3850A GDP and GPI as measures of wealth
Halstead and Cobb suggest the need for the replacement of
Gross Domestic Product (GDP) as a measure of economic
progress and wealth. The authors criticize GDP as a flawed
measure of true societal economic development. They
introduce the concept of Genine Progress Indicator (GPI). In
their view, the main flaws of GDP are:
(a)
no account is taken of the depletion of natural
resources; it is treated as income rather than
the depletion of an asset;
(b)
GDP does not differentiate between beneficial
and non-beneficial transactions; the clean-up
costs of an oil or chemical spill, and the medical
and funeral costs of those injured or killed by
the spills are treated the same as the sale of
bread or the building of a school;
(c)
GDP ignores non-monetary transactions; this
results in a failure to take account of domestic
(child rearing, care of aged parents, home
cooking, gardening, home decorating, etc.) and
volunteer work (in churches, other non-profit
organizations, hospitals, firefighting, sports
coaching etc.) in spite of their great importance
to economic and social life; there appears to be
a trend toward less volunteerism as people
have less free time due to the greater need to
earn through business or employment; just as
domestic and volunteer activities are not
counted in GDP, nor are their diminution;
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(d)
GDP fails to record income distribution; while
GDP in Canada (and USA) continues to rise
(adjusted for inflation), real wages and income
for the majority of people has dropped. The
rise in income occurred only for the top 5% of
households, whose income in USA from the
mid 1980s to the 1990s rose by 20%. A problem
encountered by discounting income
distribution is that poverty among significant
numbers of society has economic costs borne
by everyone; that is ill-health, illiteracy,
criminal activity etc. (often associated with
poverty) increase GDP and creates the illusion
of greater economic wealth for society; in
reality the costs of maldistribution of
income are either not reflected in GDP at all
(because there is no monetary transaction) or
are included in GDP, but viewed as an
economic benefit to society.
(e)
Use of GDP rather than Gross National
Product (GNP) fails to record international
transactions. This is curious in the context of
the so-called global economy. This excludes two
pieces of potentially important information on
wealth. In countries like the USA, trillions of
dollars of net borrowing from abroad are
hidden from most of the population. In a poor
developing country, profits of foreign
companies are included in the country’s GDP
even if such profits leave the country. In both
cases, GDP inflates the reality of a country’s
economic development.
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In view of the substantial inadequacies of GDP as a true
measure of progress, Halstead and Cobb introduced the
Genuine Progress Indicator (GPI). Its elements are the
following. (Read Halstead and Cobb’s article on Library
Reserve for more comment).
1. Depletion of forests, wetlands, farmlands, mineral resources
etc. are counted in GPI as a cost weighed against the short
term gain from the depletion.
2. Costs of air, water and soil pollution are included.
3. Long-term environmental damage is included. Greenhouse
warming and nuclear waste are long-range costs of nonrenewable energy use. Non-renewable energy consumption
and use of ozone-depleting chemicals are treated as costs.
4. Homework and non-market transactions are included. GPI
includes the value of such factors.
5. Leisure time is valued.
6. Hours of chronic unemployment and underemployment are
treated as a cost.
7. GPI rises when the poor receive a larger share of the
national income.
8. Lifespan of consumer durables and infrastructure. GDP
measures their value at time of purchase or creation but does
not record how long the commodity or building lasts. In GPI,
money spent on capital items is recorded as a benefit. This
depreciates over the life of the item.
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9. Defensive expenditures are treated as a cost. These can
range from the medical costs of automobile accidents, the costs
of commuting to cleaning up oil or chemical spills.
10. Sustainable investments. GPI measures net additions to
capital stock as a positive contribution to society. Borrowing
from abroad for consumption purposes represents a negative
effect, while borrowing from abroad for investment purposes is
recorded as neutral.
Conclusion
Halstead and Cobb provide important commentary on the
serious limitations and misleading aspects of GDP, as well as
interesting ideas on a better measure of economic progress or
regression. However, their application of GPI is discussed very
briefly and rather generally. Their general conclusion is the
GPI increased in the USA from the 1950s to the early 1970s,
then declined steadily through to the 1990s. The authors
suggest that it is highly questionable whether life has improved
for American society in spite of growth of GDP.
The authors suggest too that much of what is included in the
GDP as beneficial economic growth amounts to (a) fixing
blunders from the past (the flooding in New Orleans is a
topical example); (b) borrowing resources from the future; and
(c) transferring functions from the traditional realm of the
family and community volunteers to that of the market. These
are particularly relevant to developing countries where GDP
overstates the actual economic success of the economy.
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