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Finding GDP alternatives to quantify ‘unpriceable’ prosperity

April 28, 2014 at 6:37 PM EDT
Gross domestic product, the total dollar value of goods and services sold in the U.S., has become fundamental to American economic policy. But there are other essential assets, qualities and conditions that GDP can't measure, like the health of the environment or society. Economics correspondent Paul Solman looks at another way of measuring progress that takes more of these variables into account.

GWEN IFILL: What’s the best way measure a country’s economic growth and the prosperity of its citizens? Some think the U.S. government is using the wrong yardstick, particularly amid concerns about income inequality and other quality-of-life issues.

Our economics correspondent, Paul Solman, takes a look at alternatives to the quarterly report known as GDP.

But, first, he had to penetrate a batch of confusing initials. It’s part of his ongoing reporting Making Sense of financial news.

PAUL SOLMAN: In 1968 then presidential candidate Robert Kennedy blasted our country’s main measure of economic progress, called GNP in those days.

ROBERT KENNEDY: It counts napalm and it counts nuclear warhead, yet the gross national product doesn’t allow for the health of our children, the quality of their education, or the joy of their play. It measures everything in short, except that which makes life worthwhile.

PAUL SOLMAN: These days we rely on GDP, gross domestic product, GNP’s near proxy, which measures the total dollar value of goods and services sold in the U.S. in a year, plus exports, minus imports.

The measure still leaves out the things the Kennedy emphasized, but that’s because they’re just too tough to measure.

STEVE LANDEFELD, Director, Bureau of Economic Analysis: They’re very large and they’re quite uncertain in their magnitudes.

PAUL SOLMAN: Steve Landefeld runs the Bureau of Economic Analysis, the BEA, which tallies the GDP. The BEA sticks to measures of market transactions. And the data has become fundamental.

STEVE LANDEFELD: It is used by the Federal Reserve Board for economic policy. Our consumer inflation rate comes from us. The entire federal budget is based on the baseline that comes out of BEA’s data.

ZACHARY KARABELL, Author, “The Leading Indicators”: GDP has become the king of all statistics.

PAUL SOLMAN: And the king for almost all countries, adds economics writer Zachary Karabell.

ZACHARY KARABELL: Governors rise and fall on their ability to say, I enhanced GDP, or the populace’s ability to say, no, you didn’t, and, you know, GDP went down under your watch.

PAUL SOLMAN: But how does GDP’s still-lofty status square with Robert Kennedy’s 1968 critique, or with more recent evidence of its limits, which Nobel economist Joseph Stiglitz has pointed out?

JOSEPH STIGLITZ, Columbia University: Thirty years ago, we weren’t talking about climate change. Environmental degradation wasn’t as important as it is today.

PAUL SOLMAN: In 2009, Stiglitz chaired an international panel tasked with finding better measures of progress that included the environment and economic inequality.

JOSEPH STIGLITZ: GDP has been going up per capita, but most Americans are actually worse off, so median household income is actually falling.

PAUL SOLMAN: Like them or not, better prosperity gauges are hardly a novel innovation. Since the 1970s, for example, in the Himalayas, the Buddhist kingdom of Bhutan, with GDP per person less than that of the Congo, has used gross national happiness.

It’s GNH score turns out to be as elevated as its location. And back down here at sea level, there’s the GPI.

DAVE GOSHORN, Maryland Department of Natural Resources: It simply takes into account not only our economy, but the health of our environment, the health of our society.

PAUL SOLMAN: Dave Goshorn works for Maryland, the first U.S. state to adopt a metric called the Genuine Progress Indicator, made up of 26 different factors, nine of them environmental. He walked us around Annapolis to explain.

DAVE GOSHORN: When we cut down an acre of trees to put a strip mall in, that strip mall puts people to work, it contributes to our economy, our tax base. All those are very good things.

PAUL SOLMAN: And it’s GDP going up as a result.

DAVE GOSHORN: Exactly. At the same time, it is costing us to clean up the water that is degraded as a result of taking away those trees. We as a society recognize that, but we don’t account for that in GDP. And the GPI is a way of doing that.

PAUL SOLMAN: The GPI does it by subtracting an estimated value of water pollution from total economic output, also subtracted, the presumed costs of climate change.

DAVE GOSHORN: In Maryland, we have sea level, as a result in part of climate change, is increasing considerably, a foot over the past century.

PAUL SOLMAN: So, one foot right here, this is a foot higher than it was a century ago?

DAVE GOSHORN: Yes, and the best projections are that that rate will increase over the next century, even faster than a foot. That has major impacts to a lot of our low-lying — and islands, shorelines where people live, farm fields that are now inundated with saltwater where they can’t produce crops.

PAUL SOLMAN: And how do you put a number on cropless fields or polluted water?

DAVE GOSHORN: Economists have gone out and surveyed the general public and asked them questions such as: What would you be willing to pay to bring your local river up to a state where you could swim in it?

PAUL SOLMAN: In a national comparison of the two measures, GPI and GDP grew together until about 1980, when GPI flatlined. In Maryland, GPI has risen modestly since then, but it still trails GDP growth.

DAVE GOSHORN: I hear on the news all the time, when people comment about, well, what the economic indicators are looking up, we’re coming out of the recession, you frequently hear people comment, but I don’t feel any better.

And I think this is a reflection of that.

PAUL SOLMAN: And that in turn may hinge on another component of GPI: social well-being. Annapolis being the landing place for the hero of Alex Haley’s “Roots,” Kunta Kinte, we took a seat next to the author to probe the value of leisure.

How do calculate the value of, say, Alex Haley reading to these kids?

DAVE GOSHORN: Well, if it counts as education, the value of an education’s included in the GPI. If you count it as leisure time, not having that time is counted as a loss in the GPI. And we also have the value of housework, which includes things like cleaning the house and dusting, but also interacting with your children. That’s a value that’s in the GPI.

PAUL SOLMAN: What about air pollution from cars, or the amount of time it takes you to commute to work?

DAVE GOSHORN: Cost of commuting is considered in the GPI. And that is one that’s hurting Maryland, because here in Maryland, we spend more time in our cars commuting to and from work than most states in the nation.

PAUL SOLMAN: But people will tell you that a great radio show comes on and they go, wait a second, I’m listening to NPR and loving my commute, right?

DAVE GOSHORN: Exactly. Exactly.

And, to some degree, what we’re doing with the GPI is putting a price on the unpriceable. But at least we’re being consistent and seeing whether they go up or down.

PAUL SOLMAN: Maryland’s GPI is boosted by a highly educated population, but, remember, even here, GPI hasn’t gone up as much as GDP, for years now. So, why? Goshorn says a big reason is what Joe Stiglitz highlighted in 2009: rising economic inequality.

DAVE GOSHORN: The same amount of money spent by a few very wealthy people would be attributed differently to the GPI than an equal amount of money spent a little bit by a lot of people.

PAUL SOLMAN: So imagine that, in the extreme, one Marylander earned most of the state’s money, and amassed a fleet of fully loaded Mercedes she never drove, while the rest were reduced to commuting by bus. In that case, GDP might rise, since car sales boost the value of total output, but overall welfare wouldn’t.

It’s a subtle point, a debatable one. But even the BEA’s Steve Landefeld agrees.

STEVE LANDEFELD: Distribution of income may be the answer to me to this problem of the disconnect between GDP and GDP per capita going up and most Americans feeling down.

PAUL SOLMAN: But Landefeld has serious reservations about alternatives like the GPI.

STEVE LANDEFELD: The subjectivity is the Achilles’ heel of it. How much do I subtract for the commuting time? If I enjoy my commute, maybe it’s one thing, maybe not. They end up being systems of indicators that are troubling for an economist who is trying to put together objective accounts, or at least not make normative judgments about what should be.

PAUL SOLMAN: Then again, all economic indicators involve some subjectivity, says Zachary Karabell.

ZACHARY KARABELL: One synthetic number that purports to describe lived reality with an average has to make choices about what you include, what do you add, what do you exclude, because you can’t include everything.

PAUL SOLMAN: And so long as don’t, you can’t really quantify human well-being, especially if there’s any truth to the maxim that the best things in life are free.

GWEN IFILL: The GDP report for the first quarter of 2014 is due Wednesday. Read Paul’s extended conversation with author Zachary Karabell about how relying on an outdated short-term measurement could reduce prosperity over the long term. That’s on Making Sense.