Almost everything in the GPI is a value judgment. Booze is an example. Alcohol in moderation is counted as a positive expenditure. Who doesn’t like a glass of red wine or a beer after work? But anything above what is considered reasonable consumption is deducted from the GPI, which subtracts money spent on “binge drinking.” Academic research apparently puts binge drinking at 25 percent of all alcohol consumption, so this portion is subtracted from the GPI rather than added. Depending on your politics, you might consider the underlying value judgments of the GPI eminently sensible. Cigarettes and wetland destruction: bad. Home ownership, work-life balance, and clean air: good. But we must recognize that these are subjective. The GPI, for example, counts time spent in your car as wasted because you could be at home playing with your children. I might, however, adore driving and hate spending time with snotty-nosed kids—even my own.
The GPI says that if you drink yourself silly you are detracting from the well-being of society. I might find solace in the bottle and think it is none of the government’s business what I spend my money on, even if that happens to be copious quantities of vodka. The GPI says that inequality is bad because research shows unequal societies are less happy. But you could—as many people do—defend inequality as necessary in order to penalize laziness and reward people for hard work and new ideas. You might find the GPI’s emphasis on preserving the environment perfectly rational. You could, though, regard the extinction of an obscure beetle or the lesser-spotted throat warbler as a perfectly acceptable price to pay for a larger TV screen and more money in your children’s university trust fund.
The point is that indexes are self-referential. They send the signals you want them to send. You load them up with what you think is important and the index tells you how you are doing. Scandinavian countries, for example, regularly come in at the top of the Human Development Index. That, says one critic, is “because the HDI is basically a measure of how Scandinavian your country is.”
In the search for a replacement for—or useful addition to—GDP, it is important to acknowledge this basic problem with composite indexes.
The man who came up with the Scandinavian put-down is Bryan Caplan, a professor of economics at George Mason University in Virginia. He was having a go not at the twenty-six-component GPI, but at the far simpler three-component Human Development Index. The HDI was one of the first serious attempts to invent an alternative to GDP. It is the brainchild of Pakistani development economist Mahbub ul Haq, who once wrote of GDP, “Any measure that values a gun several hundred times more than a bottle of milk is bound to raise serious questions about its relevance to human progress.” Haq’s index, drawn up in conjunction with Amartya Sen, was launched in 1990. It was simplicity itself, combining three elements: income, literacy, and longevity. Though it has been tweaked since to include a measure of inequality, the basic premise remains the same. Income is measured by GDP per capita adjusted for the cost of living; longevity is life expectancy at birth; and education is a combination of literacy and enrollment at school and university.
The following is a list of the top countries, according to the HDI, compared with the top by GDP per capita. Note that this is a snapshot for 2015. Countries and numbers vary quite substantially from year to year, especially for GDP per capita.
Of the countries that do well on conventional GDP, only three—Norway, Ireland, and Switzerland—are in the top ten of the HDI. The other seven GDP stars don’t do as well at converting income into health and education. The US on the other hand doesn’t quite make the top ten in GDP per capita, but it does make the HDI top ten.
Figure 8
On the face of it, there is not much to object to in the HDI. This author quite likes it as a more rounded measure than our traditional growth gauge. Yet Caplan’s criticism is both considered and trenchant. Scores on each of its three measures—income, life expectancy, and education—are awarded between 0 and 1, he notes, with 1 being the maximum score. “This effectively means that a country of immortals with infinite per-capita GDP would get a score of 0.666 (lower than South Africa and Tajikistan) if its population were illiterate and never went to school,” he says drily. Moreover, to get a score of 1 on education, a country would need to turn everyone into a permanent student, not necessarily a desired outcome. (Who would teach them?) Income, on the other hand, could theoretically keep on rising; yet in wealthy countries it is already close to its upper limit of 1, leaving almost no room for improvement. That is because Huq and his fellow creators did not think income was important above a certain level. So HDI, like other indexes, tells you what you want to hear. “The ultimate problem with the HDI,” writes Caplan, “is lack of ambition. It effectively proclaims an ‘end of history’ where Scandinavia is the pinnacle of human achievement.”2
Yet indexes have their place. Measurements are powerful tools. If we measure something we consider positive, politicians will come up with policies designed to maximize that particular variable, whatever it is: higher income, cleaner air, or more doughnut consumption. This is very powerful. It means that “better” measurements have the power to produce “better” societies. If you want to look like Scandinavia—and measures of happiness suggest there are worse role models—then designing an index of how Scandinavian you are may be about the best place to start.
Of course, not every country wants to be like Norway or Sweden. If Barbados measured hours on the ski slopes it might come up short. But every country, presumably, wants to be a better version of itself. We should not forget either that GDP too has a hidden value system. It measures an economy’s ability to maximize activity no matter what the cost in environmental destruction or social disruption. We might call GDP a measure of how Chinese your economy is.
Equally, you could see the GPI as attempting to mold a country as envisaged by ecological economist Herman Daly, who advocates what he calls a “steady state” economy, which downplays or even eliminates growth as conventionally measured. McGuire prefers to see the GPI as a tool for illuminating trade-offs. “When you destroy a wetland for a minimart there is a cost to that,” he says. “I don’t hang my hat on the GPI itself, but it is a way of saying, if we value something, what are we willing to do to preserve it? And if that means only 1.5 percent growth in GDP to keep all the things that we care about, are we willing to accept that?” There is, he says, “no system in the world that can grow at 3 percent into infinity.”
The GPI subtracts negative externalities: air pollution, water pollution, and loss of forest, farmland and wetland. Likewise it adds positive externalities such as the hidden benefits of an investment, say a community’s better mental and physical health resulting from the installation of a public swimming pool. At one point Governor O’Malley was pushing a policy to double the number of passengers using public transport. “I ran the numbers through the GPI meat grinder,” recalls McGuire. “I could do a policy analysis with the actual numbers and show that, yes, taxpayers are actually benefiting in aggregate. There might be a little bit more spending on public buses, that kind of stuff, but when you count the benefits in terms of the cost of commuting, leisure time, car pollution, and use of non-renewable resources…it becomes an easy sell.”
As well as being a useful policymaking tool, McGuire says, the GPI has shown itself to be more sensitive than GDP to real economic conditions. He cites figures for 2009, the year in which the impact of the financial crisis rippled with devastating effect through the US economy. Yet in that year the gross state product for Maryland (the state equivalent of GDP) actually rose 3.8 percent. In a memo to his boss at the department McGuire wrote that this was “almost implausible” given the real economic hardship people in the state were suffering. By contrast, the GPI for that year was down 6.3 percent. That made a yawning gap of 10 percentage points with GDP. One of the reasons the GPI was a “more accurate” reflection of what was really going on, he says, is because it picked up on the fact that
net capital investment crashed from $9 billion in 2008 to minus $1 billion in 2009 as the state massively reined in spending.3 The GPI was also more sensitive to unemployment and underemployment, including as it did people who had part-time jobs when they wanted to work full time and those who had given up looking for work altogether because job prospects were so lousy.
Weighting and value judgments are not the only potential problems with an index like the GPI. Because it is expressed in dollars, it runs into the same difficulties we encountered in the chapter on natural capital. “I hate this putting a monetary value on air pollution so that we can see a sunset or see the mountains,” says McGuire. “It’s soul crushing.” When he first started costing Maryland’s wetlands, forests, and green spaces, he says, “I’m like, this is not cool.” But, he has concluded, in the real world of policymaking “numbers matter and money matters more. People say, ‘How do you put a price on the priceless?’ But if you don’t do that, this is what you get, what we’re doing right now: sacrificing our health and our environment for economic gain.”
McGuire likens the GPI to a budgetary reality check in which the budget is clean air, clean water, and leisure time as well as dollars and cents. “I’m a county employee. I can’t go out and buy a Ferrari every day. I am not making the dollars,” he says by way of illustrating budgetary limits. “If we want to have economic growth, that’s awesome. Just make sure we can afford it.”
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If the disadvantage of an index is that you can put in it anything you like, that is also its advantage. Canada has taken this idea to its extreme by asking—wait for it—Canadians themselves what they want to measure. The Canadian Index of Wellbeing has its origins in focus groups carried out across the country in the early 2000s. Bryan Smale, a professor at the University of Waterloo in Ontario and the director of the index, says, “The focus groups were organized around a fairly simple question: ‘What matters to you? What makes your life good?’ ”4 The index was not about how to make Canada more Scandinavian. It was about taking Canadian values and improving on what the country already had: in short, making it more Canadian.
In the focus groups, which targeted a sample of society across generations and political affiliations, Canadians were remarkably consistent about what they valued: primary and secondary education, health care access, a healthy environment, clean air and water, social programs, responsible taxation (whatever that means), public safety and security, job security, employment opportunities, a living wage, work-life balance, and civic participation. These formed the basis of the eight “domains” measured in the index, which are: Community Vitality, Democratic Engagement, Education, Environment, Healthy Populations, Leisure and Culture, Living Standards, and Time Use.
From there the index’s administrators identified robust data sets—Smale calls them “canaries in the mineshaft”—for each domain. In all there are sixty-four indicators designed to measure progress and raise the alarm if the quality of life in a particular area is slipping. “The real issue was: can we find data that was valid and reliable, consistently gathered over time that we could track to see whether or not we were making progress?” he says. “For example, we monitor incidence of diabetes within the Healthy Populations domain. The reason for that is that, depending on how widespread and severe the incidence of diabetes is, it is a marker for other sorts of health conditions such as heart illness, obesity, and so on.”
Attaching a weight to each of the sixty-four indicators is “something we’ve struggled with,” Smale admits. How could you possibly weigh public debt levels against, say, the number of hours that children spend watching TV?5 Clearly you can’t, but what you can do is pick indicators that are “actionable.” By that he means indicators that measure “the kinds of things that people can sink their teeth into and say, ‘Here’s what’s happening with respect to, for example, greenhouse gas emissions. Here’s what’s happening with respect to people’s time spent with friends.’ ”
As much as providing robust data, he says, the index has been a “great conversation starter. People are stepping back and going, ‘How is our well-being? What aren’t we doing that we should be doing? How does this compare to progress in the economy?’ ” People, he says, keep hearing that the economy is recovering nicely from recession, but see that well-being is not. That prompts them to say, “What’s going on there?”
In 2016 the Canadian Index of Wellbeing found that the gap between well-being and GDP, already large, had widened after the 2008 financial crisis. “In 2007 the gap between GDP and the Canadian Index of Wellbeing was 22 percent. By 2010 the gap had risen to 24.5 percent, and by 2014 it had jumped to 28.1 percent.” Why? One reason was that, as in Maryland, recovery from the 2008 recession brought growth but not good jobs. So measures of job security fell, while those of inequality rose. The quality of “Leisure and Culture” also fell sharply as Canadians worked harder to make ends meet, took less time off work, participated less in volunteer activities and the arts, and took fewer vacations. On the plus side, the quality of education was keeping pace with economic activity and communities remained strong. In the official growth numbers all of these details were masked by the simple fact of economic recovery.6
The whole exercise, says Smale, has raised awareness about public policy. While GDP is a “rearview mirror” which tells you what went on last year, the Index of Wellbeing is a measure of what sort of society Canada wants to be. “It looks at what people have said is important to them. If we want to be aspirational about where we want to go as a society, as a country, it asks where do we want to place our emphasis and increase well-being in a myriad of different areas?”
Smale does not claim that the index, despite its popularity, has had a discernible impact on national policy. “I think, naively, a few years ago I would have thought, Hey, when we release this we’re going to really have some influence on change in the country. I’ve now come to realize that that’s the long game,” he says. “Some people have suggested that we’re trying to replace GDP. We’re not. We’re just trying to broaden the conversation.”
14
THE GROWTH CONCLUSION
The genius of GDP is that it somehow manages to squeeze all human activity into a single number. You could think of it as like pushing a large frog into a small matchbox. Still, at its best, GDP is a brilliant and useful insight. It provides a snapshot of one version of reality, a number that policymakers can act upon. But if the beauty of GDP is aggregation, that is also its biggest flaw. No single number can capture all that is worth knowing in life—even if you’re an economist.
Think of it like a car dashboard. There’s a fuel gauge that tells you how much petrol you have left in the tank and a speedometer indicating how fast you’re going. Perhaps there’s another display that tells you what music is playing. All three give you valuable bits of information. You cannot, however, combine them into a single number that tells you anything meaningful. They are in different dimensions.1
To create a single number requires measuring everything in the same unit, which in economics means converting everything into dollars and cents. When it comes to something hard to price—say volunteer work, life expectancy, clean air, or a sense of community—you must either figure out a way of attaching a dollar amount to it or just forget all about it. The idea that all things can be priced stems partly from the work of Jeremy Bentham, the man whose missing head, you’ll recall, is worth ten pounds. The theory of marginal utility, a foundation of modern economics, states that the price of a good or a service reflects the additional satisfaction gained from consuming an extra unit of that product. It is this reductionism that allows economists to convert everything into those complicated mathematical models that occasionally cause your eyes to glaze over.
But prices cannot be a proxy for everything. That means much of what we care about as human beings is either left out of our economic ca
lculations or converted, using some jiggery-pokery, into a dollar amount that can be included. What about the other dimensions? One solution, instead of aggregating everything, is to go the other way—by disaggregating.2 That might seem like a retrograde step, like uninventing the wheel. If GDP was a brilliant invention—which it was—then why on earth would we start taking it apart? If you don’t like the idea of scrapping the wheel, think of it like this: how about liberating that frog from the matchbox?
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The problem with growth as measured by GDP is that it has become the overlord of measures. It is the number we use to define success. Of course economists and policymakers look at dozens of data points—unemployment, inflation, net exports, retail sales, house prices, and wages—to arrive at their models and predictions; Alan Greenspan, the former chairman of the Federal Reserve, used to examine men’s underwear sales as a proxy for economic activity. But in popular discourse GDP is king. Remember, economic growth is synonymous with GDP. To test out the supremacy of GDP, all you need to do is imagine a politician saying the following: “I propose shrinking our economy in return for X.” No one angling for elected office would say such a thing, no matter what X is: flame-retardant public housing, a fairer society, a two-day working week, free pizza. The idea of not maximizing growth has become almost unthinkable in modern political discourse. That is because growth has—almost without us knowing it—become all we care about.
The Growth Delusion Page 21
