Gross Domestic Product Statistics: Should We Pay Attention?
Edward J. Dodson
For most of us who get our news regarding the economy from the daily
newspaper, radio or television news programs, we are likely to read or
hear that the economy is doing well or poorly as measured by changes
in something called "Gross Domestic Product," or "GDP."
So, exactly what is GDP and is it something that tells much of
GDP is generally defined as "the measure of the USA's output of
goods and services." The U.S. Department of Commerce gathers data
from various sources on personal consumption, government expenditures,
private investment, inventory growth and the nation's trade balance to
come up with a GDP figure.
Additionally, the component elements in the GDP calculation are given
various weights based on the relative prices of goods and services and
their importance in the economy. This figure is then further adjusted
to take into account the effects of inflation, yielding what
economists refer to as the "inflation-corrected GDP."
Just looking at what is included in the calculation of GDP suggests
just how inappropriate (i.e., unscientific) this measurement is of
anything related to the well-being of the people in a society. All
spending - whether on the construction of prisons, the development of
military weaponry, the dumping of untreated and toxic chemicals into
the ground, waterways or air - all add to GDP. An alternative approach
has been developed by environmental economists working with the
Greens, referred to as the "Genuine Progress Indicator," or "GPI."
GPI takes into consideration whether the output of goods and services
of a society is positively impacting the well-being of the population.
The expenditures on criminal justice and pollution clean-up, for
example, are deducted from total increases in spending to assess
whether there is a net improvement or net decline in social welfare.
Other components look at the extent to which production occurs
utilizing sustainable processes that are not harmful to the
environment. Here's a graphic image of just how far off GPI suggests
we are from what the GDP measures.
Critics point out that the GDP measure was created during the Second
World War in an effort to keep track of wartime production gains. The
purpose was never to use this as a measure of our wellbeing and social
progress. A report issued in 1995 by the San Francisco-based
organization Redefining Progress offers a detailed analysis of GDP's
- GDP TREATS CRIME, DIVORCE AND NATURAL DISASTERS AS ECONOMIC
GAIN. Since the GDP records every monetary transaction as
positive, the costs of social decay and natural disasters are
tallied as economic advance. Crime adds billions of dollars to the
GDP due to the need for locks and other security measures,
increased police protection, property damage, and medical costs.
Divorce adds billions of dollars more through lawyer's fees, the
need to establish second households and so forth. Hurricane Andrew
was a disaster for Southern Florida. But the GDP recorded it as a
boon to the economy of well over $15 billion.
- GDP IGNORES THE NON-MARKET ECONOMY OF HOUSEHOLD AND
COMMUNITY. The crucial functions of childcare, elder care,
other home-based tasks, and volunteer work in the community go
completely unreckoned in the GDP because no money changes hands.
As the non-market economy declines, and its functions shift to the
monetized service sector, the GDP portrays this process as
economic advance. The GDP also adds the cost of prisons, social
work, drug abuse and psychological counseling that arise from the
neglect of the non-market realm.
- GDP TREATS THE DEPLETION OF NATURAL CAPITAL AS INCOME.
The GDP violates basic accounting principles and common sense by
treating the depletion of natural capital as income, rather than
as the depreciation of an asset. The Bush Administration made this
point in the 1992 report of the Council on Environmental Quality.
"Accounting systems used to estimate GDP" the report
said, "do not reflect depletion or degradation of the natural
resources used to produce goods and services." As a result,
the more the nation depletes its natural resources, the more the
GDP goes up.
- GDP INCREASES WITH POLLUTING ACTIVITIES AND THEN AGAIN WITH
CLEAN-UPS. Superfund clean-up of toxic sites is slated to cost
hundreds of billions of dollars over the next thirty years, which
gets added to the GDP. Since the GDP first added the economic
activity that generated that waste, it creates the illusion that
pollution is a double benefit for the economy. This is how the
Exxon Valdez oil spill led to an increase in the GDP.
- GDP TAKES NO ACCOUNT OF INCOME DISTRIBUTION. By
ignoring the distribution of income, the GDP hides the fact that a
rising tide does not lift all boats. From 1973 to 1993, while GDP
rose by over 50 percent, wages suffered a decline of almost 14
percent. Meanwhile, during the 1980s alone, the top 5 percent of
households increased their real income by almost 20 percent. Yet
the GDP presents this enormous gain at the top as a bounty to all.
- GDP IGNORES THE DRAWBACKS OF LIVING ON FOREIGN ASSETS.
In recent years, consumers and government alike have increased
their spending by borrowing from abroad. This raises the GDP
temporarily, but the need to repay this debt becomes a growing
burden on our national economy. To the extent that Americans
borrow for consumption rather than for capital investment, they
are living beyond their means and incurring a debt that eventually
must be repaid. This downside of borrowing from abroad is
completely ignored in the GDP.
Our nightly news programs are apt to dedicate a few minutes at most
to the state of the economy. It is very tempting to use a simplistic
indicator, such as GDP, to provide viewers and listeners with a sense
that things are going well or are turning downward. Are people fooled?
Well, as the old saying goes: "When our neighbor is unemployed,
we conclude we are in a recession. When we are unemployed, we conclude
we are in a depression." The GPI represents a major improvement
in the way statistical information is interpreted to describe trends
and the state of reality.