When a country spends more on its prisons or its military, it records a growth in gross domestic product. The same happens when it rebuilds after a natural disaster, when the effects of unmitigated climate change burn through a town or wash it away.
When a grandparent cares for a child in place of someone who is paid, however, it is a loss to GDP. So, too, when a person grows their own vegetables rather than buying them.
A booming property market boosts GDP, yet the impact of this on housing unaffordability and debt are left outside the frame. The measure has no way to account for the depletion of natural ecosystems. It increases when money is earnt, even if that money goes only to the richest few.
Problems with GDP have long been recognised. Even the indicator’s creators stressed it shouldn’t be a measure of human progress. And yet, this broken compass continues to guide the economy’s direction, or lack thereof. Governments continue to be judged on their ability to increase the size of the economy, calculated as a rise in GDP.
A recession is declared if GDP declines for two consecutive quarters, and a cascade of fear-driven reactions follow, with devastating impacts on businesses and people’s lives. GDP is more than a measurement: it carries a narrative that is highly influential.
Social scientists and political economists have, for decades, been proposing and applying alternative measures to GDP and new economic compasses. Bhutan’s gross national happiness (GNH) measure and the OECD’s Better Life Index are examples. Other recent developments have been more local, including the launch of a systems modelling tool by the Mental Wealth Initiative and, in Melbourne, Robert Costanza et al’s sustainable wellbeing index.
A recent report from the Centre for Policy Development compares the various metrics and multidimensional frameworks, lessons and histories. The problem across all such proposals is uptake. This leads to an obvious question: what would be required for these alternative measures to be used effectively in an economy still under the reign of aggregated GDP?
Splitting GDP into “good” and “bad” could be a simple option, a complement to these supplementary metrics and frameworks. It could position them as valuable tools for assessing and enabling the good drivers of growth and minimising the bad.
The genuine progress indicator (GPI) could be a launching point for such a conversation, tallying the negative costs such as that of climate change, forest depletion and crime as bad GDP, and the remaining components, plus unpaid household labour, volunteer work and higher education, as good GDP.
This might include income or costs that improve lives and wellbeing in the short and long term. Bad GDP could aggregate income or costs that worsen lives and wellbeing in the short and long term.
Splitting the indicator could also instigate reflections on possible additions to it. For example, an estimate of what home owners would pay to rent their home is currently added to GDP as “imputed rent”. If unpaid rents can be “imputed”, what’s to stop an estimate of “imputed care” also being included, to value the unpaid work of carers and volunteers?
By adapting and splitting GDP in this way, a government’s success in economic management could be evaluated in terms of how much it has increased the good and reduced the bad. It would also enable better evaluations of policies and greater coherency across economic and social goals.
Such a split would also allow an aggregated measure to be retained for international comparative purposes, while being reported on and used in Australia to make economic decisions with a clear direction.
Ideally a split GDP would be applied in conjunction with other contextual economics approaches. A well-known example of this is Kate Raworth’s “Doughnut economics”, which charts two concentric boundaries, with social foundations inspired by the United Nations Sustainable Development Goals on the inside and Johan Rockström et al’s “planetary boundaries” on the outside. In this model, the aim of good GDP growth and other economic measures, such as inflation rates, becomes to thrive in the “safe and just space” for human activities, which is shown inside the doughnut.
While the nature of all such models, metrics and frameworks is important, equally important is how they are used, by whom, and how they evolve in response to the experiences of citizens. This includes making sure that measures of wellbeing aren’t confused with actual wellbeing.
For a split GDP to be effective, it would need to become a new reporting standard in the media, receiving coverage equal to or greater than that of the international aggregate. It would also need to be used to guide policies and investments at multiple levels of government and across public institutions. The Reserve Bank of Australia, as well as economists and financial and business executives, would need to use these alternatives to guide their decisions. A recession might be redefined as when good GDP declines for two consecutive quarters, to better reflect an undesirable economic state.
What would this look like in practice? Take the four-day work week as an example. Under the existing economic approach, such a proposal would be evaluated solely on whether, and by how much, it would grow or shrink GDP. But a contextual framework that drew a distinction between positive and negative drivers of growth could also consider the potential impacts on health, on children, on resilience and on reducing carbon emissions. The result is a strong argument in support of experimenting with new work–life structures.
Aggregate inflation rates might also follow the lead of a split GDP, separating inflation into different categories, with target inflation rates specific to each category. This could inspire more effective policy responses, depending on the type of inflation that is higher or lower than its deemed target – for example, using directed taxes instead of blanket interest rates. The effectiveness of these responses could be evaluated according to their impact on good and bad GDP, in addition to assessments of people’s experiences of those impacts.
Ultimately, the only way to create an “economy that works for people, not the other way around”, as this government has promised, is to use an economic compass calibrated to people’s wellbeing and not to an abstract measure of economic transactions. To do this, economics must be brought into changing social and environmental contexts. Recalibrating our economic compass to maximise good growth, and minimise the bad, may be a simple yet highly effective place to start.
This article was first published in the print edition of The Saturday Paper on February 3, 2024 as "The good, the bad and the GDP".
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