".
And this is from a recent New York Times article
on the subject:
''We have to think of human well-being in broader terms,'' said Lyonpo Jigmi Thinley, Bhutan's home minister and ex-prime minister. ''Material well-being is only one component. That doesn't ensure that you're at peace with your environment and in harmony with each other.''
It is a concept grounded in Buddhist doctrine, and even a decade ago it might have been dismissed by most economists and international policy experts as naive idealism.
Indeed, America's brief flirtation with a similar concept, encapsulated in E.F. Schumacher's 1973 bestseller ''Small Is Beautiful: Economics as if People Mattered,'' ended abruptly with the huge and continuing burst of consumer-driven economic growth that exploded first in industrialized countries and has been spreading in fast-growing developing countries like China.
Yet many experts say it was this very explosion of affluence that eventually led social scientists to realize that economic growth is not always synonymous with progress.
In the early stages of a climb out of poverty, for a household or a country, incomes and contentment grow in lockstep. But various studies show that beyond certain thresholds, roughly as annual per capita income passes $10,000 or $20,000, happiness does not keep up.
And some countries, studies found, were happier than they should be. In the World Values Survey, a project under way since 1995, Ronald Inglehart, a political scientist at the University of Michigan, found that Latin American countries, for example, registered far more subjective happiness than their economic status would suggest.
And, just to belabor the point, this is from a New York Times editorial
An economic cynic may argue that a country with a gross national product as small as Bhutan's can well afford to worry about its gross national happiness, and that the best way to increase G.N.H. is by increasing G.N.P. But that is essentially an untested assertion, and there is plenty of evidence to suggest that it isn't necessarily true. Our sense of happiness is created by many things that are not easily measured in purely economic terms, including a sense of community and purpose, the amount and content of our leisure and even our sense of the environmental and ecological stability of the world around us.
To talk about gross national happiness may sound purely pie in the sky, partly because we have been taught to believe that happiness is essentially a personal emotion, not an attribute of a community or a country. But thinking of happiness as a quotient of cultural and environmental factors might help us understand the growing disconnect between America's prosperity and Americans' sense of well-being.
I propose that we switch to one of these latter methods for assessing how our country is doing. Instead of headlines that say "Economy (GDP) grows by 3.8%" I'd like to see the top story in the New York Times or Wall Street Journal headlined: "US moves up in UN Human Development Index". Or how about, "President Announces Gross National Happiness Goals Met"
I know some of you are going to say that banning the GDP is just plain silly. All right, I'll grant you that some do know how to use the GDP responsibly. So here's a compromise. Let's just put the GDP behind the counter; you can still look at it. But we'll only let those with a prescription actually use it. Jerome a Paris and others who know how to use the GDP safely can get a prescription. But we have to keep it out of the hands of the neo-cons. It's like giving a loaded shotgun to a bunch of chimpanzees. Sooner or later someone is going to get hurt. And it'll inevitably be us.