Memo to politicians: Stop promising to grow GDP and start targeting social benefits you can actually deliver—or prepare to face angry mobs. Nothing grows forever on a finite planet, not even the US economy.
It’s not surprising that everyone from President Obama to Michele Bachmann is assuring the electorate that he or she can deliver more GDP growth. When GDP numbers are up, more jobs appear and investments reap higher returns. When GDP is down, economic mayhem ensues.
Yet there are signs that more GDP growth may not be in the cards, regardless whose economic remedy is chosen. In fact, the day may have arrived when GDP itself has outlived whatever usefulness it ever had.
GDP (Gross Domestic Product) is a number indicating the total spending occurring in a national economy annually. Since WWII, policy makers have used GDP as their primary index of national economic health. During the late 20th century, with the world awash in cheap energy to fuel ever more industrial output and transport-driven trade, the numbers kept going up—and most economists concluded they’d continue doing so forever.
A few contrarians (including Robert F. Kennedy, in 1968) suggested that relying on GDP wasn’t a good idea. Although soaring numbers lead to financial euphoria, they can hide social ills like growing inequality; moreover, GDP fails to distinguish between waste, luxury, and the satisfaction of basic human needs. Perversely, GDP often rises during wars or after environmental disasters, due to increased government spending.
Despite criticisms, economists and policy makers have stuck with GDP—perhaps because tracking a single number makes their jobs easier.
But now, the US may have reached its practical GDP limit. The bursting of a once-in-a-lifetime credit bubble, the maxing out of consumer borrowing and spending capacity, and tightening global resource constraints (showing up as stubbornly high oil prices) have caught national economic output in an undertow. Much of the rest of the world is being drawn in, with Greece, Ireland, Portugal, Spain, and Italy swirling ever closer to the drain. During the past two years, Americans bought an anemic recovery—a few hundred billion dollars’ worth of GDP growth—but at the cost of trillions in added government debt.
Now, as Washington descends deeper into partisan acrimony, efforts to generate further growth with yet more debt have become political orphans that no Republican and few Democrats will claim as their own. If the “recovery” was all smoke and mirrors, we’ve just run out of mirrors.
Trapped in a failed paradigm
That means hard times lie ahead. People instinctively know what to do in hard times: consume less and save more. But these sensible responses will—guess what?—hammer down GDP even further.
There’s no way out of this dilemma if we stay trapped in our current economic paradigm. More government debt and spending give only temporary symptomatic relief, while slashing government spending greases the chute to economic hell for millions of poor and middle-class families. We have arrived at a historic moment when none of the solutions we are familiar with works, and we are forced to examine our basic premises. Premises like these:
- The notion that we can run an economy sustainably by perpetually increasing the rate at which we extract and burn non-renewable resources such as petroleum;
- The notion that we can use debt as money—a practice founded on our assumption that the economy will always grow, enabling us to repay both debt and its accrued interest; and
- The notion that we should chart our progress as a nation just by totaling up how much money we are spending annually.
That last premise is important because what we as a society choose to measure influences what we aim for and what we value. If what we care about most is increasing spending and consumption, then we are setting ourselves up for two big failures—the failure to solve real human problems that have nothing to do with consumption, or that may be worsened by certain kinds of consumption; and the failure to accomplish what we are trying to do (perpetually grow GDP and consumption) because it can’t be done. Again, nothing grows forever on a finite planet.
Indicators and targets help us set our agenda and tell us how we are doing at fulfilling it. With GDP, we get both a warped agenda and misleading feedback.
Proposals for a broader-based economic metric date back at least to 1972, when economists William Nordhaus and James Tobin suggested the Measure of Economic Welfare (MEW)—which Herman Daly, John Cobb, and Clifford Cobb refined in 1989 as the Index of Sustainable Economic Welfare (ISEW). The aim of these early alternative indicators was to deduct defense spending and the costs of environmental degradation from GDP, and add the unpaid services of domestic labor.
In 1995 the think tank Redefining Progress took MEW and ISEW a step further with its Genuine Progress Indicator (GPI), which adjusts not only for environmental damage and resource depletion, but also for income distribution, volunteering, crime, changes in leisure time, and the lifespan of consumer durables and public infrastructures. GPI gained more traction than either MEW or ISEW, and is now used by the scientific community and many governmental organizations globally (for example, the state of Maryland is now using GPI for planning and assessment).
Coincidentally, 1972—the year MEW was proposed—also marked the date when the tiny Himalayan kingdom of Bhutan started moving to build an economy based on what King Jigme Singye Wangchuck called “Gross National Happiness.” Seeking to preserve traditional Buddhist values in an increasingly globalized world, this tiny country set out to develop a survey instrument to measure its people’s general sense of well-being.
Until recently the subject of happiness was avoided by social scientists, who lacked good ways to measure it; however, “happiness economists” inspired by Bhutan’s experiment have found ways to combine subjective surveys with objective data on lifespan, income, and education, making a national happiness index a practical option.
Though Bhutan’s economy is still based on subsistence agriculture and has a relatively low GDP, the Bhutanese people rank among the top 20 happiest in the world. This contrasts with the US, which delivers much less happiness per unit of GDP. In his book The Politics of Happiness, former Harvard University president Derek Bok traced the history of the relationship between economic growth and happiness in America. During the past 35 years, per capita income has grown almost 60 percent, the average new home has become 50 percent larger, the number of cars has ballooned by 120 million, and the proportion of families owning personal computers has gone from zero to 80 percent. But the percentage of Americans describing themselves as either “very happy” or “pretty happy” has remained virtually constant, having peaked in the 1950s. Our economic treadmill is continually speeding up due to GDP growth and we have to push ourselves ever harder to keep up, yet we’re no happier as a result.
The thinking behind Gross National Happiness is catching on. Harvard Medical School has released a series of happiness studies, while British Prime Minister David Cameron has announced the UK’s intention to begin tracking well-being along with GDP. Sustainable Seattle has launched a Happiness Initiative and intends to conduct a city-wide well-being survey. Thailand has instituted a happiness index and releases monthly GNH data. Britain’s New Economics Foundation publishes a “Happy Planet Index,” which “shows that it’s possible for a nation to have high well-being with a low ecological footprint.” And a new documentary film called “The Economics of Happiness” argues that GNH is best served by localizing economics, politics, and culture.
Whatever index is settled upon to replace GDP, it will be more complicated than the current one-dimensional metric. But simplicity isn’t always an advantage, and the additional effort required to track factors like collective psychological well-being, quality of governance, and environmental integrity may be well spent.
This is what we must do
Milton Friedman once wrote: “Only a crisis—actual or perceived—produces real change.” Absent a crisis, politicians and economists will cling to GDP even if it is flawed and superior alternatives exist. It’s familiar, it’s simple, and it is embedded in all our existing economic institutions.
But crisis is upon us. For the past two decades, GDP growth in the US has mostly been captured by the financial industry. Today, unemployment is stubbornly high, while household net worth is plummeting. Further growth appears obtainable only through huge government deficits and ballooning debt. Government spending has been the only thing keeping the economy on life support, but governments across Europe and in the US have hit a crisis of confidence, both with the financial markets and constituents. We’re at an economic dead end. We seem to be on track for a political and social train wreck of dashed expectations and seething public rage. Think Tahrir Square times a thousand. The only way to manage this situation will be to change the goals and rules of our national game.
Here’s what might happen. Following widespread outbreaks of public dismay over austerity packages designed to reduce government deficits, world leaders issue an announcement that GDP is being phased out. There’s plenty of political cover for this: in 2008, French president Nicholas Sarkozy convened “The Commission on the Measurement of Economic Performance and Social Progress,” chaired by American economist Joseph Stiglitz, which enumerated the failings of GDP. Leaders can point to the Commission’s conclusions, and tell their people that the goal of the new economic indicator will be to track and obtain broader social and environmental benefits without expanding government debt.
A direct suggestion to President Obama: Convene economists of all stripes now to come up with that alternative indicator. They could start by surveying work already done, then make adjustments as necessary. We need an agreed-upon metric that’s ready to go when crisis strikes—and crisis is just around the bend.
After the announcement would come the work of re-aligning incentives, regulations, taxes, and spending to deliver improvements in happiness and sustainability. That will mean, among other things, changing financial rules to stop enriching banks and speculators preferentially (which increases GDP but often ends up just hiking economic inequality while failing to deliver any general benefit). One strategy to accomplish this might be to charge a small tax on all purely financial transactions, with the proceeds used to reduce income taxes.
We know from numerous studies that people are happiest when they feel in control of their lives, when they have opportunities to help shape the rules they must follow, and when they feel that those rules are fair. This means that policy makers must find ways to step aside and let the shift away from GDP be driven by people acting within their local communities where their voices can be heard.
No doubt a period of experimentation will be required. That’s why it’s important to start a general economic reform by changing our primary economic indicator: as the numbers come in, we’ll see which policies make us happier and which ones don’t. Altogether, this economic transition is likely to take two or three decades. It may be hard at first, but society will have set itself on a different trajectory—increasing human satisfaction, health, and well-being, while reducing humanity’s impact on the environment.
If our current crisis is being driven by limits both to debt and natural resources, then one might wonder whether there are limits also to progress in the social and cultural spheres. Could we eventually reach the limits of human happiness?
Maybe. But that would be an interesting problem to have.