Tag Archives: beyond GDP

Interviews with the governors and economists working on the GPI

Lew Daly and I have a new piece on The New Republic examining states implementing the Genuine Progress Indicator. Because the piece is meant for a broad audience, some of the finer points had to be brushed over. This piece explains some of the more wonky questions about GPI.

1. Why not GDP?

A lot of people argue that “GDP is a bad indicator.” It’s not; it’s a very incomplete indicator. Think of baseball statistics. A player’s batting average tells you an important fact about a player—what percentage of the time at bat he gets a hit. That’s important to know. But it’s not the only thing to know. A power hitter may have a low batting average, but he may drive in a lot of runs, so it’s important to consider RBI (Runs Batted In). If a player gets a lot of walks, his batting average won’t reflect that, you need to look at her OBP (On Base Percentage). A player may get a lot of doubles and triples, but her batting average won’t consider those any differently than a single. For that we would need the player’s slugging percentage.

Any coach who judged his players purely on their batting average would be at a competitive disadvantage to a coach who judged players on a wider collection of metrics. GDP is like a batting average, it tells you something very specific and very important, but it fails to capture the full performance of an economy.

2. Okay, so what is the Genuine Progress Indicator?

The Genuine Progress Indicator (GPI) includes 26 indicators to give a broader picture of the sustainability of growth.

When the GDP is compared with the GPI, we discover that much of the “progress” over the past several decades is illusory:

3. Why?

It varies by state. So far, the states that have implemented GPI have discovered that much of their economic growth came at the expense of the other components of GPI. Their workers have longer commutes, they have depleted natural resources, volunteerism and free time have declined and income gains have been unequal. It’s like discovering that a star player has a high batting average, but rarely advances runners and frequently strikes out in key situations. Maryland, for instance, has seen its economic component increase dramatically, while social and environmental indicators have remained flat or declined.

4. What should we do about it?

I spoke with policymakers and economists to get their thoughts on implementing GPI.

Anthony Pollina, who crafted the legislation to develop Vermont’s GPI in 2012 discussed why legislatures need to take interest:

“We make policies the same way every year and we make the same mistakes every year. We cut programs and deny the fact that we are hurting people and undermining their well-being. The GPI can put a halt to that… The GPI is a brand new concept for most people and it’s a brand new way of making policy and looking at policy. We tend to make policy the same way every year and we make the same mistakes, cutting programs and undermining well-being… What the GPI is going to do, for instance looking at the environmental impacts, it’s going to force policymakers to recognize problems with the way they’ve been doing things. A lot of policymakers choose not to recognize problems because when you recognize a problem you have to start to fix things.”

Cylvia Hayes, First Lady of Oregon told me why she decided to push for GPI:

“You can’t effectively govern a state in a two-year biennial budget cycle… As a person in the sustainable development field you have two problems. One is, we’re measuring the wrong thing, and two, you’re measuring things on such a short time horizon that you can’t actually see the full costs and benefits of policy decisions. So we’re integrating the GPI with a ten-year budget plan outcomes metric and then begin to make explicit what our policy and state budget decisions will mean to all three capital accounts (our physical capital, human capital and environmental capital)…. The intent in Oregon is to use the GPI to craft the state budget. Oregon has a long history of working up alternative metrics we had the Oregon Progress Board… but one of the reasons it didn’t move the dial is because it wasn’t attached to state policy decisions and state budget decisions… We worked with a group of graduate students and an ecological economist at Portland State University. We have a rudimentary GPI, now we are hiring a person to oversee the implementation of GPI. The first part of that will be updating the GPI, making it more rigorous.”

Bernie Sanders, Senator (VT) told me why he thinks the federal government needs to look at GPI:

“I think it is enormously important. GDP tells us about the economic growth we see as a nation, but it doesn’t tell us anything about who benefits from that growth… What we have got to do is come up with an approach that tell us how we are doing as a nation in terms of well-being for our people… Who is benefiting from economic growth, that’s the first thing that GPI tells us. Secondly, and more importantly, if someone builds a coal-burning plant and that creates economic growth, GDP measures that, but if that creates global warming, GDP doesn’t measure that… You can create jobs having one guy dig a ditch and another guy fill in that ditch… but what the GPI does is it gives us some guidelines as to what our priorities are as a nation…”

Eric Zencey, author most recently of The Other Road to Serfdom and the Path to Sustainable Democracy and a key architect in Vermont’s GPI program, told me how he convinced Vermont legislators to look into GPI:

“It just makes such good common sense… some of us hung around the capital and talked it up a little bit… We got attention because if you can get out there and say, ‘we oughta measure what matters,’ it’s hard for someone to say we should measure what doesn’t matter… Sound business practices include subtracting costs from benefits… this is just double-entry bookkeeping to the economy as a whole… Another factor in the acceptance of GPI was that the legislature had committed to doing outcome-based budgeting… if you are going to argue that programs have to be evaluated against the outcomes they produce than you have to some larger strategic sense of what you want those outcomes to be. GPI is outcomes at the macro level.”

5. Right, right, but let’s get wonky. How do we take this from an idea and actually implement it?

John Kitzhaber, Governor of Oregon, gave me the nitty-gritty about how to implement the GPI with budget decisions:

“If you invest in at-risk kids you can’t show the ROI [Return on Investment] in two years, but you can sure show it in five or six years. So we became intrigued about how we could not just adopt the GPI but make it an effective driver for policy and budget decisions….The holy grail of GPI advocates is making it more than an academic tool but to integrate it with policy. So first we’re creating a website to inform people of what this is… and we also want to see what elements of GPI we could integrate into our 2015 – 17 budget as pilots. One area where we could get good outcomes is at-risk kids. We need to start small, but what elements could we integrate in 15-17 and then what can add into the 17-19 budget. When I leave office and hand over the 19-21 budget hopefully by that time we’ve institutionalized the trajectory of using these metrics to guide budgetary policy…Most of the interest I’ve seen has not been legislative leadership, but governors and budget-makers, people on ways and means committees. It also has to be an educational initiative, that’s the importance of the website… It’s very important to get governors behind this…

Doug Hoffer, Vermont State Auditor, talked to me about how his office will use GPI for performance audits:

“My office only conducts performance audits (having contracted out for the mandated financial audits) so there may be opportunities to use the GPI as we go forward. The process of performance auditing is defined by GAGAS standards but the choice of audit topics and the definition of objectives allows for some discretion. To the extent we measure program performance against legislative intent, it may be possible (this being Vermont) that GPI values are explicit or inferred. Our only constraint would be the quality and reliability of the data used in our analysis. We are not allowed (nor is it prudent) to make findings and recommendations without sufficient supporting evidence. In any case, I look forward to using GPI metrics as circumstances permit.”

Eric Zencey tells me about standardization,

“GPI 2.0 includes some additional tweaks that cover things that are front and center for other states, some researchers in Hawaii said, ‘this is very East-coast centric’ and Utah said, ‘what about water security and range-land?’ So GPI 2.0 will include some of those things. There is a high level of cooperation among states. I see this GPI summit group like the American Society for Mechanical Engineers which sets standards… There are some elements of GPI that are science-based, other parts, it’s arbitrary, it just matters that we all do it the same.”

6. Okay, but can this get bipartisan support?

John Kitzhaber tells me that Republicans are interested in his state,

“The GPI can get public bipartisan support when it moves from the academic to the practical. We have to show the practical applicability…I’ve very committed to make it happen, we can’t have any false starts…For example the business community and a lot of Republicans in the business community are very interested in early-childhood education. They understand there is a big ROI there. If you can show that by more exclusively connecting the consequences of our budgetary and policy decisions to downstream costs, whether those are depletion of natural capital or driving up the cost of the social safety net becomes more resonant.”

Eric Zencey tells me how GPI can make the government more efficient,

“We had a Republican governor before Peter Shumlin and he brought to a Democratically controlled legislature a proposal [Challenge for Change] that would improve the efficiency of the provision of government services. When I started talking about GPI, at first they pushed it aside; I wrote back and said, ‘everything you hope to accomplish is easier under a GPI.’ An aide wrote back to me and said, ‘you just moved up on the list.’ The aide noted that this could make sure that Challenge for Change did not become a just an axe.”

7. What about the federal government?

Eric Zencey talks about the institutional memory in the federal government:

“There was interest from the BEA and there is institutional memory; they know GDP is a flawed measure… Absent federal action, GPI is going forward like other important initiatives are, a state-by-state level. I don’t think we’ll need all 50 before we get action… when somewhere between 30 and 35 states are compiling and using it.”

Cylvia Hayes tells me about trickle-up leadership:

“I think that, unfortunately we are at a point in this country that the federal governance structure is so flawed that we aren’t going to significant breakthrough leadership on any of the big issues in front of us. One of the reason’s John decided to run again was because of the notion I call trickle-up leadership. We believe that states are the innovation labs right now and that if we can have state and multistate regional collaboration on bold and innovative policies on a whole host of issues from energy and climate to poverty eradication, that will provide an opportunity for trickle-up and trickle-out leadership.”

John Kitzhaber talks about critical mass:

“We have a working relationship between Oregon, Washington, California and British Columbia… If we can work with Washington, which is interested in this and bring California on board, we can get a critical mass…I see it coming out of D.C. but I see D.C. responding to states…”

Bernie Sanders talks about his goal:

“I’m very proud that Vermont and Maryland are moving forward… all of which is terribly important in helping us to gain information about what it takes to make us a happier, healthier society…What Vermont and other states are doing is exactly the right thing… I’ll be introducing legislation soon to bring the GPI to the federal government.”

8. Okay, but we can’t measure happiness! Isn’t this just a pie-in-the-sky idea?

Cylvia Hayes explains why Bhutan has been unfairly characterized:

“When John and I went to Bhutan the newspaper here was critical of it, but what was interesting was the positive response defending the concept… there is a hunger for it, but the happiness frame was unfortunate because it tends to get trivialized. But when you look more deeply at what Bhutan is doing, it’s not trivial at all. They are attempting to run policy and infrastructure decisions through a triple-bottom line, much more comprehensive set of metrics that gives a much fuller account of the what the effects of the policy will be. That, a tool like that, should be attractive regardless of your party affiliation if you are interested in making wise public decisions with your public dollars.”

Eric Zencey talks about why GPI is serious,

“They try to associate GPI with something it isn’t then attack the thing it isn’t. GPI isn’t that flakey happiness… we’re not measuring happiness. They are both alternative indicators and they both have arguments for them, but this is not the gross happiness indicator. There have been attempts to throw smoke and throw sand.”

States are ditching GDP

Co-Authored with Lew Daly

In Douglas Adams’s The Hitchhiker’s Guide to the Galaxy, Deep Thought informs Loonquawl that the meaning of life is 42. Loonquawl exclaims, “Is that all you’ve got to show for seven and a half million years’ work?” Deep Thought replies, “I think the problem, to be quite honest with you, is that you’ve never actually known what the question is.” In much the same way, Americans talk about GDP growth without ever wondering what GDP actually measures. We all know the answer, but most of us don’t know the question.

GDP, or Gross Domestic Product, measures the market value of all goods produced within a country. It was first developed in the heart of the Great Depression, a context of dramatic declines in economic activity and scarce information about what was happening. When the architect of GDP, Simon Kuznets (who later won the Nobel Prize for this work), presented his first report to Congress, he warned against expecting GDP to answer the most important questions for a country: “The welfare of a nation can scarcely be inferred from a measurement of national income as defined by the GDP.” Later, he wrote in The New Republic, “goals for ‘more’ growth should specify of what and for what.” To quote Yogi Berra, “If you don’t know where you’re going, you might not get there.” Kuznets’s concerns were not heeded, and GDP growth increasingly became the primary standard for measuring a society’s economic progress and standard of living.

In the wake of the Great Recession, Americans have become cognizant of the fact that GDP bears little connection to their well-being, and many states are working together to implementalternative measures that more accurately reflect the progress of human well-being. One such measure is theGenuine Progress Indicator (GPI), which assesses 26 variables related to economic, social, and environmental progress. Economic indicators include inequality and the cost of unemployment. Environmental indicators include the cost of water pollution, air pollution, climate change, wetlands depletion, forest cover change, and non-renewable energy resources. Social indicators include the value of housework, higher education and volunteer work as well as the cost of commuting and crime.

Two states, Maryland and Vermont, have officially adopted GPI (Maryland through administrative action by Governor Martin O’Malley; Vermont through a bill passed by its legislature). Oregon and Washington are also moving toward adoption of the GPI in some form. At a recent national summit for “GPI in the States,” organized by the policy think tank Demos, delegations from 20 states, including researchers, advocates, and public officials, met in Baltimore todiscuss implementing GPI in their states. O’Malley went to the heart of the issue in a powerfulkeynote address:

 

To make genuine progress, we must be willing to adopt a more holistic definition of progress itself.  To seek an honest assessment of whether our graphs are moving in the right direction – or in the wrong one. A system without feedback eventually fails. And our country, our states, our cities – they are all systems.  Life creates the conditions that are conducive to life. Period. Full stop. Perhaps, there is no better description of the intent of GPI. Its purpose is to further the conditions that are conducive to life.

 

In a recent interview, reflecting on Maryland’s leadership with the GPI, O’Malley noted that, “In drafting a Constitution to form ‘a more perfect union,’ our founding fathers identified justice, tranquility, security, general welfare, and the blessings of liberty as necessary components for achieving that goal.” O’Malley noted the irony that, “more than 200 years later we do not formally take stock of any of these in evaluating our nation’s prosperity.” Already, GPI is influencing the development of new green growth and clean energy programs in Maryland. The state has established new goals that affect GPI but not Gross State Product (GSP, a measure of state economic output), such as reducing infant mortality, cutting greenhouse gas emissions by 25 percent by 2020 and planting more cover crops (crops that improve soil fertility).

Policy development using GPI is in its relative infancy. As with any new measurement framework, there are implementation challenges. The Gund Institute of the University of Vermont recently released an initial set of estimates under the state’s new GPI law, and many legislators from both political parties are interested in applying the new metrics to policy. Anthony Pollina, who crafted the legislation to develop Vermont’s GPI in 2012, told us, “We make policies the same way every year and we make the same mistakes every year. We cut programs and deny the fact that we are hurting people and undermining their well-being. The GPI can put a halt to that.”

Under Governor John Kitzhaber, honored by Governing Magazine as a “public official of the year” for his bipartisan achievements, Oregon is developing a ten-year state budget plan which will be integrated with GPI. He told us that many of the Republican concerns in his state aren’t adequately measured by GSP, citing growing support for early childhood education as an example. “GPI can get public bipartisan support when it moves from the academic to the practical,” he told us. “We have to show the practical applicability.” With GPI and related approaches, some public costs can be better understood as smart investments. “By more exclusively connecting the consequences of our budgetary and policy decisions to downstream costs, it becomes more resonant,” Kitzhaber argued.

Alternative measures of progress are getting significant traction internationally. The Human Development Index (HDI), which measures life expectancy, literacy and Gross National Income (GNI) per person, is now widely used and increasingly influential in policy debates, particularly in developing countries. More recently, the United Nations introduced the Inclusive Wealth Index (IWI) in 2012, which measures human capital and environmental capital as well as physical capital to determine the sustainability of growth.

But the U.S. government has lagged behind states and the international community. Eric Zencey, who was influential in bringing GPI to Vermont, argues that if states begin to use GPI it will put pressure on the federal government to do the same. “GPI is proceeding the way other important movements have, on a state-by-state level,” he said. “We don’t need all 50 states to adopt it before it becomes clear this needs to be done at the federal level.” Senator Bernie Sanders believes that federal action along these lines is critical for our future and said that state-level initiatives are “enormously important,” in prodding the federal government into action.

There are signs that the government is moving in that direction, notably the HHS-funded panel investigating measures of well-being and a recent report by the Bureau of Economic Analysis that examined the limits of GDP and suggested a review of the national accounting system. The National Research Council has investigated methods for including environmental values in the national accounting system.

In 1968, Robert Kennedy said that GNP “measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything, in short, except that which makes life worthwhile. And it can tell us everything about America except why we are proud that we are Americans.” We ignored those words then, and instead rushed headlong toward an unsustainable future. Only now, nearly half a century later, are we beginning to heed them.

Originally published on The New Republic.

 

What would an international carbon tax look like?

There are two market ways to reduce C02 emissions (the other options, like “command and control” would involve more overt government intervention). The first is cap and trade. The U.S. tried, and failed to pass a cap and trade bill in 2009 (Waxman-Markey). In a cap and trade system, the government puts a “cap” on the amount of carbon that can be emitted and allows companies to trade permits that allow them to emit, say a ton of CO2, on a market. The idea is that companies that can cheaply reduce emissions will do so, and then sell their permits to those who can’t do so cheaply. It also allows the government to set a hard limit on emissions.

The second option is a “carbon tax,” where the government sets a price on carbon emissions and taxes companies based on how much they emit. The advantage with this system is simplicity.

A new column by John Hassler and Per Krusell adds new insights to the debate. The authors use current GDP, the expected economic costs of carbon dioxide and an estimate of how long carbon dioxide lingers in the atmosphere to come up with an optimal international carbon tax and find that the tax would be less than the tax rate currently imposed in Sweden ($150/T USD).

The chart shows what the carbon tax would be in both USD and Euros based on what is called the “discount rate.” Discounting is an economics concept that takes into account the fact that future generations will be wealthier than we are. If they are far wealthier (high discount rate) it makes sense to spend less mitigating climate change (so the tax is low). If they will be just about as wealthy (low discount rate) then the tax should be very high (the far left of the chart). Later in the column the authors use a 1% discount rate, so I’ve noted it.

They argue that a carbon tax is preferable because carbon trading markets are prone to wild fluctuations when new technologies are developed. The E.U. market crashed last year, partially because of new technological developments. International disparities between mitigation costs would make an international market even more difficult.

The column takes up another question as well: how much do rich countries owe for the massive emissions they’ve used to “get rich quick”? Fossil fuels cause global warming, which will disproportionately hurt poor countries. In one of the cruelest ironies known to man, the U.S. gets to burn cheap fossil fuels, and the Philippines gets hit by typhoon Haiyan. It’s like if you got to eat Twinkies all day and your neighbor got fat. Because of this, the authors argue that the global carbon debt is a whopping 40% of annual world GDP. It’s unlikely, however, that developing countries will ever see the money.

I would add that the insatiable demand for resources and growth is partially driven by our reliance on an increasingly out of date and incredibly flawed metric: GDP. If we had already adopted an alternative measure, we would have known long ago how profoundly unsustainable our growth was. Part of mitigating climate change is adopting measures that accurately show how sustainable current patterns of development are. Without such measures we trod forward, foresaking our future for the illusion of progress. Yogi Berra had it right, “If you don’t know where you are going, you’ll end up somewhere else.”