Wrong Metric: Irene Shows How GDP Mismeasures Growth

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.”

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