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A Better Way to Measure Economic Growth

A recent working paper highlights the importance of accounting for environmental protection in measures of GDP.

Last November, I gained new appreciation for clean air. It wasn’t because I went to Tahoe and breathed the clear mountain air, but because we had really, really polluted air for about 2 weeks right after the Camp Fire in Northern California. There’s nothing like the absence of something to make you appreciate it.

Here’s the rub, though. The way we currently measure economic growth, we’re doing a terrible job valuing things like clean air. I recently saw a paper that measures just how big an oversight this is.

Berkeley November 14, 2018 (left) and 3 weeks prior (right). Source: Berkeley Lab

When anyone puts a precise number on “economic growth,” as in, “the US economy expanded at an annual rate of 3.2% in the first quarter,” they’re usually talking about Gross Domestic Product (GDP). Roughly, you can think of a country’s GDP as the sum total of all the goods and services consumed within its borders. This includes investments by firms, who buy things like welding machines, and spending by governments, who buy things like school lunches and paperclips. GDP calculations also subtract the consumption of imported goods, unless they’re matched by exported goods of similar value. The way we currently measure GDP, though, we’re all but ignoring the value of environmental protection.

Counting Environmental Damages

In recent work, Nick Muller, an economist at Carnegie Mellon University, sets out to estimate Gross Environmental Damages, which he then subtracts from GDP to get a measure of economic growth that accounts for the harm from pollution. The paper was presented at a conference that I helped organize, together with Matt Kotchen and Jim Stock, and will be published in a new volume on Environmental and Energy Policy and the Economy. As Muller makes clear in the paper, he’s not by any means the first to think about adjusting GDP to reflect environmental harm, but he puts together data from a bunch of different sources in order to get a 60+ year perspective on how accounting for environmental damages changes how we think about economic growth in the United States.

The figure below captures an important punchline from Muller’s work. It shows average annual growth in regular-old GDP (in red) compared to average annual growth in Muller’s adjusted GDP (blue), which subtracts environmental damages. The two bars on the left represent the 13 years before 1970 and the two bars on the right represent the 46 years after 1970.

This figure is amazing. Focusing first on the red (GDP), we see that growth has slowed since 1970. But, if we account for environmental damages, in blue (GDP – GED), that conclusion is completely reversed – growth actually accelerated after 1970 – and looks almost as fast as for regular-old GDP pre-1970. Think of it this way: with regular-old GDP, an economy is growing if its consuming more stuff. Once we account for environmental damages, though, an economy can grow either by consuming more good stuff or less bad stuff, like pollution.

What happened in 1970? The Environmental Protection Agency was born! As pollution levels dropped, so did the environmental damages, which Muller calculates added more than half a percentage point of annual growth to our economy. Just to emphasize, that’s half a percentage point of extra growth EVERY YEAR for 46 years. Counting reduced environmental damage, Muller estimates the US economy grew not 127% over these 46 years, but 211%.

Put another way, the EPA and associated environmental regulations are likely adding trillions of dollars in value to the US economy, but we’re systematically ignoring this in the way we report, discuss and evaluate economic growth.

I would love to see a similar calculation for India and China. Yes, India’s GDP has been smoking along at average annual growth rates of nearly 7% in the last decade, and China has grown by more than 8% per year over the same time period. In both countries, millions of people have been lifted out of poverty as a result. But, the environmental costs are profound. For example, the World Health Organization estimates that more than 1.6 million people die from air pollution each year in India. Economic growth in these countries could be slower than we think when environmental damages are taken into account.

How to Count Pollution?

Now, making adjustments to something as fundamental as GDP needs to be done carefully, so I hope there’s a lot of digging in to the assumptions Muller makes. Here are a couple to keep in mind.

For one, Muller’s measure of Gross Environmental Damages only includes one form of air pollution. It’s a particularly destructive air pollutant – particulate matter, which the public health literature has tied to heart attacks, aggravated asthma, and decreased lung function. And, it’s the biggest known contributor to pollution damage in the US.

But, presumably, if Muller had accounted for other air pollutants, such as ozone or carbon monoxide, or if he had gone beyond air pollution and tried to put a value on getting lead out of water and household paints, removing PCBs and other environmental hazards, adjusted economic growth could look even slower pre-1970 and faster post-1970. On the other hand, he’s not accounting for increased greenhouse gas emissions.

Also, Muller only considers the mortality damages associated with particulate matter pollution. He does not consider lesser health impacts, like more asthma attacks, or the pure unpleasantness of living with polluted air. Further, putting a monetary value on mortality is a fraught issue. That said, ignoring the damages is basically assuming that there’s no cost, which clearly isn’t right.

Valuable Even When Not Counted

Environmental protection is one form of what economists call a public good – something that benefits many people. Public goods are usually provided by the government. They tend not to be well measured in GDP since we’re only capturing what the government (or firms) have spent providing them, which doesn’t necessarily capture just how much everyone values them. For example, GDP calculations currently consider the pollution abatement equipment that firm’s purchase, and Muller discusses when these purchases will account for all of the environmental damages, but it’s not very likely.

A couple years ago, I read a book, Success and Luck, by Robert Frank, an economist at Cornell. He posed this thought exercise: would you rather drive a brand-new BMW in a country with terrible, pot-hole ridden roads, or a brand-new Toyota Camry in a country with smooth roads? (I may have the exact car models wrong, but you get the idea.) In the same way, ask yourself if you’d rather live in a country with clean air and slightly lower GDP growth, as currently measured, or a country with really polluted air. Having experienced really polluted air – both in the Bay Area last fire season and occasionally in India – the answer for me is as clear as the mountain air.

Keep up with Energy Institute blogs, research, and events on Twitter @energyathaas.

Suggested citation: Wolfram, Catherine. “A Better Way to Measure Economic Growth” Energy Institute Blog, UC Berkeley, June 17, 2019, https://energyathaas.wordpress.com/2019/06/17/a-better-way-to-measure-economic-growth/

Catherine Wolfram View All

Catherine Wolfram is the Cora Jane Flood Professor of Business Administration at the Haas School of Business, University of California, Berkeley. ​During Academic year 2018-19, she will serve as the Acting Associate Dean for Academic Affairs at Berkeley Haas. She is the Program Director of the National Bureau of Economic Research's Environment and Energy Economics Program, Faculty Director of The E2e Project, a research organization focused on energy efficiency and a research affiliate at the Energy Institute at Haas. She is also an affiliated faculty member of in the Agriculture and Resource Economics department and the Energy and Resources Group at Berkeley.

Wolfram has published extensively on the economics of energy markets. Her work has analyzed rural electrification programs in the developing world, energy efficiency programs in the US, the effects of environmental regulation on energy markets and the impact of privatization and restructuring in the US and UK. She is currently implementing several randomized controlled trials to evaluate energy programs in the U.S., Ghana, and Kenya.

She received a PhD in Economics from MIT in 1996 and an AB from Harvard in 1989. Before joining the faculty at UC Berkeley, she was an Assistant Professor of Economics at Harvard.

4 thoughts on “A Better Way to Measure Economic Growth Leave a comment

  1. We tried this for the Philippines (“Environmental Resources, Shocks and National Well-Being”) emphasizing that achieving the country’s ambitious goals for growth in levels of living by 2040 will require radical improvements in the management of the environment, natural resources, natural disasters, and the economy generally. Once these changes have been made, they cease being a source of growth but need to be maintained to avoid becoming a negative growth source.

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