If the GDP is up, why do I feel down?

If the GDP is up, why do I feel down?

By Gary Gentry

JAKARTA (JP): If you and your neighbors have to buy security
or alarm systems for your houses because of crime in the area,
does that expenditure make you feel wealthier? If you are in a
minor auto accident and have to spend Rp 200,000 to repair your
car does that expense improve your financial well-being?

Stupid questions, aren't they? Yet both those expenditures
contribute to a higher Gross Domestic Product (GDP), and today
nearly all governments have come to consider GDP to be an
indicator of a country's wealth and its citizens' well-being.
Decisions affecting hundreds of millions of people are made based
upon how the decisions will affect GDP. Organizations such as the
World Bank use GDP to classify nations' economies; their loan
policies are based upon GDP figures. Global news services
broadcast GDP figures as soon as they are released by government
offices.

In America, divorce contributes enormously to the GDP.
Starting with huge lawyer fees, people going through divorce
support a number of service industries. The separated couple must
often sell a house, then buy or rent two replacement residences.
The real estate industry loves divorce. Whichever partner gets
custody of the children may spend large sums on child care, which
may not have been necessary before the breakup. Divorce helps
support the child care industry and is great for the GDP.

Does it make good sense that something which is bad for a
nation and its values should be good for its economy? An American
research organization called Redefining Progress based in San
Francisco thinks not. Its directors believe that the divergence
between economic indicators and a nation's public perception of
its own condition is only one indication that a better gauge of
the economy's health is not simply desirable, but is crucial to
the future of the world.

In a very readable article in the October issue of the
prestigious American magazine Atlantic Monthly entitled "If the
GDP is Up, Why is America Down?" Clifford Cobb, Jonathan Rowe and
Ted Halstead of Redefining Progress propose just such a gauge
which they call GPI, standing for "Genuine Progress Indicator".
These authors are not anti-growth, anti-progress radicals, but
rather thoughtful economists who believe that a system of
accounts for a nation's business ought to reflect the true costs
of that business.

The authors make a strong case for assigning a net positive
value to family and community life, to our oceans, forests and
open spaces. The GDP already assigns these a value: zero. If it
can't be measured precisely, then the GDP doesn't recognize it as
having value. And since public policy is based upon GDP, then
these things have no value in public policy either.

Using statistical data already available, the authors propose
modifying the GDP into their GPI which would include factors such
as the following to gauge economic well being:

* The household and volunteer economy: some of a nation's most
important work is done in family and community settings -- taking
care of children and the elderly, cleaning, repairing. The GPI
would assign these a value based on the cost of hiring someone to
do it.

* Defensive costs: crime related costs, air and water filters to
overcome the degradation of the environment, repairs after auto
accidents are included in this category in the GPI. They don't
contribute to our well being, therefore they shouldn't contribute
positively to its measure.

* Resource Depletion: As a nation uses up its natural resources,
the nation incurs a cost, just as a private business does that
consumes an asset. The GDP treats that consumption as a gain,
while the GPI would show it as an expense.

* Loss of leisure: If people have to do two jobs to stay even,
then they aren't really staying even. Loss of time to further
their education, or spend with family is valued at an average
wage rate.

We might argue with the way GPI values certain factors, or on
how much weight they give a particular item, but it would be hard
to argue in favor of the perverse logic that the GDP imposes on
public policy. If we had an index that reflected more accurately
the costs of doing business, who knows how it might effect the
way we do business?