Why is the global economy constrained by the energy cost of energy?
WHAT'S WRONG WITH THE GDP?
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Since its introduction during World War II as a measure of wartime production capacity, the Gross National Product (now routinely measured as Gross Domestic Product—GDP) has become the nation's foremost indicator of economic progress. It is now widely used by policymakers, 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
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.
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
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.
The Genuine Progress Indicator (GPI) is a new measure of the economic well-being of the nation from 1950 to present. It broadens the conventional accounting framework to include the economic contributions of the family and community realms, and of the natural habitat, along with conventionally measured economic production.
The GPI takes into account more than twenty aspects of our economic lives that the GDP ignores. It includes estimates of the economic contribution of numerous social and environmental factors which the GDP dismisses with an implicit and arbitrary value of zero. It also differentiates between economic transactions that add to well-being and those which diminish it. The GPI then integrates these factors into a composite measure so that the benefits of economic activity can be weighed against the costs.
The GPI is intended to provide citizens and policy-makers with a more accurate barometer of the overall health of the economy, and of how our national condition is changing over time.
While per capita GDP has more than doubled from 1950 to present, the GPI shows a very different picture. It increased during the 1950s and 1960s, but has declined by roughly 45% since 1970. Further, the rate of decline in per capita GPI has increased from an average of 1% in the 1970s to 2% in the 1980s to 6% so far in the 1990s. This wide and growing divergence between the GDP and GPI is a warning that the economy is stuck on a path that imposes large—and as yet unreckoned—costs onto the present and the future.
Specifically, the GPI reveals that much of what economists now consider economic growth, as measured by GDP, is really one of three things: 1) fixing blunders and social decay from the past; 2) borrowing resources from the future; or 3) shifting functions from the community and household realm to that of the monetized economy. The GPI strongly suggests that the costs of the nation's current economic trajectory have begun to outweigh the benefits, leading to growth that is actually uneconomic.
If the mood of the public is any barometer at all, then it would seem that the GPI comes much closer than the GDP to the economy that Americans actually experience in their daily lives. It begins to explain why people feel increasingly gloomy despite official claims of economic progress and growth.
The GPI starts with the same personal consumption data the GDP is based on, but then makes some crucial distinctions. It adjusts for certain factors (such as income distribution), adds certain others (such as the value of household work and volunteer work), and subtracts yet others (such as the costs of crime and pollution). Because the GDP and the GPI are both measured in monetary terms, they can be compared on the same scale.
I. CRIME & FAMILY BREAKDOWN
Social breakdown imposes large economic costs on individuals and society, in the form of legal fees, medical expenses, damage to property, and the like. The GDP treats such expenses as additions to well-being. By contrast, the GPI subtracts the costs arising from crime and divorce.
II. HOUSEHOLD & VOLUNTEER WORK
Much of the most important work in society is done in household and community settings: childcare, home repairs, volunteer work, and the like. These contributions are ignored in the GDP because no money changes hands. To correct this omission, the GPI includes, among other things, the value of household work figured at the approximate cost of hiring someone to do it.
III. INCOME DISTRIBUTION
A rising tide does not necessarily lift all boats—not if the gap between the very rich and everyone else increases. Both economic theory and common sense tell us that the poor benefit more from a given increase in their income than do the rich. Accordingly, the GPI rises when the poor receive a larger percentage of national income, and falls when their share decreases.
IV. RESOURCE DEPLETION
If today's economic activity depletes the physical resource base available for tomorrow's, then it is not really creating wellbeing; rather, it is just borrowing it from future generations. The GDP counts such borrowing as current income. The GPI, by contrast, counts the depletion or degradation of wetlands, farmland, and non-renewable minerals (including, oil) as a current cost.
The GDP often counts pollution as a double gain; once when it's created, and then again when it is cleaned up. By contrast, the GPI subtracts the costs of air and water pollution as measured by actual damage to human health and the environment.
VI. LONG-TERM ENVIRONMENTAL DAMAGE
Climate change and the management of nuclear wastes are two long-term costs arising from the use of fossil fuels and atomic energy. These costs do not show up in ordinary economic accounts. The same is true of the depletion of stratospheric ozone arising from the use of chlorofluorocarbons. For this reason, the GPI treats as costs the consumption of certain forms of energy and of ozone-depleting chemicals.
VII. CHANGES IN LEISURE TIME
As a nation increases in wealth, people should have increasing latitude to choose between more work and more free time for family or other activities. In recent years, however, the opposite has occurred. The GDP ignores this loss of free time, but the GPI treats leisure as most Americans do—as,something of value. When leisure time increases, the GPI goes up; when Americans have less of it, the GPI goes down.
VIII. DEFENSIVE EXPENDITURES
The GDP counts as additions to well-being the money people spend just to prevent erosion in their quality of life or to compensate for misfortunes of various kinds. Examples are the medical and repair bills from automobile accidents, commuting costs, and household expenditures on pollution control devices such as water filters. The GPI counts such "defensive" expenditures as most Americans do: as costs rather than as benefits.
IX. LIFESPAN OF CONSUMER DURABLES & PUBLIC INFRASTRUCTURE
The GDP confuses the value provided by major consumer purchases (e.g., home appliances) with the amounts Americans spend to buy them. This hides the loss in well-being that results when products are made to wear out quickly. To overcome this, the GPI treats the money spent on capital items as a cost, and the value of the service they provide year after year as a benefit. This applies both to private capital items and to public infrastructure, such as highways.
X. DEPENDENCE ON FOREIGN ASSETS
If a nation allows its capital stock to decline, or if it finances its consumption out of borrowed capital, it is living beyond its means. The GPI counts net additions to the capital stock as contributions to well-being, and treats money borrowed from abroad as reductions. If the borrowed money is used for investment, the negative effects are canceled out. But if the borrowed money is used to finance consumption, the GPI declines.
The above text is excerpted from The Genuine Progress
Indicator: Summary of Data and Methodology, Redefining Progress
C1995. Copies of the full reports are available for $10.00 by
Redefining Progress, One Kearny Street, Fourth Floor San Francisco, CA 94108 Phone: 415-781-1191; FAX: 415-781-1198.
[ These are the same people who wrote the cover story "If the Economy Is Up, Why Is America Down?", in the October 1995 Atlantic Monthly. For back issues send $7 to: The Atlantic, Back Issues, 200 North 12th St., Newark, NJ. 07107]
THE GREEN NATIONAL PRODUCT: A Proposed Index of Sustainable Economic Welfare; Clifford W. Cobb and John B. Cobb, Jr; University Press of America, 1994 ISBN 0-8191-9322-4
This book is available for $24 + $5 shipping from:
Society for Human Economy, PO Box 28, West Swanzey, NY 03469-0028