Why our well-being won’t necessarily be improved by opting for GPI instead of GDP

The Council of Outdoor Recreation Associations has welcomed “Prime Minister Jacinda Adrian’s recent announcement that measuring the national’s progress by Gross Domestic Product (GDP) was flawed”.

Let’s overlook the flaw in the council’s spelling of the PM’s name and focus on the implication that Jacinda Ardern was announcing the discovery that GDP has shortcomings as an economic measure.

It depends what you are trying to measure, of course.

The Council of Outdoor Recreation Associations mentions “the growing realisation” that GDP is “narrowly economic in focus and ignored important social and environmental aspects”.

The realisation – awareness would be a better word for it – is several decades old.

Consider this from an economist with the Federal Reserve Bank of Richmond back in the 1990s (and what he was saying about gross domestic product and gross national produce had been recognised long before that). 

Considering the amount of data consistently measured over time and the complex interrelations revealed among disparate items, the national income and product accounts are a remarkable achievement.

In part because the accounts do so much so well, users can be tempted to expect more of the accounts than they can deliver. A few potential problems have already been mentioned; in this section other potential pitfalls are discussed.

First, it should be emphasized that the national income and product accounts only measure production, spending and income. They were not designed to measure economic welfare – that is, how highly individuals evaluate the economic rewards they receive minus the cost of obtaining them. Despite the limited focus of the accounts, it is still common for some observers to see differences in national product between nations as evidence of different standards of living. Such comparisons should be discounted for many reasons, a few of which follow:

(1) Some items included in GNP do not directly raise individual welfare. For example, military spending is like intermediate product-it can provide necessary protection that allows other economic activity to proceed, but is not valued for its own sake. Citizens of a nation that is able to obtain adequate defence for 1 per cent of GNP can consume and invest more, thus having a higher standard of living, than citizens of a nation with the same GNP who had to spend 10 per cent of  GNP for defence.

(2) Some items are not included in GNP that do make people better off. For example, unpaid household work may be highly productive but is not included in the national income and product accounts.

(3) There may be unmeasured external effects that result from productive activity. For example, the production of electric power may involve an unmeasured damage of pollution from burning coal. Two countries could have the same GNP but differ in the cleanliness of air and water.

(4) Other countries may use different data sources or even different concepts to produce income and product estimates.  Socialist countries, for example, will lack many market prices used in the US accounts, Also different governments may not have access to similar quantities or qualities of data.

The Council for Outdoor Recreation Associations references Ardern’s recent announcement that her Government would implement a ‘well-being’ budget this year in order to focus less on improving Gross Domestic Product (GDP) and the economy than in past years, and more on ensuring New Zealanders’ “wellbeing”.

Good luck with that.

Council chairman Andi Cockroft reminds us that over the last decade, his organisation has advocated the immediate need to replace GDP with GPI – ie, Genuine Progress Indicator – where social and environmental values are elevated to the same level as economic.

CORANZ has promoted the concept in its election charters at the last four elections, he said.

“Significantly and sadly, very few politicians bothered to respond,” said Andi Cockroft.

“One of the paradoxes of modern society is that while our economic standard of living measured by material goods such as sales of washing machines, automobiles, television sets and other goods, had improved, our environmental and social values have declined alarmingly. We may have modern technological aids but we are not prepared to inherit the earth or to carry on the pursuit of happiness.”

He said rapid technological advances and developments had made life easier but society was falling prey to the weakness of an indoor nation and the flabbiness of a sedentary society.

“Pursuit of GDP and an obsession with material growth is like a dog chasing its tail. An increasing number of economists have dared to challenge the fallacy of pursuing maximum growth and disregarding social and environmental impacts. The Prime Minister has shown foresight and courage to challenge the mantra of GDP,” said Andi Cockroft.

But we advise our readers not to race too uncritically to join the GPI brigade.

This article in Forbes is worthy of some consideration first.

First, it has good things to say about GDP:

GDP is also extremely useful as long as we properly understand what it is. It’s not a measure of all economic activity, nor is it a measure of the good life. And it doesn’t measure the distribution of income, another complaint.

But it does do what it says on the tin: it’s a good measure of the value added in the economy. Given that more value added is generally a good thing, as that means there’s more value to be split among everyone, as long as we remain in touch with its limitations it’s a perfectly good measure.

It’s not a God, nor a goal to be pursued beyond all else, but it’s still a useful measure. Places with high GDP per capita are notably nicer places to live in, humans have a better life in them, than places with low GDP per capita.

Then Tim Worstall, the author (and a Fellow at the Adam Smith Institute in London) addressed the problems with GPI.

For a start it includes some things that wouldn’t be universally agreed upon as making things better. It insists that loss of wetlands is a deduction from the well being of the people. Also that an increase increases it. Which argument leads us to the idea that reflooding the Pontine Marshes or the Fens would lead to an increase in the wealth of the nation. This would come as a surprise to those whose land disappears under the waters, also as one to those who then contract the inevitable malaria (and yes, both areas had endemic malaria before they were drained, the former right up until Mussolini drained them in the 1920s).

Similarly the loss of farmland isn’t particularly a fall in the wealth or income of the nation. GDP captures this rather better: moving land from say, £10,000 a hectare to £1,000,000 as it has housing built upon it is an addition to value, not a deduction. In this sense GPI is trying to codify a certain set of highly contentious ideas into the one metric by which we must judge everything. The same is true of the insistence that the distribution of income, the equity of that distribution must count. Some people might indeed say that a more equitable distribution is a better world. But I think we’d all agree that that’s not actually something that the entirety of society agrees is so? That it is more of a worry over on the left than it is in the centre or upon the right? And thus that GPI is trying to code in a particular world view rather than being an objective measure?

It’s also true that many of these things will be as, if not more, difficult to measure in anything approaching real time than the net part of NNI. This doesn’t preclude us from using it at all, but it does preclude us from being able to use it as a guide to decision making in any sensible time scale: that rear view mirror problem again.

As a matter of personal taste I can see benefits to calculating all of these things. Certainly the calculation of resource depletion is helpful: although it’s amusing to note that when you do this the only modern economy that really has a problem with this is Norway. Yes, that icy social democracy depletes its natural resources faster than any other large economy: it’s one of the things that explains the place’s wealth in GDP terms. As guides to how to run the economy in the shorter term I think they all have flaws.

The author recalls Sir John Cowperthwaite, Financial Secretary (ie, part of the colonial government) of Hong Kong who forbade anyone collecting GDP numbers on the grounds that some damn fool would only try to use them to do something.

The same view could be taken of GPI and the other mooted alternative measures.

Given the problems with the collection and calculation of the data the statistics would always be out of date for decision making purposes. Thus the information available to politicians would mean that they couldn’t take any decisions and thus we’d be free of their interference.

If only I could believe that absence of information would lead to an absence of interference.

A much greater worry though is that the people promoting GPI don’t actually even understand the GDP they’re criticising.

An article in Nature: is cited:

 If a business used GDP-style accounting, it would aim to maximize gross revenue — even at the expense of profitability, efficiency, sustainability or flexibility. That is hardly smart or sustainable (think Enron). Yet since the end of the Second World War, promoting GDP growth has remained the primary national policy goal in almost every country.

No, GDP does not equate to turnover of a company, just as it does not equate to turnover in a nation, Worstall points out.

It equates to value added in a nation and thus must do so to the value added in a company.

In the corporate case, this is the profits made by the company plus the wages paid by it.

And that’s what worries Worstall about alternatives like GPI. Those suggesting it don’t actually understand the basics of GDP, that thing they want to replace. whether they’re simply over looking something, being fools or are ignorant, none of them are a great recommendation for the alternative they proffer.

 

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