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What Does the Second Quarter GDP Mean

J. Mijin Cha

The newest GDP release shows an increase of 1.5 percent in the second quarter of 2012, down from a 1.9 percent growth in the first quarter and three percent growth in 2011. But, as we continually ask in our Beyond GDP work: What exactly is GDP measuring?

As we’ve highlighted, GDP doesn’t measure things that are good for our economy and society, like home production and volunteer work, and doesn’t count thing that are bad, like inequality and pollution. More pressingly, GDP cannot reflect the importance of ecosystem services and without valuing them, preserving them becomes only a cost and not a benefit. As we see more and more impacts from climate change, ecosystems play a vital role in adaptation and mitigation practices, not just as carbon sinks, but also by reducing erosion, providing shade and providing fresh air and water. Yet, their importance does not show up in GDP calculations.

The main difficulty with valuing ecosystems has always been pricing- how do you put a price on forests that act as carbon sinks? There are efforts to start to capture these values, including the System for Environment and Economic Accounts, which provides methods for countries to account for natural resources like minerals, timber and fisheries. There is also the Inclusive Wealth Index, which includes natural capital, in addition to manufactured and human capital, as part of a nation’s overall capital assets. Currently, at least 24 countries use some form of natural capital accounting.

While not widely used yet, capturing the value that ecosystems currently provide seems tangible. The more challenging accounting question is how do we capture future costs? The recent heat waves are causing damage not just to natural environments, but also to our built environments. Airplanes are getting stuck in asphalt that has softened from heat, subway trains are derailing after tracks become warped, and highways are shrinking, leading to cracking, because the soil under them is getting too dry. So, how do we capture the role that healthy ecosystems play in preventing these future impacts and costs?

Climate change is introducing a lot of unknowns, particularly for environmental accounting. One thing we do know, though, is that we need to move beyond GDP as our sole accounting measure. A good first step would be something like the Genuine Progress Indicator, which measures 26 metrics apart from GDP, including the health of natural resources and the level of inequality, to provide a more complete picture of whether we are making progess, and not just whether there is growth.

On a separate note, part of the reason GDP growth was slower than expected was a decline in federal spending. Austerity hawks should take note that government spending has a direct impact on GDP, and until we expand our accounting system, GDP is the primary indicator of our economic health. Increasing government spending and investment, like through a wide-scale jobs program, would boost our GDP, not just through federal expenditures but also through the increased consumer spending that comes with people being employed.