GDP as Standard-Bearer
Countries and economies are all assessed on how much incremental growth has accrued over the last analyzed period – usually quarterly and annually – to determine if an economy is growing, getting better, doing well, progressing, and being “productive”. That incremental growth is encapsulated in the analytic metric of Gross Domestic Product (GDP). GDP has become the singular, dominant measure of the health of a nation’s economy as well as the well-being of a nation’s citizens. When Trump, the current U.S. President, says he thinks America’s GDP can grow at a rate of three percent annually to the current independent economic forecast estimates of 1% growth, the underlying assumption of the assertion is that his administration has the ability to drive economic growth and citizen prosperity faster than a more incremental growth rate. The problem is GDP was never created to be used in its present incarnation and it most definitely was never meant to measure economic or social well-being.
The History Behind the Creation of GDP
The GDP concept was first introduced in the early 1930’s by Simon Kuznets, the chief architect of America’s national accounting system. At that point in time, GDP was designed to be a particular measure of economic activity for the nation. Back then, the U.S. Bureau of Economic Analysis described GDP’s purpose as being a way to answer questions such as, “How fast is the economy growing?”, “What is the pattern of spending on goods and services?”, “What percent of the increase in production is due to inflation?”, and “How much of the income produced is being used for consumption as opposed to investment or savings?”.1 The use of GDP as a measure of economic progress and stability as well as human well-being was further cemented at the tail-end of World War II at the Bretton Woods Conference (New Hampshire). The leaders of forty-four allied nations convened to set-up a “process for international cooperation on trade and currency exchange”1. The thinking behind the idea was improvements in economic well-being should be a strong catalyst for “lasting” world peace.1 Economic well-being was first and foremost achieved through continuous economic growth. The Bretton Wood Conference birthed key international economic and monetary governing bodies including the International Monetary Fund (IMF), and the International Bank for Reconstruction and Development (IBRD), now part of the World Bank.1 Of course, the financial might and world-view of the U.S. dominated both of these institutions. Thus, U.S. economic policy and measurement become the de facto standards for both. Over the course of the last three quarters of a century, GDP has become the primary measure of economic progress for nearly all nations on the globe.4
GDP as a Kitchen Sink Measurement
Equating economic growth with economic progress and human well-being is a problem. Money spent rebuilding from natural disasters (such as Hurricane Katrina, Sandy, and Harvey) factors into positive GDP. Federal funding of adding nuclear warheads to existing arsenal grows GDP. Companies that produce products known to cause cancer, disease and death such as cigarettes, flame-retardants in children’s sleepwear, unknown ingredients in cosmetics, and the cocktail of harsh chemicals used to dye clothing worn by men and women all support a growing GDP, if company revenues and product sales increase. Urban sprawl, suburban growth, highway infrastructure development all contribute to a positive GDP while the downside of these developments is deforestation, soil degradation, air smog, water contamination (think: Flint, Michigan’s contaminated river water thought to be easily treated for human consumption), biodiversity loss, declining fish populations, coral reef bleaching, and untold human suffering from water and land contamination from unregulated or illegal industrial chemical dumping. These human tolls are not factored into GDP. What is included, fairly or unfairly, is the cost of taking care of chronically sick and dying individuals.
Natural Disasters Make for A Positive GDP
The cost of massive cleanups like the 2010 Deepwater Horizon BP oil spill in the Gulf of Mexico had innumerable and not sufficiently quantifiable negative repercussions to the natural environment, communities and individuals within the Gulf of Mexico, but is positively attributed to a growing GDP. By the Natural Resource Defense Council (NRDC)’s tally, 35% of the American Gulf Waters had to be closed to fishing, putting thousands of fishermen out of work. Thousands upon thousands of wildlife perished including dolphins, wales, fish, sea turtles and birds. Important and precious ecosystems were contaminated for many decades or altogether destroyed including wetlands and estuaries around the Gulf Coast.2 In the calculation of a nation’s GDP, both positive and negative market-driven economic production and services are included. What is not included is the long-term, devastating and ultimately, incalculable toll natural and human-induced disasters have on the economic and social well-being of a national community.
The Missing Factor in GDP
Continuous market-driven economic growth is a poor indicator for measuring increases (or decreases) in human suffering, mental well-being, educational opportunities, professional development, cultural enjoyment, contentment, good health, happiness, and supportive and in-tact family units, to name a few important factors that most people agree are important for a productive, constructive, and meaningful life. Constanza et al., 2014 (economists all) offer a compelling argument to stop the misuse of GDP to measure social well-being: “Because GDP measures only monetary transactions related to the production of goods and services, it is based on an incomplete picture of the system within which the human economy operates. As a result, GDP not only fails to measure key aspects of quality of life; in many ways, it encourages activities that are counter to long-term community well-being.”3
Rethinking GDP as “The” Economic Measure
Long-term human well-being should be equated to an economy that is operated sustainably. That means stopping the depletion of natural resources, reducing our use of ecosystem services that are detrimental to their long-term survival (i.e., deforestation, fishery collapse, topsoil erosion, groundwater aquifer depletion, salinization of surface waters), and mitigating pollution-inducing activities that threaten both the Earth’s self-regulating systems and our very survival on this planet. Endless, continuous economic growth should not and cannot be our singular national goal. Economic growth for its sole sake is a path toward certain destruction – to our way of life, to the natural environment as we currently know it, to species diversity, to resource availability, and to community vibrancy and resiliency. We need to start having more voluminous and varied discussions on the fallacy of continuous economic growth at all levels of government, and within every communities and organization large and small. One clear signal that constant, ever-increasing economic momentum is false and not the measure of good economic growth would be for the Securities and Exchange Commission (SEC) to change or drop its requirement of public companies to report quarterly and annual financial results to the financial markets (U.S.’s Wall Street). In this way, companies would be free of the burden to report growth for growth sake with all the negative costs actualized against their stock price and market cap, and instead, guide industry and organizations through responsible growth that supports economic activity and vibrancy (think: profit) alongside sustainable social well-being that inherently embeds environmental stewardship into the equation. Consensus around a new economic paradigm shift needs to be developed, agreed upon, and implemented (on a global scale) so that economic and social well-being is measured rightly, more accurately, and most importantly, fundamentally sustains human communities for centuries to come.
A suggested intriguing read: Naomi Klein’s book (2014), This Changes Everything: Capitalism vs. The Climate.
Contact Kate Gaertner today to see what Triple Win Advisory can do to help your business and industry increase sustainability to result in a “triple win” for company profit and long-term competitive advantage, societal well-being, and successful environmental pollution mitigation.
Kate Gaertner
References:
1) Costanza, Robert; Hart, Maureen; Posner, Stephen; Talberth, John. (2009, January). Beyond GDP: The Need for New Measures of Progress. The Pardee Papers, No. 4.
2) Suatoni, Lisa. (2011, January 11). The Evaluation of Deepwater Horizon’s Environmental Toll (Challenges of a Novel Oil Spill).
3) Costanza, Robert; Hart, Maureen; Kubiszewski, Ida; Talberth, John. (2014). A Short History of GDP: Moving Towards Better Measures of Human Wellbeing. Solutions, Vol. 5, Issue 1, pp. 91-97.
4) The Kingdom of Bhutan is a singular country where the measure of GDP is not used but rather, Gross National Happiness (GNH). Since 2004, the Bhutan government has organized four international conferences to bring greater global awareness of the GNH index.
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