To be a steady stater is to be against GDP growth. That’s not the same as being against GDP as a metric. GDP is an invaluable tool for measuring environmental impact and mustn't be discarded, as some in the degrowth camp suggest. In this episode, host Brian Czech examines the merits of monitoring GDP, and the need to view GDP growth in the 21st century as alarming, not encouraging.
From the Center for the Advancement of the Steady State Economy, this is the Steady Stater, a podcast dedicated to discussing limits to growth and the steady state economy.Brian Czech:
Welcome to the show. I'm your host, Brian Czech, and our topic this week is GDP: Don't Shoot the Measurement. You know, at the Center for the Advancement of the Steady State Economy, we mix with the limits to growth crowd that includes academics, students, think tanks, and activists. Some of our friends and colleagues claim that GDP is a worthless indicator and there's a certain amount of activism right now for just getting rid of GDP entirely. We're familiar with the arguments, for sure. But we've also found the rumors of GDP's worthlessness to be greatly exaggerated. By the end of this episode, I think you will agree that in the 21st century, we need to monitor GDP more carefully than ever. If you go to our website at www.steadystate.org, you will see how prominent GDP is in our messaging. We have the world's first and only rolling GDP meter. It estimates in real time GDP from the immediately preceding 12 months. It's meant to alarm people to the threats of a bloating economy. These are threats to environmental protection, economic sustainability, including long term jobs, national security, and international stability. You can get a sense of that at the homepage and then if you click on the GDP meter itself, you will be taken to a 30 second alarm video that makes the point with even more urgency. Now, COVID-19 has thrown us all a curveball. We're like everyone else out there in the business of forecasting GDP. And we've had to make some rough assumptions about the speed and duration of the recession. So you'll find that our GDP meter is rolling backwards for the time being, just as the global economy has been in a dramatic recession. Well, there's a reason we have such an emphasis on GDP. First of all, it is a solid measure of the size of the economy, for reasons I'll explain, and more importantly, in the 21st century, it's a solid measure of environmental impact. And it is the metric that speaks most loudly to economists, policy wonks, and policymakers, otherwise known as politicians. And it's not going anywhere, folks. And so we need to make it work for us, at least in terms of a measurement. Now, let's consider the argument that GDP is a worthless indicator, and that we ought to dispense of it. There are two main variants of this argument. The first is that economic growth, which is measured via GDP, is the wrong goal at this point in history. And we totally agree with that at CASSE, of course, that growth is the wrong goal. But that doesn't mean we should shoot the messenger. The messenger in this case is the Bureau of Economic Analysis, which has been calculating GDP with as much consistency as possible for close to a century already. You know, if you're a doctor and you have an obese patient, the last thing you tell that patient to do is throw away the scale, far from it. In fact, you end the patient monitor that scale more intensively than ever. Yes, you also bring in a stethoscope and a blood pressure cuff and other instruments to monitor the patient's health, but the scale remains a key instrument. Likewise, with the economy, the last thing we want to do is get rid of GDP. Now, we also need to closely monitor some other metrics, such as the Genuine Progress Indicator, the ecological footprint, Human Development Index, the Living Planet Index, etc., to get a sense of human welfare. And just as the doctor informs and warns the obese patient that the reading on the scale is far too high. We need to inform the public and policymakers that GDP is way too high. It amounts to a growing ecological footprint, a declining Living Planet Index and ultimately, a declining gross national happiness. The second variant of the argument that we should get rid of GDP is that GDP, in fact, doesn't really measure the size of the economy. We're told that too many other variables come into play, making GDP a spurious measurement, at best, and worthless measurement, at the worst. Well, I recall taking a dive into the process of national income accounting while I was writing my last book, "Supply Shock." I talked with a number of economists at the Bureau of Economic Analysis, the BEA, and I studied their accounts to some extent and I found that what they're doing tracks very closely indeed with production and consumption of goods and services in the real economy. I'm talking about the real economy of production and consumption that has a trophic structure, just like the economy of nature. This trophic structure starts with the producers at the base, the agricultural and extractive producers, and it works its way up from heavy through light manufacturing, and outward into the numerous service sectors we find today in the full blown American and global economies. And whether they know it or not at the BEA, they're essentially measuring the environmental impact of the economy. That's right, GDP is an outstanding indicator of environmental impact. That's because, for that economy to grow, the trophic base of agricultural and extractive activity must expand and intensify in order to free more hands for more division of labor and more exchanging of money. We might as well see that GDP is another way of expressing the ecological footprint. In fact, at CASSE, we have an ongoing project we call the GDP correlates project, powered primarily by interns, by the way, where we're assessing both correlation and causality between GDP and numerous indicators of environmental impact, such as biodiversity loss, pollution, noise, and of course, climate change and sea level rise. You'll be hearing more about these correlations in future episodes of the Steady Stater, I'm sure, but it's worth pointing out that these correlations wouldn't exist if GDP was a worthless indicator. Now, I also pointed out in Supply Shock that yes, there are a number of variables that complicate the relationship between GDP and environmental impact. I'd say the three biggest ones are inflation, technological progress, and what John Maynard Keynes may have, or probably would have, called the propensity to use money as the means of exchange. Well, inflation doesn't turn out to be much of a problem, because the Bureau of Labor Statistics which works closely with the BEA, measures inflation with the consumer price index, and that allows the BEA and others like the World Bank, globally, to express GDP in real or inflation-adjusted terms. Now, I've heard that approach criticized as well, because prices can change dramatically. Of course, they can, but that's why the Bureau of Labor Statistics uses a basket of goods as a representative cross section of economic activity and if you look at the list of items they monitor in this basket of goods, it's also a pretty good cross section of the trophic levels in the economy. Now, technological progress, that one muddies the waters a little because entirely new products and even industries can arise over time. And in response to this, on rare occasions, the Bureau of Labor Statistics has to adjust what's in the basket of goods. More importantly, though, say some of the critics, technological progress results in an increased efficiency of production. So that GDP then is a less reliable measure of the weight or the heft or the ecological footprint. But you know, that concern misses a key point, which is that technological progress itself is a service. It's conducted via R&D. Research and development is a service and therefore technological progress is a function of an increasing agricultural and extractive surplus at the base of the economy, just like all the other service sectors. In other words, it's linked at the hip with economic growth, and it's part of the exact same environmentally impacting growing ecological footprint. Finally, GDP as a measurement of environmental impact does entail a stabilized propensity to use money as the means of exchange. One of the one of the alternatives to the legal tender are local currencies or what we might call "funny money." It's still money, but it isn't included in the BEA's calculations. So then GDP would end or underestimate the heft of the economy to the extent that funny money is used. Another alternative is barter, but scholars in recent years have done a pretty good job of describing how barter was probably never a well established means of exchange. It's just not as efficient as they made it sound in some of the earlier history books. In any scenarios with substantial agricultural surplus, barter is unlikely to put a dent in the use of money, which is so much more efficient to use. The other basic alternative is household production and consumption, where the goods and services never go to the market at all. COVID-19 offers some examples of this with a lot of families growing their own vegetables now and cooking their own food, instead of relying exclusively on the grocery store and restaurants. Money though, is an extremely efficient means of exchange, which explains why it evolved so rapidly and thoroughly and outside extreme scenarios such as a pandemic, the propensity to use money would hardly vary. Maybe the biggest exception, which we may very well encounter in the 21st century, would be when planetary limits to growth are breached because, by definition, that will entail the liquidation of natural capital stocks at the base of the economy, overconsumption of natural resources at the trophic base, in other words. And that means that money will dry up as the agricultural and extractive surplus disappears. But actually, that doesn't have a whole lot to do with the propensity to use money, when you think about it. That's just all about the money supply itself. So one of these days we'll talk about accounting for global trade, too, but none of these variables impact, to a substantial degree or fundamentally, the utility of GDP as a unit of measure. It measures the size of the economy, and more importantly, it measures the environmental impact of the economy, which is rapidly becoming the biggest threat of the 21st century. Well, that about wraps her up, folks, we've explored the notion that GDP is a worthless indicator and I think we've dispelled that as an exaggerated rumor. GDP is the measure of the human economy, not its goodness or its merits or its welfare, but its pure biophysical size. So thanks for joining us this week at the Steady Stater podcast. I'm your host, Brian Czech, and I'll see you next time.