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#516 - Measuring Progress, 16-Oct-1996

When Bill Clinton promises to "keep growth going" and Bob Dole promises
to "get the economy moving," they both are vowing to increase Gross
Domestic Product, or GDP. GDP is the standard measure of the nation's
total economic activity, and it is assumed to translate directly into
well being. If GDP rises rapidly (say, 4% per year), things are assumed
to be getting much better, and if GDP rises slowly (say, 1.5% per
year), things are not so good. Government officials first began
measuring national economic activity this way in 1932; ever since then,
the nation's main goal has been to increase GDP. (Actually, up until
1991, we measured GNP, or Gross NATIONAL Product. In 1991 we shifted to
measuring Gross DOMESTIC Product. GNP and GDP are quite similar
measures, unless you live in a developing country, in which case they
definitely are NOT the same.[1])

Simply put, GDP is a measure of all market activity, all money that
changes hands in a country during a year. GDP measures total output,
the dollar value of all finished goods and services.

Now some economists are asking whether the GDP is an adequate measure
of the nation's well being.[2] When GDP goes up are the American people
necessarily better off? They point out, for example, that real wages
have declined nearly 14% since 1973 while GDP has risen 55% during the
same period.[2,pg.7] GDP seems to be missing what's actually going on.
GDP says we are better off, but are we really? It's a fair question.

A number of economists are rejecting GDP as the basic measure of the
nation's well being, and are proposing an alternative measure, which
they call GPI (genuine progress indicator). Three economists in
particular (Clifford Cobb, Ted Halstead, and Jonathan Rowe) point to at
least 3 major problems with GDP:

1. GDP only counts money transactions, so it leaves out many "goods"
that people provide for each other free. Major parts of the household
economy are ignored. Examples: care for the elderly and for children,
home maintenance and cleaning, food preparation, and voluntary service
for neighborhood, church and civic groups. GDP assigns all these
activities a value of zero. This can lead to distorted public policies.
For example, if the "Family Leave Act" is criticized because it reduces
GDP, such a criticism is inaccurate because it fails to reflect the
increases in many household economies that the Act initiates.

2. GDP treats all transactions as positive. Crime, divorce, pollution,
and depletion of natural resources are all treated as gains. Thus GDP
treats the breakdown of the social structure, and the natural
environment as gains. If someone buys a car, GDP goes up. If the car
gets into an accident and requires major repair, GDP goes up. If the
driver is hospitalized, GDP goes up. If a lawsuit follows, GDP goes up
again. GDP makes no distinction between activities that contribute to
well being and those that diminish it. It's like keeping accounts using
a calculator that has an "add" function but no "subtract" function. So
long as money changes hands, GDP increases. Any business that kept its
accounts this way would never know where it stood. Such a business
would have an exceedingly rosy picture of its condition, but it would
be a false picture. So it is with countries that rely on GDP to measure
well being.

3. GDP treats depletion of natural capital (assets) as current income -
-an obvious violation of good accounting principles. If a forest is
converted to lumber, or farmland is turned into parking lots, GDP
treats all the money involved as current income and none of it as
capital depreciation. Again, any business that kept its accounts this
way --treating depletion of assets as current income --would have a
very rosy picture of its financial condition, but the picture would be
quite wrong. So it is with countries that rely on GDP to measure well
being.

Much of GDP is made up of three things:

1. FIXING MISTAKES AND SOCIAL FAILURES FROM THE PAST. Superfund sites
are an example. Such cleanups just get us back to where we once were;
they are not real progress. The prison system is another example.
Prisons are a response to earlier failures to help young people gain a
valued place in the economy and society. Superfund sites and prisons
are not progress, yet the GDP treats them as if they represented real
gains in well being.

2. BORROWING RESOURCES FROM THE FUTURE. Agricultural output grows each
year because of enormous chemical use, but this occurs at the expense
of depleted natural capital (fertile soil and clean water). This
represents a borrowing from our children. It imposes real costs on
future generations. GDP treats these costs as zero or, even worse, as
positive contributions to the nation's well being. Obviously, this is
an inappropriate accounting practice.

3. SHIFTING FUNCTIONS FROM THE TRADITIONAL HOUSEHOLD AND COMMUNITY TO
THE MONETARY ECONOMY.

** Baby sitters and nannies substitute for parents.

** Psychotherapy, TV sets and VCRs substitute for close contact between
friends, neighbors and family members.

** Burglar alarms and police officers substitute for neighbors keeping
an eye on things.

** Burger King and Kentucky Fried Chicken substitute for the home
kitchen.

In each of these cases, free services (free in the sense of not being
compensated by money) have disappeared and, in their place, a monetary
relationship has been established. In many instances, this represents
an INCREASE in GDP but a DECREASE in the strength of the social fabric
that holds communities and families together.

New Measures of Progress

New measures of progress are needed. The GDP is giving us a false sense
of well being. GDP makes no distinction between the secure skilled
worker in a high-paying job and the recently-laid-off worker who is
holding down two jobs without benefits just to make ends meet. Clearly
their incomes do not represent equivalent levels of well being. GDP
treats pollution as a double positive --it is counted as a gain when it
is first created as a byproduct of some other activity, and it is
counted as a gain again when society pays to clean it up. Several new
measures of well being have been established.[3] The one we like best
is called the Genuine Progress Indicator, or GPI, developed by an
organization called Redefining Progress in San Francisco.[2]

The GPI starts with the same data that underlies the GDP, but then it
is modified by both additions and subtractions.

** The GPI is weighted for income distribution. The GPI accounts not
only for increasing total income, but also for the way income is
distributed within society. The top fifth of American households took
48.2% of the nation's income in 1993; the bottom fifth received just
3.6% --an historic record for inequitable distribution of income in
America. GPI takes into account such inequitable distribution of
income.[4]

** Certain defensive expenditures are subtracted. Defensive
expenditures are such things as locks, burglar alarms, and other
security devices, which merely help maintain the status quo but don't
represent real increases in well being. Costs of automotive repairs
after accidents, and household water filters, fall in this "defensive"
category as well.

** The depreciation of natural capital (environmental assets and
natural resources) are subtracted. The following items are subtracted:
Costs of air, water and noise pollution; loss of wetlands, farmlands,
and old growth forests; depletion of earth's ozone layer. And so on.

The GPI is "conservative" in the sense that it does not go as far as it
could in subtracting negative factors. For example, loss of species is
omitted entirely because the authors couldn't put a dollar value on
species lost. Likewise, many Americans regret much of their consumption
and this could be subtracted from GDP because it represents a
"negative" in many peoples' lives. For example, half of all Americans
believe they are overweight from eating too much, and 70% of cigarette
smokers wish they could quit. Clearly such "addictive consumption"
could be subtracted from GDP, but GPI does not go this far.

In sum, GPI is an important and reasonable new attempt to measure well
being. It tries to take into account real factors that GDP ignores --
real positives (such as household work) and real negatives (such as
time spent commuting to work) --to give a better overall measure of the
economy as people actually experience it. Figure 1 shows the result:
when social and environmental costs are take into account, the overall
health of the U.S. economy has steadily declined since the mid-1970s.

--Peter Montague

=====

[1] Clifford Cobb, Ted Halstead, and Jonathan Rowe, "If the GDP is Up,
Why is America Down?" ATLANTIC MONTHLY (October, 1995), pgs. 59-77,
explains on pg. 68 that, using GNP, the earnings of a multinational
were counted in the country where the firm was owned, which is logical
because that's where the profits eventually end up. However, using GDP,
which we started doing in 1991, a multinational's profits are counted
in the country where the factory or mine is located, even though the
profits won't stay in that country. The authors comment, "This
accounting shift has turned many struggling nations into statistical
boom towns, while aiding the push for a global economy. Conveniently,
it has hidden a basic fact: the nations of the North are walking off
with the South's resources, and calling it a gain for the South." See
also Clifford Cobb, Ted Halstead, and Jonathan Rowe, "If the GDP is Up,
Why is America Down?" FOCUS: CARRYING CAPACITY SELECTIONS Vol. 6, No. 1
(1996), pgs. 25 and following pages.

[2] Clifford Cobb, Ted Halstead, and Jonathan Rowe, THE GENUINE
PROGRESS INDICATOR; SUMMARY OF DATA AND METHODOLOGY (San Francisco:
Redefining Progress [4th Floor, One Kearny Street, San Francisco, CA
94108; Tel. 415.781.1191], September, 1995). $10.00 from Redefining
Progress.

[3] See the "index of social welfare" in Herman E. Daly and John B.
Cobb, Jr., FOR THE COMMON GOOD Second edition (Boston: Beacon Press,
1994), pgs. 443-507. See also, for example, Marc Miringoff, 1995 INDEX
OF SOCIAL HEALTH: MONITORING THE SOCIAL WELL-BEING OF THE NATION
(Tarrytown, N.Y.: Fordham Institute for Innovation in Social Policy,
1995). And see United Nations Development Programme, HUMAN DEVELOPMENT
REPORT 1995 (New York: Oxford University Press, 1995).

[4] Jason DeParle, "Census Sees Falling Income and More Poor," NEW YORK
TIMES October 7, 1994, pg. A16.

. FIGURE 1. GROSS PRODUCTION VS. GENUINE PROGRESS, 1950-1994 . . .
Dollars per Person . (inflation-adjusted) . . . 18000 -- + . . + .
16000 -- . . Gross Domestic Product (GDP) + . 14000 -- + . . + . 12000
-- + . . + . 10000 -- . . + + . 8000 -- + . . * * * . 6000 -- * * * *
* . . * . 4000 -- Genuine Progress Indicator (GPI) * . . . 2000 -- . .
| | | | | | | | | | . 0 1950 1955 1960 1965 1970 1975 1980 1985 1990
1994. Year .
.....
Figure 1. Gross Production vs. Genuine Progress, 1950-1994. The . plus
signs (+) represent GDP, the asterisks (*) represent GPI. . See text
for the definition of these measures. Units of GDP and . GPI are 1982
dollars per capita. Basically this graph shows that, . when social and
environmental costs are taken into account (i.e., . measuring GPI), the
overall health of the economy has steadily . declined since the 1970s.
Adapted with permission from Clifford . Cobb, Ted Halstead, and
Jonathan Rowe, THE GENUINE PROGRESS . INDICATOR; SUMMARY OF DATA AND
METHODOLOGY (San Francisco, . California: Redefining Progress,
September, 1995). .
.....

Descriptor terms: quality of life indicators; income distribution;
measuring well being; measuring welfare; genuine progress indicator;
gpi; gross national; products; gnp; gross domestic product; gdp;
national accounts; growth;