Mon 14 Oct 2002
When Gross Domestic Product goes up, the media and citizenry have been conditioned to shout hosannas. Yet in the backrooms somewhere, decision-makers could be looking at these same robust growth figures with concern, fearing the economy may be overheating and creating the conditions for higher inflation. At some point, if these signals become too alarming, central bankers will raise their interest rates and — presto! — your mortgage payment just went up. In this way, we use indicators of economic growth to generate a series of non-economic policies and outcomes.
Whether this is good economic policy or not has been debated for decades. What is rarely discussed outside academics circles, however, is whether these indicators of progress actually give us the right guidance to create the society we collectively want. The implications go far beyond mere economics or the arcana of economic measurement. Competing views of the world — each justified by how we measure progress — play a part in the real world of public policy and public choice.
As an example, the Canadian Petroleum Association claims that adhering to the Kyoto goals of reducing carbon emissions will cost somewhere around $30 billion. The David Suzuki Foundation, however, estimates that achieving even 25 per cent of the Kyoto target would save Canadian $1 billion in health costs resulting from pollution. One side claims we should not proceed because it would impede our prosperity; the other says it’s irresponsible not to sign on to Kyoto.
The difference arises because the two organizations include (and exclude) different items in their assumptions of what is a cost and what is a benefit. The purpose of redefining prosperity by including, as the Suzuki group does, the non-monetary consequences of growth is not simply to give us a different measure of progress — an alternative societal scorecard to show where we are moving backward instead of forward. It would also reflect society’s values more fully and give more guidance to our policy-makers. If our analysis of our situation has been incomplete (or wrong), then the decisions flowing from these measurements will have been ineffective or misdirected.
For example, if current levels of carbon emissions require, say, $1 billion in additional spending to treat cases of childhood asthma that would have not occurred if we adhered to the 1990 levels that Kyoto is seeking, isn’t
that something we should include in our calculations of the “costs” of adhering to the protocols? Doesn’t this give us a different perspective on the importance and “value” of attaining Kyoto’s goals?
Traditional measures of progress record every monetary transaction on the asset side of the balance sheet. The assumption is that all activity that generates income — regardless of whether we, as a society, consider the activity or its outcome desirable — is a contributor to growth. Consumption drives prosperity, the argument goes, and all expenditures — even those associated with, say, crime, breast cancer and environmental catastrophe — are tallied as contributors to our prosperity. Police cars must be manufactured to fight crime; hospitals must be built and health workers hired to treat cancer; hourly wages must be paid to clean-up crews. Under this thinking, even the events of Sept. 11 could be considered progress because they boosted GDP.
An alternative school of thought that has emerged over the past decade urges us to consider a series of offsetting measures. By taking into account elements that are not strictly financial activity, and considering the costs as well as the benefits of growth, those who seek to “redefine progress” are attempting to get us to look through a different prism to measure society’s progress. What is the cost of loss of property and life that results from crime? What is the price we pay for family disintegration or lost wages that accompany treatment of, and often death from, cancer? What “services” do we lose from nature, and what would be the cost to replace them, when the environment is degraded?
There was a time when cumulative measures of output seemed to reflect our notion of prosperity quite well. Producing 15 widgets added more wealth than 14. If Factory A could manufacture 15 widgets in less time than Factory B, it was deemed more efficient, and all factories were advised to adopt the practices that made Factory A more productive. But now, with our more sophisticated understanding of the interlocking nature of the economy, individual well-being and the environment, an argument can be made that the standard, straight-line calculation of growth masks the real effect of economic activity on society’s health. If speedy Factory A is achieving its productivity by lowering its environmental standards or providing unhealthy
working conditions, maybe its practices should be avoided rather than emulated. Perhaps we should be including environmental standards and working conditions — not simply the rate of widget production — in our formula for measuring progress.
This alternative thinking corresponds with much of the anxiety we see in current public opinion. Canadians recognize a series of contradictions about the true health of our society and whether it is progressing at all. We live with unprecedented homelessness in the shadow of unprecedented economic growth. Obesity has reached epidemic proportions. University enrolment is at all-time highs, and so is the rate of young adult suicide. All the while, health-care costs spiral in tandem with waiting times in emergency wards.
The “redefining progress” movement began with an effort to account for non-paid (predominately female) work. A restaurant is allowed to deduct its costs of inventory and wages and amortize its investment in equipment. Considering these activities to be contributors to the economy, we include them in our measurement of growth. Even more importantly, because of the role the restaurant plays in job creation, inventory and equipment acquisition and providing a service to the community, we reward this in public policy by allowing restaurateurs to deduct these costs before their taxes are calculated. As a society we acknowledge that we value this activity. But the meal prepared in the home — using identical inventory, equipment and labour (if only on a different scale) — is neither added to our GDP nor recognized as a deductible cost by our tax system. Not only is this unfair, claim the new thinkers, it undervalues — and therefore diminishes — the importance of domestic work.
The same perspective is now being applied to the environment. We have taken great pride in the triumph of globalization in recent years and loudly trumpet the value of worldwide economic output in the order of $31 trillion annually. Taking the wind out of the sails of this celebration, a group of renowned economists has determined that the cost to generate the services that nature provides (for free) would be $133 trillion. In other words, our planet produces significantly more economic output, by providing water, oxidizing the atmosphere and so on, than every industry, government and individual combined.
This notion of “nature’s capital” is illustrated by the likes of Janet Abramovitz of the Worldwatch Institute, a Washington-basedpublic policy research organization. She has determined that the contribution a honeybee makes to pollinating flowers has up to 100 times more value than the honey it produces for the beekeeper. University of Toronto philosopher Joseph Heath has similarly determined that when government forced drivers to switch from leaded to more expensive unleaded gas, it generated a net benefit for everyone, including those who had to pay more at the pump. That’s because consumers got a major health benefit in the form of cleaner air. The result, notes Heath, is an overall gain in the efficiency of our economy, even though it may look like a loss in financial terms.
Defining progress in terms other than the monetary value of output is now being extended to other sectors. Alternative thinking treats the “savings” of eliminating a suicide prevention line as an added cost of health care, as the distraught end up in an emergency ward rather than on the other end of a telephone. The E. coli water disaster in Walkerton, Ont., and for that matter the security breach that led to Sept. 11, have demonstrated that smaller government does not necessarily lead to “efficiencies” or real cost savings. The price we are now paying for obesity may be seen as offsetting to the economic benefits of frying Big Macs. Childhood asthma is part of the Suzuki Foundation’s calibration of the cost of not implementing Kyoto.
Traditional measures of progress made sense when the roles of private and public sector were more distinct and the interdependencies of economic activity, individual well-being and the ecosystem were less clear. As we have come to appreciate that in complex systems a benefit to one part can mean a cost to another, this tradition no longer serves us well. Not only are we deluding ourselves about the extent to which we are “progressing” as a species, we are failing to take account of the true values our society wishes to pursue.