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?