Economists Explores Why GDP Doesn’t Add Up and Question Growth Model

“Mismeasuring our Lives: Why GDP Doesn’t Add Up,” a panel discussion held at Columbia University on December 7, brought four distinguished economists together for an open conversation that began with the need for policymakers to look beyond GDP as a standard economic measure to address both ecological constraints and human well-being but moved to the central challenge of our time: can economies continue to grow without degrading the ecosystem and if not, what are the alternatives?

Sponsored by the public policy research and advocacy organization Demos, the event featured panelists Alan B. Krueger, most recently the US Treasury’s Chief Economist and currently Bendheim Professor of Economics and Public Affairs at Princeton University; Glenn-Marie Lange, Senior Environmental Economist at the World Bank; Juliet B. Schor, Professor of Sociology, Boston College; and Joseph Stiglitz, Nobel Laureate and Co-Chair of the Committee on Global Thought at Columbia University.

Mismeasuring our Lives is also the title of a new book by Sitglitz, Amartya Sen and Jean-Paul Fitoussi, billed by its publishers as “the essential guide to measuring the things that matter.” Sen and Fitoussi were members of French President Nicolas Sarkozy’s Commission on the Measurement of Economic Performance and Social Progress. Chaired by Stiglitz, the commission assembled a group of eminent economists to address the inadequacy of GDP as a performance measure and to investigate new ways to monitor and assess the sustainability of the global economy and human well-being. (The working papers and reports of the Commission can be found here.)

Stiglitz noted that Sarkozy’s motivation to establish the commission was twofold. First, it was clear to him that the average French voter cared much more about environmental and social issues than he or she did about maximizing per capita GDP. Second, when government announces GDP per capita is growing people typically don’t feel better off as a consequence. This fundamentally undermines confidence in government.

Stiglitz also noted that GDP growth numbers, particularly when they are expressed in per capita terms, fail to reflect the trend of growing global income inequality. For example, despite growth in per capita GDP, the median US income was lower in 2008 than it was in 1997.  Today, the top one percent of the US population earns more than one quarter of the nation’s income.

One conclusion of the Sarkozy commission, said Stiglitz–which gets to the heart of why our current metrics system has allowed us to proceed along a path of  unsustainable growth–is that no single indicator can be depended on as a guide.  He used the analogy of a car’s dashboard where a focus on the speedometer alone without reference to the fuel gauge results in an inadequate assessment of performance.

In his concluding remarks, Stiglitz noted that over the past 40 years, the US and Europe have used the productivity “dividends” of technological innovation in very different ways. The US worked more and consumed more goods. Europe used time–the byproduct of those dividends–for leisure. “The US learned how to consume more things and Europe learned how to consume leisure,” said Stiglitz, and the US pattern is not a sustainable one.

Krueger also referenced the dashboard analogy, but noted that the real time reports we get from dashboard indicators need to be supplemented by longer term assessments, or “10,000 mile checkups.” He also raised an issue policymakers have tended to side-step, perhaps because it requires an acknowledgement of how intractable our economic problems are-that we need to focus on helping the chronically unemployed lead better lives–through richer social connections, volunteering and family activities.  (Schor’s plan for a shorter work week — see below– was particularly relevant to this discussion.)

Krueger described a new well-being measure based on a national time accounting methodology, which measures the fraction of time people report being in an “unpleasant” state. He made the case for policymakers to focus on lowering human misery using this measure. While he was pleased to note that the U.S. Labor Department plans to incorporate the American Time Use survey in its ongoing reporting, Krueger cautioned policymakers not to expect dramatic improvements in this measure.

Glenn-Marie Lang focused on the measures of asset accumulation the World Bank uses to monitor developing country’s progress in lifting populations out of poverty: produced capital, resource or natural capital, and intangible (human) capital. If wealth is declining, she reported, it is often because these nations are liquidating their natural capital in an unsustainable manner, that is, without transforming it into sustainable, long-term income flows. She also noted that in countries where institutions are weak, human capital fails to be optimized. She sited the example of China where since the mid- 1990s market reforms have supported human capital growth. A new book to be published by the World Bank this December, The Changing Wealth of Nations: Measuring Sustainable Development in the New Millennium, offers the first, longer term assessment of wealth building using more comprehensive measures of wealth for over 100 countries.

Juliet Schor, whose book Plenitude describes new ways of defining wealth in a resource-constrained global economy, spoke of the major trend she saw emerging in the 1980s and 90s when she undertook studies of American working hours, indicating a widening divergence between GDP growth and reported well-being.

The Sarkozy Commission, she noted, was right to conclude that sustainability cannot be reduced to “value” terms and that it must also be measured in terms of physical and planetary boundaries. Consequently, she maintained, if we take seriously the call for biophysical measures we must involve scientist not just economists. She also praised the Sarkozy Commission for highlighting that in an environment of extraordinary uncertainty, resilience must be part of the economic conversation. That means, said Schor, that we must pay attention to the diversity of our economy not just its output alone.

Schor also raised fundamental questions about growth. We haven’t figured out how to expand our economy without degrading our ecosystem, she reported, and doing that will be our next great global challenge. Although mainstream economists rejected the notion of limits to growth in light of biophysicial boundaries when the Club of Rome introduced the notion in the 1970s, the idea is again gaining currency.

How can the US solve its unemployment problems in an era when we have no rightful claim on ecological resources? Part of the answer, says Schor, is a national transition to shorter work hours with more meaningful and productive use of our “non-market” time, resulting in a lower carbon footprint and enhanced well-being.