Earlier this week, Scioto Analysis released an updated Genuine Progress Indicator (GPI) calculation for Ohio. GPI is an alternative measure to GDP that tries to still measure how productive an economy is, while accounting for other things that either provide or take away value like leisure time and air pollution.
We found that GPI is consistently a bit lower than GDP, and over the past five years has grown by less. This seems to explain why despite fairly healthy GDP growth during the pandemic recovery, many people still seem to be struggling in our economy.
At Scioto Analysis, we believe that GPI is a more useful economic indicator than GDP, but this comes with an assumption about what the goal of an economic indicator is. So, I’d like to talk about that assumption, and try to help explain what the goal of measuring our economy even is.
I think about economic indicators like GPI and GDP as having two main goals: they should accurately describe the current state of the economy such that growth of the indicator correlates with increased well-being and they should help policymakers identify areas for improvement.
In other words, a higher score for the indicator should mean society is more well-off and the indicator should help point policymakers trying to improve well-being in the right direction.
Let’s apply this framework to another indicator to understand it better. For example, unemployment. Unemployment does a fairly good job of describing the state of our economy, and usually as unemployment goes down well-being goes up. However, as we’ve talked about before, underemployment is a major issue that goes unnoticed by our typical unemployment figure, U-3 unemployment.
Additionally, U-3 unemployment only counts people who are actively searching for jobs and ignores those who are not even trying. This is good because it means we don’t accidentally count people who aren’t working for reasons such as being a full time student, but it also means one policy option for reducing unemployment would be to discourage people from trying to work.
If we incorporate underemployment into our measure as U-6 unemployment does, then we do a better job of checking both boxes. The indicator is better correlated with well-being, and unemployment/underemployment numbers are fairly straightforward in suggesting policies to improve our society.
A similar situation arises between GPI and GDP. GDP is certainly correlated with well-being, but maybe not as much as we’d think. Additionally, GDP growth could come at the cost of decreased well-being. For example, if public health improves and fewer people end up going to the doctor then there would be less economic activity. Our society might be more well off, but GDP might not rise.
Before we can say that GPI is more correlated with well-being than GDP, we’d need to increase our sample size. Anecdotally, it seems to better represent the state of our economy, but more calculations are certainly needed before we can say for certain.
Where GPI really shines through is that it suggests much more practical policy decisions than GDP does. For example, if a policymaker is debating between two policies, GDP would always prefer the one that would lead to more growth in the formal economy. But, if that growth is only in the short term (GPI takes into account the current value of past investments) and it comes with a large non-market cost (e.g. pollution) then it might actually not be so good for our society.
By looking at a set of conditions that better reflects our understanding of what makes an economy “good,” GPI is often a more useful economic measure than GDP. It is far from perfect as it currently stands, but hopefully more policymakers will begin to ask for GPI calculations so that we can have more informed discussions about our economy.