Metrics
Beyond GDP

A Truer Measure of Economic Well-Being? Replacing GDP with GPI, Part One

Burgess COMMENTARY

Peter Burgess

A Truer Measure of Economic Well-Being? Replacing GDP with GPI, Part One

Image credit: Rethinking Progress (2004)

The chorus decrying the shortcomings of Gross Domestic Product (GDP) as a measure of economic well-being has been rising, crescendoing recently with the release of the report by Nobel Laureates Joseph Stiglitz and Amartya Sen commissioned by then French President Nicholas Sarkozy. Here in the US, states such as Maryland and Vermont are beginning to adopt an alternative to GDP: the Genuine Progress Indicator (GPI).

To find out more about this trend, #NewMetrics channel co-curator Bill Baue recently caught up with Eric Zencey, a Fellow of the Gund Institute for Ecological Economics at the University of Vermont who also teaches Political Economy at UVM and Washington University in St. Louis. Zencey played an instrumental role in bringing GPI to Vermont. Bill Baue: What are the problems with GDP that GPI was created to solve (and how does it solve them)? Eric Zencey: GDP is a deeply foolish indicator of how we're doing economically. It measures the gross volume of monetary transactions in the economy — but it doesn't care what the money got spent on, and it doesn't care about the elements of our economic well-being that come to us without a price tag. To take up the first category: In GDP, defensive and remedial expenditures are treated as positive contributions to our well-being, when they ought properly be counted as costs. Hurricane Katrina did something like $82 billion in damage in New Orleans, and as that damage is repaired, GDP goes up — but the expenditure doesn't produce an $82 billion increase in our economic wellbeing. It just puts things back — begins to put things back — to where they were. The problem is that GDP doesn't have any way to account for the present service value of the houses, appliances, furnishings, automobiles, roads, etc. that we already have. GDP notices when we buy them, but that's it; it's an amnesiatic indicator. If you bought it last year it's like it no longer exists. So when we lose these things, and the services they provide to us, GDP doesn't have a line item that can show the loss. GPI fixes this by counting the ongoing service value of such things. And it counts the money we spend on them as a cost, not a benefit. The benefit is the use we get from them, not the fact that we spent money on them. In this way, GPI basically applies the principles of double-entry bookkeeping to the economy as a whole. If you're in business you have to deduct expenditures from income to get an accurate sense of how you're doing. Any business person knows that; it's about time we started applying that concept to the whole economy. To take the second category: We get plenty of economic benefit from outside the market system, and GDP doesn't count these contributions to our wellbeing. I'm not talking about that old saw, 'the best things in life are free' — I'm talking about concrete economic benefits, like the work done by volunteers, the do-it-yourself stuff we accomplish at home, the services that we provide to ourselves in households without spending money. If I take care of my aging parents in my house, GDP doesn't know about it. But if I park them in a nursing home, suddenly the service value of their care is monetized and counts in GDP (Whether my parents are better off or worse off depends on their needs and the quality comparison between in-home and nursing home services; but whatever the quality comparison, elder care is an economically valuable service.). Same thing with housework and garden chores: Pay someone to do it, GDP goes up, though there isn't any net gain in the economic benefit you're enjoying (Well, okay, to be precise about it: If you pay someone to do that kind of work, you'll have increased leisure time — which GDP ignores, but GPI counts as a benefit.). GPI attempts to account for the dollar value of these non-market contributions to our economic well-being. One of the biggest failures of GDP is that it doesn't deduct environmental costs from economic benefits. We all benefit from a category of good called ecosystem services — the sun warms us and dries laundry on the line; forests provide flood control and climate moderation and carbon sequestration; soil fertility feeds us, and so on. If we cut down a forest to get lumber, GDP counts the value of the lumber that's produced as a positive contribution to our well-being but doesn't deduct the lost ecosystem services as a cost. You can see that this is exactly parallel to the lost cars and houses from Hurricane Katrina: GDP counts the money that moves and ignores the benefits that have been lost. That's why I've been saying GDP is an infinite planet statistic — by not valuing ecosystem services, it's as if it assumes we'll always have enough of them. As we're beginning to learn, that's not true. Baue: Can you give a sense of how we got here — what's the history behind GPI? Zencey: As an alternative to GDP, GPI traces back to the work of economists William Norhdaus and James Tobin who, in 1972, came up with a Measure of Economic Welfare (MEW) that corrected some aspects of the GDP accounts. Herman Daly and John Cobb adapted the MEW in 1989 to produce the Index of Sustainable Economic Welfare (ISEW). The basic idea was, count costs and benefits that GDP ignores, put dollar values on them, and see where you end up. The GPI took on its present form in 1995 after some tinkering with the ISEW. The basic framework is, you take a basic measure of GDP (Personal Consumption, which is GDP minus government spending and business investment) and make 24 separate adjustments to it for various costs and benefits. Baue: Are there any shortcomings that GPI faces? How is it seeking to solve those?

Zencey: GPI is a very rough-cut instrument right now. For instance, it measures 'net change in forest cover' and puts a dollar value on the ecosystem services we gain or lose as net forest cover goes up or down. But forest doesn't come as generic acreage — it's very particular. Hardwood forest is different from softwood forest is different from rainforest. Forest in one area may serve as habitat for an economically valuable species, or it may have above-average flood-protection value if it's strategically situated in a watershed. For GPI to be a more precise guide to policy, these broad categories — 'net forest change,' 'net wetlands change,' 'net farmland change' — could be disaggregated. For instance, other things being equal, forest that's under sustained yield forestry management is more valuable than forest that isn't, and the monetary valuation of its gain or loss should reflect that.

Another issue for some people is those monetary valuations themselves. How do you put a price on something that's not sold on a market? Isn't it necessarily subjective? The answer, in a word, is no. Ecosystem service valuation isn't an exact science, but that doesn't mean it's subjective. We put dollar valuations on things that haven't sold in markets all the time. When you list your house with a realtor, the realtor does a market analysis to come up with an asking price; you don't really know the value of your house until it is sold. Similarly, we can look at comparables for the various things GPI measures and puts a monetary value on. Lost leisure time, or time lost to commuting? Let's value it at the average hourly wage rate. Flood control services of forests? Let's look at damage figures from flooding, or at the cost of building levees and dams (The first is called avoided cost valuation, the second is called replacement cost valuation.). Who decides what valuation system to use? The answer: the community of GPI researchers, meeting annually as a body that sets standards and coordinates practices. We've had two of these meetings so far and we've begun articulating a standardized model for the GPI accounts, and are working our way through some of the technical questions about valuation that need to be answered. In this, GPI is no different from GDP. Most people don't realize it, but the number that gets reported as GDP is the product of thousands of decisions about what will and won't count and how things will be counted.

In part two: applying GPI at the state and company level ...

http://www.sustainablebrands.com/news_and_views/new_metrics/truer-measure-economic-well-being-replacing-gdp-gpi-part-two

Image credit: The Utah Genuine Progress Indicator.

The chorus decrying the shortcomings of Gross Domestic Product (GDP) as a measure of economic well-being has been rising, crescendoing recently with the release of the report by Nobel Laureates Joseph Stiglitz and Amartya Sen commissioned by then French President Nicholas Sarkozy. Here in the US, states such as Maryland and Vermont are beginning to adopt an alternative to GDP: the Genuine Progress Indicator (GPI). To find out more about this trend, #NewMetrics channel co-curator Bill Baue recently caught up with Eric Zencey, a Fellow of the Gund Institute for Ecological Economics at the University of Vermont who also teaches Political Economy at UVM and Washington University in St. Louis. Zencey played an instrumental role in bringing GPI to Vermont. In part one, they examined the ideas and history behind GPI and the continued evolution of the tool. Here, they discuss the implications of applying GPI at the state and company level Bill Baue: Several US states are adopting GPI as the measure of economic health — how did Vermont come to embrace GPI?

Eric Zencey: Much of the work on GPI, nationally and internationally, has been done by people connected with the Gund Institute for Ecological Economics, both in Vermont and earlier, when it was located at the University of Maryland. So it's no coincidence that Maryland and Vermont are the first two states to compile the GPI officially. There are other state studies that are underway or finished — I'm currently working on one such study, funded by the Demos Foundation, which has a program supporting state adoption of the GPI. How did it come about in Vermont? Well, when I became a Gund Fellow, one of the interview questions was from the acting director, Jon Erickson, who was one of the principle engineers of the first Vermont GPI study. He led a seminar that compiled a rough estimate of VT GPI for the years 1950 to 2000. Jon asked me, 'so if you become a Fellow what kind of projects would you be working on?' My background is in political philosophy, and mostly I've been interested in changing the idea systems that we use to shape our interaction with the planet. But I'd also begun to feel that thinking great thoughts isn't enough — that ideas from the academy have to be carried out into the world. So I said, 'I'd work to compile a Vermont GPI.' And Jon said, 'But that's been done. I did it with some students a couple of years ago.' 'Yes,' I said. 'But if it's ever going to be a policy tool, we've got to do it year in and year out, and give the number to the state so they can start relying on it.' So that was the plan.

As a Fellow, I taught a graduate seminar that had as its group project the compilation of a GPI estimate for the state. Their final exam was a public presentation of the results, and I invited some state legislators to the presentation. The student presentations were fantastic — very clear, thorough, well-illustrated. The legislators were very impressed, and suddenly the movement to get GPI compiled and adopted as a policy tool had some influential allies. There were others lobbying as well — the Gross National Happiness (GNH) folks did a lot to raise awareness of the issues, and with them out there talking about doing survey research to see what peoples' self-reported well-being is, GPI began to look like a very straightforward, middle-of-the-road accounting issue. Tom Barefoot and Linda Wheatly of Gross National Happiness USA and I met with state Senator Anthony Pollina, who said flat out that he couldn't introduce a GNH bill but did want to push for a GPI bill. Vermont's a small state, and I live in the capital. I'd walk my dog and run into people and have conversations — some legislators, some administrators, some environmental groups, some business groups. Oh, and in the gubernatorial election of 2010, I called up each of the candidates, before the primaries, and chatted with them about GPI, so that whoever won, the person would either be a supporter or would at least have heard about it. When Anthony introduced the bill to the 2011 legislature, the committee took testimony from Jon, and from Tom at GNHUSA and from various environmental groups — Kate McCarthy at the Vermont Natural Resources Council was just great in her explanation and support — and the bill went through handily.

So in a way, GPI in Vermont was an example of what the philosopher Jean Jacques Rousseau called the General Will. The basic idea is that sometimes a public interest is so obvious and clear that when someone puts it into words everyone immediately recognizes it as the right thing to do. It's sort of like the 'sense of the meeting' that Quakers come to. GDP is such a bad measure of well-being that it isn't hard to see why we need to improve upon it. And if you're wondering about why the General Will in Vermont would support GPI, while the concept would definitely have a harder time somewhere else, I'd point to Vermont's long tradition of caring for its natural resources and environment. Vermonters get it that economic development can have a cost in damaged ecosystems, and they've got laws, like the pioneering development review law, Act 250, to prevent that. One-third of the Vermont economy is tourism-dependent, and much of that is from people who come to Vermont because it isn't like home: The petroleum economy came to Vermont later than it got to the rest of the country, and many of its worst effects have been controlled. We still have an agricultural landscape with coherent, compact village centers; there is some mall-and-sprawl but not a whole lot. Vermonters are proud of that, and supporting GPI is, they saw, one way to continue caring for the landscape in a way they can be proud of.

Bill Baue: John Entine's recent Ethical Corp article on GDP versus GPI framed the situation as if Vermont had somehow come up short in terms of its economic health — what's your response to Entine's line of reasoning?

Zencey: I was surprised that he was spinning GPI the way he did. 'According to the first-ever Vermont GPI, the state is doing terribly, with GDP overstating social welfare by more than 50%.' To my mind, that says that GDP is doing terribly as a measure of social wellbeing, not that Vermont well-being is doing terribly. In fact, we found that the GPI for Vermont has been increasing — both absolutely and on a per-capita basis — just not as rapidly as Gross State Product, or GSP, has increased. Really, there's no call for saying GPI shows that Vermont is going backwards. GPI counts greenhouse gas emissions and the resulting climate change as costs, so Vermont's decades-long commitment to energy efficiency, and its more recent commitment to getting our economy to run 90% on renewable energy by 2050, have been major contributors to the positive numbers. I think some states won't be able to show positive GPI growth — which will most likely make GPI a tough sell to politicians from those states.

Baue: How can GPI be applied at the company level, and what are the implications in terms of transforming corporate thinking from GDP-based to a more holistic view of the role of business in society?

Zencey: One of the groups that’s very interested in GPI is Vermont Businesses for Social Responsibility. My colleague Jon Erickson is our connection with them, so I can’t say a whole lot about the details, but in broad strokes: They’re going to find GPI useful as an indicator set that shows them when and where their socially responsible policies have an effect. Mark McElroy, who’s at the Center for Sustainable Organizations and is a consultant to businesses that want to play a role in bringing about a sustainable economy, is interested in seeing this done. He’s been talking with us about piloting a project in which a company does a version of GPI accounting instead of the customary, more limited kind of accounting. It would be quite a change, but since GPI is measured in dollars it’s not completely unthinkable. It’s not like saying, 'Okay, everyone has to have a moral and religious awakening so they do the right thing.'

Could it lead to a more holistic view of the role of business in society? Perhaps, perhaps. You know, there are still quite a few people who agree with Milton Friedman’s famous quotation: 'There is one and only one social responsibility of business — to increase its profits.” This idea makes perfect sense in the context of free market economic theory, but there’s a huge reality problem with that theory. As I detail in my recent book, The Other Road to Serfdom and the Path to Sustainable Democracy, free market economic theory assumes that the planet is, in effect, infinite — that there are no negative environmental externalities from economic activity. It assumes that nature can infinitely absorb our effluents, infinitely supply us with raw materials for economic growth. It’s pretty obvious that that is simply not true. Climate change is the biggest negative environmental externality you can imagine — it could, literally, end civilization, perhaps even turn our planet into uninhabitable rock like Mars — and so you can see why so many free-market conservatives are so passionate in denying climate change. If climate change is real, their favorite economic theory turns out to be hopelessly limited wishful thinking that has to be discarded.

At a pragmatic level, Friedman’s declaration about profit is very appealing simply because profit is an easily digestable indicator — once you’ve done the accounting you get this number, and it’s either up or down; it’s very elegant, very economical. You can see at a glance how you’re doing. The same is true of GPI. Companies that are interested in triple bottom line accounting, or that have social responsibility as part of their mission, should be very interested in seeing GPI adopted and implemented, because it will help them begin quantifying their impact, help them make good decisions about their programs and interventions.