CHAPTER 1
I want too much!
—RAFAEL BATKER, AGE THREE
The main message is to get away from G.D.P. fetishism and to understand the limits of it. There are many aspects of our society that are not covered by G.D.P.
—JOSEPH STIGLITZ1
“It’s the economy, stupid,” James Carville once wrote on the wall of Bill Clinton’s presidential campaign war room. But maybe those words should be scrambled. Maybe “it’s the stupid economy” sums things up better. How to describe a nation nearly twice as rich as it was a generation ago, but actually paying its median workers less than it was then?2
How is it that with so much wealth, so many people are so desperate? So unhappy? So stressed and strapped for time? Vanishing jobs, benefits, and retirement don’t help. Where’s the progress in that? How do we compete more aggressively? By paying people a dollar a day? Or by producing and consuming even more stuff ?
Just what is “the economy”? What’s it for? Is it working for us, or are we working for it? Can it work better? We’d better hope so. We’d better make it so.
Wasting Coal
Wherever you work, study, or play, you likely have experience with measures that matter. Length is measured by inches. Academic performance is indicated by grades. Measures are generally direct physical gauges quantified in specific units, such as tons of coal measured on a truck scale. Many things we want to track cannot be physically measured, so we also have indicators, intended to reflect a reality. Grades earned in school are intended to reflect knowledge learned. The terms measure and indicator are often used interchangeably.
Before he became an economist, one of the authors of this book, Dave Batker, was a geologist who worked in a coal mine. He ended up studying economics because one day, while working at the face of the Big Seam in Washington State’s Centralia Coal Mine, he broke off a cobble of coal and wondered, “How is the economic value of coal measured?” Coal has many qualities, and no one measure covers them all. There is the heat it generates, measured in British thermal units (BTUs). The cost to recover it and the price it fetches are also important measures. And there are others: hardness, luster, density, and content including carbon, mercury, amber, and sulfur.
Coal also has qualities that are not measured. In a lump of coal cleaved off the seam face you can often see the delicate structures of fossilized trees or plants that lived millions of years ago, now ready to light the darkness for but a moment. They are exquisite, but to the coal company and consumer, fossils count for nothing. Millions of years in the making, they become fire, ash, and gas for the economy.
Likewise, we measure some aspects of our economy and ignore others. Economies are less tangible than lumps of coal. So economists have developed more than forty indicators that are intended to tell us about the economy and how it is doing. We check such things as inflation, employment, interest rates, housing starts, durable goods orders, retail inventories, stock and bond prices, trading volumes, and money supply. Each describes part of the economy.
But the king of all economic indicators is the Gross Domestic Product, or GDP. Trumpets please! The higher GDP gets, the better we assume the economy to be. Fattening King GDP is more important to most of our leaders than reducing unemployment, controlling inflation, stabilizing interest rates, reducing debt, or paying attention to a host of lesser economic dukes, barons, or other measures. They all bow to the GDP. But these days, more and more critics are suggesting that King GDP has no clothes. Yet naked or not, the measure that steers our decisions is the measure that rules.
When Dave worked as a geologist at the mine, he met another imperial measure: quarterly profits. Critical to every coal mine is the “life of the mine” calculation, an estimate of the date when the coal will run out. Though the Centralia Coal Mine was the fifth largest in the United States when Dave was working there, only three of its ten seams of coal were actually mined. Seven seams of valuable coal were completely wasted, treated as “overburden,” dug up and plowed back into the pit, mixed with dirt, silt, sand, and rock.
Wasting seven seams of coal meant the mine would have a shorter life, about forty years rather than 140 years if the coal from all ten seams was recovered. Dave questioned the logic of mining only three seams. The mine’s financial officer provided an explanation: “We make one percent more in profit by mining only the three best seams.” Astonished, Dave argued the point: “But that’s one percent more profit over forty years versus one percent less profit over 140 years. The owners will make more over the long run by mining ten seams.” With a condescending smile, the financial officer replied, “But we want to maximize returns this quarter.” He shrugged, turned, and walked away.
That brief conversation helped to change Dave’s life forever. Troubled by economic decisions that made little sense, at least to him, he decided to dedicate his life to solving problems in economics instead of geology. He left the mine in 1985 to go to graduate school in economics at Louisiana State University. In time, he became an ecological economist, one who studies the impact of the economy on our planet. With his mentor, the renowned Herman E. Daly, he worked for a time at the World Bank (cue the boos from left-wing readers). After that, he worked as an economist with Greenpeace (cue the boos from right-wing readers).
Meanwhile, slope instability caused the Centralia Coal Mine to close in 2007, earlier than expected, leaving much of the best three seams unearthed. A total of 650 workers were laid off, and profits fell far short of expectations. Trains now bring Wyoming coal to the 1,400-megawatt power plant that was built only half a mile from the coal mine “for efficiency.” For the short-term-profit-obsessed owners, it appears that long-term reclamation of the mine and lands will be far more expensive than they had anticipated. And maximizing profits from a coal mine is infinitely more difficult when it is not producing any coal.
Today, the mining company’s goal is limiting corporate losses, placing the local community and larger public at constant risk of picking up the tab for the damage caused by shortsighted thinking in the first place. We now know that burning coal is a major source of atmospheric carbon dioxide (CO2). Like a car with windows rolled up on a hot day, carbon dioxide allows light through, but retains heat, warming up our planet. Thus renowned climate scientists believe avoiding a climate meltdown requires leaving tremendous quantities of coal underground, unburned.3
Just like the quick profit calculus that prevailed in the mine, the single-minded goal of GDP growth rules our national economic policies. The focus of President Barack Obama’s $787-billion stimulus package wasn’t reducing unemployment, fixing the mortgage crisis, or building a twenty-first-century economy free from dependence on fossil fuels. It was to get King GDP through a financial hangover, and fattening as quickly as possible. Similarly, right after September 11, 2001, President George W. Bush went on television and told people to go shopping. He wanted them to buy more, so the economy, as measured by the GDP, would weather the storm.
What Is the GDP?
By any measure of measures, including frequency of reporting in the media, mention by political leaders, or, most important, influence on government policy, King GDP rules.
But what is the GDP, actually?
Economists offer a simple answer: the GDP is the total market value of all final goods and services produced in a country in a given year. Enunciate each word clearly and in a monotone, as countless economics professors do each year: the GDP is the total market value of all final goods and services produced in a country in a given year.
The GDP measures the quantity times the price of final goods and services sold. In the case of the Centralia Coal Mine, the final good was the electricity sold to consumers. Every expenditure is at the same time someone’s income. This is why the GDP and associated indicators are called the National Income Accounts.
Our GDP measures the value of stuff produced and sold in the United States. It is often confused with a similar, older indicator called the Gross National Product, or GNP. The GNP was developed in the 1930s, a time when the United States was self-sufficient in nearly everything and companies in this country were overwhelmingly owned by American citizens, not foreigners. Production in the United States by a foreign company is not counted as part of the GNP. On the other hand, American-owned production is counted in the GNP even when it takes places in other countries.
By 1991, foreign-owned companies were making many products in the United States, confusing how imports were counted. At the same time many U.S. companies were making more products in other countries. Imports and exports had also become very substantial portions of the total economy. Trying to dissect U.S. production overseas and foreign-owned production here with a labyrinth of joint ventures and other arrangements became impossibly complicated. The United States and global economies had changed dramatically. Globalization made the GNP virtually impossible to accurately calculate. So, in 1991, the American government officially abandoned the GNP as its most important economic measure and crowned the GDP king. The GDP measures domestic production, no matter who owns the company. It excludes the complicated web of overseas production by American-owned companies and joint ventures.
Technical details for calculating the GDP and all other National Income Accounts can be obtained from the Bureau of Economic Analysis housed within the U.S. Department of Commerce (www.bea.gov). That’s the agency that collects and assembles data on the National Income Accounts. The Bureau of Economic Analysis (BEA) is understandably proud of its work in providing the American economy’s preeminent measurement. According to the BEA Web site: “The GDP was recognized by the Department of Commerce as its [the Bureau of Economic Analysis’s] greatest achievement of the 20th century and has been ranked as one of the three most influential measures that affect U.S. financial markets.”4
So how did we get the GDP, and how did it rise to such importance?
From Micro to Macro
New economic indicators develop because economies don’t just grow, they also transform. When the United States became a nation, most Americans were self-employed on self-sufficient farms. Some Americans were slaves, sold in markets as property. Overall, the monetary or market-based economy was small relative to the self-sufficient household economy. At that time, there were few services provided by private firms, public utilities, or government agencies, particularly compared to today’s economy. A market-based GDP would have measured little of the early American economy.
What we want from the economy also changes over time. Thus the way we measure the economy’s performance must also change. For America’s first 150 years, no one worried about how much, as a whole, our nation produced. Then came the Great Depression. With people and factories idle nationwide, the government developed new national programs to boost production and put people to work. It needed a way of measuring the success of these national programs.
Prior to the Great Depression (roughly 1929–40) there was no GNP or GDP, no measure of total national economic output. We had no idea how much stuff our country made, and no one cared. There were no reliable national measures of inflation, unemployment, consumption, or money supply. Economists refer to the study of the economy at the scale of the nation (and state) as macroeconomics. But prior to the Great Depression, there was no real study of macroeconomics. The focus instead was on microeconomics, the study of supply and demand, economics at the scale of markets, firms, and households.
There was little in the way of macroeconomic theory either. The American economy rode the wild rapids of spectacular booms and busts. Mass bank failures and widespread foreclosures erupted every decade or so between booms. Economists just called it the business cycle.
But when the Great Depression hit, the business cycle became a steady downward spiral, dragging employment, production, exports, prices, and everything else down, down, down. People were out of work and hungry. Factories were idle. Farms were foreclosed. Prices tumbled. Stocks crashed. But without macroeconomic indicators, it was hard to know just how bad things really were. Indeed, in 1930, President Herbert Hoover declared, “The Depression is over,” without knowing how many Americans were unemployed or whether overall production was rising or falling (it was falling). But to his credit, Hoover did authorize the first count of unemployed Americans on a national scale in the 1930 census.5
It is hard to solve a problem if you have no theory for how a system works, and no appropriate measures for either the problem or the solution. In the 1930s, economists had no theory about how the national economy worked and no national-scale economic indicators. Microeconomics, focused as it was on firms, households, and markets, and the fuzzy idea of the business cycle, was incapable of solving the Great Depression. Macroeconomics was created to solve tangible economic problems stemming from a national-scale depression. Much of the crisis revolved around the issue of aggregate demand at the national scale; too few products were being purchased, which depressed prices and reduced incomes. With less demand, factories closed and laid people off so they had even less money to spend. Virtually every American suffered. Tens of millions lost jobs, farms, and homes or just went hungry.
The Birth of the GNP
As the need for national economic indicators and more comprehensive economic theories grew more pressing, the Bureau of Economic Analysis asked the Russian immigrant and University of Pennsylvania economist Simon Kuznets to figure out how to measure national income and expenditures as well as the total value of all the goods and services produced in the United States each year. In 1934, Simon Kuznets unveiled his Gross National Product.
The comprehensive nature of the GNP was breathtaking. It gathered specific data from every economic sector—from sausage sales to plastics production—then aggregated the whole of U.S. economic production into one number based on a common “currency” or unit of measurement, the dollar. Simon created an important measure where there had been none. It was a measure focused on national “aggregate production and aggregate demand.” This was essential when our nation faced the problems of underproduction and underconsumption, when oil and forests were plentiful, and manufactured goods, like indoor plumbing, were rare.
The creation and adoption of the GNP was also a milestone in the most formidable economic ideological struggle in American history. The struggle wasn’t between communism and capitalism, because Americans have always overwhelmingly supported capitalism. But for more than a century, they have debated two visions of capitalism.
One is laissez-faire economics, trusting the “invisible hand” of a largely unregulated market to deliver the best possible outcomes. The proponents of laissez-faire advocate minimum government beyond such services as the military, police protection, and the courts. For them, government policies are seen as hindering economic progress.
The other vision is of a mixed economy in which government is an active player, providing services, overseeing and regulating markets, preventing monopolies, and managing economic policy. In this view, government can play a significant and positive role in improving the economy. During the Great Depression, this new view took precedence over laissez-faire, a position it would not relinquish for half a century. The GNP and other macroeconomic measures were developed to provide information for the federal government to implement active economic policy-making at a national scale.
Seven years after Kuznets created the GNP, the shocking attack on Pearl Harbor plunged a mostly unprepared America into World War II. Dramatically shifting and increasing production for the war effort became the paramount national objective. Thanks in no small part to Simon Kuznets, the United States had the best economic tools of any nation on Earth to facilitate such a dramatic economic transformation. The detailed data collected with regard to how much aluminum, steel, electricity, rubber, copper, engines, cars, and other goods the nation produced was critical to assisting government planners in figuring out how many ships, planes, bombs, tanks, tires, and guns could be built and how to allocate resources to build them. Private and public investment were mobilized as never before, and production surpassed levels that seemed unimaginable in December 1941. Unique national-scale economic indicators and production data that the United States had developed contributed significantly to both solving the Great Depression and winning World War II.
Developing the GNP was a critical part of creating a macroeconomics for the twentieth century, one that could deliver a better life to people. It was a tremendous accomplishment, and we wish to acknowledge that. Nearly every nation on Earth now uses the GNP to indicate economic output. Simon Kuznets was justifiably proud of his measure. But like many creators who understand their inventions more deeply than those who will use them, he knew its limitations and offered a word of warning about making too much of the GNP: “The welfare of a nation can scarcely be inferred from a measurement of national income.”6
But Kuznets is history.
Not the GNP, though. After World War II, the goal of full employment was replaced by growth in GNP as the primary economic goal. Presidents, congresses, the media, economists, and the general public missed the yellow light. Though Kuznets warned against it, the GNP (now the GDP) is generally assumed to measure how well our economy and our nation are doing. Increasing the GNP/GDP came to dominate economic policy decisions in the United States under every administration. It still does.
Bobby Kennedy’s Warning
There were dissenting voices. Many academics, economists, and especially environmentalists echoed Kuznets’s warnings. But for the most part, our leaders ignored them, with one very important exception. On March 18, 1968, early in his presidential campaign, Senator Robert Kennedy, the brother of assassinated president John F. Kennedy, stepped to the podium at the University of Kansas. His words seem as appropriate today as they were then, and they are worth quoting at length.
For too long we seem to have surrendered personal excellence and community value in the mere accumulation of material things. Our Gross National Product now is over 800 billion dollars a year, but that 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 people who break them. It counts the destruction of the redwoods and the loss of our natural wonder in chaotic sprawl. It counts napalm, and it counts nuclear warheads, and armored cars for the police to fight the riots in our cities. It counts Whitman’s rifle and Speck’s knives and the television programs which glorify violence in order to sell toys to our children. Yet, the Gross National Product does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. 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. And it can tell us everything about America except why we are proud that we are Americans.7
Only ten weeks later, after winning the California Democratic presidential primary, Senator Robert Kennedy was dead, felled by an assassin’s bullet. In the four decades since, hardly a single political leader has gone where Kennedy did not fear to tread. He was far ahead of his time, but he had zeroed in precisely on the problems with GNP and GDP. It counts as positive a lot of things that make our lives worse, and it doesn’t count at all so many things that make them better.
What Counts in the GDP?
Here are some of the things that count positively toward the GDP.
• Pollution. If groundwater is polluted, and we have to buy bottled water at a thousand times the price of tap water, the GDP rises. Because of enormous cleanup and legal costs, the oil belched by the BP Deepwater Horizon well in the Gulf of Mexico will contribute far more to the GDP than had that same oil actually made it to the refinery and been sold as gasoline, diesel, and other products. (The Exxon Valdez oil spill had a similar effect on the GNP two decades ago.) Cleaning oil off the beaches and wildlife can cost tens of thousands of dollars for every $100 barrel of oil cleaned up.8
• Crime. GDP increases as property loss claims arrive and people buy replacements for stolen goods. It increases as they install alarms and bars or hire guards. New prison construction, prison operating costs, and other crime costs all add to the GDP. We’re actually better off with safe communities where such “defensive” expenditures are unnecessary. Crime requires defensive expenditures, which should be subtracted from the GDP. A recent Iowa State University analysis showed the social costs of a murder at $17.25 million.9
• Health damage. Another “defensive” expenditure includes many health care costs. For example, over 350 billion cigarettes were sold in the United States in 2006, adding to the GDP.10 During the same year over $10 billion was spent treating lung cancer in the United States, which also added to the GDP.11 Instead of subtracting the cost of smoking-related cancer, the GDP treats it all as a positive benefit, the same as wheat production.
• Family breakdown. Divorce may not be good for families, but it is good for the GDP. A divorce can cost from $7,000 to $100,000.12 That total usually includes the lawyers’ fees, the establishment of separate households, and often the cost of therapy.
• Debt, foreclosure, and bankruptcy. When people or the government borrow too much and personal or national debt rises unsustainably, the GDP climbs. Even bankruptcies and foreclosures count positively in the GDP, since they incur legal costs, moving expenses, and replacement of lost housing or possessions. The average bankruptcy cost in 2010 was between $700 and $4,000,13 and with an estimated 1.5 million Americans declaring bankruptcy that year, it adds up.14
• Paper transfers and bursting bubbles. New “financial products,” such as derivatives and credit default swaps, were at the heart of the 2008 financial crisis, driving worldwide recession. These “products” count highly positively in the GDP because they increase the incomes of insurance companies and investment banks. Yet their value can just as suddenly vanish, as happened in 2008 when packages of subprime loans suddenly had no buyers. The financial services account was the fastest growing part of the GDP, as income from the sales of bundled mortgages and derivatives ballooned. Such bubbles are seen as great economic successes when they should more properly be measured as harbingers of disaster. American International Group’s income from selling credit default swaps soared in 2006 to hundreds of millions of dollars, adding to the GDP. By 2009 the company lost over $61 billion due to the same credit default swaps.15 Even the Bureau of Economic Analysis is considering changes.16
• Increasing scarcity. Depletion of natural resources is a cost to future generations. Yet scarcity is often reflected positively in the GDP. For example, as U.S. and global oil reserves have been depleted, gas prices have risen, increasing the GDP even while raiding the wallet of anyone with a gas tank to fill. The GDP gives no clue as to whether the rise in final market sales value is due to scarcity, productivity, or market manipulation. Paying four dollars for a gallon of gasoline at the pump adds twice as much to the GDP as paying two dollars per gallon. Sure feels good adding more to the GDP.
• Risk. The GDP does not take into account the risk of catastrophic costs. Retail electricity sold from nuclear power plants counts positively in the GDP. Expenditures attempting to minimize or clean up the Fukushima nuclear disaster also count positively. Due to the tremendous longevity of deadly nuclear isotopes, such as plutonium, the Environmental Protection Agency ruled that nuclear waste must be safely contained for one million years.17 The associated unknown risks and costs count for nothing in the current GDP.
Now, consider a few important things that the GDP does not count.
• Nature. Natural resources are the basis for many of our most productive economic assets. Seattle’s drinking water, for example, is filtered by the forest of the upper Cedar River watershed. Its quality far exceeds drinkability standards. This saves the city $200 million in costs for a needless filtration plant. The valuable service of natural water filtration does not count in the GDP. But building a filtration plant and raising water prices to pay for it would count. Building a levee for New Orleans counts, but the greater value of hurricane protection provided by natural coastal wetlands does not. Buying a boat to catch fish counts. The habitat that produces the fish does not count. The obvious economic goods and services that nature provides every year to Americans do not count in the GDP.
• Sustainability. The GDP says nothing about sustainability and does not discern whether activities contributing to the GDP are sustainable. The Atlantic cod fishery was the world’s largest food fishery for over five hundred years. A few decades of overfishing caused the fishery to collapse. Overfishing counted more positively in the GDP in a single year than fishing at a lower sustainable rate. The GDP is incapable of distinguishing between the unsustainable demolition of a fishery and a sustainably managed fishery, such as the Alaskan salmon fishery.
• Exercise. We all know it’s good for our health, but it only counts if we pay to go to the gym or otherwise spend money. That daily walk we try to take may be good for our health, but it’s a waste of time as far as the GDP is concerned.
• Social connection. It’s the most important thing we can do to be healthy and happy. But unless money is spent, friends and family are also a waste of time. The time Dave and John spend with their sons contributes nothing to GDP. Unless they are buying the kids something. That counts.
• Volunteering. It’s the glue that holds communities together, and it will be increasingly important as budgets for social services tighten. But if it’s unpaid, it counts for nothing. It’s just another GDP waste of time.
• Housework. Domestic work isn’t counted, at least not by the GDP. Hire a nanny; that counts. Hire a maid; that too. Hire a gardener or carpenter; you’re contributing to GDP. Do it yourself, and you’re slacking in your duties to our nation’s preeminent measurement.
• Price and quantity effects. The GDP does not separate between price effects and quantity effects. For example, if a company doubles the price of a car, it shows up in the GDP just as it would if the company built and sold two cars at the former price. This means the GDP is deeply flawed even as a measure of production, its original purpose.
• Quality. One of the long-standing critiques of the GDP was the lack of a quality adjustment. Without adjusting for quality improvements, the GDP overvalues lower quality higher priced goods and undervalues goods of higher quality and better performance. The dumber, slower, more expensive computer added more to the GDP than a smarter, faster, cheaper computer. Recently, the BEA implemented corrections for quality improvements for some goods including computers, software, and in 2011, communications equipment. This is done using a quality-adjusted price index calculated by the Federal Reserve Board. Yet for the vast majority of goods and services, quality improvements, which benefit both producers and consumers, still reduce GDP.
Just imagine you’re stuck in a traffic jam, burning gas and choking on exhaust, requiring you to pull off and fill up the tank. The traffic jam has added to the GDP. If you got into a wreck, totaling your car and increasing the cost of your insurance while the wreck caused an even bigger traffic jam for everyone else, the GDP would rise even more. And if you were injured in the wreck and sent to the hospital for weeks of recovery, the GDP would rise still higher. And if you’d had an expensive divorce that morning, and your house burned down that evening, requiring legal fees, insurance claims, and more new purchases, you would have had a completely stellar GDP day! Congratulations!
A Gathering Storm
Skepticism about the GDP is out there and contagious. Herman E. Daly began adjusting GDP measurements in the 1980s to subtract real costs like pollution, and his work culminated in the Genuine Progress Indicator (GPI) created by John Cobb Jr., Ted Halstead, and Jonathan Rowe. Beginning with the GDP, but adding the value of things such as housework and volunteering, while subtracting others, like pollution, family breakdown, and accidents, the GPI showed that quality of life in the United States had actually declined since 1973, while the GDP had more than doubled. As Rowe stated bluntly before the U.S. Congress in 2008, “Any measure that portrays an increase in car crashes, cancer, marital breakdown, kinky mortgages, oil use, and gambling as evidence of advance—as the GDP does—simply because they occasion the expenditure of money, has a tenuous claim to being reality-based discourse.”18
More recently, some government leaders have expressed agreement with that sentiment, joining the call for new measurements of progress. The World Bank announced a green accounting program in 2010.19 The European Union has held a series of conferences exploring alternatives to the GDP, while in 2009 the conservative French president Nicolas Sarkozy declared the GDP obsolete and minced no words about his agenda. “France will put this on the agenda of all of the international meetings and all the discussions that have for an objective the creation of a new order,” he said.20
Gross Domestic Product vs Genuine Progress Indicator
In February 2010, President Sarkozy created the Commission on the Measurement of Economic Performance and Social Progress, chaired by the Nobel Prize–winning economists Joseph Stiglitz and Amartya Sen. Sarkozy asked them to present their findings before the year ended.
The commission delivered on September 14. Its report noted that “there are long recognized problems in GDP as a measure of economic performance, but many of the changes in the structure of our society have made these deficiencies of greater consequence.”21
As the Declaration of Independence assailed King George III for arbitrary tyrannical governance, the report went about as far as polite, introverted, academic economists could go in calling for revolution against the world’s most powerful monarch of economic measures: “Those attempting to guide the economy are like pilots steering a course without a reliable compass. The decisions we make depend on what we measure, how we do our measurements, and how we interpret them. We are almost ‘flying blind’ when the metrics on which action is based are ill-designed. Today, there is a broad consensus that we need better metrics and that we need to understand the limitations and uses of existing metrics.”22
As the commission’s report points out, getting economic indicators right, and particularly our most important economic indicator, is critically important to the health of the economy, to people’s jobs and well-being, and to our children’s future. We should be focused on what actually makes people better off. As Stiglitz argued: “What we measure affects what we do; and if our measurements are flawed, decisions may be distorted. Policies should be aimed at increasing societal welfare, not GDP. Choices between promoting GDP and protecting the environment may be false choices, once environmental degradation is appropriately included in our measurement of economic performance.”23
Or, as the late Jonathan Rowe put it: “Metrics are silent rulers, in both senses of the word. In defining the task, they also define the steps we must take to carry it out.”24
If the GDP is mismeasuring the economy, we’re bound to make some big mistakes. Reforms of banking regulation which allowed banks to manufacture new “financial products” and inject them right into the economy, like drugs without any testing, boosted the GDP. But what we really needed was a national-scale tornado warning from our premier economic measure. As the Stiglitz report politely noted, “Some economic reforms in recent years may have increased GDP, but their adverse effects on these other dimensions of Quality of Life are unmistakable.”25
The New Key National Indicators System
For those looking for new measurements of American economic performance, great news came in the passage of the Obama health care bill in 2010. Tucked away in its pages was the appropriation of $70 million over the next eight years to develop and publicize the new Key National Indicators System (KNIS) for the United States. Administered by the National Academy of Sciences, the new system will provide comprehensive and easy-to-access data on at least three hundred indicators, with a few given priority like the meters on a dashboard.26
KNIS is the brainchild of Chris Hoenig, a former executive at both IBM and the government’s General Accountability Office who was dissatisfied with the GDP and other indicators. With help from foundations and several prominent Americans, including the former Harvard president Derek Bok, Hoenig created a Web site (www.stateoftheusa.org) that shows a prototype for the new system.
After he spent years quietly working on his project, Hoenig’s ideas for new measures were introduced as an amendment into the health care bill. It passed the Senate with only one objection, showing broad bipartisan support. Unlike the archaic GDP (wait for the quarterly announcement), the Key National Indicators System will allow all of us on our home computers to immediately access the best data for an enormous array of indicators, with cross tabs for towns and cities, states and countries, ages, genders, income, race, and other useful information. A modest, quiet man, Hoenig has shown what a single individual with a goal can accomplish. His KNIS may mark the beginning of the end for the GDP.
Indicators are associated with goals, like the goal of avoiding an explosion by measuring the pressure of a car tire or nuclear containment vessel. Understanding how the system works enables the use of indicators to achieve goals or prevent disaster, like knowing when to stop a rise in pressure. This connects measures to perhaps the most important concept in economics: the relationship between costs and benefits.
The When-to-Stop Rule
Did you ever eat pizza and never stop? Of course not. Eventually (though often not as soon as you should), you get full. Sometimes you eat too much and regret it later. Balancing costs and benefits, and knowing when to stop, is central to every part of daily life. More is not always better.
The ecological economist Herman E. Daly points out that one of the central tenets of economics is the when-to-stop rule, based on the margins. The margin is the next unit of something, like the next slice of pizza. When marginal costs exceed marginal benefits, it’s time to stop eating, or for a company to stop producing. People, businesses, government all apply this when-to-stop rule every day. Even if marginal cost and marginal benefit cannot be exactly calculated, we still decide when enough is enough. It is fundamental to microeconomics. Businesses constantly apply this rule with their best data and judgment in choosing when to stop hiring, how many products to produce, how long to stay open, and so on.
It takes some life experience and training to apply the when-to-stop rule wisely. At the age of three, when Dave’s son, Rafael, wanted more ice cream on the full ice cream cone he was being offered, he was told that any more would be too much. But the three-year-old insisted, “I want too much!” Just for the sake of experiment and a little lesson, he was given “too much.” The ice cream soon landed on the grass, and Rafael responded with a downward look of stunned disbelief followed by a yowl. It was almost like Alan Greenspan’s look as he was testifying before Congress after his “self-regulating” economy melted down. Such lessons are best learned in childhood. By adulthood, wanting too much is usually considered pathological.
But although the when-to-stop rule is essential to microeconomics, no such rule exists in macroeconomics. Unlimited GDP growth is the preeminent macroeconomic goal. Yet every economy, from household to planet level, has physical boundaries and thresholds where costs eventually surpass benefits. A body can only handle so much. We all need time to rest and relax.
Scientists tell us that 350 parts per million is the limit for carbon dioxide in the atmosphere if we wish to keep the climate from changing catastrophically. There are physical limits to our economy, which we will explore in greater detail in chapter 9. Macroeconomics needs a when-to-stop rule. The problem is that macroeconomics assumes that unlimited growth should be our primary goal, and our primary measure for economic growth is the GDP. Both the measure and the goal are flawed.
During a depression when we had no economic measures, and a world war when we really needed a gauge of how much we could produce, the GNP/GDP performed well. But eighty years on, as with the GNP, it is time to retire the GDP to the museum of antique indicators. We have new economic goals, better data, and a better understanding of how and what to measure. We need indicators that actually gauge our progress toward our most important goals.
Eyes on the Prize!
Behind every measure stands a goal. There is no need to measure something if no goal is associated with it. A good measure must indicate if you are getting closer to, or farther away from, your goal. If your goal is to make a door frame of a certain size, weighing the lumber doesn’t do you any good. You have to measure length, width, and height, and cut boards to the dimensions needed.
Simon Kuznets did not create the GNP by thinking about how to fix existing measures. He came up with a new measure for a new economic goal. The U.S. government in the 1930s set new goals: increase output, lower unemployment, stabilize prices, and manage the nation’s money supply. Then, the GNP indicated whether or not we were achieving the first of those.
The economy grew and changed. The GNP, impossible to calculate by 1991, was morphed into the GDP. Today, as an economic indicator, the GDP is obsolete: counting expenses on pollution, crime, and sickness as positive and discounting good health, family time, and much of what matters most to Americans. Faulty indicators aside and far more important, the overarching economic goal behind GDP is the wrong economic goal. Striving to produce more and more stuff, indicated by the rising value of market transactions (GDP), was a good goal in the 1930s but can no longer deliver a better economy or greater well-being to Americans. As the GDP has risen, median incomes have fallen. The prevailing economic advice is for the average American to sacrifice income, benefits, health, time, and ultimately happiness to achieve greater GDP growth. The Nobel laureates in economics Joseph Stiglitz and Amartya Sen point out that policy to promote GDP growth is degrading the quality of life in America. The primary inertia behind the old economic goal is that we’ve had it for eighty years.
It is time to ask, what’s the economy for, anyway? What do we, as Americans, now want from our economy? In the next chapter of this book, we will explore other goals. When we’ve done that, we can examine accurate, reliable indicators that can tell us how the economy is performing and how we’re doing in building a twenty-first-century economy that delivers what Americans actually want and value.