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Genuine Progress Indicator vs GDP.

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August 15, 2010 – Comments (13)

Try this idea economists,

 http://www.rprogress.org/sustainability_indicators/genuine_progress_indicator.htm#top 

We believe that if policymakers measure what really matters to people—health care, safety, a clean environment, and other indicators of well-being—economic policy would naturally shift towards sustainability.

Redefining Progress created the Genuine Progress Indicator (GPI) in 1995 as an alternative to the gross domestic product (GDP). The GPI enables policymakers at the national, state, regional, or local level to measure how well their citizens are doing both economically and socially.

Economists, policymakers, reporters, and the public rely on the GDP as a shorthand indicator of progress; but the GDP is merely a sum of national spending with no distinctions between transactions that add to well-being and those that diminish it.

The GPI is one of the first alternatives to the GDP to be vetted by the scientific community and used regularly by governmental and non-governmental organizations worldwide. Redefining Progress advocates for the adoption of the GPI as a tool for sustainable development and planning.

On a yearly basis, Redefining Progress updates the U.S. Genuine Progress Indicator to document a more truthful picture of economic and social progress. Our latest update, which plots GPI accounts from 1950 to 2004, shows that economic growth has been stagnant since the 1970s.

Download report: The Genuine Progress Indicator 2006


How We Measure Progress

The GPI starts with the same personal consumption data that the GDP is based on, but then makes some crucial distinctions. It adjusts for factors such as income distribution, adds factors such as the value of household and volunteer work, and subtracts factors such as the costs of crime and pollution.

Because the GDP and the GPI are both measured in monetary terms, they can be compared on the same scale. Measurements that make up the GPI include:

Income Distribution

Both economic theory and common sense tell us that the poor benefit more from a given increase in their income than do the rich. Accordingly, the GPI rises when the poor receive a larger percentage of national income, and falls when their share decreases.

Housework, Volunteering, and Higher Education

Much of the most important work in society is done in household and community settings: childcare, home repairs, volunteer work, and so on. The GDP ignores these contributions because no money changes hands. The GPI includes the value of this work figured at the approximate cost of hiring someone to do it. The GPI also takes into account the non-market benefits associated with a more educated population.

Crime

Crime imposes large economic costs on individuals and society in the form of legal fees, medical expenses, damage to property, and the like. The GDP treats such expenses as additions to well-being. By contrast, the GPI subtracts the costs arising from crime.

Resource Depletion

If today’s economic activity depletes the physical resource base available for tomorrow, then it is not creating well-being; rather, it is borrowing it from future generations. The GDP counts such borrowing as current income. The GPI, by contrast, counts the depletion or degradation of wetlands, forests, farmland, and nonrenewable minerals (including oil) as a current cost.

Pollution

The GDP often counts pollution as a double gain: Once when it is created, and then again when it is cleaned up. By contrast, the GPI subtracts the costs of air and water pollution as measured by actual damage to human health and the environment.

Long-Term Environmental Damage

Climate change, ozone depletion, and nuclear waste management are long-term costs arising from the use of fossil fuels, chlorofluorocarbons, and atomic energy, respectively. These costs are unaccounted for in ordinary economic indicators. The GPI treats as costs the consumption of certain forms of energy and of ozone-depleting chemicals. It also assigns a cost to carbon emissions to account for the catastrophic economic, environmental, and social effects of global warming.

Changes in Leisure Time

As a nation becomes wealthier, people should have more latitude to choose between work and free time for family or other activities. In recent years, however, the opposite has occurred. The GDP ignores this loss of free time, but the GPI treats leisure as most Americans do—as something of value. When leisure time increases, the GPI goes up; when Americans have less of it, the GPI goes down.

Defensive Expenditures

The GDP counts as additions to well-being the money people spend to prevent erosion in their quality of life or to compensate for misfortunes of various kinds. Examples are the medical and repair bills from automobile accidents, commuting costs, and household expenditures on pollution control devices such as water filters. The GPI counts such "defensive" expenditures as most Americans do: as costs rather than as benefits.

Lifespan of Consumer Durables & Public Infrastructure

The GDP confuses the value provided by major consumer purchases (e.g., home appliances) with the amount Americans spend to buy them. This hides the loss in well-being that results when products wear out quickly. The GPI treats the money spent on capital items as a cost, and the value of the service they provide year after year as a benefit. This applies both to private capital items and to public infrastructure, such as highways.

Dependence on Foreign Assets

If a nation allows its capital stock to decline, or if it finances consumption out of borrowed capital, it is living beyond its means. The GPI counts net additions to the capital stock as contributions to well-being, and treats money borrowed from abroad as reductions. If the borrowed money is used for investment, the negative effects are canceled out. But if the borrowed money is used to finance consumption, the GPI declines.

13 Comments – Post Your Own

#1) On August 15, 2010 at 8:38 PM, tomlongrpv (75.82) wrote:

This seems to be a better way of assessing the effectiveness of economic policy.

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#2) On August 15, 2010 at 8:57 PM, FleaBagger (29.25) wrote:

I don't hold out much "hope" that your man in the White House is going to effect much improvement in the GPI, unless those measuring GPI find mendacious ways to add points during Democratic administrations.

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#3) On August 15, 2010 at 9:28 PM, devoish (98.66) wrote:

tomlongrpv,

Sharing this was inspired by the Binve and Frans discussion which produced this comment - On the need of a new consensus for a new economic policy. I believe we very slowly are beginning to build such a consensus here on Caps - in the hope that would inspire some critical thinking.

Flea,

Not everyone manipulates information or data for political gain.

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#4) On August 15, 2010 at 9:31 PM, devoish (98.66) wrote:

edit:

Sharing this was inspired by the very highly recommended Binve and Frans discussion which produced this comment

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#5) On August 15, 2010 at 10:01 PM, Valyooo (99.37) wrote:

Had to do a report on this once, all I remember thinking was that this is better for measuring standards of living, but not for showing willingness to work.

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#6) On August 15, 2010 at 10:06 PM, DarthMaul09 (29.70) wrote:

The GPI is one of the first alternatives to the GDP to be vetted by the scientific community and used regularly by governmental and non-governmental organizations worldwide. Redefining Progress advocates for the adoption of the GPI as a tool for sustainable development and planning.

I think a key assumption here is that a planned society is better than an unplanned society, but there are many who disagree and fear the evolutionary consequences of social planning, even if it is started with the best of intentions.  F.A. Hayek's famous book, The Road to Serdfom is finding a new generation of readers who question the wisdom of giving up freedom for the security of a planned society.  The link above is to a cartoon strip, which highlights the points made in Hayek's book.

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#7) On August 15, 2010 at 11:47 PM, whereaminow (20.95) wrote:

Enter Dwight Shrute.... "un-shun"

According to devo, libertarians and particularly Austrian School economists have the amazing ability to both decry the reliance on aggregate-based metrics like GDP for measuring a nation's prosperity and at the same endorse it.  They are also capable of both planning and not-planning the economy, while simultaneously exercising spectacular control over the fate of the working man during long periods of time when they hold no political power and are completely shunned by the mainstream establishment.

They are truly supermen.  I am happy to count myself among their ranks.

To fix this problem of super human libertarian Austrians, we must substitue one economic indicator based on aggregates that conceals the complexity of human choice (GDP) with another economic indicator based on aggregates that conceals the complexity of human choice (GPI.)

Surely now those crafty Austrians will be foiled!

When you can't defeat economic arguments, you attack the economists:

"The revolt against reason, the characteristic mental attitude of our age, was not caused by a lack of modesty, caution, and self-examination on the part of the philosophers. Neither was it due to failures in the evolution of modern natural science. The amazing achievements of technology and therapeutics speak a language which nobody can ignore. It is hopeless to attack modern science, whether from the angle of intuitionism and mysticism, or from any other point of view. The revolt against reason was directed against another target. It did not aim at the natural sciences, but at economics. The attack against the natural sciences was only the logically necessary outcome of the attack against economics. It was impermissible to dethrone reason in one field only and not to question it in other branches of knowledge also.

The great upheaval was born out of the historical situation existing in the middle of the nineteenth century. The economists had entirely demolished the fantastic delusions of the socialist utopians. The deficiencies of the classical system prevented them from comprehending why every socialist plan must be unrealizable; but they knew enough to demonstrate the futility of all socialist schemes produced up to their time. The communist ideas were done for. The socialists were absolutely unable to raise any objection to the devastating criticism of their schemes and to advance any argument in their favor. It seemed as if socialism was dead forever.

Only one way could lead the socialists out of this impasse. They could attack logic and reason and substitute mystical intuition for ratiocination."

From Human Action by Ludwig Von Mises, Chapter 3: Economics and the Revolt Against Reason (1949)

"re-shun!"

David in Qatar

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#8) On August 15, 2010 at 11:49 PM, ChrisGraley (29.72) wrote:

It's a noble goal, albeit with a political bias. You got a rec from me.

Measurements that it doesn't take into account are...

Government inefficiency. If The dept of defense spends $600 on a toilet seat, both the GDP and GPI index view that as a value of $600 even though the value of that toilet seat to the economy may be only $20. The problem is that even though the velocity of money still helps that $600 circulate, it creates the very income imbalance mentioned aboves. The company making the toilet seats hire only enough workers to make $20 toilet seats. The corporate executives and stockholders benefit, but the working class does not. This leads to another problem I'll discuss later..

Government spending as a percentage of GDP. While I'm sure that the promoters of GPI would be happy to argue that GPI quantifies the good that government does and spending to GPI is always lower to spending to GDP, it is so by design. The fact is that a dollar spent by government is a dollar taken from consumers. That dollar still counts as income for the consumer in both formulas, but it is a dollar that they never saw and have no control over.

Consumer debt. There are 2 years since 1916 that consumer debt hit 100% of GDP. (1929 and 2007) Think about that. In those years consumers borrowed the economy's entire output. Naturally if consumer debt was included in either measurement, we would have not experienced the same "so called economic growth" on paper, but the corrections made ahead of time would have avoided as big of a collapse.

Government debt. Okay, we all know why it's bad but some of you say that in times it's necessary. I only believe that in the most extreme measures and never anywhere near in the amounts that it's practiced. My solution is to account for the future loss in GDP due to government debt. It's pretty simple Just add up the total future interest to be paid (not the principle) and subtract that from the current GDP or GPI.

Government program solvency. A neat little accounting trick lets government hide it's debt by selling a bird in the hand for a future bird in the bush to be named later. If you are gonna spend all of the cash in social security and replace it with T-bills. then in addition to the formula that we used above for government debt, you have to account for the time value of money. (PV = FV − r·PV = FV/(1+r))

Consumer disposable income for incomes below mean and percentage of consumers with income below mean. This is the most important indicator of future productivity that I can think of, and it goes virtually unnoticed. I alluded to it earlier In the government inefficiency segment. It's basically a measurement of the success of the working class. There are very few domestic companies that rely totally on exports. The vast majority rely on domestic spending more than global spending. This wasn't always true and we were once like China and relying on other nations to produce domestic jobs. Our success led to our future downfall because of both corporate and government short-sightedness. The problem is that we are 25% of the global market and we are eroding that market's purchasing power. The velocity of money is controlled by the people living paycheck to paycheck. They always spend a greater percentage of their income than people above mean on average. Corporations are measured by the expectations of investors that demand reasonable short term growth.  Corporate executives are also are usually investors as well and therefore have the same expectation. This leads the pressure to increase productivity and decrease labor costs. That isn't in itself a bad thing, because normally if a company didn't do those things, it would eventually lose in global competition, The problem is that the lowest paid employee in the food chain doesn't share in the success with those labor cuts and productivity gains and in fact he usually is hurt by them by eventually losing his job. This means that we are eliminating our biggest consumers and destroying our domestic market. We can increase investment capital all we want, but investment capital still needs consumer capital. Government does try to step in and bail out the displaced worker and redistributes investment capital to do this, but it isn't fixing the problem. It's just trying to bail out the consumer by eroding tax dollars in a declining economy. The fact that government is so inefficient in doing this, just makes things worse. To maintain a future productive economy, the lowest paid employee needs to be rewarded at an equal or better percentage of the companies success as the highest paid employee does. That same lowest paid employee also needs to educated to the point where he can supplement his income privately outside of the company through investment. This education should be government's biggest role in protecting the working class. This will focus government spending more toward improvement of the economy and less toward subsidizing the erosion of it.   Everyone always argues about government spending, but government money should never be spent. It should be invested. The government can't just invest it's money in the S&P like you and I can, (well in today's world the government can do whatever it wants including robbing retirees pension funds and giving that money to the auto unions, but let's ignore that) but it can invest in economic growth! Economic growth creates greater tax revenues without creating a bigger burden on the taxpayers. The key to economic growth is to enable the lowest rung on the ladder to move a rung up without turning the ladder upside down.

So to sum up...

Conservatives - Market erosion is created by trying to maximize short term profits by cutting labor costs without  thinking about a dwindling consumer base.

Liberals - Ignoring economic factors to subsidize victims, doesn't create less victims. It just creates less awareness of the problem and less enthusiasm for a solution.

Libertarians - My last point showed a failure of the free market system because free markets tend to pick a short term cycle over a long term cycle. While reducing labor costs is something that will keep companies in business for the short term, if the labor that increased productivity in the long term isn't rewarded appropriately, corporations are eroding their own consumer base. This still isn't as bad as a government that rewards a stupid consumer, but it is contributory.

So, I've managed to piss most people off yet again! My work is done tonight! 

 

 

 

 

 

 

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#9) On August 16, 2010 at 6:16 AM, devoish (98.66) wrote:

Hopelesslylost,

It is better to count losses as losses rather than as gains. It is better to count all the things that make an economy, not just the banker financed ones. Your failure to grasp such a basic concept is amazing. I understand you would rather not see such an accounting at all. Ignorance is bliss, and the ignorant are malleable.

ChrisGraley,

If The dept of defense spends $600 on a toilet seat, both the GDP and GPI index view that as a value of $600 even though the value of that toilet seat to the economy may be only $20

It would be correct to treat Gov't overpaying (if it did) for a toilet seat exactly the same as a homeowner overpaying for a construction project. I am sure you have identified an opportunity to complain about Government, I am not sure you have identified a problem with either the GPI or the GDP measurements. Do you want to expand the CBO to shop and compare prices or should that remain in the realm of purchase managers?

 Okay, we all know why it's bad but some of you say that in times it's necessary.

Why is it bad?

Thank you for the "rec".

valyooRLholdings,

Had to do a report on this once, all I remember thinking was that this is better for measuring standards of living, but not for showing willingness to work.

That is also a failure of GDP. I have been on factory floors and in corporate board meetings. I would suggest that most people feel pressure and are working more than are willing to in order to make ends meet or improve their standards of living - noble goals and efforts. The whole point of GPI is to measure their success, not their employers. And they have been failing by the standards of GPI since 1975.  It is good to know you are off course, so you do not stay the wrong course.

DarthMaul09,

I think a key assumption here is that a planned society is better than an unplanned society,

There is no such assumption. If an unplanned society gave us shorter working days, time off with our kids, secure retirements, access to healthcare, and all the things we are working our tails off to get, it would measure that result.  GDP's failure is that it does not measure what we get for our hard work in the office or the factory.

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#10) On August 16, 2010 at 6:54 AM, ChrisGraley (29.72) wrote:

devoish do you honestly not know why it's bad for our government to "gladly pay you Tuesday for a hamburger today" ?

 

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#11) On August 16, 2010 at 9:40 AM, fransgeraedts (99.91) wrote:

Dear devoish,

a great post. Very interesting that GPI. Glad you brought it to our attention. I see it not as replacing GDP but as an addition. Am i right in that? It brings to our attention that (1)while GDP can be growing the actual well being of the majority of a people can be lagging or even declining (2) GDP growth now can diminish our growth potential (GDP and GPI)for the future.

What i find interesting about the comments by Chris is that he opens a debate on what should be in such a broad measurement of progress. I suspect that that is one the ways we could rediscover that we agree on more then we think  -which is very important i believe. It would be very worthwhile i think to talk about what we would consider progress -lets say for the next fifty years?

 fransgeraedts

 

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#12) On August 16, 2010 at 11:57 AM, davejh23 (< 20) wrote:

"It brings to our attention that (1)while GDP can be growing the actual well being of the majority of a people can be lagging or even declining..."

I believe that this point is made clear through a variety of metrics that all come to the same conclusion as the GPI..."that economic growth [and quality of life] has been stagnant since the 1970s."  There's evidence that this is now going into a period of decline...not just stagnation.

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#13) On August 16, 2010 at 8:35 PM, devoish (98.66) wrote:

Frans,

Thanks. I see it as eventually replacing GDP. This is not the only version I have seen of trying to measure what is really important to most people beyond just the dollars and accounting for losses as losses. I would not stop measuring GDP though.

Thanks especially for the comment about ChrisGraleys reply. Discussions between Chris and I have been a little... contentious.

ChrisGraley, Thank you for the thoughtful reply. I do not think that Government overspending  is any different than private overspending to the economy. But Govenment waste of my tax dollars is painful to me personally when I believe that I would have done better.

davejh23,

I agree. The point is made by combining a variety of measurements but not by GDP which is the most commonly cited measure of economic success or failure. GPI attempts to include those various metrics into one number.

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