December 24th, 2013
10:49 AM ET

Why GDP doesn’t cut it anymore

By Heather Gautney, Special to CNN

Editor’s note: Heather Gautney is an associate professor of sociology at Fordham University and the author of Protest and Organization in the Alternative Globalization Era. The views expressed are her own.

Five years ago, then-French President Nicolas Sarkozy commissioned a panel of world-renowned economists, led by Nobel Prize winners Joseph Stiglitz and Amartya Sen, to determine whether Gross Domestic Product (GDP) was a reliable measure of economic stability and social progress.

It was no surprise to Sarkozy, nor anyone hit by the financial crisis, that the panel staunchly agreed it was not.

GDP is a tally of everything produced. It is a monetary measure of all goods and services produced within a given country – and the sum of a country’s total expenditures, through consumption, investment, government purchases, and net exports. But while GDP has become the primary (albeit blunt) tool for gauging the health of national economies, and a crystal ball for policymaking, measurements like GDP often paint only a partial and often misleading picture of social and economic reality.

Take an issue that has been on the minds of many commentators this year, including Fareed Zakaria last week in the Washington Post – inequality. GDP uses mean (average) income to evaluate income growth, which does not reflect problems tied to income inequality. Indeed, as one analyst notes, it places a high value on financial trading, regardless of its volatile and speculative nature, and “counts” costs associated with crime and corporate fraud, for example, the same as productive investments in education or transportation infrastructure.

According to a recently published international study, GDP increased more than three-fold between 1950 and 2003, yet GPI estimates paint a very different picture. It isn’t hard to see how, had GPI been in place in the early 1990s, the coming of the financial crisis and its profound impact on the world’s population might have been more apparent – and how it might have prompted more effective responses from policymakers.

So what are the alternatives? Measures of “genuine” progress, such as the Genuine Progress Indicator (GPI), are meant to compensate for GDP’s limits. In broad strokes, as one study put it, GPI recognizes economic activity "that diminishes both natural and social capital" and is designed to measure sustainable economic welfare according to three principles: factoring in income inequality, including non-market benefits, and accounting for “bads,” such as environmental waste and accidents related to weak infrastructure.

GPI also, as another analysis highlights, considers the costs of social inequality, including crime, reduced worker productivity, and reduced investment, and is based on “sustainable income” – an income value based on cost of living and other social costs rather than average income. It also accounts for “sustainable development” – environmental costs of infrastructure development, production, and consumption on current and future generations, hence its nickname of “green GDP.”

GPIs are already being implemented by foreign governments and supranational organizations. The OECD and United Nations, for example, established the Better Life Index and Human Development Index based on the work of Stiglitz’s Commission. And countries like Austria, Chile, Germany, the U.K and Australia are currently using GPIs, or GPI-like measures.

Meanwhile, in the U.S., a bipartisan commission of the National Academy of Sciences has developed new measures for social and economic wellbeing – the Key National Indicator System. On a local level, states like Maryland and Vermont are using GPI as supplements to Gross State Product (GSP). Maryland is ranked among the richest states in the country. But its GPI reporting as of last year also showed that the biggest factor limiting the state’s progress has been growing economic inequality. And Vermont’s state legislature, in collaboration with the Gund Institute at the University of Vermont, has established a GPI for the state.

The reality is that regardless of how “scientific” a measurement appears, it involves political and ethical choices. And those choices reflect how we view ourselves and our moment in history. GPI is therefore about more than just recrunching the numbers – it marks a potentially important step toward a new way of looking at the world, its development, and what we want from our future.

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Topics: Economy • Inequality

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soundoff (6 Responses)
  1. chrissy

    Well if its left up to political choices this country is doomed! And WHEN will there be an audit of the Federal Reserve? Then the truth might finally come out...guess that pretty much answers that question huh? Hence...NEVER!

    December 25, 2013 at 8:27 pm |
  2. Ron

    Inequality is NOT a good indicator of economic progress. While the rich may get richer, the poor don't necessarily get poorer. The gap is a perception we experience, not something that can be accurately measured. What would be more important than inequality would be some measurement of upward mobility opportunity. If people feel hopeless in improving their lives, there is real inequality. If their is a massive gap between the rich and the poor but the ability to move upward is great, people really don't care about inequality. But since both inequality and measuring upward mobility opportunity is an in-exact science, we should continue to use GDP.

    December 26, 2013 at 9:14 am |
  3. j. von hettlingen

    Ordinary people don't care about all these fancy terms like GDP, GPI or GSP in macro-economics! They have a different perception of their country's economy.
    What counts is how much they receive every month on their account or how much they have in their wallet.

    December 26, 2013 at 11:40 am |
  4. Tim

    Globalization should not mean messing up the world. We need to think in partnerships, alliances, business zones, limitations, sanctions, no-import-rules and last but not least in terms of economic metrics, such as: unemployment rates, average income, monetary value, GDP, CPI, job security, job opportunities, ...!

    December 26, 2013 at 12:05 pm |

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