There’s No G-D-P in “A Better Economy”
Shifting the focus away from GDP would lead to real economic progress.
The year-end numbers have been tabulated, and America is winning the race by a large margin. The nation's closest competitor, China, scores only half as high, and European nations, Japan, and Brazil lag way behind with little chance of catching up.
This statement is not about medal counts from the summer Olympics; it's not about citizens' health; and it's certainly not about student test scores in math and science. It's about GDP. The United States continues to dominate the race for the biggest economy.
Gross domestic product has become the most watched and most misinterpreted of all economic indicators. It's a measure of economic activity—of money changing hands. Despite the mundane nature of this economic indicator, politicians fiercely compete with each other to see who can promise the fastest GDP growth. Government programs and investments in technology get the green light only when they are predicted to spur GDP growth. Economists, bankers, and businesspeople pop the champagne corks when they hear "good news" about quarterly GDP numbers.
And while the United States leads in GDP, it also leads in military spending, the number of people in prison, and the percentage of people who are obese. These other first-place finishes seem at odds with America's position atop the GDP standings—that is, until you realize that spending on war, incarceration, and disease, as well as other "defensive expenditures," all count toward GDP. The arithmetic of GDP doesn’t consider what the money is actually being spent on, and over time, we’ve been spending more and more money on remedial activities and calling this "progress."
Counting all these negatives in GDP (not to mention omitting positive activities such as raising children, volunteering, and caring for elderly people) seems like an oversight or an accounting mix-up. But it also seems like something that could be easily fixed. Many people, including Nobel laureates in economics (and even the laureate who invented national income accounting) have issued stern warnings not to confuse GDP with national progress, and many forward-thinking economists have proposed alternative indicators of progress.
One such indicator, touted by The Economist, was designed expressly to assess quality of life in contrast to GDP. You can think of it as a "where-to-be-born" index, and it takes into account a lot of things besides GDP, including markers of health and happiness. Back in 1988, The United States was number one on this index, but it has been falling off the pace and now sits way back in the pack behind nations like Switzerland and New Zealand.
Even though we have a technical solution to the problem (new indicators are proliferating; for examples, see the Ecological Footprint, Happy Planet Index, Genuine Progress Indicator, and the United Kingdom's Sustainable Development Indicators), nations have failed to embrace alternative indicators and put them into widespread use. Politicians and the media continue to obsess over GDP. The reason we're having such a tough time abandoning GDP, despite all the criticisms that have been heaped upon it, is that the economy, as it’s currently configured, must grow to escape recession. And GDP is the marker of economic growth.
But it doesn’t have to be this way. With different economic policies, it’s possible to create an economic system that is not geared for growth and that does not require growth to guarantee jobs. For example, we can use the benefits of technological progress to reduce working hours and lower unemployment, instead of using them to produce and sell more stuff. We can give the Federal Reserve the power to manage the money supply directly, instead of allowing private banks to create most of our money in the form of interest-bearing loans. By reforming certain key economic institutions, we can do away with the growth imperative that is built into our economy at the moment.
So long as the economic system calls for growth, GDP will continue its reign as the primary economic indicator, a situation that sets up a chicken-egg conundrum. On the one hand, consigning GDP to the dustbin of history would help shift the focus of the economy away from growth and toward human well-being. On the other hand, shifting the focus away from growth would impart a demand for adoption of better measures of progress. No matter which comes first, there's a need to change economic direction—to make a transition to an economy that operates on the principle of enough, rather than one that perpetually chases more. When will the United States and other nations pull out of the maddening race for more and recognize that it's the journey to enough that really matters? And on that journey, we need to measure what really matters—the health of our societies and the environmental systems that contain them.
Read an excerpt from Enough Is Enough.