Correcting the Books with the Genuine Progress Indicator

Former Maryland Governor Robert Ehrlich got it totally wrong in a recent essay on the National Review website when he suggested that “liberal states” that have adopted the Genuine Progress Indicator (GPI) as a measure of social and economic progress “cook the books” and generate “dishonest analysis” of economic development. He refers to the recent resignation of Former Oregon Governor John Kitzhaber over allegations of misused public resources related to his partner’s consulting activities associated with the development and implementation of the GPI in Oregon. Despite Ehrlich’s misinformed denigration of the GPI, the recent political events in Oregon do not invalidate the theoretical merit of the indicator, which is an alternative indicator of well-being that has been widely studied by ecological economists and other scholars. Ehrlich would be well served to learn about the roots of the GPI, which was developed in an attempt to correct for the fundamental shortcomings of the gross domestic product (GDP) as a measure of national economic welfare. Mr. Ehrlich may be surprised to learn that it is well established in peer-reviewed economic literature that the GDP is a defective and theoretically inaccurate measure of progress, and that the GPI is a product of decades of theoretical and empirical research by economists on the development alternative indicators that attempt to correct for the inherent accounting errors in the GDP.

It has long been established that measures of national income such as the GDP (and its predecessor, gross national product, or GNP) are flawed indicators of socioeconomic welfare. Throughout much of the twentieth century, economists and policy makers have highlighted the deficiencies of using the GDP (or GNP) for this purpose, yet it continues to be the most widely used measure of economic development. In fact, in a 1934 report to Congress, Simon Kuznets—economist, Nobel laureate, and chief architect of the system of national income accounts used to calculate GNP—cautioned that “the welfare of a nation can scarcely be inferred from a measurement of national income.” A former staff member of the National Bureau of Economic Research, Kuznets warned in the report that in measuring economic growth, “distinctions must be kept in mind between quantity and quality of growth, between its costs and return, and between the short and the long run…Goals for ‘more’ growth should specify more growth of what and for what.” In 1973, prominent Yale economists Nordhaus and Tobin wrote that, gross national product statistics cannot give the answers, for GNP is not a measure of economic welfare”.

There are numerous problems associated with GDP or GNP as a measure of socioeconomic welfare. First, it considers all economic activity as equally positive, including welfare-reducing activities such as expenditures on pollution, crime, war, and pandemics. It also ignores welfare-enhancing activities such as volunteer work, unpaid child care and other domestic work, and the value of ecosystem services, most of which are overlooked by markets but affect GDP only when they are interrupted, impaired, or damaged through environmental degradation. Furthermore, the GDP does not account for the distribution of income, even though a marginal increase in income enhances the welfare of the poor much more than that of the rich.

At a minimum, a better measure of socioeconomic well-being would be net domestic product (NDP), which would deduct from GDP the costs associated with economic growth. A calculation of NDP would subtract the costs of depreciation of human-made capital (such as infrastructure), the depreciation of natural capital (such as forests and wetlands), and expenditures associated with defensive or rehabilitative activities (such as expenses associated with cleanup after an oil spill).

The GPI is far better indicator of socioeconomic welfare, in that it incorporates the value of social capital, the effects of inequality, and long-term environmental damage. The GPI is a variant of the Index of Sustainable Economic Welfare (ISEW) which was first proposed by Herman Daly and John Cobb (1989) as an alternative to the GDP, and it has been updated to account for income inequality, costs of crime, costs of environmental degradation, services of public infrastructure, and the benefits of household and volunteer work. The GPI aims to differentiate between economic activity that diminishes natural and social capital and activity that enhances such capital. Contrary to Ehrlich’s condemnation of the GPI as “classic liberal snake oil,” the ISEW and GPI are soundly based on long-recognized concepts of income and capital first advanced by economist Irving Fisher in 1906 that are superior to standard definitions of income. The ISEW and GPI are theoretically sound and indicators of both income and sustainable economic welfare, and this conclusion has been published in numerous peer-reviewed journal articles and national reports.

There are five categories of calculations that are used to adjust the value of GDP to compute the GPI. First, personal consumption expenditures are adjusted for income inequality using the Gini coefficient, a widely accepted measure of inequality of income distribution to arrive at weighted personal consumption. Second, there are adjustments to reflect the unrecognized contribution of household activities, including the values of household work and parenting, volunteer work, education, and the benefits of consumer durable goods, none of which is recognized by market values but which clearly contributes to socioeconomic well-being. The third category of adjustments incorporates non-market values related to the collective costs born by society that reduce socioeconomic well-being, including the costs of crime, commuting, and underemployment, and the value of the loss of leisure time. This category also includes estimates of the overlooked value of the services of public goods, including infrastructure, such as highways and streets. Fourth, the GPI is adjusted to account for the environmental costs and the depreciation of natural capital, including expenses associated with household pollution abatement; the costs of water pollution, air pollution, and noise pollution; the loss of primary forests, farmlands, and wetlands; the depletion of nonrenewable resources for energy production; and long-term damages from carbon dioxide emissions and ozone depletion. The fifth adjustment is for net investment in capital, which may be positive for societies that are saving to meet the demands of increased population, and negative for a society that is consuming its capital as income.

A 2006 paper by John Talberth and colleagues calculated the GPI for the United States for the period from 1950 to 2004. Figure 1 illustrates that genuine progresshas grown much more slowly than GDP, and that many of the gains from economic growth have been offset by growing income inequality, and the costs of crime, pollution, and depletion of natural capital. The figure provides empirical evidence of the so-called “threshold hypothesis” from ecological economics, which proposes that when macroeconomic systems expand beyond a certain size, the additional cost of growth exceeds the flow of additional benefits. The graph demonstrates that there seems to be a period in which economic growth (as measured by the GDP) is correlated with improvements in the quality of life, but only up to a point—the threshold point—beyond which, more economic growth may bring about a stagnant or deteriorating quality of life.

Featured image

Figure 1: Real GDP and GPI per capita, 1950-2004 (2000 US dollars); Adapted from Talberth et al., Sustainable Development and the Genuine Progress Indicator, 2006

Most calculations of the GPI have been at national levels for the United States, Canada, Australia, and several European countries. More recently, there have been several initiatives to use the GPI to help inform public policy decisions in several U.S. cities and states, and Canadian provinces. The state of Maryland is the first state government to sanction the GPI as a tool to measure the 26 indicators of social, environmental, and economic health of the state. The State’s GPI initiative was implemented to measure how development activities impact long-term prosperity, both positively and negatively. The Utah Population and Environment Coalition used the framework of the GPI in its assessment of changes in quality of life in that state (it was interesting to note that Utah was not mentioned in Ehrlich’s essay among the list of “liberal” and “anti-business” states that have implemented the GPI). The state legislature in Vermont passed an act in 2012 to develop the GPI “to measure the state of Vermont’s economic, environmental, and societal well-being as a supplement to the measurement derived from the gross state product”. The GPI has also been developed in other regions to measure welfare at state, county, and city scales in California, Hawaii, Maryland, Michigan, Ohio, Utah, and Vermont, and at the provincial level in several Canadian provinces. Several state and regional estimates of the GPI have been published in peer-reviewed academic journals, including calculations for the state of Vermont and several counties and northeast Ohio. And yes, the state of Oregon was in the process of implementing a GPI initiative, but it seems likely to be derailed in light of the recent political events.

Mr. Ehrlich clearly got it wrong when he suggested that such GPI initiatives represent efforts to “cook the books” in measuring socioeconomic welfare. Actually he got it backwards: if society is interested in measuring progress and well-being, it is the GDP’s books that are “cooked” (or at least misguided), and this is well documented in peer-reviewed academic journal articles by revered economists. Initiatives to develop the GPI are motivated by an attempt to correct the books. The unfortunate political drama in Oregon does not detract from the sound theoretical foundations of the genuine progress indicator as a measure of human progress.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s