Download What`s Wrong with the GDP

What’s Wrong with the GDP?
A briefing paper from the Global Women’s Project
Julia Wartenberg, November 2010
On August 31, 2010 the Bureau of Economic Analysis released their second quarter 2010 Gross
Domestic Product (GDP) report stating that the economy was continuing to expand.1 During the first
quarter, real GDP had increased by 3.7%. During the second quarter, real GDP increased at an annualized rate of 1.6% from the first quarter. Meanwhile, this past August, 54,000 jobs were lost, causing the unemployment rate to climb to 9.6% (up from July’s 9.5%).2 In July, 131,000 jobs were lost.3
June had also been a lackluster month for job growth, as was the month before. Schools across the
country are facing budget cuts, states are imposing austerity cuts on numerous social services and
programs, and this summer Congress wrangled over whether or not to extend unemployment benefits. After months of stalemate, the measure was passed extending “emergency jobless benefits
for the long-term unemployed;” it is unknown what will happen in the coming months when Congress is forced to face the same issue.4 Yet in looking at the GDP numbers, one would never guess
the country was in such a state.
GDP is the sum of four economic components - total domestic consumption, total domestic investment expenditures, government expenditures and net exports. It strictly measures the total market
value of final goods and services produced by a country, within that country’s borders, during a
specific interval of time, customarily a calendar year. As noted, GDP is a measure of the value of all
output, and accordingly, can rise as a result of two factors: as a result of increase in the amount of
production of goods and services or, because of an increase in the price of the goods and services
which have been produced.
Clearly, the GDP is a measure of market production. Its computation of products and services
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bought and sold on the market makes no distinction between ones which are advantageous to
individual, environmental or societal well-being versus those that detract from well-being. It does
not distinguish between beneficial or costly, productive or destructive, harmless or harmful; rather,
it assumes that any market transaction is, by definition, beneficial, productive, harmless and adds to
individual, environmental and societal well-being. Hurricane Katrina ravaged the Gulf coast, leaving
thousands homeless and jobless, but the money that was spent on humanitarian, clean-up and rebuilding efforts actually increased our nation’s GDP. That many lives were devastated and that many
are still coping with the destruction left by the hurricane does not get counted.
Yet despite this huge flaw, the GDP has frequently been looked upon as precisely what it is not – an
indicator of a society’s well-being, of the standard of living in a particular state. The rationale for
such reasoning has often been that as a country increases its economic production all members
of a society benefit from it. But we know this is not true. Often times, the rich get richer, while the
poor get poorer and the middle class stagnates. We see this in our society today. In confusing and
conflating these two, the GDP and a society’s economic well-being, we are doing more than merely
misinterpreting a measurement. GDP is one of the most important and most cited measurements,
and inaccuracies in its readings and meanings may lead to wrong policy decisions and erroneous
international comparisons which often serve a central role in political debates and decisions.
Some economists have stated that GDP should not be viewed as an indicator of a society’s standard
of living, rather that it should be viewed for what it is, a measurement of economic transaction.
They acknowledge that GDP leaves out far too many variables. Let us now look at what some of
those variables are.
Perhaps most glaringly, what is not counted by the GDP are goods and services provided outside
of monetized exchange. Thus all work done in the informal sector, such as domestic work, goes
uncounted and is kept invisible. The unpaid care that parents provide for their loved ones goes
completely unacknowledged. Volunteer work is also ignored by the GDP. Ironically it is this work,
care work in particular, which may not have a measurable market value, but is the foundation of a
society’s general level of the economic, social, and physical well-being. Not to go unnoticed in this
discussion is the fact that the majority of the work performed in the informal sector is performed by
women. This exemplifies the value and significance that the GDP places on productive work and the
insignificance with which it views reproductive work.
As mentioned earlier, the GDP has often been associated with a country’s level of economic wellbeing; however, it in no way accounts for wealth distribution or income inequality in a country. We
are living through a time in which we are witnessing an increasing gap between mean income and
median income, meaning the rich are getting richer and the rest of us are getting poorer. Moreover,
in many societies including our own, women in all positions and across all sectors continually earn
less than their male counterparts. The GDP in no way reflects this and therefore fails to show the
economic experience of the citizens it is trying to portray.
Additionally, the GDP does not take into account the negative consequences of economic expansion
such as pollution and the strain on natural resources; nor does it account for the ways we benefit
from nature. It does not factor in whether and how much leisure time we have, progress in health,
education and public infrastructure our society may experience or the cost of production on the
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environment. By not accounting for any growth in sustainability, the GDP is a very much here and
now measurement. It gives no mind to how economic growth today may be the cause of economic
and environmental degradation tomorrow.
As a result of only measuring commodities bought and sold, the GDP fails to measure another
important element: progress, particularly as it relates to the quality of goods bought and sold.
When individuals buy low-quality products which are short-lived, they boost the GDP by returning to the marketplace for similar purchases. If the individual had bought a higher-quality item and
spent more money the first time, she/he would not need to return to the marketplace as often,
but the GDP would suffer. The GDP grows as a direct result of waste and inefficiency. The same is
true when inefficient manufactured capital services are exchanged for more natural and environmentally friendly capital services. Manufactured capital services can be expensive to maintain over
time and are rarely life-time purchases. For example, let’s assume you live 10 miles from where you
work, much too far to walk, so you drive. By buying a car, purchasing gas, and maintaining the car
with oil changes, brake tune-ups and so on, you are contributing to the increase of the GDP. Now
let’s say you decided to you wanted to exercise more and start riding your bike to work. A bike is far
less expensive than a car – no gas, far fewer maintenance expenses – and much better for you and
the environment. Nevertheless, the GDP will be negatively affected. GDP rewards exactly what we
should be trying to minimize – waste and inefficiency.
While it is important to understand what the GDP does not measure, it is equally important to
articulate the negative elements that it does measure. As previously mentioned, all economic activity is counted as positive in the GDP, but let’s look at what exactly that means. In our day to day
lives it means that an increase in crime rates results in more expenditures on police and safety and
accordingly an increase in GDP; an increase in disease results in more medical spending; an oil spill
results in extensive and costly clean-up activities; war and other international tensions increase arm
expenditures. All these increase the GDP. Thus GDP doesn’t just ignore social and natural disasters
and breakdowns it calculates them as economic expansion.
To be sure, it is easy to criticize the GDP, listing everything that it does and does not measure. The
real challenge comes in outlining new measures and creating them. It is imperative that the diversity of people, society and nature be represented. A single indicator cannot capture the economic,
social, environmental, equality and social justice elements which create individual and societal wellbeing. We need multiple measures so that the care economy, the household economy, the natural
economy and the volunteer economy are visible and valued. Without these there is no market
economy, no means of production.
Creating complementary indicators is a challenge, but perhaps the biggest challenge will be in
creating just the right number of indicators that are neither too complicated to calculate nor too
simplistic that they become inaccurate. This is the hidden charm of the GDP – it’s relatively easy
calculation, its universal usage and its utilization over time. Thus, consistent and coherent measurements must be created which complement the GDP. We should not eradicate the GDP, rather let it
be what it was meant to be – an economic indicator; instead we should enhance it with measurements which it currently does not account for. Several have tried. Perhaps the most widely known
is the Commission on the Measurement of Economic Performance established by President Nicolas
Sarkozy. Headed by Stiglitz, Sen and Fitoussi, the report emphasized the need to measure people’s
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well-being and sustainability. Other attempts have been made; indices such as the Index of Sustainable Economic Welfare factors in income and pollution distribution; the Genuine Progress Indicator
incorporates a number of elements: social welfare, health care access, pollution, income equity;
the Happy Planet Index measures ecological efficiency, life satisfaction and other well-being indicators; the list goes on. As impressive as these measurements are, none give the care economy the
acknowledgement or importance it deserves. We cannot survive without care, we are in depths of
a care crisis, care must become one of a society’s well-being indicators.
The GDP has come to represent the economic well-being of a society and thereby relaying how
successful that society is. Yet in looking at the unemployment numbers of this past summer, our
society does not seem to be enjoying the economic well-being that the GDP would have us believe.
The GDP fails to measure a number of important elements in our society and views social and natural breakdowns as economic expansion. Creating and institutionalizing complementary indicators
to the GDP will give us a better view of our economic, social, physical, and natural standing. It will
also be the first step in addressing another serious problem: the equation of economic growth with
progress. It is only when we take this first step to understand and measure the complexity of our
well-being that we will be able to progress to a more caring and sustainable future.
Endnotes
1 The Bureau of Economic Analysis News Release is available for download at: http://www.bea.gov/newsreleases/national/gdp/2010/pdf/gdp2q10_2nd.pdf
2 See Rich, Motoko. 2010. “Growth in Jobs Beats Estimates, Causing Concern.” New York Times Accessed
Sept. 3, 2010. <http://www.nytimes.com/2010/09/04/business/economy/04jobs.html?_r=2&hp>
3 See Rich, Motoko. 2010. “U.S. Lost 131,000 Jobs as Governments Cut Back.” New York Times Accessed Aug.
6, 2010. <http://www.nytimes.com/2010/08/07/business/economy/07econ.html>
4 See Montgomery, Lori. 2010. “President Obama Signs Six-Month Extension of Emergency Unemployment
Benefits.” The Washington Post Accessed July 23, 2010. <http://www.washingtonpost.com/wp-dyn/content/
article/2010/07/22/AR2010072203825.html>
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