The 2011 fourth quarter GDP numbers released today show a 2.8 percent growth in economic activity, due in part to the increase in spending around the holidays. But, what do GDP numbers really show? A new report from Demos, Beyond GDP, looks at the flaws in our dependence on GDP as the sole measure of progress and highlights important economic and social measures that are not captured by GDP.
GDP calculates the total monetary value of goods and services produced domestically in a given period. At the time it was developed at the end of the Great Depression, it was meant to be used as a tool to help policymakers gauge the success of economic recovery measures. At no time was it meant to be a tool for measuring economic, let alone social, progress. Fast forward several decades and GDP has become the go to measure for determining economic and societal well-being, even though it is not equipped to offer an accurate reflection of either. To paraphrase Robert F. Kennedy in a speech he made back in 1968, economic measures like GDP can measure everything except that which makes life worth living.
GDP is not an appropriate measure of our economic and social progress for many reasons, as highlighted by a set of infographics that plot measures of progress against GDP growth. For starters, GDP counts any spending as good spending. Economic activity from cleaning up a hurricane counts the same as economic activity from a boost in manufacturing even though there are serious societal and economic drawbacks to a hurricane.
And, as GDP has grown, so has inequality. If a wealthy family spends $100,000, the GDP activity is exactly the same as if 100 families spent $1,000, even though the latter shows a more equal distribution of spending power.
The increase in inequality is accompanied by a lack of meaningful growth in median individual income. Over the last forty or so years, while GDP has steadily increased, median individual income has grown only modestly. In 1982, the median individual income was a little over $24,800 (in 2009 dollars). In 2009, the median individual income was $30, 899. In 30 years, the median income rose by less than $6000, or at a rate of 0.8 percent per year—far below the rate of inflation. At the same time, GDP per capita—the amount of income potentially available for every person, more than doubled.
Other factors, like environmental depletion, pollution, and health impacts, are also excluded from GDP measures. If an entire fish stock is depleted in one year all that is reflected is the boost to GDP and not the future economic and environmental consequences of depleting an entire fish stock in one year. A plant that spews toxins into the air, causing increased asthma rates and other health problems for surrounding residents, is only counted based on its economic activity and not the economic costs it imposes. In this case, the plant may be generating more economic costs than benefits but that reality is not represented in GDP measures.
At the same time as not counting economic negatives, GDP does not count many economic positives. If you hire a nanny to watch after your children, that will count in GDP. If you stay at home to watch your children, your contribution is not counted as part of GDP. Other non-monetary contributions, like volunteering and public investment, are not counted even though they make society stronger. The heavy dependence on GDP ensures that growth, and in turn progress, can only be measured in economic terms.
Over the years, beyond just an economic measure, GDP has come to represent overall societal progress. If GDP increases, all is well. If GDP starts to decline, there is trouble. Yet, when plotted against social health indicators, it becomes clear that economic growth does not equate social progress. The Index of Social Health calculates a composite rate of social health based on over fifteen trends, including infant mortality, child abuse, high school dropout rates, homicides, and food insecurity. In 2009, social health was 16 points lower than in 1974, even though there was steady economic growth.
As a measure of economic growth, GDP is only able to capture a small segment of what is really going on. It fails to count many costs, ignores many benefits, and focuses almost singularly on consumption and spending. This focus dictates an infinite growth model where growth is the only measure of success and given the current rate of resource consumption, an increasingly unsustainable and undesirable model.
As a measure of social progress, GDP has never been able to show that economic growth translates to social progress. If anything, the singular dependence on economic growth has ignored an increasingly unequal society and all the ills that accompany it. Including metrics beyond GDP will provide a more accurate assessment of economic and societal well-being and provide policymakers with the data needed to implement policies that begin to turn around the tide of inequality, increase social health, and recognize the very real planetary limits.