Tuesday, March 12, 2013

GDP is not a great indicator of development

Yesterday I wrote questioning whether we need a better measure of progress than growth in the GDP. I was focusing on the growth of consumer surplus as compared with the cost of goods and services.

I suppose the classic example is in health. It is clearly better for people to be healthy than for them to be sick. On the other hand, healthy people will tend to buy only relatively inexpensive preventive health services to keep themselves healthy, while sick people tend to buy much more expensive curative and palliative services. Thus more sickness leads to higher GDP, more health to lower GDP.

I was just listening to Jeremy Grantham on the Charlie Rose show. He pointed out that our society runs on fossil fuel, fertilizer, and some other minerals. If the price of those natural resources goes up, say because they are more difficult to extract, then it appears that GDP is going up. This is in part because they are part of the cost of producing all the other goods and services. But the benefit of a barrel of oil that now costs $100 is no greater than the benefit of a $16 barrel of oil many years ago was to that economy. The Chinese are competing in world markets for fossil fuels and other natural resources, and the increased demand is increasing prices (as is the decreasing supply). That fuels growth in the GDP, but not improvement in the quality of life.

On the other hand, increasing energy efficiency (say by insulating buildings better or using energy efficient lighting) decreases energy use without decreasing quality of life. The rapid growth in renewable energy and its substitution for energy based on fossil fuel similarly tends to keep quality of life high while cutting back on the rate of growth of GDP.

Grantham points out that population growth has contributed to growth in GDP but that a smaller population is better for the environment and the conservation of natural resources. We must keep human population within the carrying capacity of the earth, and indeed within bounds that will allow a decent standard of living.

Grantham is famous for predicting stock market bubbles, and his philosophy seems to suggest that we may be living in a centuries long "bubble". The technological revolutions that have fueled our economic development have literally been fueled by the exploitation of fossil fuels built up over millions of years, and we are depleting those fossil fuel resources while pouring greenhouse gasses into the atmosphere. If we drive climate change and environmental degradation too far while depleting natural resources and overpopulating the earth, the quality of life will necessarily deteriorate.

I have a feeling that there are great gains to be had in quality of life through the right kind of education. Schooling children and young adults does cost money for schools, teachers and supplies. At some point, however, people can move into lifelong learning modes that are beneficial to all aspects of life, but that don't require schools. The more that people learn, I suppose that they can be more productive as workers, better citizens, more able to protect their own health and that of their families, etc. If their schooling has given them the enthusiasm to continue self education, the social network to share learning with others, and the tools to learn for the rest of their lives then there is great benefit with little cost.

Food and agriculture is another area where focus on GDP may have perverse effects. We live in a society that eats too much, and too much of the wrong things. There is an epidemic of obesity. We eat too much meat while data show that a Mediterranean diet would be better for our health; that diet does not seem to reduce the quality of life for the Greeks and Italians as compared to us fat Americans. Obviously, producing and distributing more food increases the GDP; so does producing the high fat, high sugar processed foods that contribute to health problems.

My point is that "the good life" is different than "the affluent life". It would be better to focus on fundamental values and seek a life style that maximizes them than to focus on income and wealth, maximizing them while sacrificing other (more important) values. A focus on increasing GDP in a society with high rates of school drop outs, poor health statistics, high rates of crime and addiction, huge numbers of people in jail and other social problems is not the way to progress.

1 comment:

Norman Holly said...

Some years ago Bhutan abandoned GDP for a "Gross National Happiness Index" which I followed for a while until learning that Minority groups suffer discrimination and intimidation there as well. A group in Canada has been working along similar lines, although I have heard little from them recently. I pursued a "basic needs" policy when working in international development, which unfortunately enjoyed more lip service than accomplishment among professional colleagues and government agencies.