Virus Economic Destruction Renews Push Against GDP Fixation
(Bloomberg) -- The damage unleashed by the coronavirus pandemic might turn out to be the catalyst for weakening our fixation with gross domestic product.
A renewed push to demote GDP as a measure of economic welfare has emerged amid a crisis that brutally exposed gaps in healthcare and social safety nets. The subsequent economic rebound has deepened the divide through the K-shaped recovery, where the wealthiest benefit from rising asset prices and others live in daily fear of losing their job.
On Oct. 21, the World Economic Forum released a report in which it proposes embedding GDP into a dashboard that also takes into account factors such as inequality, energy use and public health. The same day, at the European Central Bank’s first public hearing as part of its policy review, contributors raised the topic of alternative economic models.
“The pandemic has completely highlighted that what we care about, including as economists, is not the amount of money circulating in the economy but people’s wellbeing in a broader sense,” said Diane Coyle, a professor at the University of Cambridge and author of “GDP: A Brief but Affectionate History.’ However, “there’s no obvious single candidate to replace GDP at the moment.”
The indicator has dominated for nearly a century, and its endurance has much to do with its simplicity. It’s a single number, an easy-to-understand metric, and one that politicians can use -- when it’s good -- to crow about their policies.
But GDP’s hegemony has come under assault in recent years. Nobel-laureate Joseph Stiglitz has spoken of “GDP fetishism” and, along with Jean-Paul Fitoussi, proposed a nuanced approach that includes wellbeing and the environment.
“You can have a very important growth rate of GDP but if it goes to only 1% of the population, it has no meaning,” says Fitoussi, professor emeritus at the Paris Institute of Political Studies. “When you are missing some metric you are probably taking some bad decisions.”
GDP’s origins reach back to the Great Depression, when American economist Simon Kuznets was looking for ways to explain to Congress what was happening to the U.S. economy. Even back then, he warned of its limits.
“The welfare of a nation can scarcely be inferred from a measurement of national income,” he wrote.
The big problem is that the measure is crude -- production of weapons, hospital beds or chocolate cake all get counted in the same way, regardless of whether or not they are beneficial to society and the environment.
Also, it’s an imperfect tool for measuring production of intangibles -- a definite downside in the digital age. And it makes no allowance for unpaid labor like child rearing and housework, despite the fact that these take up a huge proportion of peoples’ lives.
As an alternative, Bhutan started pursuing gross national happiness in the 1970s, and other measures have sprung up this century, but nothing has come close to usurping GDP.
Australia started measuring wellbeing in 2001, while Europe’s “Beyond GDP” initiative of more comprehensive indicators dates to 2007. New Zealand has a “wellbeing” budget with a focus on metrics including spending on mental health issues and child poverty. A United Nations-linked group publishes a World Happiness Report.
Kate Raworth, an adviser at Oxford University’s Environmental Change Institute, came up with a “donut model,” that includes access to housing, food, healthcare and education, as well as climate change. The ring of the donut is the sweet spot between minimum social standards on one side and overusing the planet’s resources on the other.
Others, like Harvard Professor Karen Dynan, favor a dashboard, though the metrics -- income inequality, healthcare and the environment -- are similar.
The U.S. Bureau of Economic Analysis has embarked on a “GDP and Beyond” initiative to improve its use of data on economic wellbeing and sustainability. It released a set of prototype measures in March and expects to update some of them regularly from December.
Climate change and social justice feature heavily in many alternative models. Some even argue the objective of growth itself must be abandoned in major economies in order to save the planet. That’s the crux of the “degrowth” movement.
“It’s not just enough to switch to a better indicator, although we must also do that,” said Jason Hickel, senior lecturer in anthropology at Goldsmiths, University of London. “We also have to have policy that’s actively organized around reducing energy and material throughput.”
The coronavirus crisis could accelerate the shift.
“The time is right because people have become much more aware that it is not only material success, but there are other things that count in life,” said WEF founder Klaus Schwab. “Covid has shown us very clearly what those are.”
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