Monday, August 10, 2009

GDP and Nature

Writing in the New York Times, Eric Zencey, a professor of historical and political studies describes how the gross domestic product or GDP distorts our understanding of the economy:
If you let the sun dry your clothes, the service is free and doesn’t show up in our domestic product; if you throw your laundry in the dryer, you burn fossil fuel, increase your carbon footprint, make the economy more unsustainable — and give G.D.P. a bit of a bump.
Only God can make a tree, but it doesn't have value in GDP until someone cuts it down. If I cut down a tree or destroy an entire mountain and burn it for heat, GDP is increased. But if I make my home more energy efficient, and don't have to burn that wood or that coal, the savings don't show up in GDP—at least not directly.
Instead, the savings are likely to show up indirectly. I can either spend the savings on other goods and services, or put more money in my bank account. The fallacy that reducing spending on energy reduces economic value is related to the shortcomings of using GDP to measure economic value:
This points to the larger, deeper flaw in using a measurement of national income as an indicator of economic well-being. In summing all economic activity in the economy, gross domestic product makes no distinction between items that are costs and items that are benefits. If you get into a fender-bender and have your car fixed, G.D.P. goes up.
This of course is nonsensical. If a corporation had an asset damaged, it would be expected to write down the asset value on its balance sheet. But a nation can cut down forests or dynamite mountains out of existence and see its GDP go up.
As I noted recently, some critics of energy conservation have fallen prey to the fallacy that if I spend less on energy I must be worse off, when the opposite could be true. The measure of my well being is not what I spend, but the value I receive. An economic measure that fails to recognize that a tree has value before it is cut down is clearly flawed. But GDP, as presently constituted, is more likely to measure value if something is burned in the process.


Anonymous Edmund Dohnert said...

Tom -

Right on!

I too have reached the same conclusion some time ago that GDP, as it is currently calculated, is a next to useless indicator whose main value is to politicians trying to 'prove' that the economy is healthy.

As you intimated, some components of GDP actually have a negative correlation to economic well-being.

7:09 PM, August 10, 2009  

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