Why The GDP Needs A Makeover

This is a guest post by Ryan Schmitz who writes about achieving your dreams through learning about personal finance at PlantingDollars.com. He recently moved to Hawaii where he’s following his passion for scuba diving, living a frugal lifestyle, and is currently building a travel niche website for the Waikiki area.

This article was featured in the Carnival of Financial Planning hosted by The Skilled Investor. Please check out this Festival for many other great articles about personal finance and frugality.

Have you heard? The US was recently in a recession. Millions of people have lost their jobs and the future of the country seems a bit uncertain. As you’re reading this you’re probably thinking “well this guy is some rocket scientist, tell me something I don’t know!” Okay okay, but stay with me for a minute and realize that the only reason we experienced a recession was because the GDP said so. However, who’s the GDP to tell us what we’re experiencing? Just because we’re in a recession according to the GDP, does that mean that our lives suck and that we’re not happy or leading fulfilling lives?

For those of you who don’t know, the GDP is simply a basic measure of a country’s overall economic output. Each time we build a new coal power plant the GDP increases. Each time we produce a tickle me Elmo, the GDP increases. Does creating these things make us better off? To be honest, I’m not really sure. The coal power plant gives us power and jobs, but it also creates waste and damages the environment. The tickle me Elmo brings temporary joy to children and annoys me with it’s never ending laughter, but it also promotes consumerism and will eventually be placed in a landfill somewhere to be forgotten forever. That is, until tiny particles of Elmo get in the water… who has the last laugh then!

The thing to question is this: if you have more stuff does it make you happier and does it provide a more fulfilling human life? In my opinion and personal experience the two are not correlated whatsoever. I currently ride a bike, rent in a small house, and cook all my meals myself and I’ve never been happier. You can find children in refuge camps near Darfur that smile more than some rich kids I know. These kids could have more fun playing a game of kick the can than a spoiled kid sitting in a room full of toys and stuffed animals. I’m not trying to be insensitive here, but it’s the truth. From this, we realize that more stuff does not equate to more happiness and fulfillment.

So what are the alternatives to the GDP?

What should we really be measuring? I would argue that the quality, sustainability, and length of a human life should be what we measure, not how many tickle me Elmos or coal plants we produce. How do we measure quality of life rather than GDP? Here are a couple alternatives that are gaining in popularity.

Genuine Progress Indicator

The genuine progress indicator (GPI) takes the GDP one step further by adding new factors into the equation. These factors include:

• Income Distribution
• Housework, Volunteering, and Higher Education
• Crime
• Resource Depletion
• Pollution
• Long-Term Environmental Damage
• Changes in Leisure Time
• Defensive Expenditures
• Lifespan of Consumer Durables & Public Infrastructure
• Dependence on Foreign Assets

According to their website:

“We believe that if policymakers measure what really matters to people – health care, safety, a clean environment, and other indicators of well-being – economic policy would naturally shift towards sustainability.”

Learn more about the Genuine Progress Indicator via their website.

Happy Planet Index

The Happy Planet Index (HPI) shows the relative efficiency with which nations convert the planet’s natural resources into long and happy lives for their citizens. The HPI places a high value on life expectancy and ecological footprint rather than output on products.

According to their website the:

“The HPI is an innovative measure that shows the ecological efficiency with which human well-being is delivered around the world. It is the first ever index to combine environmental impact with well-being to measure the environmental efficiency with which country by country, people live long and happy lives”

Check out their website to learn What the HPI Tells us.

Summing it up

Things don’t equate to happiness, and we need a new measurement… badly! The GDP has been around since before WWII and is showing its age. Many economist agree and are battling to get it removed from our way of thinking about national progress.

According to economist Clifford Cobb and colleagues, “Much of what we now call the growth of GDP is really just one of three things in disguise: (1) fixing blunders and social decay from the past [paying for pollution, costs of crime, etc.]; (2) borrowing resources from the future [GDP excludes the costs related to farmland depletion, water, other resources]; or (3) shifting functions from the traditional realm of household and community to the realm of the monetized economy [i.e. eating out, rather than at home].” From “What’s Wrong With the Economy?”

New options such as the Genuine Progress Indicator and the Happy Planet Index are taking a charge against a system that is obviously broken and needs to be corrected. We’ve seen that people have blamed the recession on a lot of their problems over the last two years, yet these problems wouldn’t exist if we were taking the time to measure the system correctly. Our perceptions of growth, success, and productivity need a makeover.

What do you think? Is the GDP the best way to measure the overall economy?

What do you think is the best alternative and what other factors should be measured?

Can the GDP grow forever?

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photo by Arenamontanus