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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.


National Wildlife Federation Adopts Key Element of Steady-State Thinking

by Eric Zencey

The National Wildlife Federation held its annual meeting near Capitol Hill in Washington, D.C. on Friday, April 15. The meeting took a bold, firm step toward implementing a key feature of steady-state economic thinking: it passed a resolution calling on the President, Congress, state governors and state legislators to abandon gross domestic product (GDP) as the indicator that economic policy makers seek to maximize, and to develop and adopt instead a broader measurement of economic and ecological well-being.

The resolution passed unanimously, as delegates from 47 states and two overseas territories said “aye,” no one said “nay,” and the resolution was gaveled into force. I was there representing the Vermont Natural Resources Council, which had put the resolution on the agenda. The vote was a quiet moment in a large conference hall, with delegates shuffling papers as they sat at long tables facing the dais, each of us fronted by a miniature version of our state flag. This is what revolutions in political economy sometimes look like: quiet meetings in stuffy conference halls in which concerned citizens say, in unison, “Stop doing that and do this instead.”

In passing the resolution, the Federation lends its considerable support to an international movement that seeks to alter what we count as progress. That change—measuring the actual well-being delivered by the economy instead of the amount of money that changes hands each quarter—is crucial to establishing a sane, sustainable, steady state economy.

Every economics textbook warns that GDP is a poor measure of well-being, and yet by default it continues to be the indicator that economic policy seeks to maximize. GDP doesn’t measure well-being at all, but simply tries to tally the dollar value of final goods and services produced in the U.S. By design, it leaves out volunteer work and domestic production—the daycare you do at home doesn’t count, but if you commercialize the transaction by dropping your kids off at the daycare center, GDP goes up. Cooking, cleaning, maintenance, yard work, caring for aging parents—none of it counts if money doesn’t change hands. Neighborhoods, communities and households all benefit mightily from this kind of non-commercial production, and their replacement by commercial services often fails to bring the same level of satisfaction and well-being.

By design, GDP also leaves out ecosystem services; if you hang your laundry out to dry, the sun and wind do the job, but if you throw it in the dryer you use electricity, increase your carbon footprint, and give GDP a bit of a bump. Ecological economists identify a dozen categories of ecosystem services, including climate stability, recycling of nutrients, creation of soil fertility, maintenance of a library of genetic diversity, pollination, purification and transport of water by the solar-powered hydrological cycle, flood protection services of marshlands and forests, and so on. Ecosystem services count for nothing in GDP. If we don’t value them, they are easily ignored. Yet the loss of ecosystem services leads, eventually and inevitably, to the loss of civilization itself.

GDP also misreads our level of well-being by treating defensive and remedial expenditures as positive economic activity. Remedial: the $12 billion that British Petroleum alone has spent (so far) in its efforts to clean up the catastrophic oil release in the Gulf of Mexico counts as an increase in GDP, though the expenditure comes nowhere close to putting things back to their pre-Deepwater state. Defensive: if someone breaks into a neighbor’s house and you decide to buy a burglar alarm, GDP goes up—but you probably don’t feel as secure as you did before the break-in.

Economic growth brings us problems, and as we spend money to deal with those problems (e.g., trucking in water to replace the services of an aquifer contaminated by mountaintop-removal coal mining, adding treatment plants to purify drinking water fouled by chemical discharges, or turning up the air conditioning because smog and particulate matter make opening a window an undesirable option), GDP goes up. By some estimates, as much as one-quarter to one-third of our GDP consists of such expenditures.

If we’re ever to have a sustainable, steady state economy—an economy that operates on a sustainably sized flow of matter and energy, and which excretes outputs that can successfully be absorbed by the ecosystems of the planet—we need to start measuring what matters, and not mistake the commotion of money for the creation of well-being. Steady-state economics doesn’t mean that our quality of life will stagnate; we can have continual improvement in social and cultural well-being as we spend less on remediation and repair. Ecological economists call this development to distinguish it from footprint-enlarging growth. And this is the key to steady-state thinking—we have to stop growing our ecological footprint (which is already too large to be sustained) and begin budgeting our economy within the limits of what we can sustainably extract and emit. The National Wildlife Federation did not specifically sign on to the steady-state vision; but by calling for an accurate measurement of the costs of economic growth, it has officially joined us on a path that can lead nowhere else.

The resolution passed by the annual meeting reads, in part,

…be it resolved that the National Wildlife Federation urges the President, the Congress, and state Governors and legislatures to take immediate steps to redesign the use of the Gross Domestic Product as an indicator of economic well-being, and to take all necessary action to develop and implement a system of economic accounting that gives a more accurate measure of overall economic and ecological well-being; and be it further resolved that the new or modified system of national accounts should treat as cost or debit items the depletion of finite, non-renewable natural resources and the loss and degradation of ecosystem services, including the service of providing habitat for wildlife.

The Federation is, as the name implies, an umbrella organization that offers central administration and the strength of shared purpose to its affiliate organizations. It’s the largest environmental advocacy group in the nation, with affiliates in 47 states, several territories, and a total membership of 1.5 million members. The organization brings together hunters, anglers and sportsmen, on the one side, with hikers, backpackers, and birders on the other, with a good strong mix of environmentally aware citizens thrown in as well. It’s a broad coalition bound together by a shared understanding of the need to protect wildlife and wildlife habitat—ecosystems and their genetic diversity.

In its seventy-five year history, the NWF has fought and won a lot of battles, from the Pittman-Robertson Wildlife Restoration Act of 1937 (which for the first time provided Federal funding for wildlife programs), through the 1944 invention of the concept of the environmental impact statement and its eventual adoption into law, and on through a leadership role in the major environmental legislation of the 1960’s and 1970’s: the Clean Water Act of 1963, the Endangered Species Preservation Act of 1966, the National Environmental Protection Act of 1969, the dramatically expanded Clean Water Act of 1970. The Federation is an active litigator, using these laws and others to block unwise economic activity and protect the nation’s ecosystems. It’s safe to say that without the Federation, many of the ecosystems of North America would be not just threatened but degraded to the point of collapse.

Begun by a group of outdoorsmen who saw their beloved wilderness areas, and the animals in them, being threatened by the encroachment of economic activities, the Federation has in its seventy-five year history broadened its approach. As a history of the Federation puts it, “While the NWF continues to champion threatened species, its work has evolved to embrace a multi-species, ecosystem approach.” (source: “What We Want is Action,” by Jessica Snyder Sachs in National Wildlife, February/March 2011, p. 27.) It also broadened its reach in another way: “we began seeing the patterns,” says former NWF counsel Patrick Parenteau, “and attacking the root causes of such problems.” (quoted by Sachs, p. 25.) The adoption of the economic indicators resolution is a continuation of this trend, reaching beyond symptoms to address the problem at its source.

The root cause of our environmental problems—our ecological crisis—is infinite planet economic theory, the rules and axioms of a discipline that tells us that it is possible to have infinite economic growth on a finite planet. It sounds crazy, doesn’t it? But neoclassical economists continue to believe this is possible because human ingenuity is a factor of production and, supposedly, it is infinitely powerful. You can get to that conclusion only if you ignore the laws of thermodynamics. Economic production is, at bottom and unalterably, a process that relies on physical inputs. No amount of human ingenuity will ever let us make something from nothing or nothing from something. No amount of ingenuity will let us create energy out of nothing or recycle it to use it again.

In the real world outside of infinite planet theory, our acts and works are constrained by physical law. Those laws tell us that increasing our matter-and-energy throughput has unavoidable consequences in the world. It damages ecosystems, leading to the loss of (sometimes irreplaceable) ecosystem services. We can’t count that loss as a cost unless we first value ecosystem services as a benefit and adopt an indicator other than GDP as the one we seek to maximize. With the passage of this resolution, the National Wildlife Federation commits to lending its considerable energies and expertise to that effort.

New Thinking on BP Spill: Declare a Holiday!

The BP spill demands a far more significant response than ongoing cleanups, unsuccessful attempts to plug the gushing oil, and desperate efforts to mitigate the multitude of impacts from the biggest oil catastrophe in U.S. history. The BP spill demands a paradigm shift in how we run our economy and carry out our governance. Historians will one day look back on this spill as the nadir of governmental regulatory performance, in which oil companies commandeered and corrupted the Interior Department oil leasing program.  So what’s the response we need to get the paradigm shift going?  How about declaring a new holiday?

Before describing this new holiday, let’s look a little more closely at the current response.  Congress is not thinking in terms of a paradigm change either in the economy or the regulatory framework. Nor is the Obama administration. They are thinking about where oil drilling is okay and where it is not. Some Republican leaders, like Representative Barton of Texas, even accused President Obama of trying to “shake down” BP.

So instead of fundamental change, the most likely Congressional response to the BP spill will be to go back and write a new liability law for oil.

Following the tragic Exxon Valdez tanker accident in Alaska in 1989, Friends of the Earth was a leader in pushing for the 1990 Oil Liability Law to help safeguard against another Exxon Valdez accident. This law put in place requirements for double-hull oil tankers and new liability ceilings. Our hope was that the 1990 law would prevent bad spills and reduce spill frequency, but given the nature of enforcement (coupled with oil company attempts to flout regulations), the law was insufficient to protect the Gulf of Mexico.

This type of legislative response is too tepid to meet the challenge. The gravity of the current BP spill is the latest manifestation of the massively polluting direction of worldwide energy growth – growth that is jeopardizing the livability of our planet.

On July 5, the New York Times reported that per capita energy consumption in China is soaring as its population seeks more and bigger cars and appliances. Given that the global population stands at 6.8 billion and is headed toward 9 to 11 billion by 2050, a paradigm shift in the basis for the world economy is necessary just to head off the many tragedies that are already occurring in connection with excessive consumption, soaring population, grotesque pollution, and the obliteration of diverse ecosystems.

The economic structure must be totally reshaped to require real cost pricing for natural resources to reflect all the external costs imposed on current and future generations and on the life-support systems of the earth. We must ask ourselves serious questions that most economists don’t want to deal with. For example, what is the real cost of coal or of oil? Why is the concept of economic growth sacrosanct?

It is not just in the energy sector that we see prices failing to reflect their ecological costs, but across the food, health, and safety spectrum. What is the real cost of our food and of the animal factory slum operations that brutalize animals and shove their health and pollution impacts off on neighboring communities? What is the real condition of our topsoil and our groundwater? What is the real index of social and economic well-being, given that GDP (gross domestic product) only measures throughput in the economy with little accounting for the future?

In particular, under a new economics there would be a shift away from oil usage because the price of gasoline at the pump would be about $9 per gallon when social and environmental costs are included, not the artificially low prices we see today.

The Center for Technology Assessment published an updated estimate showing that the real cost of gasoline at the pump is between $5.60 and $15.14 per gallon if all the hidden subsidies and serious damages caused by gasoline usage were factored in. Health damages from all the air pollution caused by motor vehicles ranges between $231.7 and $942.9 billion annually, and military protection for oil supplies ranges between $55 and $96.3 billion per year.

To move us toward bigger thinking, the United States should declare an Interdependence Day. This July Americans celebrated the 234th Independence Day with fireworks galore. But the U.S. needs more ecological awareness and recognition of our interdependence with the rest of humanity and other life on this planet. On Interdependence Day we could reflect on how much we depend on others and on our environment to support us. We are on spaceship earth together and we need a spaceship economics for us to survive over the long run, not the cowboy economics that produces boom and bust cycles with some big winners and massive numbers of losers.

The gigantic economies of the United States, China, and Europe can spread air pollution and toxins all over the earth and even affect people living in remote areas. Interdependence Day would dramatize how pollution in one area harms people’s health in other areas. It would help foster consideration of the profound changes that must follow in the aftermath of the BP spill.

The future of civilization depends on moving rapidly away from an economy that glorifies jobless growth and futureless growth to a prosperous steady state economy, an economy that tells the truth about the real cost of natural resource extraction and usage.

The stewardship aspects of the economy should appeal to all the great religions of the world, and their voices are needed to counter the disinformation campaigns of the major polluters. The BP oil disaster gives citizens the platform to speak out and demand a new economics for a clean energy future and for the well-being of humanity.

British Petroleum Vs. a Sustainable Planet: Time to Ban BP from Doing Business in the United States

British Petroleum (BP) portrayed itself this past decade as an oil company investing in renewable sources of clean energy for a “Beyond Petroleum” future. BP had many people convinced that it was a very different kind of oil company, but the catastrophic spill this spring in the Gulf of Mexico is shedding light on the true nature of this transnational corporation.

The BP spill jeopardizes the entire northern coastline of the Gulf with its outstanding fish and shellfish productivity. Seventy percent of the U.S. shrimp harvest comes from the Gulf. This oil spill could exceed that of the 11-million-gallon spill by the Exxon Valdez in Alaska in 1989 and deliver a devastating blow to economies from Louisiana to the Florida panhandle.

BP is the embodiment of mindless growth, an organization that puts profits ahead of people and the planet. Its practices run counter to the prudent economic policies promoted by the Center for the Advancement of a Steady State Economy. BP in fact provides a case study of a corporation fixated on unlimited growth in oil consumption while pretending to be focused on sustainable living.

Prize-winning economist Kenneth Boulding could have used BP as the poster child for his critique of cowboy or frontier economics (see The Economics of the Coming Spaceship Earth). In contrast to an urgently needed spaceship economy for a planet of 6.8 billion people, BP’s cowboy economy exploits natural resources with abandon as if there were no such thing as peak oil. Maximization of throughput and growth of oil usage regardless of consequences underpin BP’s strategy, as it seeks oil in every nook and cranny of our planet and takes risks that jeopardize the well-being of millions.

BP’s advertising slogan “Beyond Petroleum” suggested that the company was going to move rapidly away from dirty oil, cut energy waste, and support clean transportation policies. BP pushed aggressively ahead with massive pursuit of fossil fuel, and rather than spend profits on clean energy investments, the company used $50 billion this past decade buying back its own stock.

Accidents and Sloppiness

In March 2005, explosions shook the BP refinery in Texas City, Texas, killing 15 workers and injuring 170. The CBS program 60 Minutes investigated the accident and found evidence that BP ignored warning after warning.

BP’s cavalier attitude toward safety revealed itself once again last fall when it opposed the Interior Department’s plan to require better safety measures on offshore drilling rigs. On September 12, 2009, Richard Morrison, Vice President of BP America for Gulf of Mexico Operations, wrote to the Department objecting to the new safety plan, saying “…we are not supportive of the extensive prescriptive regulations… We believe the industry’s current safety and environmental statistics demonstrate that the voluntary programs… have been and continue to be very successful.”  BP’s “successful” record includes 41 deaths and over 300 injuries between 2001 and 2007.

BP’s oil accidents and spillage are nothing new. In March of 2006, BP’s badly corroded pipeline in Alaska ruptured, sending hundreds of thousand of gallons of crude oil into the Arctic Ocean. The House Energy and Commerce Committee found in its 2007 hearing a mountain of evidence that BP’s cost-cutting maintenance had led to the spill. Once again last year in Alaska, BP spilled oil from its Prudhoe Bay pipeline.

Hypocritical and Irresponsible Decisions

This year BP announced the closure of its solar panel facility in Frederick, Maryland. BP says it is going to relocate in Asia. However, BP has also approached the U.S. Department of Energy for a taxpayer loan to build a central solar facility at the Brookhaven Lab on Long Island. What do actions like these say about BP’s community values? Is it ethical for BP to pursue federal solar grants, given its major disinvestment in solar energy in America?

Perhaps an even more disturbing demonstration of BP’s environmentally unsound tactics comes from its choice to route an oil pipeline from the Caspian Sea to the Black Sea right through a national park in the nation of Georgia. This move (a European corporation defacing a European national park) is akin to a U.S. oil company running a pipeline up the Yellowstone River smack dab in the middle of our first National Park.

The Best Bet? Banning BP

On March 31 President Obama launched an offshore drilling program, encompassing 167 million acres. In so doing he embraced the aggressive drilling program called for by the 2008 Republican National Convention and surprised many of his supporters who thought his administration would usher in a new era of clean energy. Last year the Interior Department waived the environmental impact assessment requirement for BP’s Gulf of Mexico drilling. Now the question is whether the Obama administration will treat BP like Goldman Sachs as “too big to fail.”

Some like Michael Brune, the new executive director of the Sierra Club, have called for separation of oil and state. This makes sense as an initial step, because the oil industry cannot police itself. But much more dramatic action is necessary to break the oil industry’s stranglehold on governments worldwide if we are going to achieve a prosperous, steady state economy.

Given the current massive BP oil spill and the history of BP’s malfeasance with repeated pollution debacles, it is time to deny BP the right to do business in the United States. The track record shows that BP:

  1. is lacking in basic moral principles;
  2. has perpetrated a fraudulent advertising campaign suggesting that it is better than other oil companies;
  3. has failed to take safety and environmental responsibilities seriously; and
  4. is unwilling to consider limits to growth in the fossil fuel industry.

BP is an obstacle to a sustainable, prosperous economy – an obstacle that we can no longer afford to tolerate.