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A Problem with GDP as a Measure of Growth

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Connie Hedegaard, the EU Commissioner for Climate Action, had a piece in the Guardian a few days ago on the urgent need to combat climate change. She’s completely right of course but basically nobody cares enough to really do much about it. Still, I want to focus on one particular aspect of her argument:

The traditional way of measuring economic growth based on GDP alone is not sufficient. GDP is nothing more than a measure of production. It takes no account of human wellbeing or natural wealth.

For example, GDP gives no value to a forest until it is chopped down and turned into timber. Likewise, natural disasters that kill people and destroy infrastructure and cultural heritage are positive for GDP because the reconstruction works that follow boost economic activity.

Putting a price on environmental pollution is also crucial to building a sustainable model for global growth. The cost of production cannot be the only factor determining the price of a product. The true cost of its environmental impact also needs to be factored into the price if people are to have an incentive to buy the least harmful and resource-intensive products available.

That is why the Global Sustainability Panel report recommends that, by 2020, all governments establish price signals that value sustainability. This would help guide the consumption and investment decisions of households, businesses and the public sector in a more sustainable direction.

This makes a lot of sense to me. I feel like statistics like GDP or housing starts (another pet peeve of mine) are the RBIs of economic statistics. They measure something useful, but they are hardly the best way to understand the economic health of a society. They measure immediate and short-term gains fairly well but fail miserably at understanding the long-term effects of economic decision making.

Take housing starts for example. Seeing housing starts as a key measure of economic growth does effectively measure short-term employment because construction can employ a lot of people. But is a robust housing market good for our economy in the long-term? This statistic does not measure the enormous investments in roads and other infrastructure needed to sustain suburban communities where most housing starts take place. It doesn’t measure the pollution outputs that drag down the economy through health problems. It doesn’t take into consideration the wasted time commuting to a job. Moreover, it doesn’t even begin to ask the question of whether more housing is a good thing or even necessary.

For similar reasons, I approve of Hedegaard questioning the value of GDP in a world where we need to worry about climate change, which will have massive negative economic effects.

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