These numbers don’t add up

by David Zetland, a series of posts highlighting major points over time. The paper must be downloaded to read.  Wageningen UR – Environmental Economics and Natural Resources Group; PERC – Property and Environment Research Center
Economists Owe Ecology an Apology
March 9, 2013

Part 2 Nature Bats Last

Pare 3  These numbers don’t add up

These numbers don’t add up

Gross Domestic Product (GDP) was invented during the Great Depression for politicians who wanted to know if their policies were working. GDP as a measure of production has several flaws. First, it only counts payments for goods and services. It does not reflect our work—and pleasure—in the home. A home-cooked meal contributes less to GDP than Happy Meals from McDonalds. Second, its measures are based on prices, not values. An innovation that lowers the price of phone calls, for example, appears to reduce the benefit from calls—and totally misses the greater value of calls on Mother’s Day. Third, GDP ignores the benefits of functional ecosystems and grows when unpriced environmental inputs become priced outputs—when water moves from rivers to irrigated fields, for example. Economists know about these measurement problems (Stiglitz et al., 2009), but they cannot prevent the widespread abuse of GDP statistics.

Goddert’s Law states that “a measure that becomes a target ceases to be a good measure,” and that’s what happened with GDP. Politicians claim they will increase GDP—and thus prosperity, happiness and national pride—while their opponents will destroy it. Those claims lead to policy. Why protect an unpriced wetlands when you can convert it into a housing subdivision and boost the economy?  Why promote walking to work in 20 minutes when people can buy cars and use gasoline to drive for an hour on highways whose construction costs boost local GDP?  There is no GDP value in the unpriced time people spend commuting or the air pollution that results, but there’s plenty of GDP value in the (priced) resources burned on the way.

Economists’ attempts to improve GDP (adding up the negative impact of excessive congestion delays, for example) failed to clarify costs or improve understanding because those adjustments to GDP—a measure of the flow of goods and services—did not account for the capital depletion of burned fuel that might be valuable in the future, the negative impact of pollution on the capital stock of local and global air quality, and the socially and psychologically relevant fact that an hour spent in congestion free traffic is still an hour lost from either work or leisure. Reasonable people know that the flow of our economic activities is bound to affect stocks—it’s not possible to live (or enjoy life) without taking water from streams, cutting a few trees or taking fish from the sea—but there’s a difference between reasonable and excessive taking. We may disagree on the appropriate flow of these takings, but we can’t discuss “appropriate” without an accurate measure of their level, and GDP doesn’t include levels. GDP doesn’t help us understand where we are or where we’re going—it sows confusion and scrambles priorities.