The disconnect between GDP and economic reality
An article in The Denver Post earlier this month provided a perfect example of why, when we try to square the growth of the broader economy with the more lackluster experiences of ordinary people, traditional measures don’t tell you the whole story.
The Post story was about a new report from the U.S. Bureau of Economic Analysis that showed Colorado was among the top six states in the nation with the fastest-growing gross domestic product in 2013. Five of the six were top oil-and gas-producing states, including Colorado, where state GDP grew by 3.8 percent, making our state’s economy the sixth-fastest growing in the country.
The story also noted Colorado ranked 17th for per capita GDP.
That sounds like good news for Colorado. But GDP, which simply measures the total value of all goods and services in an economy, does not measure economic well-being. In other words, if Colorado’s economy is growing, does that necessarily mean that the state’s residents also are better off economically? Looking at things that directly touch people’s lives, like wages and unemployment, the answer is no.
While GDP is a useful measure of economic output, some states have been turning to a different measure of economic well-being – the Genuine Progress Indicator, or GPI. As with GDP, the GPI takes into account total economic output, but it balances that number with a host of other factors that add or subtract from the value, such as average hours worked, the costs of pollution, income inequality, the value of higher education and time spent commuting.
Last year, the Colorado Fiscal Institute for the first time calculated GPI in our state, finding that while GDP tripled in Colorado from 1960 to 2011, GPI trailed far behind.
Here’s a classic case of GDP disconnect: Guess which state in 2005 led the nation in economic growth, increasing its GDP by a whopping 15 percent? The answer is Louisiana, which, also in 2005, suffered the loss of 850,000 housing units, the disruption of 600,000 jobs and the tragic, largely preventable deaths of 1,836 people. So, that which Katrina destroyed, damaged or polluted, people had to rebuild, fix and clean up, and all of those goods and services that came from the aftermath of the hurricane were counted in the state’s GDP.
But it’s pretty doubtful the folks in Louisiana felt better off economically because of the hurricane.
Similarly, Colorado has had to rebuild homes, buildings, roads, bridges and water systems after last year’s devastating floods and fires, and all of that output is counted in our state’s GDP. Were those natural disasters good for our economy? If you only looked at GDP, it would seem so.
It’s probably true that a boom in oil and gas production is driving the bulk of the growth in Colorado’s GDP, but the measure counts all spending the same. If you have to spend more money on environmental clean-up and prevention measures as a result of more drilling, that’s counted right alongside the value of the minerals extracted. If your state suddenly experiences a sharp increase in crime and you have to spend more on law enforcement and incarceration, boom, you’ve increased GDP.
GDP also doesn’t take into account income inequality. Theoretically, if all the financial gains from increased economic growth in Colorado went to one person, GDP would still increase even though the state’s Gini coefficient – a measure of income inequality – would fly off the charts.
One need look no further in Colorado for the disconnect between GDP and the reality of middle-class Coloradans than the state’s long-term unemployment rate. Those without work for 27 weeks or more now represent 37.3 percent of all those unemployed. In the U.S. as a whole, the number of long-term unemployed is roughly twice the rate it has been after the prior seven recessions.
All of this discussion about GDP vs. GPI illustrates an important point: Public policies should be focused squarely on what’s best for the middle class, not just on increasing economic output. High GDP growth in the face of record long-term unemployment does not indicate an increase in economic well-being.
A strong middle class guarantees the sustainability of the economy and ultimately benefits everyone, including the folks reading the financial pages of the newspaper to check up on GDP and the people who deliver those papers to their doorsteps.
