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Changes to GDP Measurement Still Don't Capture Progress

J. Mijin Cha

Yesterday, Jared Bernstein and Dean Baker wrote about the new changes in how the Bureau of Economic Affairs calculates GDP. In short, as Bernstein and Baker explain:

Now there is a new category in the quarterly G.D.P. reports called “intellectual property products,” including “entertainment originals.” For example, the production costs of what the B.E.A., a part of the Commerce Department, calls “long-lived TV shows” — ones that provide a steady stream of income, like “Seinfeld” reruns — will for the first time be counted as investment. That’s right — the ultimate show about nothing will now add billions to G.D.P.

We have talked about these changes a bit before and the positive impacts they could have. In the case of pharmaceutical products, for instance, the money spent researching and inventing them will be counted, in addition to the sale of the end product. Before, only drug sales would have be counted. Putting a monetary value on research and development justifies its importance to the bottom line.

But, as Bernstein and Baker point out, there is still a lot that isn’t reflected in GDP even with the new changes. For one, the intellectual property products seem to focus on entertainment that is copyrighted and does not reflect the value of free content. Two, as we have written about before, there are still several, deep costs that not reflected in GDP. The example Bernstein and Baker use is a clear example of what is still missing from GDP:

If we use hydraulic fracturing to reach deep pools of natural gas and in the process pollute groundwater, we will count only the value of the gas. There is no subtraction for the polluted groundwater or the greenhouse gas emitted when the gas is burned.

The failure to capture these costs is one of the fundamental reasons GDP is such a poor measure of societal and economic progress, even though it has come to be seen as the main metric by which we measure our progress. If the entire global fish stock is harvested in one year, global GDP would see a huge bump but there would be no way to reflect the lasting economic and environmental harm that depleting the fish stock would cause. Fracking is seen only as a positive economic gain due to the value of the gas. The poisoning of drinking water, the danger to community health, and the other damage it causes are not reflected. Then, when policymakers make decisions, their heavy reliance on GDP presents a skewed picture of the economic and environmental consequences to fracking.

The inability of GDP to accurately reflect societal and economic progress has led to the development of alternative metrics, including the Genuine Progress Indicator with Maryland leading the way in its use. Maryland looks at 26 different indicators in three areas: economic, environmental and social. The idea is to have a more complete picture of economic, environmental and social health. With GPI metrics, policy makers can make more informed decisions. If there is economic growth but at the cost of significant natural resource depletion, is that sustainable growth? If the state’s gross domestic product increases but its inequality also increases, is that progress?

The changes to the BEA calculation are good in that they expand the idea of what is considered investment. But, until GDP can accurately reflect the environmental and social costs that are borne by society but not reflected in economics, it will still be a poor measure of our overall progress.