“Our Gross National Product… counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl. It counts napalm and counts nuclear warheads… [Yet it] measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile.”
You almost have to feel sorry for Gross Domestic Product (GDP). From its Depression-era beginnings, it was recognized as utilitarian and limited, and even its originators longed for a second metric with more soul and national purpose. Economist Simon Kuznets, who won the Nobel in Economics for his work developing GDP, told Congress in 1934 that “the welfare of a nation can scarcely be inferred from a measure of national income. If the GDP is up, why is America down?”
GDP is the sum of household and government expenditures for goods and services, net exports, and net capital formation. It evolved into the preeminent econometric by which the business community, policy makers, and academics measure the “size” of the economy and determine how fast it is growing. It’s used to compare quality of life between countries, to measure the success of policies, to help formulate monetary policy, to prepare economic forecasts, and more. It can influence markets and can determine which countries receive foreign aid.
And yet because its formula is purely additive, negative phenomena ranging from environmental degradation to the costs of crime don’t get factored into the equation. GDP is not “inherently bad,” according to the authors of Beyond GDP: The Need for New Measures of Progress, but “rather it is being misused as an indicator of something it doesn’t measure and was never intended to measure.” That “something” was tackled by the architects of the Genuine Progress Indicator (GPI), an alternative indicator that is making inroads into the GDP’s once-solid turf.
In contrast to GDP, the GPI’s 26 indicators are a mix of both positive and negative metrics, as seen in Figure 1. Environmental and social costs are subtracted from commercial gains, resulting in a metric that better reflects quality of life and the costs of growth and consumerism. The GPI was first proposed by economist Herman Daly and theologian and environmentalist J.B. Cobb Jr., and was further developed by the public policy think tank Redefining Progress in the mid-1990s.
Consider how the two indicators would account for the impact of heating our homes with coal. GDP would be boosted by revenues received by coal mines and coal-burning utilities, and income received by miners, among other things. And rather than counted as losses, hospital revenues from treating coal-related asthma would boost GDP, as would the income earned by corporations who sell scrubbers to decrease air pollution. Coal-fired power “benefits” the economy and nary a loss is recorded, sending false signals to policy makers and business leaders even as we cough our way to an overheated planet.
Perhaps, then, it should come as no surprise that researchers have found that GPI consistently trails GDP (see Figure 2 below). In fact, researchers have observed what they’ve dubbed the “threshold effect”: as GDP increases, it increases quality of life only up to a point, then begins to plateau due to externalities such as rising income inequality, loss of leisure time, and industrial pollution. In Figure 2, one can see the threshold effect beginning to set in after the mid-1960s as GDP continues to rise as GPI plateaus.
When The States Come Marching In
A number of states are now calculating their own GPIs. In 2012, Vermont became the second state after Maryland to enact a GPI law, which directed the Gund Institute for Ecological Economics at the University of Vermont to develop the tools to measure the state’s GPI and to develop and test its use in public policy and budget analysis.
The Gund Institute’s first Vermont GPI analysis looked at trends in the state since 1960. Notably, it found that 2011 GPI was nearly 43% less than GSP (Gross State Product). Vermont’s GPI began to fall behind its GSP dramatically in the mid-1970s. Vermonters consumed twice more per capita in 2011 than they did in 1970, but the decline in GPI indicates that they weren’t necessarily better off, consistent with the “threshold effect.”
Fortunately, not all the trends were headed in the wrong direction. The cost of nonrenewable energy depletion was down, air pollution continued to be low, and the rate of greenhouse gas emissions growth has slackened over time. Volunteering contributed an estimated $250 million to the economy. Overall, Vermont’s GPI per capita was higher than the nation’s as a whole.
Vermont incorporated the GPI in its post-Hurricane Irene Comprehensive Economic Development Strategy, which sets a “unique, overarching goal” to not only grow GDP but also improve GPI by 5% over five years. In a Vermont Digger column, Erik Zencey, a University of Vermont faculty member who heads the Vermont GPI Project, extolled this action as a “revolutionary” development that “portends a quiet, far-reaching revolution in governance in the Green Mountain State – and perhaps on a larger stage.”
Maryland became the first state to officially adopt the GPI in 2010. It has adopted new goals that directly affect GPI, such as reducing infant mortality, cutting GHG emissions and planting more cover crops to improve soil fertility. Hopefully, the GPI will not fall into disuse since its champion, former Governor Martin O’Malley, is no longer in office. Oregon is another state where the GPI had made inroads, but it too lost its gubernatorial champion. A little farther north, the state of Washington set a goal of increasing its GPI from $193B to $204B in 2015. More information on states’ uptake of GPI can be found at GPIintheStates.org.
As for the feds, Demos researcher Sean McElwee reports in a recent New Republic piece that the federal government is looking at the GPI, noting a report by the Bureau of Economic Analysis that examined the limits of GDP and suggested a review of the national accounting system. GPI could be improved more quickly and serve policy makers better if it were better funded according to Eric Zencey, the coordinator of the Vermont GPI Project. “Thousands of careers have been invested in GDP’s accuracy. Would that we had the interest and the investment in resources that GDP has had.”
That, at a minimum, would be some genuine progress.
Beyond GDP: The Need for New Measures of Progress, Robert Costanza, et al., Boston University Pardee Papers, No. 4 (January 2009).
Vermont Genuine Progress Indicator, 1960-2011: Findings and Recommendations, Gund Institute for Ecological Economics
“Forget the GDP. Some States Have Found a Better Way to Measure Our Progress,” The New Republic, February 3, 1014.
“Beyond GDP: US States Have Adopted Genuine Progress Indicators,” by Marta Ceroni, The Guardian, September 23, 2014.
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Eric Zencey, GDP, Genuine Progress Indicator, GPI, Gund Institute for Ecological Economics, Herman Daly, Marta Ceroni, Redefining Progress, Robert F. Kennedy, Vermont GPI Project