Tim Haab asked me to respond to a question by Jonathan Pfeiffer from The Answer Desk:
But first, a quick defense of GDP: It does a pretty good job of measuring the size of our economy. Most importantly, it was never intended as a welfare measure. GDP measures market transactions. It does not include the value of your leisure time, the value of taking care of your kids at home, or the value of the oxygen produced by the tree outside your window. In the end, environmental degradation frequently looks good for the economy because it often is good for the economy. It is bad for overall well-being, but it increases GDP.
That said, we — and this includes economists — frequently fall into the trap of using GDP as a measure of how well we are doing as a society. This is often done out of necessity, since we do not have a consistent, alternative measure of true well-being. Up to a point, it is also a pretty good approximation. There is most certainly a correlation between material wealth and well-being. Not eating at all would put a damper on our welfare. Eating too much, however, could actually make us feel worse again. The question is where is the point of inflection. Starting when does one more dollar of GDP decrease well-being? This is where the alternative measures of well-being come in.
Among the first to ask this question were two Yale economists, Bill Nordhaus and the late James Tobin, in a paper titled "Is growth obsolete?" in 1973. They developed the Measure of Economic Welfare, which used GDP (or more accurately NNP, net national product) as the starting point and made some imputations for the value of leisure and the depreciation of natural capital, among others. It turned out that GDP tracked the MEW pretty closely. Their conclusion: "Is growth obsolete? We think not."
Next came Daly, Cobb and Cobb in 1989 with the Index of Sustainable Economic Welfare. They made some further adjustments and concluded that "empirical evidence that GDP growth has increased welfare is very weak."
In the 1990s, Redefining Progress entered the picture. They developed the Genuine Progress Indicator, which makes the most far-reaching adjustments to GDP. They conclude that the growth of well-being has not kept pace with that of economic output. "GPI started declining around 1975, while GDP keeps increasing."
Besides these three alternative measures of well-being, there are efforts underway to amend official GDP statistics. Several countries, including the United States, have attempted to make such calculations at various points in time. The United Nations Statistical Office, which publishes guidelines on how to calculate GDP, also produces a set of rules for environmental or green accounting.
In the end, though, it’s politics, stupid. For all its inglorious number crunching, green accounting tends to be politically loaded. In the United States, it was Congress that stopped any official efforts through one line in an amendment to several appropriations bills. For more on this sorry tale, listen to an NPR story by yours truly.
For an overview of green accounting in general, you may be interested in this green accounting bibliography.
I'd like to see an overview of ways of measuring economic progress that don't ignore ecological concerns. For example, what alternatives are there to indicators such as gross domestic product? (Alternatives should include indicators that somehow factor environmental data into the equations.)Jonathan, you are right to point out that the Gross Domestic Product (GDP) almost completely ignores our environment. Even worse, actually, GDP often includes the environment on the wrong side of the balance sheet. If we first pollute and then pay to clean up the mess, both activities add to GDP. Environmental degradation frequently looks good for the economy. In that regard, GDP is a poor welfare measure.
But first, a quick defense of GDP: It does a pretty good job of measuring the size of our economy. Most importantly, it was never intended as a welfare measure. GDP measures market transactions. It does not include the value of your leisure time, the value of taking care of your kids at home, or the value of the oxygen produced by the tree outside your window. In the end, environmental degradation frequently looks good for the economy because it often is good for the economy. It is bad for overall well-being, but it increases GDP.
That said, we — and this includes economists — frequently fall into the trap of using GDP as a measure of how well we are doing as a society. This is often done out of necessity, since we do not have a consistent, alternative measure of true well-being. Up to a point, it is also a pretty good approximation. There is most certainly a correlation between material wealth and well-being. Not eating at all would put a damper on our welfare. Eating too much, however, could actually make us feel worse again. The question is where is the point of inflection. Starting when does one more dollar of GDP decrease well-being? This is where the alternative measures of well-being come in.
Among the first to ask this question were two Yale economists, Bill Nordhaus and the late James Tobin, in a paper titled "Is growth obsolete?" in 1973. They developed the Measure of Economic Welfare, which used GDP (or more accurately NNP, net national product) as the starting point and made some imputations for the value of leisure and the depreciation of natural capital, among others. It turned out that GDP tracked the MEW pretty closely. Their conclusion: "Is growth obsolete? We think not."
Next came Daly, Cobb and Cobb in 1989 with the Index of Sustainable Economic Welfare. They made some further adjustments and concluded that "empirical evidence that GDP growth has increased welfare is very weak."
In the 1990s, Redefining Progress entered the picture. They developed the Genuine Progress Indicator, which makes the most far-reaching adjustments to GDP. They conclude that the growth of well-being has not kept pace with that of economic output. "GPI started declining around 1975, while GDP keeps increasing."
Besides these three alternative measures of well-being, there are efforts underway to amend official GDP statistics. Several countries, including the United States, have attempted to make such calculations at various points in time. The United Nations Statistical Office, which publishes guidelines on how to calculate GDP, also produces a set of rules for environmental or green accounting.
In the end, though, it’s politics, stupid. For all its inglorious number crunching, green accounting tends to be politically loaded. In the United States, it was Congress that stopped any official efforts through one line in an amendment to several appropriations bills. For more on this sorry tale, listen to an NPR story by yours truly.
For an overview of green accounting in general, you may be interested in this green accounting bibliography.
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