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The Poison Beer of GDP

 

By Herman Daly, CASSE Economist Emeritus – October 3, 2018

Disaggregating reported GDP growth to reveal the differences in growth by income class, as per the Schumer-Heinrich Bill, is a good idea. After all, telling us, say, that average income grew by 4% is not nearly as informative as telling us that the richest ten percent received the entire growth increment while the bottom ten percent suffered a decline in income. Average income and growth rates are like the famous recipe for “50% rabbit stew”—one rabbit, one horse. We already know the extreme inequality in the distribution of wealth, of income, and of the growth increment, even without the Schumer-Heinrich Bill. However, if that information is incorporated every time new GDP figures are reported it will be much harder to ignore. Of course, that is exactly why the bill will be opposed by those who want us to believe that we are all getting 4% better off every year or that “a rising tide lifts all boats”, when in fact a rising tide in one place means an ebbing tide somewhere else.

Once we correct GDP for ignoring distribution, then perhaps we can go on to correct other defects, such as the fact that it adds defensive expenditures made to protect ourselves from the unwanted costs of growth (pollution, depletion, congestion, crime, etc.) while failing to subtract as a cost the damages that made the defensive expenditures necessary in the first place. For example, damages caused by an oil spill are not deducted, but expenditures to clean up the spill are added; depletion of soil fertility is not deducted, but expenditure on fertilizer is added, etc.

In addition, the very concept of income in economics is defined as the maximum amount that a community can consume this year and still produce and consume the same amount again next year, and the years after. The income from a fishery is its sustainable catch; the income from a forest is its sustainable cut. Consuming more than that is capital consumption, not income. Yet, as far as GDP is concerned, we can cut the entire forest and catch every fish this year and count it all as income—there is no rule against counting consumption of natural capital as income in GDP accounting.

If our main goal is to increase GDP rapidly, then we will not want to slow it down for concern about equity of distribution, or by correcting the asymmetric accounting of defensive expenditures, or by correcting the fundamental economic error of counting capital drawdown as income.  Maximizing GDP growth will lead to less concern for distributional equity, more depletion and pollution, and more consumption of natural capital.

I am reminded of a story told by G. K. Chesterton. A pub was serving poison beer and customers were dying. Alert citizens petitioned the local magistrate to close down the offending establishment. The cautious magistrate said, “You have made a convincing case against the pub. But before we  can do something so drastic as closing it down, you must consider the question of what you propose to put in its place…”.  Contrary to the magistrate you don’t need to put anything in the pub’s place. Nor is it really necessary to put anything in the place of the poison beer of GDP. As it happens, however, there are in fact better things to put in its place, such as the Index of Sustainable Economic Welfare, National Welfare Index, and Genuine Progress Indicator.


Herman DalyHerman Daly is an emeritus professor at the University of Maryland School of Public Affairs and a member of the CASSE executive board. He is co-founder and associate editor of the journal Ecological Economics, and he was a senior economist with the World Bank from 1988 to 1994. His interests in economic development, population, resources and environment have resulted in more than 100 articles in professional journals and anthologies, as well as numerous books.


Game Changer: National Wildlife Federation Adopts a Resolution on GDP

Brian Czech PhotoAmong the world’s biggest environmental organizations, there is now a clear leader of the sustainability pack. The National Wildlife Federation has boldly gone where the Sierra Club, World Wildlife Fund, Defenders of Wildlife, and so many others have feared to tread. As the first big NGO in the 21st century to raise awareness of the trade-off between economic growth and environmental protection, NWF has earned the admiration of a burgeoning group of citizens.

Which burgeoning group is that, you ask? Let’s call it the Common Sense Club. They’re tired of the propaganda that we can have our environmental cake and eat it too. The Common Sense Club knows there’s a limit to economic growth, and that growth has been causing more problems than it solves. No, they’re not for high unemployment or poverty – of course not! – but they’re also not for imperiling our grandkids by ruining the environment. The Common Sense Club realizes that, if we care about wildlife, the grandkids, national security, and international stability, we have to strike a balance between the size of the economy and the environment that sustains it.

At CASSE, we’re more aware by the day of how rapidly the Common Sense Club is growing and how diverse it’s becoming. Take for example the five most recent signatories of the CASSE position on economic growth: a Croatian air traffic controller, an Indian economics professor, a Swedish artist, an American banker (that’s right, a banker), and a Dutch computer scientist. The group of steady state signatories is ranging far beyond the original bunch of ecologists and economists who kicked it off seven years ago (although I like to think the original bunch had some common sense too).

But back to the NWF and its resolution on GDP growth; now that’s a real game changer. For the sake of ecological and economic sustainability, the news could hardly be bigger. We finally have a significant counterweight to the neoclassical nonsense that “there is no conflict between growing the economy and protecting the environment.” To put this counterweight in political perspective, the NWF, at 4.4 million strong, has more members than the National Rifle Association. It’s a centrist organization with a rock-solid history.

Why bring the NRA into this? It makes for an interesting contrast because, like the NRA, NWF counts a lot of hunters, fisherman, and general conservationists among its membership. Indeed there is substantial overlap in membership. But NWF also includes a great number of wildlife aficionados who have never pulled the trigger of more than a water pistol. It’s the rare, well-rounded organization that unites citizens far and wide over a mission everyone supports: wildlife conservation.

And wildlife conservation – indeed environmental protection in general – is not a supportable mission as long as the overriding goal is economic growth. That’s why, since the late 1990’s, dedicated ecologists and ecological economists have been toiling in the trenches of professional, scientific societies, engaging these societies in the subject of economic growth. They’ve been working toward days like April 15, when NWF adopted its resolution.

In these scientific societies, efforts have focused on the development of papers and policy statements explaining the trade-off between economic growth and environmental protection. For example, in 2003 The Wildlife Society published a technical review explaining the “fundamental conflict between economic growth and wildlife conservation.” In 2004 the Society for Conservation Biology (North America Section) took the position that “There is a fundamental conflict between economic growth and biodiversity conservation based on the ecological principle of competitive exclusion.” In 2007, the American Society of Mammalogists adopted a resolution noting the “fundamental conflict between economic growth and the conservation of ecosystems, mammalian populations, and species.” Note that the trade-off is often described as a “fundamental conflict” because it ultimately boils down to core principles of physics and ecology.

The scientific societies have addressed the issue of economic growth in such venues as peer-reviewed papers, special sections, and series in journals; symposia, plenary talks, and workshops; working groups and committees; editorials and debates, etc. These academic studies and discussions are a critical phase in a broad movement to build awareness, as illustrated below.

Basic Vision of Awareness-Building

Meanwhile the NGOs (such as NWF) need a sound, scientific foundation to build upon. Otherwise any talk of trade-offs with economic growth can be blown away in the political winds. The collection of papers, proceedings, position statements and policy reviews now constitutes that foundation.

Of course the process of awareness-building isn’t quite as simple as building a pyramid from the bottom up. It is also an iterative process in which NWF’s resolution will empower yet another scientific society to take a position on economic growth, thereby firming up the foundation. The strengthened foundation may then provide the support for the next big NGO (perhaps the World Wildlife Fund, Friends of the Earth, or Sierra Club?) to weigh in. The NGOs are key because, unlike the scientific societies, they have the resources (staff, magazines, mailing lists, etc.) to educate the masses, beginning with their own substantial memberships.

Meanwhile, the general public (third level in the diagram) is being populated by the Common Sense Club. As the Common Sense Club grows, NGOs such as NWF can feel more comfortable telling it like it is about the perils of economic growth. They won’t be left out in the cold, and will in fact attract many new members.

It should also be noted that the NWF didn’t use the “fundamental conflict” language in its resolution. Rather, they simply pointed out that GDP is a poor indicator of welfare because it doesn’t account for many important goals, such as wildlife conservation. But when we recognize that GDP is THE indicator of economic growth, it’s easy to get the point: there is a trade-off between economic growth and wildlife conservation.

Like CASSE, NWF would like to see indicators other than GDP used to assess human welfare. GDP is like the scale for an obese patient; it’s good for indicating how overweight the economy is becoming. But we need a blood pressure cuff and a stethoscope, too, for a broader picture of health. The Genuine Progress Indicator (GPI) and Index of Sustainable Economic Welfare (ISEW) are examples of indicators that help us form a broader perspective of human welfare.

It should also be noted that, in the diagram above, the politicians at the top aren’t necessarily essential for a sustainable outcome. If the scientific societies, NGOs, and general public are adequately aware of the trade-offs between economic growth and environmental protection (and so much else), a steady state economy can result from the “demand side.” In other words, less consumption and more family planning can stabilize the economy regardless of how much the policy makers try to “stimulate” the economy. Ideally, though, policy makers will serve the public that elects them, and gradually set those fiscal and monetary policy levers back toward a sustainable steady state.

Normally, I reserve my own charitable contributions for a few choice NGOs, most notably CASSE and the irresistible Smile Train. But this year I’m joining NWF, and I hope you do too. They earned it!