Replace the GDP


January/February 1996
The Washington Monthly


Browse in Economic Indicators

Adam Smith said that the final measure of an economy is the well-being of the people. Yet this is the one question that the policy establishment never asks. The government studies the supposed means to that end in exacting detail. It can tell us how many televisions we buy, how much money the drug or record industry invests, practically down to the last penny.

But nobody bothers to ask whether such means actually bring about the. desired end. Economists simply assume it, and this assumption is the implicit baseline of just about every policy debate in Washington. More consumption or investment will bring about more well-being, regardless of what that consumption and investment consist and the actual impact on people’s lives.

The result has been a growing chasm between the way the policy establishment measures the economy and the way Americans actually experience it. The experts keep saying the economy is up; Americans experience it as down. Economist Robert Lucas, the Nobel laureate, says the economy is in “excellent shape.” Ask your neighbors about that.

Like the former Soviet rulers, America’s policy establishment dismisses such skepticism of official economics as a sign of psychological disorder. You are spending more money, folks, they say; what possibly could be troubling you? Alan Greenspan, the Federal Reserve Board chairman, has scratched his head publicly over the “extraordinarily deep-rooted foreboding about the [economic] outlook.” Yet just maybe the people are on to something. Until our politicians cast off their archaic assumptions about well-being and what helps bring it about, their efforts to make things better will continue to make them worse.

A good place to start would be the official gauge of economic progress, the Gross Domestic Product. The GDP is accepted as the main measure of economic policy and performance. Yet it is built upon several stunning fallacies.

The first is the assumption that everything produced and sold is a “good” by definition; more production and buying automatically equal more economic well-being. The result is a Mad Hatter’s accounting system that adds but can’t subtract. Car wrecks, divorces, disease, crime–social and environmental breakdown of all kinds–get tallied in Washington as economic growth, simply because they cost money.

What Americans experience as bad, in other words, the experts count as good. Environmental breakdown gets counted as a double of triple gain. The factory pollutes the water: The GDP goes up. People buy bottled water to replace the questionable stuff from the tap: The GDP goes up some more. People contract cancers or other diseases from the toxic chemicals that are emitted: Medical bills make the GDP go up again. And on and on. It is on this crazy basis that economists say environmental protection must come at the expense of “the economy.”

A second assumption is more subtle and insidious. The GDP includes only the part of the economy that is transacted through money. (The conventional economic mind can grasp only that which has a price.) This leaves out entirely the vital economic functions of households, communities, and the natural habitat. So the more these fall apart, and monetized products and services take their places, the better the experts say the economy is doing.

Child care takes the place of parents. McDonald’s displaces the kitchen table. Air purifying devices take the place of the natural purifying functions of trees. More money changes hands, so the economists cheer–even though the economy Americans actually experience is going to hell.

This kind of thinking governs the policy establishment in Washington. It is built into the cost-benefit analyses that increasingly determine the fate of proposals of all kinds, (except certain ones that Republicans favor, such as curbs on abortion and the B-2 bomber.) Yet it is a relic of another era, when pedal-to-the-floor production was the overriding national goal. Today the economic problem is much more complex, and it goes much deeper than the two-tier economy and declining wages in the middle. Increasingly, Americans must contend with the new burdens that the economy (not just government) places on people in the name of economic growth.

The nation desperately needs new ways to measure economic progress, ones that reflect the actual experience of Americans rather than the brain-dead assumptions of conventional economics. It needs to distinguish costs from benefits, progress from regress; and it must start to value the functions of households, communities, and the natural habitat that are inherently beyond price. America has to gauge the actual impact of the economy on human well-being, instead of just the amount of stuff produced and consumed.

Such measures would be a truth serum to the economic debate. No longer could Bob Dole blast gangsta rap one day and call for increased GDP the next, when sales of gangsta rap are part of the GDP.

Put another way, politicians and pundits would have to stop hiding behind abstractions like “investment” and “growth.” They would have to name what they are actually talking about. Investment in what? Growth of what? Casinos or apple orchards? This in turn would diminish the role of the purveyors of these abstractions–namely, economists–in the national debate. To ask questions of quality instead of just quantity, values instead of just price, would open the door to a much larger range of disciplines and concerns.

One particular issue that would change radically is work. Work occupies an exceedingly odd place in the nation’s policy debates. Politicians extol it continually. Yet they listen to an economic establishment which regards work as a “disutility,” a loathsome thing which people do only to gain the wherewithal to consume. They view the destruction of work–called “productivity”–as an unquestionable good. They rig the tax system to reward “investment,” which can eliminate work, instead of rewarding work itself and the creation of it. (Today the Republicans want to shift the entire tax burden onto work, through a misnamed “flat tax” that includes a gaping exemption for unearned income.

This view is obsolete. Work is much more than just a way to acquire money for consumption. It has value in itself. It provides a daily setting for social interaction, a sense of competence and achievement, and the opportunity to feel useful and needed. Some 70 percent of big lottery winners choose to keep working, as do most executives long after they have made enough to retire comfortably.

In other words, work today is more a good than many of the things economists call “goods.” Increasingly, people need it more than they need the stuff that work enables them to buy. Yet the policy establishment continues to applaud its destruction (in the name of efficiency); and the GDP counts the production of stuff rather than the production of work, which people need more. A new measure of progress would include work as a good and its destruction as a bad. This would alter the nation’s policy debate, from taxes on down, in a radical and healthful way.

Jonathan Rowe is policy director of Redefining Progress, an organization based in San Francisco.