Posted by: seanmichaelbutler | March 4, 2010

THE GROSS DOMESTIC HOAX

On a sunny Saturday four summers ago the gaiety of a festive afternoon was shattered by the terrible sound of impacting metal and breaking glass. A minivan heading toward Ottawa for Canada Day had lost control rounding a bend in the highway and smashed into a Honda Civic going in the opposite direction. At the last moment, the driver of the Civic, a woman in her 30’s, swerved to take the full force of the collision on her side of the car, so saving the lives of the two young daughters riding with her.

The mother was killed instantly. The minivan’s driver, a 57 year old man with a family of his own, was admitted to hospital in critical condition, while its other five occupants were treated for minor injuries and released, as were the two now motherless girls from the Honda.  The ripples of grief and trauma, as always with horrific accidents, were immeasurable and in a way eternal – certainly the families of the victims and the survivors would never forget the day, and never be able to calculate the weight of pain that it had caused.

But something else was triggered by that afternoon in July that was eminently calculable and measurable.  Doctors, nurses, and paramedics sprang into action to treat the injured; police and fire departments rushed to the scene; tow trucks cleared the wreckage; insurers worked on claims; mechanics repaired property damage; auto plant workers churned out replacement vehicles; public works employees improved highways for better safety; the media reported the story; driving instructors read the story to their students, who booked more lessons; employers of the dead hired and trained new workers, employers of the injured paid sick leave and hired replacements;  lawyers and notaries were engaged; judges and other court personnel heard the case when charges were laid; and, finally, the funeral industry gained another client. In total, those few seconds of horror, and their lingering aftermath, contributed almost $1 million to the economy – a sum representing years of work for the adults involved.

And the GDP – the country’s Gross Domestic Product – rose.

   *     

In a world divided by religion, politics, and culture, one thing unites us all:  the Gross Domestic Product.  From Washington to Pyongyang, New Delhi to Berlin, Riyadh to Rome, government and business the world over worship it with absolute devotion. Legions of acolytes track its progress and prophesize its future course, believing wholeheartedly that GDP growth is the road to salvation, and GDP decline the path to damnation.

In fact, though it is trumpeted almost daily by the media and government, many – possibly most — people are not quite sure what GDP actually is. Ask a random sample of people to define it, and you’ll get answers ranging from professions of ignorance: “I actually have no idea how they measure these things,” to brave but misguided stabs: “The product that Canada produces that brings in the most income,” to pretty close: “The tally of all financial transactions that take place in a, I don’t know, culture?”

In reality the GDP can be described in three equally accurate ways:  1.  the total value of all the goods and services produced in a country in one year   2.  the total income of a country in a particular year  3. the total expenditures on goods and services of a country in a particular year.  These three different ways of looking at the figure yield nearly equal results. Basically, GDP can be thought of as an indicator of the amount of economic activity going on in a country. We call an increase in activity “economic growth” and a protracted slowdown in that increase a “recession”. GDP, which Statistics Canada calculates once a month, is the pulse of the economy.

What it isn’t is a measure of societal well-being.  This is possibly the most insidious part of the unintentional GDP myth:  the belief that economic growth – as defined by the GDP — equals an improved quality of life.  While GDP is good at what it does – adding up economic activity – equating mere activity with well-being is worse than questionable. “There is probably no more pervasive and dangerous myth in our society than the materialist assumption that ‘more is better’,” writes Canadian political scientist Ron Colman. “The GDP is a quantitative measure of size. How can that, by definition, measure quality of life?”  John Kenneth Galbraith recently highlighted the shortcomings of GDP as one of the most important issues of “unfinished business” facing economics. And Roy Romanow makes his opinion of GDP clear when he calls it the “Gross Distortion of Prosperity”.

It may be more perverse than that.  Each day in this country there are an average of eight car crash fatalities, 623 injuries, and 1700 collisions. Taken yearly, the car crash “industry” runs into the billions. A conservative estimate made by the SAAQ – Quebec’s public auto insurer – puts the economic yearly “benefit” of car accidents at nearly $3 billion for Quebec alone: or 1.4 percent of the province’s GDP.

Economic growth, it turns out, can be very good for countries, but very bad for people.  And as much as the GDP can be called the Gross Domestic Product, it could equally be labelled the “Gross Disaster Product”.

   *

Criticisms of the limitations of GDP are nothing new; they go all the way back to its conception, in the Second World War. Simon Kuznets, the Russian-born, American-naturalized economist who won the Nobel Prize for being the principle architect of the GDP, became one of its most vocal critics. He cautioned that “the welfare of a nation can scarcely be inferred from a measurement of national income as defined by the GDP,” and spent much of his life pointing out the limitations of the framework he had helped to create. How, then, did we manage to get to where we are now?  How did we conspire to disregard Simon Kuznets to the point where we tacitly accept as our unassailable gauge of “progress” a number that is compromised at best, and meaningless at worst?  And why does that number, when it comes to those things we consider elemental parameters of happiness, function as a kind of unwitting con-game?

GDP actually diverges from true well-being in two major ways. First, it counts as “progress” things that any common-sense definition of the word would exclude: pollution, divorce, problem gambling, crime, war, disease, loss of free time – all these cause an increase in spending, and a correspond ing rise in GDP. “The nation’s central measure of well-being,” write Clifford Cobb, Ted Halstead and Jonathan Rowe (of Redefining Progress, a San Francisco-based economic think-tank), “works like a calculating machine that adds but cannot subtract.” As the saying has it:  “Economists have to learn to subtract.”
The second main digression GDP makes from genuine well-being is in its exclusion of every contribution to society made outside the market. There’s a lot more that can’t be bought besides love: strong families, robust communities, healthy ecosystems, fit bodies, wise hearts. The GDP, Robert Kennedy once observed, “measures everything, in short, except that which makes life worthwhile.”   
Sometimes referred to as the “love economy”, volunteering and household work contribute the equivalent of an estimated $325 billion a year in services to Canadians – equivalent to nearly one-third of our GDP, but utterly ignored by it. In fact the GDP is blind to the love economy whether it goes up or down. From 1997 to 2000, says Colman, 12.3 percent fewer Canadians volunteered, ‘and it’s not a blip on the radar screen of any policy-maker because no money changes hands.’”
Similarly, the contributions of the natural environment go unnoticed and unappreciated. For instance, forests are typically valued only for their GDP-boosting timber. But if we consider their value in protecting watersheds and biodiversity; guarding against erosion and flooding; regulating climate and sequestering carbon; and providing recreation and spiritual enjoyment, they may be worth more standing than cut. A team of economists and ecologists estimated in a 1997 Nature magazine article that the value of nature’s services was $33 trillion a year, or nearly double the gross world product of $18 trillion.
 “Much of what is recorded as economic growth,” writes Colman, “is merely a shift in work from the unpaid household economy to the paid economy.” Ditto for the ecological economy. Parenting becomes childcare, shade trees become air conditioners, road hockey becomes PlayStation, clean water becomes a Brita filter, community cohesion becomes locks on the door, and free time becomes a second job to pay for all these things that were once provided free. Every time, the GDP goes up – but does our well-being? “Growth,” write Cobb, Halstead, and Rowe, “can be social decline by another name.”
The rise in American unemployment currently baffling U.S. observers (In a “surging” American economy) is just another example of the pernicious disconnect between our economic indicators and reality. Little wonder that through the myopic lens of GDP, building highways through neighbourhoods, clear-cutting old growth forest for toilet paper, and working people to an early grave all seem to make good economic sense. Just count the fallout as a benefit, ignore the human, social and ecological assets you’re bulldozing, and watch the economy grow.
*
In the evening of March 23, 1989, an aircraft carrier-sized supertanker named the Exxon Valdez slipped its last mooring at Alaska’s Alyeska Pipeline Terminal and manoeuvered through the Valdez Narrows, out into the darkness of Prince William Sound. The ship increased speed for the run down the coast to Long Beach, California, laden with over a million barrels of Alaskan North Slope crude oil.  As the Valdez accelerated southward, the radar operator reported small icebergs — sloughed off the Columbia Glacier – blocking the outbound shipping lane ahead. The captain of the tanker, Joseph Hazelwood, was faced with the choice of slowing down to proceed through the bergs safely, or diverting into the inbound shipping lane and continuing at speed.  He chose the inbound lane.  Thirty-four minutes later  the Valdez, with the third mate at the helm, ran aground on the Bligh reef, in the process rupturing 8 of its 11 storage compartments. 

As the equivalent of 125 Olympic-sized swimming pools of oil seeped into the surrounding ocean, the world quickly learned the name of this supertanker, and soon came to associate the Exxon Valdez with the worst environmental disaster in the United States since Three Mile Island. The death of marine wildlife from the spilled oil could only be guessed at: 250 000 seabirds, 2 800 sea otters, 300 harbour seals, 250 bald eagles, up to 22 orcas, and billions of salmon and herring eggs, according to the best estimates. A disaster of this magnitude – and publicity – begat a colossal response; at the height of the clean-up effort, approximately 10000 workers, 1000 boats, and 100 aircraft scrambled to contain the spill, rescue wildlife, and scour beaches, costing Exxon $2.1 billion. But that was just the proverbial  tip of the iceberg. Spending on legal and court costs, media reporting, and repair to the tanker pumped billions of extra dollars into the Alaskan and American economies, a payday that has yet to run dry, judging from the recent $6.75 billion (including interest) awarded to 32000 Alaskan fishermen and residents who brought a suit against Exxon. In the end, the total economic windfall of this terrible disaster dwarfs the $22 million that the oil would have been worth had it been delivered safely to port. The GDP benefitted accordingly, and hugely.

Oil spills aren’t the only disasters that are a growth industry. After the wildfires in California last summer, the Los Angeles Times predicted the tragedy  would, “pump some juice into the economy,” as homeowners replaced their losses. The Oklahoma City bombing prompted The Wall Street Journal to forecast a rise in the share prices of firms in the security industry. And the ice storm that hit Ontario and Quebec, while initially causing economic losses of $1.8 billion, ended up generating 16 000 jobs and a net gain to GDP of $1.5 billion.

All these disasters are, in effect, little wars. So what happens when we engage in the real thing? Warfare contributes to GDP twice – once when we make the bombs and hire the people to drop them, and again when we dole out contracts to rebuild what we’ve destroyed.

History doesn’t have to be destiny, though, not even when it comes to wars or math.  The question begs itself: can’t we come up with a better number?

    *

In fact, someone is doing just that. Since 1997, GPI Atlantic, a non-profit research group based in Halifax, has been developing an index of sustainable development and well-being for Nova Scotia. So far, it has completed indicators for 16 of the 22 areas it set out to measure. In another year, says the group’s founder, Ron Colman, it hopes to have all 22 indicators finished, and the province’s first Genuine Progress Index – or GPI – up and running.

Yet the index’s work-in-progress status hasn’t stopped the group from grabbing headlines in Halifax papers over the past few years with reports that put a dollar value on things not usually measured monetarily; costs such as crime, clear-cutting and smoking, and benefits like volunteer work, forests and childcare.

The GPI, explains Colman, a former Assistant Professor of Political Science at St. Mary’s University and researcher and speechwriter at the United Nations, “uses monetary values as a communications strategy to demonstrate the economic value of non-market goods and services.” It does this by calculating what it would cost to replace those non-market goods and services in the market economy, or, conversely, how non-market costs adversely affect the economic bottom-line. 

For example, Nova Scotians volunteer more than anywhere else in Canada, to the tune of 140 million formal and informal hours a year. “People might say, ‘That’s very nice.’”, says Colman. “But then if we say that’s the equivalent of $1.9 billion worth of services – 10% of our GDP and larger than all government services combined – then the politicians take notice.”

“If you don’t measure it,” he points out, “the real message you’re conveying is it has no value. If you measure it properly, it has value, it gets attention, it changes behaviour. Indicators are tremendously powerful that way.”

In a way, Colman’s strategy is: if you can’t beat ‘em, join ‘em. Policy-makers are so used to looking at things in monetary terms that he, in effect, shows them the money – for everything of value. He speaks their language. He also speaks about values.  His 22 sets of indicators, ranging from measurements of the value of leisure time, sustainable transportation, soils and agriculture, to income distribution, and health, reflect “consensus [Canadian] values. In other words, if there was an indicator that was acceptable to the Right and not the Left, or vice-versa, then these things would never be accepted by Canadians.” 

It makes sense, as does the GPI’S extension of the concept of capital – usually thought of as the total assets of a company – to humans and nature. It’s a basic accounting principle that you don’t count the depletion of capital as income, yet that’s exactly what the GDP does with human and natural capital.  “If Coca-Cola operated its accounts the way we operate our System of National Accounts,” says Mark Anielski, “they’d be bankrupt.”

“I would say that we are at a turning point in human history where the window of opportunity is quite small,” says Ron Coleman. “When I was my daughter’s age, we didn’t dream that a whole fish stock could collapse… we don’t have much time or luxury to fool around anymore, and until we actually measure these things, we’ll only have words.”
   *
How then, did we learn to stop worrying about our most cherished values for community, family and the environment, and come to love the GDP?

One obvious explanation is self-justification.  If people like to think of themselves as relatively well-off in the world, as fortunate, as happy, then what better strategy than to find something we do well and attach our gauge of happiness to it?  In the western world, we’re good at at buying, selling, and accumulating.  If we decide that these activities equal well-being, then it’s tautological that we’re the most successful  — the most fortunate, the happiest – people on earth.

But what if, in fact, we – western capitalists – aren’t the most gratified people on earth?  What is the GDP then but a tool that has turned the tables on its creators?

The highly regarded World Values Survey recently asked people in over 65 countries how happy they felt. The results?  According to their data the happiest people on earth were Nigerians – 70% of the respondents in that country somehow got by their abysmal per capita GDP of $840 and reported to the survey that they felt “very happy”. Canada placed in the top fifteen, with 45% in good spirits.  In the U.S., according to a similar study, the number of people who describe themselves as “very happy” has fallen from 35 to 32 percent in the past 40 years – despite a doubling of inflation-adjusted per capita income.  In fact, although incomes have risen considerably across the board in the industrialized world, only in Denmark have people become more satisfied with life over the last three decades. 

The King of Bhutan, perhaps sensing that money doesn’t necessarily lead to contentment, recently declared that his country is more interested in Gross National Happiness than Gross National Product.

    *

Mike Nickerson, founder of the Seventh Generation Initiative, an advocacy group predicated on the Native American tradition of considering the implications of current actions on the next seven generations, likes to compare the growth of a society to the growth of an organism.  In the early years, physical growth is important, but there comes a time when it naturally ends – from then on we call growth “obesity”. He believes that, “as a culture, we are in late adolescence.”

If so, then Albertans are the teenagers in the rec-room. At just over $40,000, Alberta is the Canadian GDP per capita all-star. Over the past 10 years, its economy has grown at an average rate of 4.2 percent — the highest in the country. Per capita investment, exports, and population are all growing faster than the Canadian average, while unemployment rates continue to undercut the rest of the country. All the standard economic indicators forecast smooth sailing and the captain of the ship, eyes fixed firmly on the horizon, shouts a hearty full steam ahead.

But down in the bowels of that vessel, a group called the Pembina Institute for Appropriate Development has been poking around the engine room, trying to see if the machinery is really functioning as well as the gauges up top suggest.  Working in parallel with GPI Atlantic, but going into less detail, a team of researchers at Pembina assembled over the course of a year and a half a GPI of 51 indicators for Alberta, and published their results in 2001.

Tracking data from 1961 to 1999, they found that, while per capita GDP in Alberta has risen at an average rate of 2.2 percent a year, the GPI has actually fallen by an average of 0.5 percent yearly, although it has been holding steady for the past 20 years. (see Chart #1). The composite index for what they call “Economic Well-Being” faired slightly better than the overall GPI, but still fell far short of GDP growth, at an average gain of only 0.4 percent a year. Their “Personal-Societal Well-Being Index”, on the other hand, seemed to have an inverse relationship with the Economic Index – while the Personal-Societal declined, the Economic increased, until both plateaued in the mid-1980’s.  Finally, the “Environmental” Index has been dropping an average of one percent a year – not surprising when you consider that Albertans’ ecological footprint – the amount of productive land and resources needed to sustain one’s lifestyle – has swelled 66 percent since 1961, and is now the fourth largest on the planet, after the United Arab Emirates, Singapore, and the United States. “Albertans,” writes Canadian economist Mark Anielski, “are not living off the interest of their natural capital and are, therefore, not living sustainably.”  All this, of course, is going on while Alberta’s GDP continues its oblivious ascent, at 2.2 percent a year. 

The translation: not only does GDP fail to accurately measure those things that make a society livable, it fails just as completely to take into account the complexity of the interaction between those things. The challenge, says Mark Anielski, is to “think about the world as a system – a complex, integrated system – rather than dividing the world up into portfolios.” The universe, economic and otherwise, doesn’t work in the linear way we’d perhaps like it to. Instead, it’s more like an interconnected web, where cause becomes effect, and effect becomes cause, and a butterfly flapping its wings can trigger a hurricane on the other side of the globe.    

*

The attempt to look beyond money and measure the real well-being of people and ecosystems hasn’t been restricted to Canada, of course. One of the best known international scales is the UN’s Human Development Index, which has been around since 1990. Canada was in first place for much of the 1990’s, but the most recent report now puts Norway first, with Canada in eighth place. But the HDI is extremely limited, looking at only four indicators: life expectancy, literacy, school enrolment, and per capita GDP. Lesser known UN measurements include the Human Poverty Index, which pits rich countries against each other in the areas of poverty, illiteracy, unemployment, and life expectancy (Sweden fares best in this context, the U.S. worst), and the Gender Empowerment Measure, which measures women’s participation in politics and business (Botswana, Costa Rica, and Namibia rank higher than Greece, Italy, and Japan). The World Bank has also recognized the importance of a more complete accounting for true wealth, by measuring five kinds of capital – financial, physical, human, social, and natural.

Nevertheless, no state has yet incorporated anything like a GPI into its national accounts. Ron Colman, who lived in Australia and the U.S. before immigrating to Canada, thinks Canada is well positioned to be the first. “Statistics Canada is ranked as the best statistical agency in the world by The Economist magazine year after year,” he says, “so we have everything it takes to be a world leader in this field.”

In fact, the Liberal government has taken the first tentative steps in this direction. Back in 2000, when Paul Martin was still the Finance Minister, he gave $9 million to what was called the Environment and Sustainable Development Indicators Initiative, stating that, “the current means of measuring progress are inadequate.”  The Initiative produced six new indicators, for water, air, greenhouse gasses, forests, wetlands, and educational attainment, and recommended that these indicators be added to Canada’s System of National Accounts. In this year’s budget, Martin’s new government announced $15 million in spending over the next two years to implement this recommendation – albeit with only three of the indicators: air, water, and greenhouse gasses.

Of course, measurement is a means, not an end; the implications of a more holistic concept of wealth are many. For example, the GPI’s “human capital” approach could change the national discourse around healthcare, by showing the potential savings of a shift from “sick care” – which currently boosts GDP with every new illness that needs treatment – to a more preventative approach to health care. By bringing the full costs to society and the environment into the equation, a GPI might also show us that the benefits of some activities are simply not worth the costs. In 1994, the Clinton administration suggested the baby step of subtracting resource depletion from the GDP. The coal industry was aghast. If the costs of air pollution were also subtracted, said Congressman Alan Mollohan of West Virginia, “somebody is going to say…that the coal industry isn’t contributing anything to the country.” Exactly. Without a GPI, in fact, Colman sees a real difficulty in implementing the Kyoto Protocol, and similar agreements. “So long as we measure the burning of fossil fuels as a contributor to prosperity, nothing much is going to happen”

But perhaps most importantly, a GPI could finally make us question our unhesitating acceptance of economic growth, and instead ask ourselves, Growth towards what? To regard disaster and suffering and deprivation as positives is perverse, but this is partly, in a way, what the GDP does.  A majority of Canadians today believe that fundamentals like their health, education, democratic freedoms, and the environment should come before the economic bottom line. We’re all grown up now, thanks. Isn’t it time that our central forms of measurement – society’s eyes and ears, and government’s guide for policy decisions – caught up? Maybe then the numbers would start to add up, too.

Copyright Sean Butler 2004

Published in Saturday Night Magazine, June 2004

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