The Limits of GDP

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Audio Transcript:

KATY CLARK: I'm Katy Clark, and this is The World, a co-production of the BBC World Service, PRI and WGBH Boston. The great recession is technically over. The US economy grew at an annual rate of 3.5 percent last quarter. That's measured by the gross domestic product, or GDP. Here's President Obama.

PRESIDENT OBAMA: This is obviously welcome news and affirmation that this recession is abating and the steps we've taken have made a difference but I also know that we've got a long way to go to fully restore our economy and recover from what's been the longest and deepest downturn since the Great Depression

CLARK: The recession sure doesn't feel over for the tens of millions of unemployed in the US and around the world. That's one reason why there's a growing chorus of voices saying it's time to ditch GDP as the leading indicator of economic health. Here's the World's Jason Margolis.

JASON MARGOLIS: That's the sound of GDP. It's essentially a measure of the combined value of all economic transactions. For decades, the health of a country has generally been tracked by growth in GDP. But a growing number of people are taking issue with the measure, because GDP also includes things like this.

[sound of car crashing]

MARGOLIS: Under GDP, that's also a sound of economic progress.

ERIC ZENCEY: One of the basic problems with GDP is it just measures economic activity. If, for instance you dent your car, GDP goes up.

MARGOLIS: That's Eric Zencey, a professor of historical and political studies at Empire State
College in New York. When you take your car to the body shop and your insurance company pays off another driver, money is changing hands. So, Zencey says, your car crash is spurring the economy.

ZENCEY: And it's difficult to count that as progress. You're just trying to restore the state you had.

MARGOLIS: Similarly, if a toxic spill pollutes a river, the cost of the clean-up counts towards GDP. When Hurricane Katrina slammed the Gulf Coast, the cost of rebuilding was a boon for GDP. Bad for communities and the environment, but good for the economy. This idea that GDP shouldn't be the ultimate determinant of prosperity isn't new: It's spelled out in many economics text books. Critics say a major problem with GDP is that it lumps all economic activity together. Former World Bank economist Herman Daly says think of it this way: imagine using GDP to gauge how well your store is doing.

HERMAN DALEY: You wouldn't expect a merchant or a business to add up its revenues and its expenditures. That wouldn't make any sense at all. You compare revenues and expenditures.

MARGOLIS: GDP also ignores the value things that don't involve market transactions. Things like clean water, healthy ecosystems or a low infant mortality rate aren't taken into account. So why then do we cling to GDP as the holy grail of prosperity? I put that question to Herman Daly.

DALEY: <laughing> That's a good question. There just seems to be an enormous resistance. Economists are just, well, how shall I say? I really don't know the answer to your question.

MARGOLIS: Perhaps it's because of inertia. We've just been doing it this way for decades. And we can only count what's countable. GDP is good at that. Still, some countries are trying to move beyond GDP. French President Nicolas Sarkozy recently gathered some Nobel laureate economists and social scientists in Paris to identify the limits of GDP and come up with an alternative measure. Here's Princeton economist Angus Deaton speaking at the Sorbonne.

ANGUS DEATON: We must measure well being broadly, including not only income but other measures such as health, education, democratic and social participation, as well as measures of well being as people themselves perceive them."

MARGOLIS: That's the tricky part: How do people measure well being? Or, put another way, how do we measure happiness? It's a question that's vexed philosophers for centuries. Here's Nobel economist Amartya Sen in Paris.

AMARTYA SEN: The remark of Protagoras from the 5th century BC, Greece, that, I quote, "man is the measure of all things" unquote, has been differently interpreted in history.

MARGOLIS: The academics in the Sorbonne freely admitted, coming up with a quantifiable, alternative measure to GDP won't be easy. Still, the idea is gaining traction worldwide. The United Nations has developed what it calls the Human Development Index, a combination of GDP along with life expectancy and literacy. In Bhutan, the government already measures what it calls "gross national happiness." But not everybody is excited about finding a new economic metric. Brian Dimitrovic is an economic historian at Sam Houston State University in Texas.

BRIAN DIMITROVIC: If economists want to talk about happiness, they should understand that most people won't listen to them, because economists are statisticians and mathematicians. And the people who tell us about happiness are literary types and spiritual leaders. It is simply beyond the competence of the kind of, dare I say, social misfits that are economists. They should really stick to what they're best at, which is simply counting things.

MARGOLIS: Dimitrovic concedes that GDP is not a perfect measure. But he says it's an important tool to gauge production and progress. Critics agree, but say the importance of GDP has become over-inflated. And Eric Zencey at Empire State College says countries with strong GDP cling to it for the wrong reasons.

ZENCEY: And so it's a little bit like we're winning at this game, and now you want to change the rules? I think that's part of the resistance to moving beyond GDP. That resistance to moving beyond GDP probably got stronger today. That's because in the US and many other nations, GDP is once again up. And that means elected officials can point to one simple yardstick to show that their economic policies are succeeding. For The World, I'm Jason Margolis.