A DIFFERENT SHADE OF GREEN L o w ell “ R u sty ” Pritchard
Measuring the Real Economy
this year, today’s bread is not better. The value of money has changed, not the value of bread, and what we want GDP to measure is how much the “real” economy changes from year to year (thinking it gives us a clue to how welloff we really are). So we make adjustA healthy economy is a necessary but ments for inflation, recognizing that insufficient condition for human flour- money itself is unimportant. ishing. C.S. Lewis would call it a “secAs I noted last time, this is the logic ond thing” rather than a “first thing.” that should apply to appreciation in real A healthy economy should serve higher estate values. Since the stock of land is goals of justice, peace, compassion, and fixed (or declining, if you count soil erorest. In the same manner that Wendell sion and fertility loss, which you should), Berry asked, “What are people for?” we increases in land prices don’t reflect real should always ask, “What is the econo- value, just more money chasing the same my for?” amount of real estate. In my last column I contrasted the There are other problems with GDP, whirlwind of activity spent on chasing though, which take us directly to the financial returns with the more mun- heart of measuring how well-off we are, dane health of the real economy (and materially speaking. Money changes suggested that using money to chase hands and adds to GDP when people more money is the pursuit of “no thing”). buy useful products, but also when they You can’t eat financial instruments; nor defend themselves from crime, social can you live in them, wear them, or cook disruption, and environmental pollution. with them. Like money itself, they are Divorce by itself is a major contributor a social fiction only distantly related to to a rising GDP.When a couple divorces, any kind of real wealth. the economy rejoices, at least as meaSo much for the “no thing.” But what sured by GDP. Someone buys a second about the “second thing”—that is, the home, pays for lawyer’s bills, takes on an health of the economy? Do we really additional job, and pays for counseling understand much about the real wealth for the children. All of these transactions that makes for a prosperous economy? add to the GDP. How much of our economy actually The growth in breast cancer and does any good for the people that par- lung cancer are positive results, through ticipate in it? Or, put in dynamic terms, the flawed lens of the gross domestic is all growth in the economy economic product. The costs of disease-causing growth? Is it possible that growth can environmental pollution aren’t deductbe uneconomic? ed from GDP, and the economic activTake, for example, the most com- ity that enjoys free disposal of carcinomonly used metric for the health of the gens in the environment is counted as economy, the gross domestic product a pure benefit. Reliance on home and (GDP). It is designed as a measure of community gardens, solar energy, and real economic activity, and in any given neighbors helping neighbors would cause year it is a summary of the flow of money, the GDP to tank. to be sure. “Real GDP,” however, is When kids and families spend money measured in a way that acknowledges on video games and big-screen TVs the nothingness of money—real GDP instead of playing outside for free, GDP is adjusted for inflation. If bread cost goes up. When the same distractions $1.50 a loaf last year and $2.00 a loaf keep people from joining civic activities, PRISM 2009
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GDP goes up. When people are forced to spend more time on the road fighting traffic, the money spent on auto fuel and maintenance adds to GDP. The lost parenting, neighboring, and volunteering hours? No worries. At a price of zero, volunteering for the common good simply doesn’t affect GDP. Working longer hours and paying for a nanny and a maid? Counts double! In the last column, I argued that leading up to the financial crisis, we were focusing closely on things that generally don’t increase social welfare (finance, insurance, and real estate). Now we see that we aren’t paying very much attention to many of the things that do have an impact on social welfare, because our primary measure of the economy doesn’t distinguish between costs and benefits. Some economists have struggled to create a metric that does describe the real economy (the one that serves the needs of people). Herman Daly and John Cobb, in their excellent introduction to “real” economics (For the Common Good, 2nd ed, Beacon Press, 1994), explain the history of attempts to get a better measure of economic success. They introduce their own measure, the Index of Sustainable Economic Welfare, which has since been elaborated on and extended into the Genuine Progress Indicator (GPI) by the researchers at Redefining Progress. By their reckoning, healthy growth in the economy slowed in the 1970s and has since leveled off. Looking for a single index that tells us how we’re doing is not the point of these exercises. Looking hard at the data which make up the GDP can give us a richer understanding of how the economy actually operates, help us make better decisions about the real economy, and to use it as a springboard to achieving the first things that should occupy most of our time. n Rusty Pritchard is president of Flourish (Flourishonline.org).