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Mismeasuring Our Economy: Why the GDP is Not Useful

Tuesday, 23 July 2013 12:40 By Jaisal Noor, The Real News Network | Video

JAISAL NOOR, TRNN PRODUCER: Welcome to The Real News Network. I'm Jaisal Noor in Baltimore.

Gross domestic product is the most widely cited economic indicator. As the old quip goes, we value what we measure. Our guest today suggests there are many economic activities that contribute to growth but undermine quality of life. In other words, there are many activities that play an important role in raising living standards but are not included in GDP.

Now joining us to talk more about this is James Boyce. He's director of the Program on Development, Peace Building, and the Environment at the PERI institute. He's also a professor of economics at UMass Amherst.

Thank you for joining us, James.

JAMES K. BOYCE, PROF. ECONOMICS, UMASS AMHERST: Nice to be back.

Noor: So, James, what can you tell us about this, about your argument that GDP is not a good economic indicator?

Boyce: Well, there are several major problems with GDP is a measure of average well-being in a country. One of them is the one that you mentioned, that there are many things that are important to our economic well-being that GDP doesn't measure because they're not monetized. So, for example, when people provide care labor in their household, taking care of children, taking care of elderly people, disabled people, that doesn't get counted in GDP. Clean air doesn't get counted in GDP. The value of having a stable climate doesn't get counted in GDP. Open source information that people don't have to pay for every time they use it doesn't get counted. So part of the problem is that there are things that are really important to our economic well-being that GDP doesn't measure.

On the other hand, another problem is there are things that do get counted in GDP that actually don't enhance our welfare. Let me give you one example of that. When we had the big oil spill in the Gulf of Mexico, the BP oil spill, the damage and cleanup costs for that spill were estimated at $90 billion. Now, that $90 billion gets counted as part of GDP. It added, oh, about $300 to the average income of Americans, according to that GDP calculation. But that doesn't mean that we were better off because of that oil spill. That oil spill was really a cost rather than a benefit.

So GDP rather hopelessly, I'm afraid, mixes up good things, bad things, counts some of the bad things but not some of the good things, and is really not a satisfactory measure for average well-being in any society.

Noor: And another thing that's often left out of GDP analysis is distribution of income. Can you talk about how GDP can be used, better used to examine income inequality in the U.S.?

Boyce: Yeah. Well, you're absolutely right about that. I mean, any average misses the distribution. As the joke goes, when Bill Gates walks into a bar, the average customer suddenly becomes a millionaire. High-end people raise the average, and that doesn't mean that normal people in the room are any better off.

So what we really should be using as a measure of well-being is one that takes into account the distribution of income as well as average income. And there are ways to do this. I mean, for example, people who do cost-benefit analysis have known now since the 1970s how to use what are called distributional weights. And what these basically do is they count a percentage change in a person's income equally regardless of their income level. So a 1 percent addition to my income counts the same as a 1 percent addition to the income of somebody who's living below the poverty line or a 1 percent change in the income of a millionaire or a billionaire. Even though the dollar amounts are different, it's the percentage changes that count.

So if we apply that to GDP, to national income in trying to get a measure of improvements or lack of improvements and well-being, what we would do is we would value, say, a 1 percent change in the income of somebody living at the poverty line, which is $23,000, roughly, for a family of four, the same as a 1 percent change in the income of a millionaire.

What we currently do instead is we value the 1 percent change for the millionaire much more highly because it takes more dollars to ratchet up their income by yet another percentage point.

So that is a fairly straightforward way to come up with a distributionally adjusted measure of GDP. It treats everybody the same instead of treating every dollar the same regardless of to whom it accrues.

Noor: And you're not alone in criticizing GDP. In 2009, Nobel prize-winning economist Joseph Stiglitz and others wrote a paper criticizing GDP as an insufficient measure of economic well-being. Can you talk about some of the specific criticisms they made?

Boyce: Yeah. That was a commission that was convened by the president of France at the time, and it included in addition to Joe Stiglitz, who, as you say, is a Nobel laureate--another of the cochairs was Amartya Sen, a Nobel laureate. My colleague here at the University of Massachusetts, Nancy Folbre, was a member of that commission. A number of really distinguished economists were part of it. And they voiced several of the same criticisms that we've just been discussing, the failure of GDP to count many things that are good that improve our well-being, the fact that GDP counts things that don't improve our well-being, and the fact that GDP misses how well-being and income are distributed across the population.

In addition, another important point that they raised in their report--and I would encourage your listeners to check it out on the web; you can download the entire report online--is that another important dimension of economic performance is whether or not that performance is sustainable over the long haul. Gains in income that come at the expense of future income, at the expense of future generations shouldn't really be counted is gain. They should be counted as borrowing against the future rather than lifting our level of income. So that issue of sustainability, which is particularly important with respect to environmental issues like global climate change and resource depletion, was another important point that they discuss in their report.

Noor: And, James, can you tell us the obstacles to getting this changed? 'Cause, you know, you see this starting out in, like, middle school and high school, and this analysis of GDP is used so widely in society and the government. What's it going to take to really change this, how GDP is analyzed?

Boyce: Well, that's a good question. I mean, you should never underestimate the inertial forces in the economics profession. Once an idea becomes received wisdom, it takes a long time to dislodge it, no matter how transparently erroneous that idea is. And the use of national income as a measure of well-being is the example of that broader pattern.

I think changes have already begun to happen. People have been talking about this for a number of years now, not only economists, but others in the policy community. And so I think we do see some changes in the offing. A number of the U.S. states, for example, are experimenting with alternative measures of economic performance, alternatives to state domestic product per capita. There are dozens of such initiatives. And if you look at the website of the New Economics Institute, you can find a nice summary of many of them.

I think gradually we're moving away from GDP towards other measures, but we still have a long way to go. And I think what would really help are two things--first, if the federal government were to stop exclusively using national income as a measure of performance, economic growth as a measure of performance, and instead report and cite other important measures. And the other thing would be if the public at large actually demands better information and stops being bamboozled by the notion that a three percentage point increase in economic growth is better than a two percentage point increase regardless of what that growth consists of and what it leaves out.

Noor: James, thank you so much for joining us.

Boyce: Thanks very much. It's been a pleasure talking to you.

Noor: And thank you for joining us on The Real News Network.

This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.

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Mismeasuring Our Economy: Why the GDP is Not Useful

Tuesday, 23 July 2013 12:40 By Jaisal Noor, The Real News Network | Video

JAISAL NOOR, TRNN PRODUCER: Welcome to The Real News Network. I'm Jaisal Noor in Baltimore.

Gross domestic product is the most widely cited economic indicator. As the old quip goes, we value what we measure. Our guest today suggests there are many economic activities that contribute to growth but undermine quality of life. In other words, there are many activities that play an important role in raising living standards but are not included in GDP.

Now joining us to talk more about this is James Boyce. He's director of the Program on Development, Peace Building, and the Environment at the PERI institute. He's also a professor of economics at UMass Amherst.

Thank you for joining us, James.

JAMES K. BOYCE, PROF. ECONOMICS, UMASS AMHERST: Nice to be back.

Noor: So, James, what can you tell us about this, about your argument that GDP is not a good economic indicator?

Boyce: Well, there are several major problems with GDP is a measure of average well-being in a country. One of them is the one that you mentioned, that there are many things that are important to our economic well-being that GDP doesn't measure because they're not monetized. So, for example, when people provide care labor in their household, taking care of children, taking care of elderly people, disabled people, that doesn't get counted in GDP. Clean air doesn't get counted in GDP. The value of having a stable climate doesn't get counted in GDP. Open source information that people don't have to pay for every time they use it doesn't get counted. So part of the problem is that there are things that are really important to our economic well-being that GDP doesn't measure.

On the other hand, another problem is there are things that do get counted in GDP that actually don't enhance our welfare. Let me give you one example of that. When we had the big oil spill in the Gulf of Mexico, the BP oil spill, the damage and cleanup costs for that spill were estimated at $90 billion. Now, that $90 billion gets counted as part of GDP. It added, oh, about $300 to the average income of Americans, according to that GDP calculation. But that doesn't mean that we were better off because of that oil spill. That oil spill was really a cost rather than a benefit.

So GDP rather hopelessly, I'm afraid, mixes up good things, bad things, counts some of the bad things but not some of the good things, and is really not a satisfactory measure for average well-being in any society.

Noor: And another thing that's often left out of GDP analysis is distribution of income. Can you talk about how GDP can be used, better used to examine income inequality in the U.S.?

Boyce: Yeah. Well, you're absolutely right about that. I mean, any average misses the distribution. As the joke goes, when Bill Gates walks into a bar, the average customer suddenly becomes a millionaire. High-end people raise the average, and that doesn't mean that normal people in the room are any better off.

So what we really should be using as a measure of well-being is one that takes into account the distribution of income as well as average income. And there are ways to do this. I mean, for example, people who do cost-benefit analysis have known now since the 1970s how to use what are called distributional weights. And what these basically do is they count a percentage change in a person's income equally regardless of their income level. So a 1 percent addition to my income counts the same as a 1 percent addition to the income of somebody who's living below the poverty line or a 1 percent change in the income of a millionaire or a billionaire. Even though the dollar amounts are different, it's the percentage changes that count.

So if we apply that to GDP, to national income in trying to get a measure of improvements or lack of improvements and well-being, what we would do is we would value, say, a 1 percent change in the income of somebody living at the poverty line, which is $23,000, roughly, for a family of four, the same as a 1 percent change in the income of a millionaire.

What we currently do instead is we value the 1 percent change for the millionaire much more highly because it takes more dollars to ratchet up their income by yet another percentage point.

So that is a fairly straightforward way to come up with a distributionally adjusted measure of GDP. It treats everybody the same instead of treating every dollar the same regardless of to whom it accrues.

Noor: And you're not alone in criticizing GDP. In 2009, Nobel prize-winning economist Joseph Stiglitz and others wrote a paper criticizing GDP as an insufficient measure of economic well-being. Can you talk about some of the specific criticisms they made?

Boyce: Yeah. That was a commission that was convened by the president of France at the time, and it included in addition to Joe Stiglitz, who, as you say, is a Nobel laureate--another of the cochairs was Amartya Sen, a Nobel laureate. My colleague here at the University of Massachusetts, Nancy Folbre, was a member of that commission. A number of really distinguished economists were part of it. And they voiced several of the same criticisms that we've just been discussing, the failure of GDP to count many things that are good that improve our well-being, the fact that GDP counts things that don't improve our well-being, and the fact that GDP misses how well-being and income are distributed across the population.

In addition, another important point that they raised in their report--and I would encourage your listeners to check it out on the web; you can download the entire report online--is that another important dimension of economic performance is whether or not that performance is sustainable over the long haul. Gains in income that come at the expense of future income, at the expense of future generations shouldn't really be counted is gain. They should be counted as borrowing against the future rather than lifting our level of income. So that issue of sustainability, which is particularly important with respect to environmental issues like global climate change and resource depletion, was another important point that they discuss in their report.

Noor: And, James, can you tell us the obstacles to getting this changed? 'Cause, you know, you see this starting out in, like, middle school and high school, and this analysis of GDP is used so widely in society and the government. What's it going to take to really change this, how GDP is analyzed?

Boyce: Well, that's a good question. I mean, you should never underestimate the inertial forces in the economics profession. Once an idea becomes received wisdom, it takes a long time to dislodge it, no matter how transparently erroneous that idea is. And the use of national income as a measure of well-being is the example of that broader pattern.

I think changes have already begun to happen. People have been talking about this for a number of years now, not only economists, but others in the policy community. And so I think we do see some changes in the offing. A number of the U.S. states, for example, are experimenting with alternative measures of economic performance, alternatives to state domestic product per capita. There are dozens of such initiatives. And if you look at the website of the New Economics Institute, you can find a nice summary of many of them.

I think gradually we're moving away from GDP towards other measures, but we still have a long way to go. And I think what would really help are two things--first, if the federal government were to stop exclusively using national income as a measure of performance, economic growth as a measure of performance, and instead report and cite other important measures. And the other thing would be if the public at large actually demands better information and stops being bamboozled by the notion that a three percentage point increase in economic growth is better than a two percentage point increase regardless of what that growth consists of and what it leaves out.

Noor: James, thank you so much for joining us.

Boyce: Thanks very much. It's been a pleasure talking to you.

Noor: And thank you for joining us on The Real News Network.

This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.

Hide Comments

blog comments powered by Disqus