Commentary—

Gross Domestic Product (GDP) Is Overrated

By Tracy Fernandez Rysavy

When the Commerce Department announced the nation’s Gross Domestic Product (GDP) figures for the fourth quarter of 2008, they revealed a historical context for our economic slide. The 3.8 percent GDP shrinkage at the end of 2008 is the fastest pace for an economic slowdown in a quarter of a century.

Consumer spending, according to the Commerce Department, has fallen sharply, with big-ticket spending plunging even faster, falling off by 22 percent for the 2008 fourth quarter. But what if the GDP — measuring the market value of a country’s economic output — isn’t the best indicator of societal well-being?

“GDP growth is mostly a measure of growth in consumption, which is the driving cause of environmental decline,” writes Positive Futures Network chair David Korten in his new book, Agenda for a New Economy. “Human health and well-being depend on a great many things that do have market value: food, housing, transportation, education, health care, and many other essentials of a healthy life. These, however, are means, not ends, and their real value is a function of how they contribute to improving human and natural health and vitality.”

Because the GDP measures quantity of consumption only, rather than quality of that consumption (and its costs to society or the environment), relying on such a measurement suggests an underlying assumption that material growth and wealth accumulation are the greatest goods. In actuality, the GDP remains largely silent on societal well-being.

For example, the GDP counts economic activity that produces horrific pollution alongside the economic activity required to clean up that pollution — as if there were no difference for society between the two.

As Korten points out, a rising GDP can occur alongside simultaneous social upheaval: “[The GDP] can be rising in the face of disintegrating families and a vanishing middle class, increasing prison populations, rising unemployment, the disruption of community, collapsing environmental systems, the hollowing out of domestic manufacturing capabilities, failing schools, growing trade deficits, and costly but senseless foreign wars.”

Instead of relying on the GDP as our primary economic measurement, Korten recommends adding nonfinancial indicators to the GDP, as 150 other countries have already done. The Human Development Index (HDI), conceived by Pakistani economist Mahbub ul Haq, replaces a country’s GDP with a collection of measurements that examine the overall well-being of its people by looking at statistics on health, education, and standard-of-living.

Shifting from the GDP and its emphasis on growth to something like the HDI and its emphasis on environmental and social well-being would require a vast retooling of the role of business — particularly big business — in our society. Instead of focusing solely on growing their bottom lines to the detriment of our collective social and ecological well-being, companies would have to operate in ways that support the life expectancy and life satisfaction of their workers, customers, and communities. They would have to operate in ecologically efficient ways that restore, rather than destroy, the environment.

And for those companies that do harm instead?

Dr Neva Goodwin, an economist at Tufts University, suggests we revive the practice of revoking their charters. “In the 19th Century, it was understood that a corporate charter was given to allow a group of people to do something that was in the interest of society,” says Dr Goodwin. “Corporate charters were sometimes given for limited periods of time, and if the producer wasn’t living up to their part of the bargain, the charter could be taken away.”

Another solution is to levy severe taxes on corporations that do harm, such as violating environmental rules, while giving tax breaks and incentives to corporations advancing the greater good, and contributing to an increased HDI. Finally, regulations to reduce corporate influence in politics could help enact laws that push big business further toward ensuring that they operate in the interest of society rather than in the interest of their bottom lines. The better path for our society is to turn away from of the GDP-focused model of relentless economic growth — which comes at a steep cost to human health and well-being, and to the environment — and toward a renewed emphasis on real wealth.

(Tracy Fernandez Rysavy is publication editor for Green America–Co-op America (www.coopamerica.org), a nonprofit consumer organization advocating socially and environmentally responsible purchasing and investing.)