With lockdowns, political paralysis, physical separation from friends and family we want to hold, it’s…
If there is one point of agreement among prognosticators in 2020, it’s that the second quarter of the year does not look good for the economy. A range of different forecasters including investors, former Federal Reserve Chair Janet Yellen, and the Congressional Budget Office have all projected that the national GDP will contract by over 7% (or 30% annualized) in the second quarter of 2020, over three times larger a drop than the worst quarter of the Great Recession.
The advantage of GDP is that it provides a standardized methodology for economic activity that allows a range of forecasters such as those above to come to similar results. A disadvantage of GDP is that many activities of economic value such as housework, environmental damage, and the ongoing value of consumer goods are not captured in GDP. This is why a group of environmental economists have developed an alternate methodology called the Genuine Progress Indicator (GPI) that tries to better capture the range of economic activity in the economy.
States like Maryland, Washington, and Vermont have passed legislation to require calculation of state GPI. In other states, GPI is calculated by independent organizations (like Ohio, where my firm calculates it), or it is not calculated at all. The federal government has no agency that calculates GPI.
A GPI framework can be valuable during a time like this because the serious social distancing measures taken by states to slow the spread of COVID-19 have suppressed regular market activity which has both encouraged nonmarket activity that is not captured by GDP and has reduced market activity with negative spillovers not captured by GDP. Below are some examples.
The Value of Housework and Parenting. While GDP falls when someone spends more time caring for their child at home or cleaning their house rather than hiring housekeepers or child care services, GPI estimates the value of nonmarket home care by marrying time use data with local average wages to estimate this local value. The extra time that people are spending at home on housekeeping and caring for children or other family members (not to mention cooking at home and hobbies, which are not measured in many GPI calculations) have an economic value that would cushion the blow of a recession that puts a lot of people in their homes for a long period of time.
Environmental Damage. One ongoing criticism of GDP is that the measure counts the value of economic activity that causes environmental damage, then counts the value of cleaning up that damage, leading to what is called “double counting.” GPI corrects for this by subtracting out the cost of environmental damages ranging from the cost of pollution to the loss of natural resources caused by other economic activity. Thus, while GDP would fall when a streams fails to be polluted and thus no one needs to clean that stream, and through reduction of broader pollution activity which is happening with reduced travel and economic activity right now, GPI removes that double counting and cushions that blow.
Value of Consumer Durables. People are likely deferring purchases of new cars, televisions, washing machines, and other household appliances right now but are still using many of these goods they had purchased before, especially those around the house. While GDP only counts the value of a good upon purchase, GPI estimates the value consumers receive during use, more accurately capturing the value of the good to a household if they are deferring purchases to another time.
The Cost of Motor Vehicle Crashes and Commuting. Crashes exact a large cost in terms of human life and commuting exacts a large cost in terms of people’s time. An increase in telecommuting during this time has led to plunges in car crashes and has freed up a lot of time for people. This time cannot be spent doing the range of activities someone may want to do with that time because of social distancing measures, but the time freed up by not having a commute is substantial and can still be used by households on a range of activities.
Overall, alternative frameworks such as GPI show us that many of the things that matter to families trying to budget their resources but not counted by GDP are faring well under social distancing measures. The massive drop in consumption brought on by closing of retail operations likely still has led to a net decrease in GPI, but it is plausible and dare I say likely that if GPI were measured as consistently and widely as GDP, the economic damage wrought by COVID-19 and our response to it would not be quite as dramatic as the story told by GDP. And even GPI does not measure what most economists consider the overriding economic concern of social distancing measures: the reduction in risk of death across the population that can be achieved by slowing the spread of the novel coronavirus.
Rob Moore is a board member for Gross National Happiness USA and the principal for Scioto Analysis, a public policy analysis firm based in Columbus, Ohio.