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  THE GENUINE PROGRESS INDICATOR: a barometer of economic health

Redefining Progress

It is no accident that the social and environmental realms that have suffered such erosion in recent decades are precisely those that our systems of national accounting fail to address. Accounting drives policy, for business and the nation alike.

It defines the issues that policymakers seek to address. If economic indicators provide no feedback regarding matters crucial to human health and well-being, these matters will continue to be undermined by misguided politics. The shortcomings of the Gross Domestic Product (GDP) as a measure of progress have long been known by economists, and to a lesser degree, by policymakers. The GDP makes no distinction between economic transactions that add to well-being and those which diminish it; and it completely ignores the nonmonetary contributions of families, communities and the natural environment. As a result, the GDP masks the breakdown of the social structure and natural habitat; and worse, it portrays this breakdown as economic gain.

Despite these well-known deficiencies, policy-makers, economists, international agencies and the media continue to use the GDP as the primary scorecard of a nation’s economic health and well-being. Besides inertia, continued reliance on the GDP is often justified by the lack of a concrete alternative, and the belief that there is no valid way to approximate the value of social and economic factors in economic terms. The Genuine Progress Indicator was developed to demonstrate that both of these obstacles can be overcome. We have sought to develop estimates for the economic contributions of over twenty aspects of our economic lives that the GDP ignores. We then integrated these factors into a composite measure so that the benefits of economic activity could be weighed against the costs. Where existing data and complex economic theory reach a dead end, we have relied on common-sense accounting.

Developing estimates of the economic value of social and environmental factors is a sobering task. There will never be a way to register the value of these factors in a way that is comparable to market prices. But the challenge is not to await a perfect solution to the valuation problem; rather it is to improve on the information contained in the GDP. This is not hard to do, because the GDP already places an arbitrary and indefensible value on the social structure and natural habitat - zero. A reasonable estimate for these is necessarily more accurate than asserting, as the GDP implicitly does, that their breakdown has no economic consequence. The result of this study is a new measure of the nation’s well-being from 1950 to present. We call it the Genuine Progress Indicator or GPI. It begins to provide citizens and policymakers with a more accurate barometer of the overall health of the economy, and of how our national condition is changing over time.

Our findings are cause for concern. They reveal that much of what economists now consider economic growth, as measured by GDP, is really based on one of three things:

  1. fixing blunders and social decay from the past;
  2. borrowing resources from the future; or
  3. shifting functions from the community and household realm to that of the monetised economy.

There is an urgent need to improve and broaden the accounting framework that steers public policy. If we are to preserve our social structure and natural habitat, we must develop means to estimate their contributions to our economic well-being. We offer the GPI as a step in this direction.

The GPI starts with the same personal consumption data the GDP is based on, but then makes some crucial distinctions. It adds certain factors (such as value of housework and volunteer work), and subtracts certain others (such as the costs of crime and pollution). Because the GDP and the GPI are both measured in monetary terms, they can be compared on the same scale. The following illustrates how these two measures approach some critical dimensions of our social life:

Crime and Family Breakdown: Social breakdown imposes large economic costs on individuals and society, in the form of legal fees, medical expenses, damage to property, and the like. The GDP treats such expenses as additions to well-being. By contrast, the GPI subtracts the costs arising from crime and divorce.

Household and Volunteer Work: Much of the most important work in society is done in households and community settings: childcare, home repairs, volunteer work, and the like. The GDP ignores these contributions because no money changes hands. To correct this omission, the GPI includes, among other things, the value of household work figured at the approximate cost of hiring someone to do it.

Income Distribution: A rising tide does not necessarily lift all boats - not if the gap between the very rich and everyone else increases. Both economic theory and common sense tell us that the poor benefit more from a given increase in their income than do the rich. Accordingly, the GPI rises when the poor receive a larger percentage of national income, and falls when their share decreases.

Resource Depletion: If today’s economic activity depletes the physical resource base available for tomorrow’s people, then it is not really creating well-being; rather, it is just borrowing it from future generations. The GDP counts such borrowing as current income. The GPI, by contrast, counts the depletion or degradation of wetlands, farmland, and non-renewable minerals (including oil) as a current cost.

Pollution: The GDP often counts pollution as a double gain; once when it’s created, and then again when it is cleaned up. By contrast, the GPI subtracts the costs of air and water pollution as measured by actual damage to human health and the environment.

Long-Term Environmental Damage: Climate change and the management of nuclear wastes are two long-term costs arising from the use of fossil fuels and atomic energy. These costs do not show up in ordinary economic accounts. The same holds true for depletion of stratospheric ozone arising from the use of chlorofluorocarbons. For this reason, the GPI treats as costs the consumption of certain forms of energy and of ozone-depleting chemicals.

Redefining Progress is a public policy organisation based in San Francisco. The full report from which this is excerpted (with permission) is available for $10 US by writing: Janie Riley, Office Manager, One Kearney Street, 4th floor, San Francisco, Ca 94108.

Source: Earth Ethics, Spring/Summer 1996.

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