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The Poison Beer of GDP – Herman Daly

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Disaggregating the reported growth of GDP to reveal the differences in growth by income class, as per the Schumer- Heinrich U.S. 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 10% received the entire growth increment while the bottom 10% suffered income decline.

The 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 in the absence of the Schumer-Heinrich Bill. However if that information were to be incorporated every time new GDP figures are reported it would 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 our-selves from the unwanted costs of growth (pollution, depletion, crime, congestion 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 expenditure to clean up the spill is added; the depletion of soil fertility is not deducted, while 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 sustain- able 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 was to increase GDP rapidly, then we would not want to slow it down for concern about the equity of distribution, or by correcting the asymmetric accounting of defensive expenditures, or by correcting the fundamental economic error of counting any draw- down of capital as income. Maximizing the growth of GDP will lead to reduced concern for distributional equity, more depletion and pollution, and 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 some-thing 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 Sustain- able Economic Welfare, the National Welfare Index, and the Genuine Progress Indicator.

Source: CASSE website, 3 Oct 2018

Herman Daly is an emeritus professor at the University of Maryland, a member of the CASSE executive board, a co-founder and associate editor of the journal of Ecological Economics, and was a senior economist with the World Bank from 1988 to 1994.

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