Enough with the GDP — it’s time to measure genuine progress

GDP growth is up.  Time to celebrate! Then GDP growth is down again. Time to panic?

These gyrations aren’t uncommon, and we have just been through one. A few weeks ago, President Biden boasted about achieving the highest economic growth rate in nearly 40 years. Now Wall Street says the economy is growing at a far slower rate.  The inability to predict GDP growth accurately has just led the Federal Reserve Bank of New York to stop publishing its real time forecasts.

But why should anybody care one way or the other? The truth is, gross domestic product (GDP) is a metric that has little to do with the economic wellbeing of American households. Its growth, or lack thereof, can be either a good sign or a bad sign. As many scholars and politicians have said for decades, it’s time to dethrone GDP as the nation’s leading economic indicator.

It has been the most prominent measure of economic health since World War II, but was never designed for that purpose. GDP tells us important information about the level and value of production, consumption, trade, government spending and national income. But when it grows, it does not necessarily mean anyone is better off.

GDP grows when people spend more on college tuition and medical insurance without any corresponding increases in the quality of education or health care. It grows when prison construction booms and more money is spent on incarcerating otherwise productive workers for harmless missteps. It grows when prime farm and forest lands are paved over and replaced with strip malls and oversized houses for the wealthy. It grows when those at the very top of the economic food chain add to their vast share of global wealth even while real incomes of the majority of the population decline. The top 10 percent of wealth holders in the U.S. now control 70 percent of the nation’s wealth. 

In 1968, Robert Kennedy put the case against GDP succinctly when he said that it “measures everything except that which is worthwhile.” Despite this, politicians generally still act as though GDP growth is the Holy Grail whose magic will keep the electorate happy.

But that may be about to change. In late July, Rep. Ilhan Omar (D-Minn) and five House cosponsors introduced legislation designed to move federal agencies away from GDP and towards a metric that has been thoroughly vetted by economists, adopted by law or executive action in Maryland, Washington State and Vermont, and calculated by researchers for all 50 states — the Genuine Progress Indicator (GPI). The bill – the Genuine Progress Indicator Act of 2021 (H.R. 4894) — would require federal agencies to use the GPI alongside GDP when reporting on the state of the U.S. economy, forecasting its growth, and analyzing the economic impact of budgets, policy initiatives, programs and legislation. Unlike GDP, the Genuine Progress Indicator  is designed to measure economic performance from the perspective of ordinary American households, not corporations or Wall Street investors. 

Use of the GPI in federal decision-making processes would correct many of the shortcomings of relying on GDP by differentiating between government and consumer expenditures that are welfare-enhancing (e.g., homes for the houseless and modern infrastructure) vs. those that go toward paying for market failures (e.g., climate disasters and overpriced prescriptions). 

The GPI also captures the vast economic contributions from the non-market sector which GDP ignores, such as the value of volunteering, unpaid care work, modern infrastructure and protected natural areas. Unlike GDP, it factors in inequality by counting gains for those least well off more than gains for billionaires, based on well-established economic principles of declining marginal benefits of income, wealth and consumption. 

The GPI also factors in costs which are otherwise treated as “externalities” and ignored by GDP and other analysis: namely the damaging economic consequences of unsustainable production and consumption patterns, including the costs of climate change, deforestation, pollution, homelessness, crime and family breakdown, to name a few. Economic textbooks have discussed and quantified such externalities for generations.  It’s high time to incorporate them into official economic calculations.

The GPI gives us a rational measurement of the nation’s economic health, performance and impact. Unlike GDP, it can tell us reliably whether real, meaningful growth that helps the vast majority of Americans is taking place or not. That’s essential for making good economic policy choices, whether those choices are ultimately fiscally conservative or progressive. That’s why the Genuine Progress Indicator Act of 2021 should get strong bipartisan support and be enacted quickly.  

That way, when politicians tout government statistics showing robust growth, it really will be time to celebrate.

John Talberth, Ph.D., is president and senior economist of Center for Sustainable Economy, www.sustainable-economy.org and lead author in a recent publication updating the GPI methodology.