A Better Measure than GDP

French president Nicolas Sarkozy drew heat last month when he suggested that countries should factor happiness into their statistics for growth. After all, Sarkozy campaigned on promises of wealth creation, and rejigging the data to include France's welfare system, famously generous holidays, and je ne sais quoi seems like an easy way to fulfill a promise he is struggling to keep.

But what if Sarkozy has a point? After all, the figure at which he was taking aim — gross domestic product — was never intended to gauge anything other than how much money was changing hands. Yet we routinely use economic growth as shorthand for how well a country is doing. If we're going to use a metric to track our progress, shouldn't we choose something that measures the things we care about? (See pictures of President Sarkozy in the U.K.)

Policymakers have been warning about confusing economic activity with wellbeing ever since the economist Simon Kuznets devised a way to measure that activity at the end of the Great Depression. Kuznets himself warned that "the welfare of a nation can ... scarcely be inferred from a measure of national income." Seventy-five years on, GDP feels like an idea whose time has finally passed. "GDP measures, in a certain sense, how much stuff we can produce that we can drop on an enemy," Alan Krueger — now a top-ranked economist in the Obama Administration — said at the Organization for Economic Cooperation and Development (OECD) World Forum in 2007. "It's natural in the post–Cold War era that we would turn to other measures of how well our society is doing."

Natural disasters, oil spills, car crashes, riots, crime: anything you pay to fix will boost GDP. Helping a neighbor up the stairs, skipping work to watch your son's Little League game, strolling in the woods won't. GDP tallies the value of an item, but not the environmental cost of its production: pollution, carbon emissions or the depletion of minerals and ecosystems. "It counts napalm and the cost of a nuclear warhead, and armored cars for police who fight riots in our streets," said Robert Kennedy in 1968. "It does not include the beauty of our poetry or the strength of our marriages; the intelligence of our public debate or the integrity of our public officials." (See TIME's special report on the environment.)

GDP doesn't even consistently measure what actually gets done. Did you pay a cleaning company to clean your floors? Congratulations, you've added to this year's numbers. Did you scrub them yourself? Sorry, you haven't. Buying eggs from a factory farm: a GDP boost. Raising chickens in your backyard: nope. Forty years ago, buying a VCR to watch a movie at home would have been a significant contribution. Today, picking up a DVD player adds almost nothing. But doesn't the more modern machine provide the better picture?

An overreliance on GDP is not just misleading, it's harmful. Focusing on economic growth blinds policymakers to other measures of progress. "If a policy is going to hurt GDP then it's difficult for that policy to survive," says Jon Hall, who is overseeing a search for better measures of progress by the OECD.

Joseph Stiglitz, the Nobel Prize-winning economist, argues that a single-minded fixation on growth masked the warning signs of the financial crisis. Temporary profits in the financial industry, increasing debt loads, and the real estate bubble all contributed to a false rise in our economic measurements. (See how Nobel winners spend their prize money.)

Despite its flaws, GDP has proved hard to replace — if only because it provides a single number which nations can use to measure themselves against neighbors and rivals. At an OECD conference in Korea later this month, attendees will try to develop an array of measures that take into account broader definitions of well-being. They have their work cut out for them. While the tiny Himalayan kingdom of Bhutan measures its gross national happiness, no major economy has followed suit.

Starting in 2004, China attempted to introduce a "green GDP," adjusted to reflect the cost of pollution. By the time officials computed the costs of tainted rivers, smoke-filled skies, shattered ecosystems and strip-mined hillsides, their growth figures had dropped so dramatically — in some provinces they fell close to zero — that the proposal was quickly scrapped. By 2007 the effort had collapsed completely.

China's example shows how hard it will be to switch to a more comprehensive measure. But it's also another lesson on how misleading the current figure can be. The numbers that caused so much shock were a better reflection of the country's long-range economic health. It might take time before we find a replacement for GDP. Until then, there's little point in marking our progress against something that's so clearly wrong.

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