The sad flaw of measuring hurricanes by GDP

By David Callahan
August 30, 2011
By David Callahan
The opinions expressed are his own. 

Hurricane Irene may not have lived up to all the media hype, but it still did billions of dollars in damage. Some analysts say cleaning up the mess will boost Gross Domestic Product for the second half of 2011. These estimates are surely correct – and remind us why GDP is such a perverse way to measure economic progress.

No number is more closely watched than GDP. Americans walk with more bounce in their step when GDP is rising at a nice clip and turn gloomy when this indicator sinks. While GDP first came into use after World War II as a technical way to measure all economic activity, it has somehow morphed into the nation’s thermometer – the leading gauge of how well we are doing.

Such is the dominance of GDP that we tend to forget just how crude this indicator really is – so crude that it can’t even distinguish between growth caused by a terrible event, like a hurricane, and growth tied to higher productivity or technological breakthroughs.

Hurricane Irene will mean a lot work for contractors and landscapers – just like it meant big sales at Home Depot before it hit – but none of this activity will produce anything new. Instead, billions and billions will be spent just to get homes, roads, and power lines back to how they were before the storm. It’s absurd to dub such running in place as “growth.”

Of course, we didn’t need Hurricane Irene to remind us that GDP measures the wrong things. That became apparent a few years ago when the real estate bubble imploded and the entire country got hit with a financial tsunami. While the early 2000s seemed to be good times judged by GDP, it turned out that much of the consumer spending fueling this growth came from homeowners tapping the equity of over-valued properties. The dark clouds gathering in the go-go years weren’t apparent if you just tracked GDP, which can’t distinguish between growth fueled by borrowing versus real income gains – kind of like a nutrition gauge that can’t tell the difference between cotton candy and protein.

Robert F. Kennedy famously criticized GDP for measuring everything “except that which makes life worthwhile.” This goes too far, since much of the economic activity that GDP counts has positive effects on people’s lives. But Kennedy was among the first to note how GDP doesn’t measure myriad aspects of society’s well-being – like health or education – even as it rises every time a redwood tree is chopped down or another prison is built.

The obsession with GDP reflects America’s worst side – a society that embraces such an extreme form of capitalism that making a buck is more important than how it gets made. Worse, the GDP’s dominance reinforces this trait. As the Nobel-winning economist Joseph Stiglitz has noted “What we measure affects what we do.”

In 2008, Stiglitz co-chaired an official commission in France charged with the goal of establishing a new framework of national accounts that incorporates measures of economic, social, and environmental sustainability. Since then, other countries – and multilateral bodies – have begun to explore alternatives to GDP. Last year, German Chancellor Angela Merkel issued a statement jointly with the heads of the IMF, the World Bank, and other organizations saying that a key lesson of the recent economic crisis was that “traditional concepts of growth” are inadequate. GDP should be complemented, she said, by “including appropriate social, employment, and environmental components.” Both the OECD and the European Union are now exploring alternatives to GDP.

So far, the United States has lagged behind other advanced countries in seriously questioning GDP. But even here, the GDP’s reign is coming under scrutiny. The 2010 healthcare law authorized millions of dollars to develop a Key National Indicator System that some lawmakers and advocates hope will draw attention to alternative measures of progress. In the meantime, the Bureau of Economic Analysis (the federal agency that calculates GDP) published a “GDP and Beyond” agenda in 2010 and has proposed new measures for household economic well-being, the economic impact of energy, and other important areas. States like Maryland are also exploring how to gauge the full range of indicators that really matter to their residents.

The United States may never go the way of Bhutan, the tiny Buddhist kingdom which tracks “Gross National Happiness.” But it would make sense if the U.S. did embrace a better measure of human progress. After all, this country is not just famously obsessed with money and work, but also with personal fulfillment.

Indeed, the “pursuit of happiness” has helped guide America’s mission since its founding. All that is needed now is a way to measure the nation’s progress on this crucial front.

Photo: Vermont Governor Peter Shumlin (2nd L), U.S. Senator Patrick Leahy (D-VT) (2nd R) and Brattleboro Town Manager Barbara Sondag (R) tour areas in Brattleboro, Vermont damaged and flooded by Hurricane Irene August 29, 2011.   REUTERS/Brian Snyder

David Callahan is a Senior Fellow at Demos and editor of PolicyShop.net, the Demos blog.

3 comments

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GDP also counts expenditure on war as positive contributions.

As the USA approaches a USSR like future, this sad fact will become more apparent.

Posted by upstater | Report as abusive

Picture this imaginary scenario. There’s a plague of cancer ravaging children in the USA requiring a huge expenditure in medical care, medicines, etc. And the GDP goes up! That’s a good ting, right?

Posted by IntoTheTardis | Report as abusive

Excellent!

It’s about time someone pointed out that GDP is just a rule-of-thumb measure. It also leads directly to the conclusion that classifying a recession as two, and only two, quarters of less than zero percentage growth in the percentage of GDP, is totally artificial and relatively meaningless.

Every economist who pereforms modelling of our economy knows that the breakeven point in the economy between real growth and lack of growth – however it is measured – is in the range of three to five percent, not zero. Including that fact, whether the number is actually 2.75% or 3.6454% would give us a better indicator that we have been in a recession for over four years – i.e. a depression. Seems Paul Krugman already wrote that last year.

Posted by ptiffany | Report as abusive

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