[Senate Hearing 110-1141]
[From the U.S. Government Publishing Office]





                                                       S. Hrg. 110-1141

  RETHINKING THE GROSS DOMESTIC PRODUCT AS A MEASUREMENT OF NATIONAL 
                                STRENGTH

=======================================================================

                                HEARING

                               before the

        SUBCOMMITTEE ON INTERSTATE COMMERCE, TRADE, AND TOURISM

                                 OF THE

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 12, 2008

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation











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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                   DANIEL K. INOUYE, Hawaii, Chairman
JOHN D. ROCKEFELLER IV, West         TED STEVENS, Alaska, Vice Chairman
    Virginia                         JOHN McCAIN, Arizona
JOHN F. KERRY, Massachusetts         KAY BAILEY HUTCHISON, Texas
BYRON L. DORGAN, North Dakota        OLYMPIA J. SNOWE, Maine
BARBARA BOXER, California            GORDON H. SMITH, Oregon
BILL NELSON, Florida                 JOHN ENSIGN, Nevada
MARIA CANTWELL, Washington           JOHN E. SUNUNU, New Hampshire
FRANK R. LAUTENBERG, New Jersey      JIM DeMINT, South Carolina
MARK PRYOR, Arkansas                 DAVID VITTER, Louisiana
THOMAS R. CARPER, Delaware           JOHN THUNE, South Dakota
CLAIRE McCASKILL, Missouri           ROGER F. WICKER, Mississippi
AMY KLOBUCHAR, Minnesota
   Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
Lila Harper Helms, Democratic Deputy Staff Director and Policy Director
   Christine D. Kurth, Republican Staff Director and General Counsel
                  Paul Nagle, Republican Chief Counsel
                                 ------                                

        SUBCOMMITTEE ON INTERSTATE COMMERCE, TRADE, AND TOURISM

BYRON L. DORGAN, North Dakota,       JIM DeMINT, South Carolina, 
    Chairman                             Ranking
JOHN D. ROCKEFELLER IV, West         JOHN McCAIN, Arizona
    Virginia                         OLYMPIA J. SNOWE, Maine
JOHN F. KERRY, Massachusetts         GORDON H. SMITH, Oregon
BARBARA BOXER, California            JOHN ENSIGN, Nevada
MARIA CANTWELL, Washington           JOHN E. SUNUNU, New Hampshire
MARK PRYOR, Arkansas
CLAIRE McCASKILL, Missouri










                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on March 12, 2008...................................     1
Statement of Senator Dorgan......................................     1

                               Witnesses

Abraham, Katharine G., Professor of Survey Methodology, 
  University of Maryland.........................................    25
    Prepared statement...........................................    26
Davis, Karen, President, The Commonwealth Fund...................    11
    Prepared statement...........................................    13
Frank, Dr. Robert H., Henrietta Johnson Louis Professor of 
  Management and Professor of Economics, Johnson Graduate School 
  of Management, Cornell University..............................     8
    Prepared statement...........................................     9
Landefeld, Dr. J. Steven, Director, Bureau of Economic Analysis, 
  U.S. Department of Commerce....................................     3
    Prepared statement...........................................     5
Rowe, Jonathan, Co-Director, West Marin Commons..................    30
    Prepared statement...........................................    31

                                Appendix

Article, dated October 1995, from The Atlantic Monthly entitled 
  ``If the GDP is Up, Why is America Down?''.....................    47
Remarks of Robert F. Kennedy at the University of Kansas, March 
  18, 1968.......................................................    59
    Article, dated March 9, 2008, from The New York Times 
      entitled ``Income and Happiness: An Imperfect Link''.......    63
    Article, dated March 10, 2008, from The Los Angeles Times 
      entitled ``Our three-decade recession''....................    65

 
                     RETHINKING THE GROSS DOMESTIC
                      PRODUCT AS A MEASUREMENT OF
                           NATIONAL STRENGTH

                              ----------                              


                       WEDNESDAY, MARCH 12, 2008

                               U.S. Senate,
      Subcommittee Interstate Commerce, Trade, and 
                                           Tourism,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 1:30 p.m. in 
room 253, Russell Senate Office Building, Hon. Byron L. Dorgan, 
Chairman of the Subcommittee, presiding.

          OPENING STATEMENT OF HON. BYRON L. DORGAN, 
                 U.S. SENATOR FROM NORTH DAKOTA

    Senator Dorgan. We're going to begin the hearing today. 
This is a hearing of the Senate Commerce Committee, and we are 
here today to talk about an interesting issue. So many hearings 
deal with the immediate and urgent, this issue is an inquiry 
into something that is interesting to me especially.
    But it relates to measurements of our country's economic 
strength, our country's economic well-being, our country's 
living standards, and we're here to discuss the performance of 
something called the ``Gross Domestic Product'' as a measure of 
our nation's economic strength.
    Forty years ago, Robert Kennedy gave a famous speech. And I 
remembered some of it because I worked for Robert Kennedy, who 
served in this U.S. Senate. I worked for his 1968 Presidential 
Campaign. I was a supporter of his. And he described the 
conundrum of measurements in a statement he made. I'm going to 
read a part of that, because it represents my interest in this 
issue.
    This was 1968, March 18. It's interesting, at that point 
our Gross Domestic Product--``Gross National Product,'' as he 
called it back then--was $800 billion a year. Now, of course, I 
believe it's $13 trillion or $14 trillion. Here's what he said, 
and I'm quoting Robert F. Kennedy:
    ``Our Gross National Product now is over $800 billion a 
year, but that Gross National Product--if we judge the United 
States of America by that--that Gross National Product counts 
air pollution and cigarette advertising, and ambulances to 
clear our highways of carnage. It counts specials locks for our 
doors and the jails for the people who break them. It counts 
the destruction of the redwood and the loss of our natural 
wonder in chaotic sprawl. It counts napalm and it counts 
nuclear warheads and armored cars for the police to fight the 
riots in our cities. It counts Whitman's rifle and Speck's 
knife, and the television programs which glorify violence in 
order to sell toys to our children.
    Yet, the Gross National Product does not allow for the 
health of our children, the quality of their education, or the 
joy of their play. 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. It 
measures neither our wit nor our courage; neither, our wisdom 
or our learning; neither, our compassion nor our devotion to 
country.
    It measures everything, in short, except much of that which 
makes life worthwhile. It can tell us everything about America, 
except why we are proud that we are Americans.''
    I thought it very interesting in 1968, when I heard Robert 
Kennedy say this, and I've thought about this a long while, and 
I'm pleased that we're able to hold a hearing on the public 
record today on this subject. What is it that measures the 
well-being of our country?
    There's been ample talk in our country over the years of 
perhaps revising the Gross Domestic Product, which is a 
derivation of what used to be the Gross National Product, and 
developing some alternative measures of well-being.
    And I might just observe that the GDP was created by a man 
named Simon Kuznets, who, when he created it, argued that this 
should not be used as a measure of living standards or well-
being. It is pretty typical here in the U.S. Congress, and it's 
certainly typical in the press, for there to be a story. They 
describe GDP as if it were the single piece of compelling 
evidence about how well we're doing in this country.
    Of course, that is not the case. It is one measurement, and 
it measures economic activity and growth in only a certain 
area. One of our witnesses, Jonathan Rowe, wrote in a 1995 
piece on this subject that ``GDP is simply a gross measure of 
market activity, of money changing hands. It makes no 
distinction whatsoever between the desirable and the 
undesirable, or the costs and the gain. On top of that, it 
looks only at the portion of reality that economists choose to 
acknowledge--the part involved in monetary transactions.''
    So there's much to talk about with respect to measurements 
and what it is that represents a valid measurement of well-
being in this country--economic strength, and other issues that 
make life a wonderful life in the United States. So our 
witnesses today will lay the groundwork for the Congress to 
have a dialogue about the GDP.
    It's clear from the current economic circumstances in our 
country that we've not been accurately reflecting either the 
wealth or the stability of our economy. We measure, and we 
measure a lot, and we certainly report that measurement, but it 
is not clear to me that it reflects the measurement of the kind 
of stability or progress that most people are looking to have 
measured.
    We're going to hear from two panels of witnesses. We have 
Dr. Steven Landefeld, Director of the Bureau of Economic 
Analysis of the Commerce Department. And then, on the second 
panel, Dr. Robert Frank, the Professor of Management and 
Economics at the Johnson Graduate School of Management at 
Cornell University; Dr. Karen Davis, the President of the 
Commonwealth Fund; Dr. Katherine Abraham, Professor of Joint 
Program in Survey Methodology at the University of Maryland; 
and Mr. Jonathan Rowe, who I mentioned earlier, Co-Director of 
West Marin Commons.
    I thank all of them for being here. I would like to ask Dr. 
Steven Landefeld, would you be courteous enough to allow me to 
bring you up, but also bring the other witnesses up at the same 
time? I will certainly hear you first, but if you don't mind, I 
would like to bring the panel up together because I think what 
we'll want to do is have some exchange between the panel and 
you.
    So if you would come forward and sit on the end here, I'm 
going to call on you first. And the other panelists, if you 
would also come forward and just take your seat at the table, 
I'd appreciate that very much.
    Dr. Landefeld, am I pronouncing your name correctly? Is the 
``E'' silent?
    Dr. Landefeld. Close enough, sir.
    Senator Dorgan. OK.
    Dr. Landefeld. Landefeld.
    Senator Dorgan. What is it?
    Dr. Landefeld. Landefeld.
    Senator Dorgan. Landefeld. Dr. Landefeld, you are the 
Professor of Management and Economics at the Johnson Graduate--
excuse me. Dr. Steven Landefeld, you are the Director of Bureau 
of Economic Analysis of the Commerce Department, and so I'm 
assuming that much of your life is tied up in these measurement 
issues, and that's why we've asked you to come today to 
testify. And we appreciate you doing that. So why don't you 
proceed?
    The statements that will be issued by all of the witnesses 
will be made a permanent part of the record. The entire 
statement will be a part of the record. And you may summarize 
your statement. Dr. Landefeld?

             STATEMENT OF DR. J. STEVEN LANDEFELD,

             DIRECTOR, BUREAU OF ECONOMIC ANALYSIS,

                  U.S. DEPARTMENT OF COMMERCE

    Dr. Landefeld. Thank you, Mr. Chairman. It's a pleasure to 
be here, and I appreciate the opportunity to talk about this 
important topic.
    Let me start with a little background. The United States 
possesses one of the best-developed set of Gross Domestic 
Product, what used to be GNP, accounts in the world.
    These accounts, which are collectively known as the 
National Income and Product Accounts, have been regularly 
updated over the years, and have served researchers, the 
business community, and policymakers alike to measure: long-run 
growth and productivity, standards of living, short-term 
business cycles, decomposition of growth into inflation and 
real output, changes in the composition of output and 
industrial performance, changes in the size and composition of 
National Income, and the impact of changes in imports and 
exports on growth.
    However, as you've noted, since their inception in the 
1930s, issues have been raised about the scope and structure of 
these accounts. As you pointed out, Simon Kuznets, who was a 
Nobel medalist and one of the primary architects of the U.S. 
accounts, recognized the limitations of focusing on just those 
market transactions and excluding household production and a 
broad range of other nonmarket activities and assets that have 
productive value or yield satisfaction.
    Further, the need to better understand the sources of 
economic growth in the postwar era led to the development--much 
of it by academic researchers, rather than the government--of 
various supplemental series, such as investments in human 
capital and the value of the natural resources.
    More recently, a report by Secretary Gutierrez's Advisory 
Committee on Measuring Innovation called for expanding the 
scope of the accounts to cover business investments in Research 
and Development and other intangible assets.
    A recent volume, A New Architecture for the U.S. National 
Accounts, edited by Professor Dale Jorgenson of Harvard, 
William Nordhaus of Yale, and me, reviewed these issues and 
found that the existing accounts have served the Nation well, 
but there was a need for further expansion and integration of 
the accounts which consisted of:
    (A) an integration of the accounts that would include a 
complete production account to improve the analysis of growth 
and productivity; (B) an expansion of the accounts to cover 
goods and services that are important to the analysis of growth 
and productivity, but are not fully captured in the existing 
accounts, such as mineral resources, human capital, and R&D 
and (C) an expansion of the accounts to nonmarket goods and 
services that are important to the economy, but also have large 
economic welfare implications, such as environmental and health 
accounts.
    Expansion to these areas, however, will not be easy nor 
without cost. Past efforts by outside researchers have 
foundered on the inevitable problems of subjectivity and 
uncertainty inherent in measuring health, happiness, and the 
environment. It was feared that the inclusion of such uncertain 
and subjective values in GDP would seriously diminish the 
usefulness of the national accounts to financial markets, the 
Federal Reserve Board, the Treasury, and Congress in measuring 
and managing the market economy.
    Therefore, several National Academy of Sciences studies--
including the Beyond the Market Study chaired by Professor 
Abraham, who is appearing next, and the Natures Numbers 
studies, chaired by Professor Nordhaus, who is of note in 
producing the original study by Tobin and Nordhaus on net 
economic welfare that actually was the grandfather of a lot of 
the research that has gone on in this area--those studies, as 
well as the International Guidelines for Compiling GDP, which 
are jointly published by the United Nations, the IMF, the OECD, 
and the EU, all concluded that such an expansion of the GDP 
accounts should take place in supplemental or satellite 
accounts that extend the scope of the accounts without reducing 
the usefulness of the core GDP accounts, in other words, a set 
of one-off accounts.
    They also conclude that such an expansion should focus on 
the economic aspects of nonmarket and near-market activities, 
things like the economy's use of energy resources or the impact 
of investments in healthcare and productivity and economic 
growth, and not attempt to measure the full welfare effect of 
such interactions.
    Such an expansion would require interdisciplinary research 
amongst economists and such subject area experts as 
epidemiologists, geologists, and engineers, requiring 
cooperation across government agencies and with private sector 
experts. This kind of collaboration is going to especially be 
important when we look at things, like what I understand Dr. 
Davis is going to recommend in terms of a comprehensive 
accounting for healthcare.
    And indeed, some of what we're doing on a set of 
preliminary satellite accounts on health is being done with a 
group at Harvard, which includes epidemiologists and doctors 
and the like.
    This expansion would also require, the design, development, 
and collection of data from new surveys. And even in areas such 
as income distribution, which Professor Frank will talk about, 
where we have data, developing a contemporaneous measure which 
maps into the national accounts will require much more timely 
and detailed information than we currently have available.
    In summary, in an environment of constrained resources, it 
is critical that any such expansion not occur at the expense of 
urgently needed funds to maintain, update, and improve the 
existing GDP accounts.
    I thank you for the opportunity. And after we finish, I'd 
be happy to answer any questions.
    [The prepared statement of Dr. Landefeld follows:]

  Prepared Statement of Dr. J. Steven Landefeld, Director, Bureau of 
             Economic Analysis, U.S. Department of Commerce
    Mr. Chairman, distinguished members of the Committee, it is a 
pleasure to be here and I appreciate the invitation to testify today at 
your hearing on ``Rethinking GDP.''
    The United States possesses some of the best-developed sets of 
Gross Domestic Product (GDP) and related accounts in the world. These 
accounts, which are collectively known as the National Income and 
Product Accounts, have been regularly updated over the years and have 
served researchers, the business community, and policymakers alike to 
measure:

   long-run growth, productivity, and standards of living;

   short-term business cycles;

   the decomposition of growth into inflation and real output;

   changes in the composition of output and industrial 
        performance;

   the adequacy of saving and investment; and

   changes in the size and composition of exports and imports 
        and other components of GDP and National Income.

    However, since their inception in the 1930s, issues have been 
raised about the scope and structure of these accounts. Simon Kuznets, 
Nobel medalist and one of the primary architects of the U.S. accounts, 
recognized the limitations of focusing on market activities and 
excluding household production and a broad range of other nonmarket 
activities and assets that have productive value or yield satisfaction. 
Further, the need to better understand the sources of economic growth 
in the postwar era led to the development--much of it by academic 
researchers--of various supplemental series, such as investments in 
human capital and the value of natural resources. More recently, a 
report by Secretary Gutierrez' Advisory Committee on Measuring 
Innovation in the 21st Century Economy called for expanding the scope 
of the accounts to cover business investments in Research and 
Development (R&D) and other intangible assets.
    A recent volume, A New Architecture for the U.S. National Accounts, 
edited by Professor Dale Jorgenson of Harvard, William Nordhaus of 
Yale, and me, reviewed these issues in the context of an assessment of 
the GDP accounts and found that the existing accounts have served the 
Nation well through incremental updates and expansions, and that there 
was no need for a new paradigm. What was called for was a further 
expansion and integration of the accounts produced by the Bureau of 
Economic Analysis (BEA), Bureau of Labor Statistics (BLS), and Federal 
Reserve Board (FRB) in coordination with the U.S. Census Bureau 
(Census), a primary supplier of source data.
    The integration and expansion would consist of: (a) an integration 
of the accounts to include a complete production account to improve the 
analysis of growth and productivity; (b) an expansion of the accounts 
to cover goods and services that are important to the analysis of 
growth and productivity, but not fully captured in the existing 
accounts, such as mineral resources, human capital, and R&D and (c) an 
expansion of the accounts to nonmarket goods and services that are 
important to the economy, but also have large economic welfare 
implications--such as environmental and health accounts.
    Expansion to these areas, however, will not be easy nor without 
cost. Past efforts by outside researchers have foundered on the 
inevitable problems of subjectivity and uncertainty inherent in 
measuring health, happiness, and the environment. It was feared that 
the inclusion of such uncertain and subjective values in GDP would 
seriously diminish the essential role of the national accounts to 
financial markets, the Federal Reserve Board, the Treasury, and the 
Congress in measuring and managing the market economy.
    Therefore, several National Academy of Sciences studies, and the 
United Nations System of National Accounts guidelines for compiling GDP 
(see References), as well as the New Architecture volume, have all 
concluded that such an expansion of the GDP accounts should take place 
in supplemental, or satellite, accounts that extend the scope of the 
accounts without reducing the usefulness of the core GDP accounts. They 
also conclude that such an expansion should focus on economic aspects 
of non-market and near-market activities--the economy's use of energy 
resources or the impact of investments in health care costs on 
productivity and growth--and not attempt to measure the full welfare 
effect of such interactions.
    Finally, such an expansion of work would require interdisciplinary 
research among economists and such subject area experts as 
epidemiologists, physicians, geologists, and engineers, requiring 
cooperation across government agencies and with private sector experts. 
It would also require the design, development, and collection of data 
from new surveys. In an environment of constrained resources, it is 
critical that any such expansion not occur at the expense of urgently 
needed funds to maintain, update, and improve the existing GDP 
accounts.
    Thank you. I will be pleased to answer any questions you may have.
References:
    System of National Accounts 1993, by Commission of the European 
Communities, International Monetary Fund, Organization for Economic Co-
operation and Development, United Nations and World Bank, United 
Nations, 1993.
    ``Integrated Economic and Environmental Accounts,'' Carol S. 
Carson, J. Steven Landefeld, et al, Survey of Current Business, April, 
1994.
    Natures Numbers: Expanding the National Economic Accounts to 
Include the Environment, edited by William D. Nordhaus and Edward C. 
Kokkelenberg, National Academy Press, Washington, D.C., 1999.
    ``Accounting for Nonmarket Household Production Within A National 
Accounts Framework,'' J. Steven Landefeld and Stephanie H. McCulla, 
Review of Income and Wealth, September 2000.
    Beyond the Market: Designing Nonmarket Accounts for the United 
States, edited by Katherine G. Abraham and Christopher Mackie, National 
Academies Press, 2005.
    A New Architecture for the U.S. National Accounts, edited by Dale 
W. Jorgenson, J. Steven Landefeld, and William D. Nordhaus, National 
Bureau of Economic Research, The University of Chicago Press, 2006.
    Innovation Measurement, Tracking the State of Innovation in the 
American Economy, a Report to the Secretary of Commerce by The Advisory 
Committee on Measuring Innovation in the 21st Century Economy, January 
2008.
    ``National Time Accounting and National Economic Accounting,'' by 
J. Steven Landefeld in National Time Accounting: The Currency of Life, 
edited by Alan B. Krueger, Daniel Kahneman, David Schkade, Norbert 
Schwarz, and Arthur A. Stone, forthcoming.

    Senator Dorgan. Dr. Landefeld, thank you very much. How 
often have you come to Capitol Hill to testify on the subject 
of what the GDP means?
    Dr. Landefeld. Not very often, sir. It's an interesting 
topic, often dealt with by the press and the academics, but I 
haven't been up here before, sir.
    Senator Dorgan. This is your first time?
    Dr. Landefeld. Yes, sir. Other than the Appropriations 
hearings.
    Senator Dorgan. Right. What do you think the GDP means? 
What does it tell your family, for example? Your family knows 
where you live, correct? And so, they read in the paper that 
the Labor Department releases information about GDP, what 
should your family think of that? What's that mean to them? 
What do you tell them it means to them?
    Dr. Landefeld. I would tell them that it's one of many 
measures of the economy's performance. The Bureau doesn't 
represent--or the Federal Government, I don't think, represents 
GDP as a single measure of welfare (although I do have an 
economist in the family, so he may understand). And I, myself, 
personally have spent a lot of research time trying to expand 
these sets of accounts.
    So I entirely agree with the eloquent comments that you 
read of Senator Kennedy, that there is a lot more to be 
measured out there. And the Federal Government does and needs 
to continue to measure other things. This is just one 
scorekeeping device that focuses on market transactions.
    Senator Dorgan. Yes. This hearing is not to denigrate the 
GDP; it is what it is. It measures what it measures. But, for 
example, Secretary Gutierrez said, I believe, in March 2007, 
that we had a growth rate of 2.5 percent in the previous 
quarter. And, therefore, we've got good growth in the economy.
    It might well have been that you could have a growth rate 
of 3 percent, or 2.5 percent, and have had used or depleted 
more than that in the resources of the country, which would 
mean you have a net 0 contribution to the economy and to the 
general well-being, but we would report, at least based on this 
measurement, that we're making progress and growing.
    Could that be the case with GDP?
    Dr. Landefeld. Absolutely. And that was something that 
Simon Kuznets pointed out in the original sets of accounts; 
they actually had a depletion allowance originally in the 
accounts, but they felt it wasn't well-measured. And so, what 
we have done more recently at the BEA, we developed some 
integrated environmental economic account, which made exactly 
that point.
    Senator Dorgan. What I'm going to do is I'm going to ask 
the other contributors to offer their testimony, and then I 
want to ask you a series of additional questions if you're able 
to stay. And you're very courteous to allow me to do that. It 
is typical of the government witness to be alone on a panel, 
but I thank you for your willingness to sit at the table and 
allow us to have the back-and-forth discussion.
    Dr. Landefeld. Thanks for that.
    Senator Dorgan. Dr. Frank, you are the Professor of 
Management and Economics at the Johnson Graduate School of 
Management at Cornell University, and we appreciate your being 
here today.
    Dr. Frank. My pleasure.
    Senator Dorgan. You may proceed.

      STATEMENT OF DR. ROBERT H. FRANK, HENRIETTA JOHNSON

          LOUIS PROFESSOR OF MANAGEMENT AND PROFESSOR

 OF ECONOMICS, JOHNSON GRADUATE SCHOOL OF MANAGEMENT, CORNELL 
                           UNIVERSITY

    Dr. Frank. I think it's a great thing that you're holding 
these hearings. It's very important what we measure and use as 
a standard of well-being. We're accustomed to recalling Ronald 
Reagan's question, from 1980, ``Are you better off now than you 
were 4 years ago?''
    We need a metric by which to answer a question like that, 
and typically the metric we use is the one that's handiest, and 
that's GDP or GDP-per-capita, and it does suffer from all the 
myriad shortcomings that have been pointed out. It's hard, 
because we don't have a salient measure to compete with, then 
we tend not to direct our efforts in areas that will produce 
the most good for the country. So it's a very good thing that 
we're inquiring into this.
    The standard measure suffers from a whole variety of 
technical problems, the fact that we don't adjust properly for 
quality changes, the fact that various inflation adjustments 
don't really capture adequately the true increase of the cost 
of living. Those have been debated at great length. I think 
they're mostly minor problems.
    The kinds of problems that you touched on in your 
recitation of Senator Kennedy's passage I think are much, much 
bigger, the things we leave out or wrongly include as measures 
of progress in GDP. There's another problem, though, that 
hasn't been much remarked upon, and that's the fact that the 
core assumption that economists would use to link GDP to 
economic well-being is the idea that utility--that's the 
standard economist construct--the satisfaction people take from 
their economic resources is just assumed to depend on absolute 
income and expenditure. So if your house is bigger, that's 
without question an improvement in your welfare. If your suit 
is more expensive, that, too, is an improvement in your 
welfare.
    What recent evidence has shown, however, is that 
satisfaction depends as much or more on relative consumption. 
This is not a novel idea. It's an old idea. It's not a 
controversial idea. If you had a car, for example, in 1920 that 
would eventually reach 60 miles an hour, it would seem to you 
like a fast car. Today, if your car won't get to 60 miles an 
hour in under 5 seconds, then it seems a little sluggish.
    Similarly, when you ask whether an interview suit is 
adequate, and your task as a job applicant is to look good when 
you appear for your interview, what does that mean? Looking 
good is a quintessentially context-dependent context. It means 
to look good relative to the other applicants who want the same 
job you do. If they're all wearing much more expensive, well-
tailored suits than you, you're less likely to get the 
callback.
    So relative consumption is hugely important as a measure of 
welfare. Now, that's nowhere captured in any of the traditional 
measures of GDP. This was not a terribly big issue throughout 
much of the post-war decades, 1945 to the mid-1970s. Income was 
growing at about the same rate for rich, middle, and low-income 
families alike, about 3 percent a year.
    Again, not counting all the adjustments to that that we 
might want to make, but the rich had bigger houses, which they 
always did, and they were getting bigger by about the same 
amount that the middle-class houses were getting bigger. And so 
everything was growing more or less in balance. Distributional 
issues were not salient at that time.
    Since then, though, there's been a huge shift in the 
pattern of income growth. From about the mid-1970s onward, 
virtually all the income growth has gone to people at the top 
of the income ladder. The top 1 percent now has about three 
times the real purchasing power of three decades ago. Families 
in the middle have--the median family has only about 15 percent 
more than it did at that time. If you go inside the top 1 
percent, the pattern repeats--it's the people in the top one-
tenth of 1 percent who've captured the lion's share of the 
gains.
    What's happened then is that there's been a big change in 
the way GDP gets spent. The change has occurred because it's 
not going evenly in the increments to all families; it's going 
preponderantly to families at the top. It's very important not 
to make this a class warfare issue. I think many people point 
out the things that the wealthy consume and wag their fingers 
critically at them. Have they lost their moral compass? How can 
they be consuming such things?
    In fact, virtually every part of the income distribution 
behaves the same way. When its income goes up, they spend more. 
And that's true of the wealthy, that's true of people in the 
middle, and people at the bottom. And so, what we know is that 
when people at the top spend more, they get very little extra 
happiness from that, because the main effect of building a 
bigger mansion or having a more expensive coming-of-age party 
for your children is simply to raise the bar that defines what 
people like you need to spend on such things.
    And so, I think for that reason, if we can't come up with 
more distribution or sensitive measures of our economic 
progress, we're going to fail to pick up what's really been the 
salient pattern the last three decades. So, again, I applaud 
your effort to open up this question and try to make headway on 
it.
    [The prepared statement of Dr. Frank follows:]

  Prepared Statement of Dr. Robert H. Frank, Henrietta Johnson Louis 
 Professor of Management and Professor of Economics, Johnson Graduate 
                School of Management, Cornell University
    Is economic well-being accurately captured by traditional economic 
measures like per-capita income? This has long been a contested issue. 
Although everyone concedes that income is an imperfect welfare measure, 
conservative economists have tended to emphasize its virtues, while 
liberals have been more likely to stress its shortcomings.
    This debate is not just of philosophical interest; it also has 
important policy implications. Recent research findings offer support 
for specific arguments made on both sides. Mounting evidence suggests, 
however, that per capita income becomes a much less informative index 
of economic welfare when income inequality has been rising rapidly, as 
in recent decades.
    First a few words about how economists measure income. The simplest 
approach might seem to be just to add up everyone's income. But because 
one person's spending is another person's income, we can also estimate 
income by adding up how much everyone spends. And because spending 
turns out to be easier to keep track of than income, the most commonly 
used income metric is Gross Domestic Product (GDP), the annual market 
value of all final goods and services produced within a country. Per 
capita GDP is simply GDP divided by total population. Measured in 2000 
dollars, it was $32,833 in 1998 and $37,832 in 2006. The real value of 
goods and services purchased by Americans in 2006 was thus about 
fifteen percent higher than in 1998. In purely economic terms, does 
that mean we were roughly fifteen percent better off in 2006?
    Not necessarily. To measure changes in the standard of living over 
time, it is necessary to adjust for inflation. But as conservatives 
stress, traditional inflation adjustments may overstate actual 
inflation because they fail to account adequately for quality 
improvements. For example, although the current model of Honda's lowest 
priced car, the Civic, is about the same size as the company's 1998 
Accord and is in almost every respect far superior, it sells for only 
slightly more than the earlier Accord. Inflation adjustments, which are 
based on price changes for corresponding models, thus overstate the 
increase in the cost of car ownership, thereby causing per capita GDP 
to understate the corresponding increase in our standard of living.
    Quality changes are not always positive, of course. For example, if 
you had a question about your health insurance in 1998, you could talk 
to a real person; today, you are likely to find yourself in an endless 
phone loop. On balance, however, most consumers would probably prefer 
to choose from today's overall menu of goods and services than from 
1998's.
    Inflation adjustments may introduce further bias if people 
rearrange their spending patterns when prices rise unevenly. When beef 
prices rise twice as fast chicken prices, for example, people typically 
eat less beef and more chicken. Because traditional inflation measures 
fail to take such adjustments fully into account, they overestimate the 
amount of inflation that has actually occurred. As in the case of 
failure to control adequately for quality changes, the effect is to 
cause per capita GDP growth to understate increases in the standard of 
living.
    Liberals, for their part, have long objected that many expenditures 
included in GDP reflect reductions, not increases, in our standard of 
living. GDP also fails to include many aspects of life that clearly 
contribute to well-being. In a speech delivered forty years ago this 
week, the late Senator Robert F. Kennedy made these points eloquently:

        Too much and too long, we seem to have surrendered community 
        excellence and community values in the mere accumulation of 
        material things. Our gross national product . . . if we should 
        judge America by that--counts air pollution and cigarette 
        advertising, and ambulances to clear our highways of carnage. 
        It counts special locks for our doors and the jails for those 
        who break them. It counts the destruction of our redwoods and 
        the loss of our natural wonder in chaotic sprawl. It counts 
        napalm and the cost of a nuclear warhead, and armored cars for 
        police who fight riots in our streets. It counts Whitman's 
        rifle and Speck's knife, and the television programs which 
        glorify violence in order to sell toys to our children.

        Yet the gross national product does not allow for the health of 
        our children, the quality of their education, or the joy of 
        their play. 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. It measures 
        neither our wit nor our courage; neither our wisdom nor our 
        learning; neither our compassion nor our devotion to our 
        country; it measures everything, in short, except that which 
        makes life worthwhile. And it tells us everything about America 
        except why we are proud that we are Americans.

    GDP suffers from another big problem, one that challenges the very 
foundation of the presumed link between per capita GDP and economic 
welfare. I refer to the assumption, traditional in economic models, 
that absolute income levels are the primary determinant of individual 
well-being.
    This assumption is contradicted by consistent survey findings that 
when everyone's income grows at about the same rate, average happiness 
levels remain the same. Yet at any moment in time, the consistent 
pattern is that wealthy people are happier, on average, than poor 
people. These findings suggest that relative income is a much better 
predictor of well-being than absolute income.
    In the three decades following World War II, the relationship 
between income distribution and welfare was not a big issue, because 
incomes were growing at about the same rate for all income groups. 
Since the mid-1970s, however, income growth has been confined almost 
entirely to top earners. Changes in per capita GDP, which track only 
changes in average income, are completely silent about the effects of 
this distributional shift.
    When measuring the economic welfare of the typical family, the 
natural focus is on median, or 50th percentile, family earnings. Per 
capita GDP has grown by more than 85 percent since 1973, while median 
family earnings have grown by less than one-fifth that amount. Changing 
patterns of income growth have thus caused per capita GDP growth to 
vastly overstate the increase in the typical American family's standard 
of living during the past three decades.
    Some economists have advanced an even stronger claim--that there is 
simply no link, in developed countries at least, between absolute 
spending and well-being. Recent work supports this claim with respect 
to expenditures in some domains--especially those in which the link 
between well-being and relative consumption is strongest. Beyond some 
point, for instance, when the rich spend more on larger mansions or 
more elaborate coming-of-age parties for their children, the apparent 
effect is merely to redefine what counts as adequate.
    Top earners are not spending more because they are morally 
deficient. Having received not only the greatest income gains over the 
last three decades but also substantial tax cuts, they have been 
building larger houses simply because they have more money. Those 
houses have shifted the frame of reference for people with slightly 
lower incomes, leading them to build larger as well. The resulting 
expenditure cascade has affected families at all income levels.
    The median new house in the United States, for example, now has 
over 2,300 square feet, over 40 percent more than in 1979, even though 
real median family earnings have risen little since then. The problem 
is not that middle-income families are trying to ``keep up with the 
Gateses.'' Rather, these families feel pressure to spend beyond what 
they can comfortably afford because more expensive neighborhoods tend 
to have better schools. A family that spends less than its peers on 
housing must thus send its children to lower-quality schools. Yet no 
matter how intensively families bid for houses in better school 
districts, half of all children are destined to attend bottom-half 
schools. Similarly, when all spend more on interview suits, the same 
jobs go to the same applicants as before. For these reasons, it has 
become much more costly for middle-class families to achieve many basic 
goals.
    In many other spending domains, however, greater levels of absolute 
income clearly promote well-being, even in the richest societies. Thus, 
the economist Benjamin Friedman has found that higher rates of GDP 
growth are associated with increased levels of social tolerance and 
public support for the economically disadvantaged. Richer countries 
also typically have cleaner environments and healthier populations than 
their poorer counterparts.
    In sum, we have long known that per capita GDP is a imperfect index 
of economic welfare. But recent work suggests that it is especially 
uninformative when income inequality has been rising sharply, as it has 
been in recent decades. A society that aspires to improve needs a 
better measure of what counts as progress.

    Senator Dorgan. Dr. Frank, thank you very much for being 
with us today. We appreciate your testimony. Next, we will hear 
from Dr. Karen Davis, President of The Commonwealth Fund. Dr. 
Davis?

             STATEMENT OF KAREN DAVIS, PRESIDENT, 
                     THE COMMONWEALTH FUND

    Dr. Davis. It's a privilege to be here today. I'd like to 
focus specifically on the healthcare system. Americans value 
healthcare, maybe more than any other good or service, and yet, 
when we look at the GDP and see the latest figures, and we see 
spending going up on consumer goods, on cars, we think, ``Oh, 
good. We're not in a recession; that's the sign of a strong 
economy.''
    But when healthcare spending goes up faster than the GDP, 
there are hearings on the problem of healthcare costs. And so, 
why is it that spending on healthcare creates alarm? I think 
it's because it's a sign of a deeply dysfunctional market, and 
we realize that what we spend on healthcare bears very little 
relationship to the value of that healthcare.
    Upon what the Bureau of----
    Senator Dorgan. Dr. Davis, on that point, is the current 
GDP measuring a heart attack as a benefit?
    Dr. Davis. Right. And all of the services and tests that 
come into play, as opposed to looking at--does it reduce the 
probability of another heart attack? Does it help you live 
longer? I think what Dr. Landefeld has said that the Bureau of 
Economic Analysis is trying to move to supplement GDP with 
national health accounts that would get us a better sense of 
what we're getting for different diseases or conditions like a 
heart attack is a good step.
    But I think we need something broader than that. And to go 
immediately to my bottom line, I think we need something 
parallel to the National Economic Council of the White House, a 
Council of Health Advisors that's really charged with setting 
goals for the health system, setting priorities for 
improvement, monitoring and tracking progress toward the 
attainment of that, so that we really can begin to have a sound 
foundation for what we have viewed as to a high-performance 
health system.
    The Commonwealth Fund has established a Commission on a 
High Performance Health System. We have issued a national 
scorecard of the performance of the health system. We have 
noted, for example, that the U.S. spends twice what other 
countries spend on healthcare per capita. And yet, if you look 
at a measure, like preventable mortality that's amenable to 
medical care, the U.S. ranks 19th out of 19 countries.
    We also issued, in June of 2007, a state scorecard on 
performance of the healthcare system. It turned out North 
Dakota was in the top quartile of states--low spending, high 
outcomes--so we took our Commission on the High Performance 
Health System to North Dakota. I'm very pleased that you could 
join us on teleconference there.
    But I think what North Dakota demonstrates is that through 
medicine, through effective use of pharmacy technicians, nurse 
practitioners, because there's a shortage of pharmacists, 
there's a shortage of physicians, that they are able to provide 
high-quality care at much lower cost. Now, ironically, if every 
state in the U.S. did what North Dakota did, health spending 
would go down. And since that's one out of every six dollars in 
the GDP, the GDP would go down, and we would think we were 
worse off, when in fact we would be better off.
    I think it is important to have this kind of information, 
much better information, if we're really going to influence 
policies. But The Commonwealth Fund issued a report in December 
called Bending the Curve: Options for Achieving Savings and 
Improving Value in Health Spending, and we laid out 15 options.
    We found you could save $1.5 trillion. Maybe we can't just 
go to North Dakota, but you could save $1.5 trillion over 10 
years, provide health insurance to everyone, if we'd make the 
investments in information technology, comparative 
effectiveness, public health, and really changing our financial 
incentives to reward better results.
    We know there are lots of missed opportunities in the 
health system. The Institute of Medicine estimates that about 
20,000 people die every year because they are uninsured. We 
lose $65 to $130 billion in economic gains, as well. There are 
many opportunities to invest in healthy children, including 
reducing childhood obesity, investing in a healthy workforce, 
that could have high payoff.
    Having said there's a lot of waste in our system, I do want 
to just conclude by saying there's a lot of value in our health 
system, and certainly the studies that have been done on care 
of cardiac conditions show that the amount we spend is far less 
than the benefit that's gained. So while there's waste, there's 
also a lot of value that we want to preserve.
    So just in conclusion, we need better numbers. We need 
better data. We need to sort out spending on healthcare. We 
need to know when spending more means we're getting more, when 
it doesn't, how much we're paying, whether we're really getting 
good value for what we're spending, for example, on 
pharmaceutical care, by negotiating prices or using more cost-
effective drugs.
    We need to know which services add value, and which ones 
are duplicative, ineffective, and there just to generate 
income. So searching for true value, effective treatments, 
better outcomes, high quality should be the purpose and focus 
of this new activity. Thank you.
    [The prepared statement of Dr. Davis follows:]

  Prepared Statement of Karen Davis, President, The Commonwealth Fund
    Acknowledgments: This testimony draws on reports prepared by a 
number of colleagues at The Commonwealth Fund including Cathy Schoen, 
Vice President for Research and Evaluation; and Sara Collins, Assistant 
Vice President for the Future of Health Insurance. Comments by Stephen 
C. Schoenbaum, M.D., Executive Vice President for Programs, and the 
Research Assistance of Katherine Shea are also gratefully acknowledged. 
The views expressed, however, are those of the witness and not those of 
The Commonwealth Fund, its directors, officers, and staff.
Health and Wealth: Measuring Health System Performance
    Thank you, Mr. Chairman and members of the Committee, for this 
invitation to testify today on the measurement of health expenditures 
in our national accounts. Americans value good health--perhaps more 
than any other good or service produced in the economy--yet policy 
officials, business leaders, and experts express alarm when health care 
spending grows as a percent of the gross domestic product (GDP). If 
spending more on cars and consumer goods is a sign of a strong economy, 
why is spending more on health care a sign of a deeply dysfunctional 
health care market? The answer lies in the broken link between what we 
pay for health care services and the contribution those services make 
to longer and healthier lives, relief of pain and anxiety, and quality 
of life and functioning. Simply put, spending on health care does not 
reflect the value of health care delivered. Rather there is evidence 
from other countries--and from some states within the U.S.--that it is 
possible to have better health outcomes and spend less on health care.
    When a sector of the economy that makes up one-sixth of total GDP 
is not adequately captured in our national accounts and when there is 
no consensus on what constitutes good performance in the health sector, 
it is not surprising that the debate over health policy is often 
stymied. Forty years ago, Robert F. Kennedy noted that ``the gross 
national product does not allow for the health of our children.'' \1\ 
He called for a better system of national accounts that measures the 
benefits of investing in health care and other aspects that enhance the 
quality of life.
---------------------------------------------------------------------------
    \1\ Remarks of Robert F. Kennedy at the University of Kansas, March 
18, 1968.
---------------------------------------------------------------------------
    An annual report to Congress setting goals for performance of the 
U.S. health system, priorities for improvement, and monitoring benefits 
and costs, as well as progress toward achieving value, would lay a 
sound foundation for public policy deliberations. It would help us 
shape policies to ensure access to the care essential to health and 
well-being, and to hold the health system accountable for yielding 
value commensurate to the resources we devote to health care.
Bending the Curve on Health Spending While Enhancing Value
    U.S. health care expenditures have risen rapidly in the last 7 
years, imposing increasing stress on families, businesses, and public 
budgets. Health spending is rising faster than the economy as a whole 
and faster than workers' earnings. In recent years, insurance 
administrative overhead, in particular, has been rising faster than 
other components of health spending, while pharmaceutical spending has 
increased more rapidly than spending on other health care services.\2\
---------------------------------------------------------------------------
    \2\ K. Davis, C. Schoen, S. Guterman, T. Shih, S.C. Schoenbaum, and 
I. Weinbaum, Slowing the Growth of U.S. Health Care Expenditures: What 
Are the Options? (New York: The Commonwealth Fund, January 2007).
---------------------------------------------------------------------------
    The U.S. spent 16.3 percent of GDP on health care in 2007, compared 
with 8 percent to 10 percent in most major industrialized nations 
(Figure 1). On a per capita basis, the U.S. spends twice what other 
major industrialized nations spend on health care, but ranks 19th out 
of 19 countries on mortality amenable to medical care (Figure 2). The 
Centers for Medicare and Medicaid Services (CMS) projects that growth 
in health spending will continue to outpace GDP over the next 10 years, 
reaching 19.5 percent of GDP by 2017.\3\ (Figure 3) One reason the U.S. 
experience differs from that of other countries is that the Federal 
Government does not leverage its purchasing power to achieve lower 
administrative overhead or negotiate lower prices for prescription 
drugs and health care services.
---------------------------------------------------------------------------
    \3\ S. Keehan et al., ``Health Spending Projections Through 2017: 
The Baby-Boom Generation Is Coming to Medicare,'' Health Affairs, 
February 2008, w145-w155.



    A recent report by the Agency for Healthcare Research and Quality 
found that health care quality gains are not keeping pace with cost 
increases. Between 1994 and 2005, the quality of health care improved 
by an average 2.3 percent a year. Over the same period, health 
expenditures rose by 6.7 percent a year.\4\ The agency director noted 
that ``these findings about quality underscore the urgency to improve 
the value Americans are getting for their health care dollars.'' \5\
---------------------------------------------------------------------------
    \4\ Agency for Healthcare Research and Quality, ``Modest Health 
Care Quality Gains Outpaced by Spending,'' March 3, 2008. Available: 
http://www.ahrq.gov/news/press/pr2008/qrdr07
pr.htm, last accessed March 10, 2008.
    \5\ M.A. Carey, ``Health Care Quality Gains Not Keeping Pace with 
Cost Increases,'' CQ HealthBeat, March 7, 2008.
---------------------------------------------------------------------------
    There are also wide variations in health care spending across the 
U.S., indicating opportunities to increase efficiency. For example, the 
Dartmouth Atlas of Health Care shows that Medicare outlays per 
beneficiary adjusted for area wage costs ranged from $4,530 in Hawaii 
to $8,080 in New Jersey in 2003 (Figure 4). Yet studies find no 
systematic relationship between spending more and achieving longer 
lives or higher quality of care for Medicare beneficiaries. For 
example, one-year mortality rates for Medicare patients hospitalized 
for heart attacks, colon cancer, and hip fracture range from 27 percent 
in the best 10 percent of hospital referral regions to 32 percent in 
the worst 10 percent. At the same time the total relative resource use 
ranges from $23,314 in the best 10 percent of areas to $29,047 in the 
highest cost areas, with no relation between mortality and Medicare 
spending. (Figure 5)



    To move the debate forward, a new Commonwealth Fund report provides 
estimates by the Lewin Group on options for achieving savings in health 
expenditures while simultaneously enhancing the value of that care.\6\ 
Bending the Curve: Options for Achieving Savings and Improving Value in 
Health Spending analyzes 15 Federal health policy options for their 
potential to lower spending over the next 10 years and to yield higher 
value for the Nation's investment in health care (Figure 6). Cost 
savings can be achieved by the implementation of policies related to 
health information technology and improving knowledge for clinical 
decision-making; public health measures such as reducing smoking and 
obesity and creating positive incentives for health; financial 
incentives aligned with quality and efficiency such as hospital pay-
for-performance and strengthening primary care; and policies that use 
the health care market to increase efficiency, add value, and reduce 
costs.
---------------------------------------------------------------------------
    \6\ C. Schoen, S. Guterman, A. Shih, J. Lau, S. Kasimow, A. 
Gauthier, and K. Davis, Bending the Curve: Options for Achieving 
Savings and Improving Value in U.S. Health Spending (New York: The 
Commonwealth Fund, December 2007).



    The report also examines the effects of combining policy options 
targeted toward slowing health care cost growth with extending 
affordable health insurance to all. Combining universal coverage with 
policies aimed at achieving health care savings could have a 
significant impact because improvements in delivery and financing would 
apply to a larger number of people, could lower insurance 
administrative costs, and would lead to a more integrated health care 
system. Additionally, savings from improved efficiency would 
substantially offset the Federal cost of expanding coverage.
    Currently, health spending in the U.S. is predicted to increase 
from $2 trillion to more than $4 trillion over the next 10 years, and 
to consume one of every five dollars of national income, as increases 
outpace income growth by a wide margin. According to the report's 
estimates, it is possible to curb health care spending by $1.5 trillion 
over the next 10 years, and to simultaneously enhance the overall 
performance of the health care system. (Figure 7) The sooner policy 
changes addressed at reducing spending are enacted, the greater the 
cumulative savings for families, businesses, and public health 
insurance programs. In fact, even modest changes can quickly add up to 
billions of dollars. However, in order to see real savings and higher 
value, policies must address overall health system costs and not simply 
shift cost from one part of the system to another.



Examples of Savings Over 10 Years:
   Promoting Health Information Technology: With an initial 
        increase in investment, $88 billion could be saved by 
        accelerating health care providers' adoption of health 
        information technology to allow them to share patient health 
        information with other providers involved in the patient's 
        care.

   Center for Medical Effectiveness and Health Care Decision-
        Making: Investing in the knowledge needed to improve health 
        care decision-making; incorporating information about relative 
        clinical and cost effectiveness into insurance benefit design; 
        and including incentives for providers, payers and consumers to 
        use this information could save an estimated $368 billion over 
        10 years.

   Public Health--Reducing Tobacco Use: Increasing Federal 
        taxes on tobacco products by $2 per pack of cigarettes, with 
        revenues to support national and state tobacco programs, could 
        yield an estimated $191 billion savings over 10 years.

   Public Health--Reducing Obesity: Increasing Federal taxes on 
        sugared soft drinks by one cent per 12-ounce drink, with 
        revenues to support national and state obesity programs, could 
        yield an estimated $283 billion savings over 10 years.

   Strengthen Primary Care and Care Coordination: A ``medical 
        home'' approach, including improving Medicare reimbursements to 
        primary care physician practices to support enhanced primary 
        care services such as care coordination, chronic care 
        management, and easy access to care, could result in net health 
        system savings of $194 billion over 10 years if all Medicare 
        fee-for-service beneficiaries were enrolled. Estimated national 
        savings would be larger if this approach were adopted by all 
        payers.
Missed Opportunities to Ensure Healthy and Productive Lives
    Not all Americans have access to the benefits of modern medicine. 
In fact, access to health care has seriously eroded over the last 7 
years. In 2006, 47 million people were uninsured, an increase of 8.6 
million from 2000.\7\ The Institute of Medicine (IOM) has concluded 
that the most important determinant of access to health care is 
adequate health insurance coverage.\8\
---------------------------------------------------------------------------
    \7\ C. DeNavas-Walt, B.D. Proctor, and J. Smith, Insurance, 
Poverty, and Health Insurance Coverage in the United States: 2006 
(Washington, D.C.: U.S. Census Bureau, Aug. 2007).
    \8\ Institute of Medicine, Hidden Costs, Value Lost: Uninsurance in 
America (Washington, D.C.: National Academies Press, June 2003).
---------------------------------------------------------------------------
    Loss of health insurance coverage has been most marked among lower-
income workers.\9\ Only 22 percent of adults under age 65 in families 
with incomes of $20,000 or less had coverage through an employer in 
2006, down from 29 percent in 2000. Employer-based coverage in the next 
higher income category--under $37,800 annually--declined from 62 
percent in 2000 to 53 percent in 2006 (Figure 8).
---------------------------------------------------------------------------
    \9\ S.R. Collins, C. Schoen, K. Davis, A.K. Gauthier, and S.C. 
Schoenbaum, A Roadmap to Health Insurance for All: Principles for 
Reform (New York: The Commonwealth Fund, October 2007).



    Failure to provide health insurance to all has a price--to both the 
health of Americans and to our economy. The IOM estimated that 18,000 
deaths of adults ages 25 to 54 in 1999 occurred as a direct consequence 
of being uninsured.\10\ A more recent update of that study by Stan Dorn 
at the Urban Institute puts the toll in 2004 at 20,000 deaths, making 
it the fifth leading cause of death in the U.S. for working age 
adults.\11\ (Figure 9) The IOM projected that the aggregate, annualized 
cost of uninsured people's lost capital and earnings from poor health 
and shorter life spans falls between $65 billion and $130 billion for 
each year without coverage.
---------------------------------------------------------------------------
    \10\ Institute of Medicine, Hidden Costs, Value Lost: Uninsurance 
in America (Washington, D.C.: National Academies Press, June 2003).
    \11\ S. Dorn, Uninsured and Dying Because of It (Washington, D.C.: 
The Urban Institute, January 2008).



    A healthy workforce is one of our most important economic assets as 
a nation. For too long we have focused on only one side of the ledger--
the cost to provide health insurance to all Americans and to ensure 
that everyone receives effective medical services. We have ignored the 
other side--the costs incurred by having workers too sick to work or 
function effectively. There are three major sources of lost economic 
productivity related to health: adults who do not work because of poor 
health or disability; workers who miss time from work as a result of 
health problems; and workers who remain present on the job but 
experience reduced productivity because of their own health problems or 
concerns about sick family members.
    In 2003, an estimated 18 million adults ages 19 to 64--12 percent 
of all working-age adults--were not working and reported a disability, 
handicap, or chronic disease, or said they were not working because of 
health reasons.\12\ (Figure 10) Nearly seven of 10 workers (69 percent) 
reported sick loss days, for a total of 407 million days of lost time 
at work. Half (55 percent) of workers also reported a time when they 
were unable to concentrate at work due to their own illness or that of 
a family member, accounting for another 478 million days a year. 
Together this ``lost labor time'' represents lost economic output 
because of health reasons of an estimated $260 billion per year. 
Workers without paid time off to see a physician are more likely to 
report sick loss days and being unable to concentrate at work.
---------------------------------------------------------------------------
    \12\ K. Davis, S.R. Collins, M.M. Doty, A. Ho, and A.L. Holmgren, 
Health and Productivity Among U.S. Workers (New York: The Commonwealth 
Fund, August 2005).



    In recent years, the U.S. has improved health insurance coverage 
for children, primarily through the State Children's Health Insurance 
Program (Figure 11). Unlike the trend for adults, the proportion of 
children without health insurance declined from 12 percent in 1999-2000 
to 11.3 percent in 2005-2006. However, there are still significant 
variations across states and 9 million children remain uninsured, 
nearly three-fourths in families with incomes below twice the Federal 
poverty level.\13\
---------------------------------------------------------------------------
    \13\ K. Schwartz, C. Hoffman, A. Cook, Health Insurance Coverage of 
America's Children (Washington, D.C.: Kaiser Family Foundation, January 
2007).



    Failure to invest in a healthy start for children can have lifetime 
consequences in reduced productivity and serious health problems. 
Uninsured children are much less likely to obtain preventive care 
(Figure 12). A Commonwealth Fund Commission on a High Performance 
Health System National Scorecard found that 63 percent of insured 
children had preventive visits in 2003, compared with 35 percent of 
uninsured children.\14\ Investing in children's health by ensuring 
access to care and insisting on high standards of care, such as regular 
screening for developmental and behavioral delays in young children, is 
important to detecting conditions early and helping children reach 
school age ready to learn.\15\
---------------------------------------------------------------------------
    \14\ The Commonwealth Fund Commission on a High Performance Health 
System, Why Not the Best? Results from a National Scorecard on U.S. 
Health System Performance, (New York: The Commonwealth Fund, September 
2006).
    \15\ E.L. Schor, ``The Future Pediatrician: Promoting Children's 
Health and Development,'' The Journal of Pediatrics, November 2007 
151(5):S. 11-S 16.



    Gaps in health insurance coverage and financial barriers to care 
are the most important reason children and adults fail to receive 
preventive care. But even insured adults and Medicare beneficiaries 
often fail to receive beneficial care. Less than half of American 
adults age 50 and older are up to date with preventive care; the 
percent ranges from 50 percent in Minnesota to 33 percent in Idaho.\16\ 
If all states reached the levels achieved among the top-ranked states, 
almost 9 million more older adults would receive recommended preventive 
care. Control of chronic conditions also varies from state to state. If 
all states performed at the rate of the best states, almost 4 million 
more diabetics would receive care to help prevent disease 
complications. Ensuring that all Americans receive care from a regular 
source of care that is accountable for ensuring that patients receive 
all appropriate preventive care and care of chronic conditions would 
improve health and productivity, as well as reduce disparities in 
care.\17\
---------------------------------------------------------------------------
    \16\ J.C. Cantor, C. Schoen, D. Belloff, S.K.H. How, and D. 
McCarthy, Aiming Higher: Results from a State Scorecard on Health 
System Performance (New York: The Commonwealth Fund Commission on a 
High Performance Health System, June 2007).
    \17\ A.C. Beal, M.M. Doty, S.E. Hernandez, K.K. Shea, and K. Davis, 
Closing the Divide: How Medical Homes Promote Equity in Health Care: 
Results From The Commonwealth Fund 2006 Health Care Quality Survey (New 
York: The Commonwealth Fund, June 2007).
---------------------------------------------------------------------------
    In short, we often fail to realize the benefits of the best of 
American medicine. Quality of care is highly variable across geographic 
regions and across different populations. A better data system 
measuring health system performance by state and by population 
subgroups would help identify best practices and show where additional 
investment could reap high returns--in healthier Americans and greater 
economic productivity.
The Value of Health
    There is no question that Americans value the right to life, 
liberty, and the pursuit of happiness. William Nordhaus, an economist 
at Yale, posed the question: ``Would you rather have a 1950 economic 
standard of living and a 2000 health standard of living, or a 2000 
economic standard of living and a 1950 health standard of living?'' 
\18\ The universal response was a 2000 health standard of living, even 
at the cost of foregoing all the economic gains of the last half of the 
20th century. Nordhaus therefore concluded that advances in health and 
health care in the last half of the 20th century were more valuable 
than all the economic productivity gains over those 50 years. By 
focusing just on economic gains, we are neglecting the far more 
valuable health gains.
---------------------------------------------------------------------------
    \18\ W.D. Nordhaus, ``The Health of Nations: The Contribution of 
Improved Health to Living Standards,'' in Kevin Murphy and Robert 
Topel, eds., The Economic Value of Medical Research, University of 
Chicago Press, Chicago, 2002.
---------------------------------------------------------------------------
    David Cutler, an economist at Harvard, and colleagues have 
quantified the benefit of health gains, and concluded that they 
certainly far outweigh the cost of increased spending on health care in 
recent years.\19\ Cutler and McClellan demonstrated that for every $1 
spent on care of heart attack patients, the economic gain in longer 
life alone has been $7, with over 70 percent of the gain in life 
expectancy between 1974 and 1998 attributable to improved treatment. 
Similar analyses of improved care for low-birth weight infants, 
depression, and cataracts found benefits exceeding costs, and for 
breast cancer patients roughly equaling costs. They summed up their 
work by concluding that between 1950 and 1990, the present value of 
per-person medical spending increased by $35,000 and life expectancy by 
7 years for a present value gain of about $130,000.
---------------------------------------------------------------------------
    \19\ D.M. Cutler and M. McClellan, ``Is Technological Change In 
Medicine Worth It?'' Health Affairs, September/October 2001; 20(5): 11-
29.
---------------------------------------------------------------------------
    More recent estimates of the value of coronary heart disease care 
for the elderly between 1987 and 2002 confirm this earlier work.\20\ 
Cutler and colleagues show that improved treatment not only improves 
longevity following heart attacks but also reduces the incidence of 
first heart attacks through improved control of risk factors, such as 
cholesterol and hypertension. They note that only half of elderly 
people with coronary heart disease are taking statins, beta-blockers, 
and ACE inhibitors, and that further gains could be achieved if the use 
of these treatments were increased.
---------------------------------------------------------------------------
    \20\ A.B. Rosen, D.M. Cutler, D.M. Norton, H.M. Hu, and S. Vijan, 
``The Value Of Coronary Heart Disease Care For The Elderly: 1987-
2002,'' Health Affairs, January/February 2007; 26(1): 111-123.
---------------------------------------------------------------------------
    Cutler and colleagues find that investing in the health of infants 
and children has an especially high payoff.\21\ They estimate that from 
1960 to 2000 the life expectancy for newborns increased by 6.97 years. 
The cost per year of life gained was $19,900, with benefits at least 
five times the costs. Medical care for children at age 15 yields at 
least a two to one return in benefits to costs. They conclude that 
although medical spending has increased substantially over this period, 
the money spent has provided good value. Cutler and his colleagues 
underscore the importance of a set of National Health Accounts 
measuring the benefits of medical care on a disease-specific basis.
---------------------------------------------------------------------------
    \21\ D.M. Cutler, A.B. Rosen, and S. Vigan, ``The Value of Medical 
Spending in the United States: 1960-2000,'' New England Journal of 
Medicine 355, 9:920-7, August 31, 2006.
---------------------------------------------------------------------------
Path to a High Performance Health System
    Whether comparing U.S. performance with international benchmarks of 
high value or with benchmarks set within the U.S., it is clear there 
are opportunities to improve the yield we reap given the resources we 
invest in health care. The U.S. could learn from best practices within 
the Nation and from other countries. Evidence of extensive variations 
in costs and quality and studies documenting provision of duplicative, 
inappropriate, and unnecessary care have led the Commonwealth Fund 
Commission on a High Performance Health System to conclude that the 
U.S. health care system could improve quality, access, and cost 
performance.\22\ Five key strategies required to reach high performance 
include:
---------------------------------------------------------------------------
    \22\ Commission on a High Performance Health System, A High 
Performance Health System for the United States: An Ambitious Agenda 
for the Next President (New York: The Commonwealth Fund, November 
2007).

---------------------------------------------------------------------------
        1. Extending affordable health insurance to all

        2. Aligning financial incentives to enhance value and achieve 
        savings

        3. Organizing the health care system around the patient to 
        ensure that care is accessible and coordinated

        4. Meeting and raising benchmarks for high-quality, efficient 
        care

        5. Ensuring accountable national leadership and public/private 
        collaboration
    To begin, the U.S. should establish a process, such as a Council of 
Health Advisers parallel to the National Economic Council, charged with 
establishing national goals for the health system, setting priorities 
for improvement, and making an annual report to Congress on health 
system performance, including health outcomes across geographic regions 
of the U.S. and different population subgroups, access to care, quality 
of care, efficiency, and our capacity to innovate and improve. Such a 
report would be an important complement to the Economic Report of the 
President, and to data reports on economic growth and employment.
    The U.S. should shape policies that ensure access to health care 
for all and policies that enhance value for spending on health care. A 
series of measures show promise for both slowing the growth in health 
care outlays while improving access and quality of care. Over 10 years 
an estimated $1.5 trillion could be saved in health spending while 
providing health insurance coverage to all, ensuring cost-effectiveness 
of care rendered, and investing in public health and modern information 
technology. Investing in the health of children and reducing childhood 
obesity are particularly urgent needs, and should involve not only 
health insurance but a medical home for every child, and developmental 
and preventive services for young children to ensure a healthy start in 
life.
    These steps would take us a long way toward ensuring that the U.S. 
has a high-performing health system worthy of the 21st century. Thank 
you very much for the opportunity to join this panel. I look forward to 
learning from my fellow panelists and answering any questions.

    Senator Dorgan. Dr. Davis, thank you very much. Next, we'll 
hear from Dr. Katharine Abraham, the Professor of Joint Program 
and Survey Methodology at the University of Maryland. Dr. 
Abraham, thank you for joining us.

    STATEMENT OF DR. KATHARINE ABRAHAM, PROFESSOR OF SURVEY 
              METHODOLOGY, UNIVERSITY OF MARYLAND

    Dr. Abraham. Thank you very much. I appreciate the 
opportunity to be here. I would like to begin by saying 
something that I think you've said already, which is that the 
development of the national income and product accounts was a 
great accomplishment. And the existence of those accounts is a 
real asset to anyone concerned with managing the economy. So 
I'm not here to criticize the work of the Bureau of Economic 
Analysis in any way. I think they do a great job.
    Having said that, as you also noted in your opening 
remarks, the national income and product accounts are 
incomplete. They cover market activity. They leave out 
everything that goes on outside of the market. In addition, 
they don't always handle things in the right way. There are 
things they treat as consumption that really are an investment 
in our future. The value of the national income and product 
accounts could be substantially enhanced if they were to be 
supplemented with satellite accounts that would look at non-
market activity in a number of areas.
    Just to give a flavor for the sort of thing that I'm 
talking about--and I might note that my testimony today draws 
heavily on work that I did as the Chair of a National Academy 
of Sciences panel that was charged to look into these issues--
it is well known that there has over time been a big increase 
in the number of women who are in the labor force. In putting 
together the national income and product accounts, we count 
what those women do when they're working for pay as output. We 
don't count what they do at home as output. So as there has 
been a big shift of women from home into the workplace, all of 
that added output in the workplace is counted as a gain. None 
of the loss of production at home that may have occurred as 
that shift took place gets counted as a loss. So the picture 
that we get is likely to be misleading.
    To give another example of the kind of thing that I'm 
concerned about, our measure of investment focuses primarily on 
equipment, structures, physical things. But in today's economy, 
a lot of the investing that we do isn't in physical things. 
It's in less tangible things. Much of the investing we do is 
investment in the human capital of our population. And we're 
not reflecting that in the national income and product 
accounts.
    The National Academies panel that I chaired came up with a 
set of recommendations to begin to address some of these 
issues. Even when you're taking the national income and product 
accounts on their own terms, thinking about trying to measure 
output properly, not about trying to measure well-being, but to 
measure output, we could benefit from the development of 
supplemental accounts in at least five areas.
    Our report proposed measures of household production; a 
supplemental account that would look more closely at the 
activities of the nonprofit sector, where there's a lot of 
volunteer labor that isn't currently reflected in the accounts; 
an education account that would track investments of time and 
money in the human capital of our population; the development 
of a health account, very much along the lines of what Dr. 
Davis has recommended; and the development of supplemental 
accounts to track environmental assets and services.
    From my previous experience as Commissioner of the Bureau 
Labor Statistics, which has some related responsibilities, I 
know that just recommending the development of these kinds of 
measures is easier said than actually done. There are a whole 
set of technical issues that you would have to work through in 
order to accomplish this, but I do feel confident those could 
be resolved.
    Having said this, a key ingredient to doing a lot of what 
we were talking about is the availability of information on how 
people spend their time. That's our metric for activity in a 
lot of these nonmarket areas. We have good data at this moment 
on how Americans spend their time. Since 2003, there has been a 
survey done by the Bureau of Labor Statistics called the 
American Time Use Survey, which provides exactly the sort of 
information that's required to make progress in these areas.
    Unfortunately, the budget that the President has proposed 
for Fiscal Year 2009 eliminates the funding for that survey, 
and it is my hope that the Congress will recognize the value of 
that information and decide that the survey should be 
continued.
    [The prepared statement of Dr. Abraham follows:]

    Prepared Statement of Katharine G. Abraham, Professor of Survey 
                  Methodology, University of Maryland
    Mr. Chairman and Members of the Committee, I would like to begin by 
thanking you for the opportunity to appear before you this afternoon. 
My testimony will discuss how the national income and product accounts 
(NIPAs)--the source of the Gross Domestic Product (GDP) measurement 
that is the subject of today's hearing--might be supplemented with 
information about non-market activity to provide a more complete 
picture of national output and the sources of economic growth. My 
testimony draws heavily on the work of a recent National Academy of 
Sciences panel that I chaired. The panel was charged with making 
recommendations about whether and how our accounting of non-market 
activity might best be expanded and a more in-depth discussion of this 
topic can be found in the panel's published report (Abraham and Mackie, 
2005; see also Abraham and Mackie 2006).
    Concern that the NIPAs are incomplete and thus potentially 
misleading is not new--these concerns data back to the 1930s when the 
first U.S. economic accounts were developed by Simon Kuznets (Kuznets 
1934). The development of these accounts rightly has been hailed as a 
major accomplishment. The NIPAs meet rigorous standards and enjoy broad 
acceptance among data users seeking to track economic activity. They 
are, however, primarily market-based and, by design, shed little light 
on production in the home or in other non-market contexts. Further, 
even where activity is organized in markets, important aspects of that 
activity may be omitted from the NIPAs. Unpaid time inputs and 
associated outputs often are critical to production processes but, 
because no market transaction is associated with their provision, they 
are not reflected in the accounts. One illustration is provided by 
estimates (LaPlante et al., 2002) suggesting that the value of in-home 
long-term care services provided by family and friends is greater than 
the value of similar market-provided services.
    In other cases, because it cannot be bought and sold, the output 
resulting from market-based production may be incorrectly characterized 
or valued. There is wide agreement, for example, that the output of the 
education sector properly should be considered investment rather than 
consumption, and that its value should be assessed in terms of the 
returns on that investment rather than the cost of the inputs used in 
its production, but this is not how education presently is treated. The 
conventional accounts do not account for the asset value of human 
capital production associated with education, or for that associated 
with health care and other personal investment activities. Available 
estimates are rough, but suggest that the value of the human capital 
stock may be as large as that of the physical capital stock (see 
Kendrick, 1976, and, for a discussion in the context of analyzing 
economic growth, Mankiw et al., 1992).
    Although the importance of non-market--but productive--endeavors 
has long been recognized, few attempts have been made to provide 
systematic information about even the most quantitatively significant 
of them. The state of non-market accounting today resembles the 
situation for market-based accounting in the 1920s and 1930s before the 
creation of the NIPAs. Economic accounting need not, and arguably 
should not, extend to all non-market activities, but there are certain 
areas in which non-market accounts, designed to supplement the NIPAs, 
could make particularly important contributions.
    Extending the Nation's accounting systems to better incorporate 
non-market production promises substantial benefits to policymakers and 
researchers. For example, intangible investments seem certain to have 
accounted for a very large portion of the advance in living standards 
over time. But researchers who study economic growth have been forced 
to supplement data from the national accounts with rough-and-ready 
estimates from other sources in order to identify the contributions of 
factors such as investment in research and development or investment in 
human capital to growth. In this regard, the Bureau of Economic 
Analysis should be commended for the work it has done to develop a 
supplemental account that focuses on investments in research and 
development, but no comprehensive accounting of other intangible 
investments, most especially investments in our human capital, are 
available.
    Non-market accounting also would illuminate the processes whereby 
inputs are transformed into outputs in particular sectors. Consider, 
for example the production of health. In contrast to currently 
constructed health expenditure accounts, which track market payments 
but do not identify the outputs in a way that is useful for measuring 
price change or productivity, a health account would relate health 
improvements--the real ``good'' that is produced--to medical 
treatments, as well as to a wide range of other inputs, including diet, 
the environment, exercise, and research and development. By most 
measures, improvements in health have outpaced increases in spending on 
medical care. Since medical care interacts with these interrelated 
factors, however, we do not know with any certainty the productivity of 
resources directed toward health care (Cutler and Richardson, 1997; 
Cutler 2004). Optimally, expenditures and outcomes would be tracked so 
that changes in well-being associated with different actions could be 
monitored; in turn, this information could support better management of 
expenditures (both private and public) to achieve desired outcomes.
    To take another example, education accounts might be designed to 
relate improvements in skill capital--the output--to the various inputs 
to the educational process. As in the health case, schooling is 
characterized by a mix of market and non-market inputs and outputs. The 
value of time students spend in school--the key non-market input--is 
likely to be at least comparable to the expenditures on marketed 
inputs. The 2003 Statistical Abstract shows that, in 2000, school 
expenditures on primary and secondary education amounted to 
approximately $400 billion and that just over 47 million students were 
enrolled in primary and secondary schools. Assuming 180 days at 6 hours 
a day, plus an hour of commuting time and 2 hours of homework per 
student, students in these grades devoted more than 75 billion hours to 
their education. If students' time were valued at the then-current 
minimum wage of $5.15 per hour (purely for illustrative purposes), the 
value of unpaid student time would have been almost as large as the 
expenditures measured in the conventional accounts.
    The inherent limitation of the NIPAs--that they fail to consider 
the full array of the economy's productive inputs and outputs--might be 
less important if market and non-market activities trended similarly, 
but there is little evidence to suggest that they do. To take one 
frequently cited example, failing to account for the output produced 
within households may yield misleading comparisons of economy-wide 
production, as conventionally measured. To the extent that the entry of 
women into paid employment has reduced effort devoted to household 
production, the long-term trend in output as measured by GDP may 
exaggerate the true growth in national output (Landefeld and McCulla, 
2000). Similarly, the relatively smaller portion of total output 
attributable to home production in the United States as compared to 
many developing countries surely exaggerates its national output 
relative to theirs.
    Perhaps less well recognized are potential problems with the 
measurement of national output over the business cycle. If people who 
lose their jobs during cyclical downturns take advantage of their 
absence from paid employment to increase the effort they devote to home 
production, the short-term decline in national output may be dampened 
relative to that measured by GDP. Knowing more about the level and 
distribution of non-market activity could be important for other 
purposes as well. Such information could, for example, change 
perceptions of the extent of economic inequality among U.S. households 
and how that has changed over time. This, in turn, could affect where 
welfare and poverty lines are drawn (Michael 1996).
    Different observers looking at the limitations of the existing 
NIPAs and thinking about how they might most fruitfully be expanded 
might come to somewhat different conclusions about the relative 
priority of extensions in different directions. The National Academies 
panel in which I participated recommended that work to develop measures 
in five areas be prioritized:

   Household production.

   Investments in formal education and the resulting stock of 
        skill capital.

   Investments in health and the resulting stock of health 
        capital.

   Selected activities of the nonprofit and government sectors, 
        and

   Environmental assets and services.

    Each of these areas involves productive activity that is 
substantial in magnitude, so that focusing attention on the activity 
should improve our understanding of the Nation's total output; is 
sufficiently ``market-like'' in its character that it would fit 
naturally into an expanded accounting framework that builds on the 
national income and product accounts; and satisfies a feasibility 
constraint, meaning that it seems possible to develop sensible 
approaches to quantifying and valuing the inputs and outputs that the 
expanded accounting of activity in the area would record.
    Just to be clear, I am not recommending that the core National 
Income and Product Accounts be changed to incorporate the expanded 
measurement of non-market activity that I am envisioning. Rather, I am 
proposing that this information be incorporated into a set of satellite 
accounts that would augment rather than replace the existing accounts. 
To be useful, however, these satellite accounts should be produced on a 
regular schedule so that users of the data can count on its being 
available.
    I should also acknowledge that there are a variety of technical and 
methodological questions that remain to be addressed in order to 
produce the satellite accounts I am recommending. Many of these 
questions are considered at some length in the report to which I 
alluded earlier. Without dismissing their significance, however, I do 
not believe this to be the proper forum in which to take them up, other 
than to say that I am confident that, with some effort, appropriate 
answers to them can be found.
    An essential building block for carrying out much of the work to 
build a system of non-market satellite accounts that the National 
Academies panel has recommended is the availability of data on how 
Americans spend their time and, in particular, the time they devote to 
productive non-market activity. Data on time use are needed to measure 
the time devoted to household production, to track the time devoted to 
investments in education and health, and to provide a complete picture 
of time spent on productive activities in the nonprofit sector, 
including volunteer as well as paid labor. One reason for the optimism 
of the National Academies panel regarding the prospects for progress to 
develop useful non-market satellite accounts was the advent of the 
American Time Use Survey (ATUS), which in 2003 began to produce exactly 
the sort of information that is needed on how people allocate their 
time. Indeed, one of the panel's central recommendations was as 
follows:

        Recommendation 2.1. The American Time Use Survey, which can be 
        used to quantify time inputs into productive non-market 
        activity, should underpin the construction of supplemental 
        accounts for the United States. To serve effectively in this 
        role, the survey should be ongoing and conducted in a 
        methodologically consistent manner over time.

    Given the importance of the ATUS for addressing the recognized 
limitations of the GDP as a measure of national output, I was dismayed 
to learn recently that the budget the President has proposed for FY 
2009 eliminates funding for these important data. Without the ATUS, 
much of the work envisioned by the National Academies panel on non-
market accounting and others interested in developing a comprehensive 
set of supplemental accounts to complement the existing GDP measure, as 
well as other important research on the quality of our lives more 
broadly, will not be possible. Put simply, the ATUS is needed to expand 
our horizons beyond merely charting where dollars go, to charting where 
time goes too. Even beyond a more complete accounting of output and 
productivity, anyone who wants to understand the changing lives of 
American families, to monitor the well-being of the American 
population, or to make informed social policy decisions needs 
information on how our population spends its time.
    The loss of the ATUS would make it much more difficult if not 
impossible to address the limitations of the GDP as a measure of 
national output that we are discussing here today. For that reason, I 
would like to express the hope that the Congress will find a way to 
preserve the funding for this important survey. I am not alone in this 
view--more than 1,500 economists and other researchers, including four 
Nobel laureates, have signed a letter in support of continued funding 
for the American Time Use Survey.
    In summary, the existing National Income and Product Accounts have 
great value, but their value would be enhanced by the addition of 
satellite accounts to track important areas of non-market activity and 
their contribution to growth. I would be happy to answer any questions 
you might have about my testimony in this regard.
References
    Abraham, Katharine G. and Christopher Mackie, eds. 2005. Beyond the 
Market: Designing Non-market Accounts for the United States, 
Washington, D.C.: National Academies Press.
    Abraham, Katharine G. and Christopher Mackie. 2006. ``A Framework 
for Non-market Accounting,'' in D. Jorgenson, S. Landefeld and W. 
Nordhaus, eds., A New Architecture for the U.S. National Accounts, 
Chicago: University of Chicago Press, pp. 161-192.
    Cutler, David, and E. Richardson. 1997. Measuring the Health of the 
United States Population. Brookings Papers on Economic Activity, 
Microeconomics: 217-272. Washington D.C.
    Cutler, David. 2004. Your Money or Your Life: Strong Medicine for 
America's Health Care System. New York: Oxford University Press.
    Kendrick, John W., Y. Lethem, and J. Rowley. 1976. The Formation 
and Stocks of Total Capital. New York: Columbia University for NBER.
    Kuznets, Simon S. 1934. National Income 1929-1932. Senate Document 
No. 124, 73rd Congress, 2nd Session. Washington, D.C.
    Landefeld, J. Steven, and Stephanie H. McCulla. 2000. Accounting 
for Non-market Household Production within a National Accounts 
Framework. Review of Income and Wealth 46(3):289-307.
    LaPlante, M.P., C. Harrington, and T. Kang. 2002. Estimating paid 
and unpaid hours of personal assistance services in activities of daily 
living provided to adults living at home. Health Services Research 
37(2): 397-415.
    Mankiw, N. Gregory, David Romer and David N. Weil. 1992. ``A 
Contribution to the Empirics of Economic Growth.'' Quarterly Journal of 
Economics 107 (May): 407-437.
    Michael, Robert. 1996. Money Illusion: The Importance of Household 
Time Use in Social Policy Making. Journal of Family and Economic Issues 
17 (Winter): 245-260.

    Senator Dorgan. Dr. Abraham, thank you very much. Finally, 
we will hear from Mr. Jonathan Rowe, Co-Director of the West 
Marin Commons. You may proceed.

           STATEMENT OF JONATHAN ROWE, CO-DIRECTOR, 
                       WEST MARIN COMMONS

    Mr. Rowe. Thank you. You know, usually up here, people--oh, 
I'm sorry. Is that on? OK, thank you. Usually, up here, people 
are staring at the movie that is playing on the movie screen. 
What you're doing today is taking us back to the projection 
room and looking at the lens through which the movie is 
projected, and shapes what we see.
    It's really, really important. We aren't just talking about 
a technical measure here. We're talking about what you mean, 
what Congress means, what the media means when we talk about 
the economy. We're going to stimulate the economy. We're going 
to incentivize the economy. This is the content of that term 
``the economy.''
    This is what you're looking at when you say, ``Let's make 
it grow. Let's incentivize it. Let's stimulate it.'' And how 
often, how often do people step back and ask the question that 
is begging to be asked? What exactly is it that we're 
stimulating? Why is that when we get into this arena that we 
call ``economics,'' the mind drifts into abstraction, and it 
stays there?
    So what we're talking about is not just a technical 
measure. It's a shame that there are not more people from the 
media here today, because in my experience, it's the media that 
more than anything is the megaphone for the fallacies that 
we're talking about here. And I've had some experience with 
that on both sides. But I want to use my time to suggest to you 
four categories of things that we need to be looking at more.
    And I agree that there is a use for the GDP accounts as 
they exist today. You need to know about the monetary flows 
through the economy. You need to know about that for purposes 
of taxation, for trade, all those things. There's a lot more 
you need to know.
    One is, as numerous people have mentioned here already, all 
those economic functions that take place outside the realm of 
monetized exchange, in both the ecosystem and the social 
system. It's like we're driving a car that has two dials on the 
dashboard; one is for gas, and the other is for oil. The gas is 
our natural resources; the oil is our social resources. And 
they both go up the more we burn them down.
    Number two, time matters. How many parents looking back 
wouldn't pay any amount of money to have been able to spend 
more time with their kids? Time is wealth. And yet, we don't 
count that. If two parents are working 10 hours a day, and have 
no time with their kids, the time that has been subtracted from 
their home life is invisible. It doesn't count.
    Simon Kuznets said in his report to Congress, ``We should 
go further. We should count the wear and tear on workers. We 
count depreciation for buildings. We count depreciation for 
machinery. How about depreciation of our own bodies? Our own 
psyches?''
    I've just got a few more minutes, and I'm going to jump 
ahead to--less than minute--and I'm going to jump ahead to the 
one thing that I think is probably the most important, and this 
encompasses not just the GDP, but also the way you think about 
productivity. We measure performance in this economy not by 
performance; we don't look at results; we look at supposed 
means to the result, but we don't look at the result.
    We look at the productivity of the medical system, as was 
just mentioned, by the pills that we sell. We measure the 
productivity of the automobile industry by the cars that they 
turn out per hour worked. Really, it's a transportation 
business. We should be measuring the transportation that 
results from all this output. We should be measuring the health 
that results from all this output.
    And again, I really appreciate the opportunity to be here, 
and that you're holding these hearings.
    [The prepared statement of Mr. Rowe follows:]

         Prepared Statement of Mr. Jonathan Rowe, Co-Director, 
                           West Marin Commons
    Mr. Chairman and Members of the Committee:

    Let's suppose that the head of a Federal agency came before this 
Committee and reported with pride that agency employees had burned 10 
percent more calories in the workplace than they did the year before. 
Not only that--they had spent 10 percent more money too.
    I have a feeling you would want to know more. What were these 
employees doing when they burnt those calories? What did they spend 
that money on? Most important, what were the results? Expenditure is a 
means not an end; and to assess the health of an agency, or system, or 
whatever, you need to know what it has accomplished, not just how much 
motion it has generated and money it has spent.
    The point seems obvious. Yet Congress does this very thing every 
day, and usually many times a day, when it talks about this thing 
called ``the economy.'' The administration and the media do it too. 
Every time you say that the ``economy'' is up, or that you want to 
``stimulate'' it, or get it going again, or whatever words you use, 
this is what you actually are saying. You are urging more expenditure 
and motion without regard to what that expenditure is and what it might 
accomplish--and without regard to what it might crowd out or displace 
in the process.
    That term ``the economy'': what it means, in practice, is the Gross 
Domestic Product or GDP. It's just a big statistical pot that includes 
all the money spent in a given period of time. (I'm simplifying but 
that's the gist.) If the pot is bigger than it was the previous 
quarter, or year, then you cheer. If it isn't bigger, or bigger enough, 
then you get Bernanke up here and ask him what the heck is going on.
    The what of the economy makes no difference in these councils. It 
never seems to come up. The money in the big pot could be going to 
cancer treatments or casinos, violent video games or usurious credit 
card rates. It could go toward the $9 billion or so that Americans 
spend on gas they burn while they sit in traffic and go nowhere; or the 
billion plus that goes to drugs such as Ritalin and Prozac that schools 
are stuffing into kids to keep them quiet in class.
    The money could be the $20 billion or so that Americans spend on 
divorce lawyers each year; or the $5 billion on identity theft; or the 
billions more spent to repair property damage caused by environmental 
pollution. The money in the pot could betoken social and environmental 
breakdown--misery and distress of all kinds. It makes no difference. 
You don't ask. All you want to know is the total amount, which is the 
GDP. So long as it is growing then everything is fine.
    We aren't here today to talk about an obscure technical measure. 
This isn't stuff for the folks in the back room. We are talking about 
what you mean when you use that term ``the economy.'' Few words induce 
such a reverential hush in these halls. Few words are so laden with 
authority and portent. When you say ``the economy'' is up then no news 
is brighter. When you argue that a proposal will help the economy or 
hurt it, then you have played the ultimate trump card in your polemical 
decks, bin Laden possibly excepted.
    As I said it isn't just you. The President does it, the media, the 
reporters sitting at that table over there. They do it too. How many of 
them, or of you, asked during the recent debate over the ``stimulus'' 
package, exactly what it was that would be stimulated. How many of them 
say, when Bernanke comes up here to report on the Nation's growth, 
``Hey wait a minute. What exactly are we talking about here?''
    Doesn't it matter whether it is textbooks or porn magazines, 
childbirths or treatments for childhood asthma born of bad air? Doesn't 
it matter whether the expenditure comes from living within our means or 
from going into financial and ecological debt? Don't we need to know 
such things before we can say whether the increase in transactions in 
the pot--what we call ``growth''--has been good or not?
    This is not an argument against growth by the way. To be 
reflexively against growth is as numb-minded as to be reflexively for 
it. Those are theological positions. I am arguing for an empirical one. 
Let's find out what is growing, and the effects. Tell us what this 
growth is, in concrete terms. Then we can begin to say whether it has 
been good or not.
    The failure to do this is insane, literally. It is an insanity that 
is embedded in the political debate, and in media reportage; and it 
leads to fallacy in many directions. We hear for example that efforts 
to address climate change will hurt ``the economy.'' Do they mean that 
if we clean up the air we will spend less money treating asthma in 
young kids? That Americans will spend fewer billions of dollars on 
gasoline to sit in traffic jams? That they will spend less on coastal 
insurance if the sea level stops rising?
    There is a basic fallacy here. The atmosphere is part of the 
economy too--the real economy that is, though not the artificial 
construct portrayed in the GDP. It does real work, as we would discover 
quickly if it were to collapse. Yet the GDP does not include this work. 
If we burn more gas, the expenditure gets added to the GDP. But there 
is no corresponding subtraction for the toll this burning takes on the 
thermostatic and buffering functions that the atmosphere provides. (Nor 
is there a subtraction for the oil we take out of the ground.)
    Yet if we burn less gas, and thus maintain the crucial functions of 
the atmosphere, we say ``the economy'' has suffered, even though the 
real economy has been enhanced. With families it's the same thing. By 
the standard of the GDP, the worst families in America are those that 
actually function as families--that cook their own meals, take walks 
after dinner and talk together instead of just farming the kids out to 
the commercial culture.
    Cooking at home, talking with kids, talking instead of driving, 
involve less expenditure of money than do their commercial 
counterparts. Solid marriages involve less expenditure for counseling 
and divorce. Thus they are threats to the economy as portrayed in the 
GDP. By that standard, the best kids are the ones that eat the most 
junk food and exercise the least, because they will run up the biggest 
medical bills for obesity and diabetes.
    This kind of thinking has been guiding the economic policy minds of 
this country for the last sixty years at least. Is it surprising that 
the family structure is shaky, real community is in decline, and kids 
have become Petri dishes of market-related dysfunction and disease? The 
nation has been driving by a instrument panel that portrays such things 
as growth and therefore good. It is not accidental that the two major 
protest movements of recent decades--environmental and pro-family--both 
deal with parts of the real economy that the GDP leaves out and that 
the commercial culture that embodies it tends to erode or destroy.
    How did we get to this strange pass, in which up is down and down 
is up? How did it happen that the Nation's economic hero is a terminal 
cancer patient going through a costly divorce? How is it that Congress 
talks about stimulating ``the economy'' when much that actually will be 
stimulated is the destruction of things it says it cares about on other 
days? How did the notion of economy become so totally uneconomic?
          * * * * * * *
    It's a long story, but for the present purpose it probably starts 
in Ireland in the 1640s. British troops just had repressed another 
uprising there, and the Cromwell government had devised a final 
solution to put its Irish problem to rest. The government would remove 
a significant portion of the populace--Catholics in particular--to a 
remote part of the island. Then it would redistribute their lands to 
British troops, thus providing compensation to them, and also an 
occupational presence for the benefit of the government in London.
    The task of creating an inventory of the lands went to an army 
surgeon by the name of William Petty. Petty was a quick study, and also 
a man with an eye for the main chance. He classified much land as 
marginal that actually was quite good. Then he got himself appointed to 
the panel that made the distributions, and bestowed much of that land 
upon himself.
    Petty's survey was the first known attempt in Western history to 
create a total inventory of a nation's wealth. It was not done for the 
well-being of the Irish people, but rather to take their lands away 
from them. It was an instrument of government policy; and this has been 
true from that time to the present. Governments have sought to 
catalogue the national wealth for purposes of taxation, confiscation, 
planning and mobilization in times of war. They have not designed these 
catalogues to be measures of national well-being or of quality of life.
    Yet that is how the national wealth inventories have come to be 
used, and especially the GDP. Somehow, a means of policy has become the 
end of policy. The tool has become the task. This part of the story 
begins with the Great Depression.
    In the early 1930s, as the U.S. sank deeper into an economic 
slough, Congress faced an absence of data to help guide the way out. It 
didn't really know exactly what was happening, and where. There were no 
systematic figures on unemployment or production. Then-President Hoover 
had dispatched six employees from the Commerce Department to travel 
around the country and file reports. These were anecdotal and tended 
toward the Hoover view that recovery was just around the corner.
    Members of Congress wanted more. Senator Robert LaFollette, a 
Republican, introduced a resolution to require the Commerce Department 
to develop a spreadsheet--as we would call it today--of economy with 
its component parts. LaFollette was a Progressive in the original 
sense. He believed in ``scientific management and planning;'' and the 
resolution was to produce a tool to that end. It passed on June 8, 
1932, and the work fell to one Simon Kuznets, a professor at the 
University of Pennsylvania who was working at the National Bureau for 
Economic Research in New York.
    Kuznets was clear that he was producing a policy tool, and not a 
measure of living standards or well-being. As he put it later in his 
clinical prose, the goal was to help understand the ``relations and 
relative importance of various parts of the productive system and their 
responsiveness to various types of stimulae as shown by their changes 
in the past.''
    The project was a marvel by today's standards. Kuznets had 
virtually no budget, and a tiny staff. Data sources were fragmentary. 
But about a year and a half later, Kuznets submitted his report to 
Congress. It is Senate Document 124, 73rd Congress, 2nd Session, 
January 4, 1934, and I urge you to read it. The national accounts were 
a first, but even more remarkable was the report that came with them. 
With a brevity and candor that are rare today, Kuznets laid out for 
Congress the limitations of the accounts he had constructed. He took 
particular pains to tell you why you should not use these accounts the 
way you--and the media--have come to use them.
    For one thing, the national accounts leave out a crucial dimension 
of the economy--namely, the part that exists outside the realm of 
monetary exchange. This includes both the ecosystem and the social 
system--the life-supporting functions of the oceans and atmosphere for 
example, and work within families and communities that isn't done for 
money. The GDP takes no account of these. The result is that when the 
monetized economy displaces them--as when both parents have to work, or 
when forest clearing eliminates the cleansing function of trees--the 
losses are not subtracted against the market gain.
    Kuznets was under no such illusion. ``The volume of services 
rendered by housewives and other members of the household toward the 
satisfaction of wants must be imposing indeed,'' he writes. There's 
also the question of what he called ``odd jobs,'' or what we would call 
the ``underground economy.'' He knew that these played a large role in 
the economy. He also grasped, more broadly, that the quality and 
importance of a function does not depend upon the amount of money paid 
for it--or whether any money was paid at all. The care of a mother or 
father is not inferior to that of a day care worker just because they 
do not charge a price for their services.
    This recognition undercuts a basic assumption behind the GDP--
namely, that the contribution of an activity can be gauged solely from 
its market price. But there's a practical problem, Kuznets observed. 
Accounts require data; and there is by definition little data on the 
underground economy and on non-market exchange. As a result, the 
national accounts include only the slice of economic reality that falls 
within the bandwidth that economists are able to grasp--that is, 
recorded expenditures of money.
    Then there's the thorny question of constructive versus destructive 
activities within the realm of monetized exchange. Once you have 
decided to count only that which is transacted through money, do you 
make the further assumption that everything transacted for money counts 
on the plus side of the ledger? Is something beneficial just because 
money changes hands when it passes from a seller to a buyer?
    The mentality that lies behind the GDP assumes that it does. We all 
are ``rational,'' and so any choice we make in the market is by 
definition one that makes our lives better. Kuznets focused on one 
obvious exception: activities that are illegal, such as gambling (when 
it is) and drugs. To assume that such expenditures add to the national 
well-being would undercut the rationale for making them illegal in the 
first place. The GDP is an instrument of the state, after all, and so 
Kuznets drew the line there.
    He was aware of how arbitrary this is from an economic standpoint. 
Why exactly does legal gambling add to well-being if the illegal kind 
does not? Or what about alcohol? Given the assumption that legality 
confers benediction, the economy had a huge boost at the end of 
Prohibition, simply because the drinking that formally was illegal now 
was deemed OK. But booze still was booze. If the government can 
increase the growth rate by jiggering the metrics in this way, that 
does not increase confidence in the validity of measure.
    But legality is the easy part. Just beneath it lies a deeper 
issue--namely, the assumption that every purchase is beneficial simply 
because someone has paid the purchase price. The exclusion of illegal 
activities, Kuznets said, ``does not imply . . . that all lawful 
pursuits are necessarily serviceable from the social viewpoint.'' He 
left the question there, a chasm that an honest inquiry has to address.
    There are so many examples of expenditure that goes into the GDP 
that has a questionable claim to the stature of growth and good, even 
from the standpoint of those who make it. For example, much consumption 
is compulsory, in that buyers have little choice. There is fraud, such 
as the way seniors are cheated in reverse mortgage scams. There's also 
products that are designed to lock buyers into an endless stream of 
high-priced replacements, such as inkjet printer cartridges that are 
designed to resist refilling.
    Or what about car bumpers that are designed not to bump, so that a 
mild fender bender turns into a $5,000 repair bill? Or the usurious 
charges and fees that are built into credit cards. Not all Americans 
confronted with these regard them as ``consumption choices'' that 
propel them further up the mountain of more.
    The toughest case for the economic mind is addiction. The GDP 
assumes, as most economists do, that people are inherently 
``rational.'' What they buy is exactly what they want, and so their 
purchases must make them happy in exact proportion to the prices paid. 
Yet addiction has become pervasive. It has metastasized far beyond the 
usual suspects--gambling, tobacco, drink and drugs--and come to roost 
on such things as eating, credit cards, and shopping itself.
    How can anyone assume that buying makes people feel better when 
those very people are engaged in a mighty struggle to do less of it? 
Kuznets didn't explore all of these problems. But as I said, the terse 
language of his report suggested an awareness of them. It's another 
reason that the national accounts bear little relationship to a tally 
of economic well-being.
    Yet another reason is what economists call ``distribution.'' The 
GDP makes no distinction between a $500.00 dinner in Manhattan and the 
hundreds of more humble meals that could be provided for that same 
amount. An Upper East Side socialite who buys a pair of $800.00 pumps 
from Manolo Blahnik, appears to contribute forty times more to the 
national well-being than does the mother who buys a pair of $20.00 
sneakers at Payless for her son. ``Economic welfare cannot be 
adequately measured unless the personal distribution of income is 
known.''
    As included in the national accounts, an accretion of luxury buying 
at the top covers up a lack of necessary buying at the bottom. As the 
income scale becomes more skewed, as it has in the U.S., the cover up 
becomes even greater. In this respect the GDP serves as a statistical 
laundry operation that hides the suffering at the bottom--when used as 
a measure of national well-being.
    Another problem has to do with work, and the toll it takes on those 
who do it. Kuznets called this the ``reverse side of income, that is, 
the intensity and unpleasantness of effort going into the earning of 
income.'' That earning comes at a cost of wear and tear upon the body 
and psyche. If the GDP subtracts depreciation on buildings and 
equipment, should there not be a corresponding subtraction for the 
wearing out of people?
    What about the loss in the value of their skills as one technology 
displaces another? In the current accounting, this toll often gets 
added to the GDP rather than subtracted, in the form of medications, 
expenditures for retraining, and day care for children as parents work 
longer hours. Most workers would regard such outlays as costs not 
gains.
    Had Kuznets been writing today, moreover, he probably would have 
added another kind of depletion--that of natural resources. It sounds 
incredible, but when this Nation drills its oil and mines its coal, the 
national accounts treat this as an addition to the national wealth 
rather than a subtraction from it. The result is like a car with a gas 
gauge that goes up as the fuel tank gets lower. The national accounts 
portray a nation getting richer, when in fact it is draining itself 
dry.
    Kuznets concluded his report with words that ought to be inscribed 
on the walls in every office on Capitol Hill, and over every computer 
screen within a twenty mile radius. ``The welfare of a nation can, 
therefore, scarcely be inferred from a measurement of national income 
as defined above.''
    I'm going to repeat that in case anyone missed it:

        ``The welfare of a nation can, therefore, scarcely be inferred 
        from a measurement of national income as defined above.''

    That's what the man who invented the GDP--its predecessor, more 
precisely--told Congress regarding the use of his invention. Yet 
Congress has done exactly what Kuznets urged it not to do. Congress and 
everybody else.
    How exactly that came about is another long story. It began with 
the gradual seep of the new accounts into the political arena. In his 
1936 re-election campaign, Franklin Roosevelt noted that the economy--
as defined by the national accounts--had increased under his watch. It 
was a number: who could resist? The likely source was FDR's close 
advisor Harry Hopkins, whose office was a hub for the young economists 
who came to Washington to join the New Deal. But in the passage across 
15th Street from the Commerce Department to the White House, Kuznets' 
numbers were turning in to precisely what he said they shouldn't be.
    Then came World War II, when the national accounts played a central 
role in the mobilization effort. A bitter debate erupted in Washington 
over the Nation's production goals. Corporate leaders insisted that the 
mobilization must come out of the existing level of production They 
didn't want to be stuck with excess capacity when the war was over. 
Kuznets and others argued to the contrary that the U.S. had vast troves 
of untapped capacity; and they used the national accounts to prove it.
    FDR sided with the ``all-outers'' as this group was called. They 
appealed to his belief in the energizing effects of challenges; 
Roosevelt took their high estimates and made them even higher, the 
better to make his point. (The planners then had to shift gears argue 
the case for system limits, which the national accounts also helped 
them do.) Then the accounts helped to coordinate the war production so 
as to prevent bottlenecks and snafus. By 1944 war production alone had 
surpassed the Nation's entire output just 10 years before.
    It was as close as the Nation ever has come to pure economic 
planning; and though much reviled, it helped to win the war. Post-war 
surveys revealed that Germany had no such planning tool, and Hitler's 
production program had been greatly hindered as a result. America had 
become the ``arsenal of democracy'' in part through a top-down approach 
made possible by the national accounts. A paper published by the 
Russell Sage Foundation called the use of these ``one of the great 
technical triumphs in the history of the economics discipline.''
    This was heady stuff, and it was just a start. As the war was 
winding down, the accounts served again to guide the shift back to a 
peacetime basis without relapse into the dreaded Depression. 
Consumption was the key; the Cold War, with its Pentagon spending, was 
not yet in prospect. As war production diminished, shoppers would have 
to pick up the slack. The national accounts showed exactly how it could 
be done. As John Kenneth Galbraith put it in a series of articles for 
Fortune Magazine, ``One good reason for expecting prosperity after the 
war is the fact that we can lay down its specifications.''
    The new Keynesian economists such as Galbraith were now the Merlins 
of prosperity, and the national accounts were their magic wand. 
Consumption itself was taking on a heroic stature; the returning troops 
were handing off the mantle of national purpose to the shoppers who 
would replace them in keeping the industrial machinery in motion. (The 
heroic imagery persists in media accounts today, as when we read that 
consumers will provide the ``engine'' for recovery, or that they will 
``pull'' the Nation out of its recession.)
    In this atmosphere, it was perhaps inevitable that the map of the 
Nation's capacity would become a totem to its economic success. But 
Simon Kuznets watched it happen with increasing dismay. (Galbraith came 
to have second thoughts as well.) Kuznets was a quiet academic who was 
loathe to mount a soapbox. But he asserted over and over that those who 
had seized upon his handiwork had missed the point.
    In 1962 he wrote an article in the New Republic magazine on the 
question of growth. In evaluating growth, he said, ``distinctions must 
be kept in mind between quantity and quality of growth, between its 
costs and return, and between the short and the long run.''
    Kuznet's continued, ``goals for `more' growth should specify more 
growth of what and for what. It is scarcely helpful to urge that the 
over-all growth rate be raised to x percent a year, without specifying 
the components of the product that should grow at increased rates to 
yield this acceleration.'' If you are going to ``stimulate'' the 
economy, in other words, could we at least have a little debate over 
what exactly you are going to stimulate?
    That is the challenge that you face today. You might think of it as 
a broken feedback loop. If you had a gas gauge that went up as you 
drove, eventually you would run out of gas. If you have an index of 
economic well-being that goes up as families and communities cease to 
function, then you will keep doing the things that cause this 
dysfunction to increase. If your measures portray resource depletion as 
wealth increase, then you will continue to borrow from the future and 
to drain America first.
    Better measures will help lead to better results not by way of top 
down planning, but through the feedback they provide regarding when 
current policy is going off the tracks. I doubt that it is possible to 
include all the needed information into one single indicator. There are 
too many apples and oranges. To value a parent's work in the home at 
the going market price, for example, is both insulting to parents, and 
an exercise in self-parody for an economics profession that cannot see 
beyond the realm of market price.
    But at the very least there needs to be an array of indicators that 
connects such hidden forms of economic function to a larger economic 
whole. Here are some principles you might find useful.
1. The Future Matters
    Herman Daly, the economist, says that the national accounts look at 
America as a ``business in liquidation.'' The more we drain our natural 
resources, and the more we burden the natural dump space in the air and 
sky, the better we say we are doing. The same goes with the financial 
debt we are heaping upon the future and therefore upon our kids. You 
must weigh the burden these activities impose upon our kids and 
grandkids, against the temporary gains--if gains they are--they yield 
for us today.
2. Time Matters
    Time is perhaps the most basic form of wealth. Yet Americans, for 
all their wealth, are the most time-impoverished people on earth. The 
time they spend both working and consuming--that is, the time absorbed 
into the market--comes out of the time available for their families and 
communities; and both are going wanting as a result.
    Time is a finite resource, just as coal and oil and dump space in 
the sky are finite resources. To take more of it for work or 
consumption is to take it from someplace else. You need to look not 
just at the money and stuff that people have, but also at the time they 
have.
3. The Non-Market Economy Matters
    Most of the crucial life-supporting functions take place outside 
the realm of monetized exchange. They are not part of the market or the 
government--both of which function through money--but rather occur 
through natural or social process. The help and care of parents and 
neighbors; the cooling and cleansing functions of trees; woods in which 
to hike and hunt; clean water in which to fish and swim; these all are 
off the books. They do not register in the GDP until something destroys 
them and people have to buy substitutes in the market.
    This is insane. A tally of economic well-being needs to reflect 
reality, not just the portion of it that is convenient for economists 
to measure.
4. Distinguish Positives From Negatives
    This is tricky but there is no avoiding it forever. Not everything 
that is called ``consumption'' represents advance up the mountain of 
more. Here are a few examples:

   Compulsory expenditures that are built into products, such 
        as cars designed to cost a fortune to repair, and inkjet 
        printer cartridges designed to resist refilling.

   Fraud and abuse, such as exorbitant fees built into credit 
        cards that issuers increase whenever they want.

   Medical bills incurred because of other activities that 
        increase the GDP but degrade the environment. An example is 
        medical bills to treat asthma in children brought on by bad 
        air.

   Addictive consumption, which is shopping that the shoppers 
        themselves wish they could drop. It is hard to see how this 
        could add to well-being, when the people are doing it thinks it 
        adds to their own misery instead.

   Defensive consumption, such as the double-pane windows that 
        city dwellers buy to keep out noise from boom box cars and the 
        like on the street.

    It is not possible to parse out every single expenditure for its 
plusses and minuses. But neither is it tenable to assume that every 
expenditure represents a plus for the individual and society, just 
because somebody has made it. Yet the GDP starts with just that 
assumption; or more precisely, the people who interpret the GDP that 
way do. It is time to begin to make distinctions.
5. Measure Results Not Expenditures
    This is the most important thing. The purpose of an economy is to 
meet human needs in such a way that life becomes in some respect richer 
and better in the process. It is not simply to produce a lot of stuff. 
Stuff is a means, not an end. Yet current modes of economic measurement 
focus almost entirely on means.
    For example, an automobile is productive if it produces 
transportation. Yet today we look only at the cars produced per hour 
worked. More cars can mean more traffic and therefore a transportation 
system that is less productive. The medical system is the same way. The 
aim should be healthy people, not the sale of more medical services and 
drugs. Yet today, we assess the economic contribution of the medical 
system on the basis of treatment rather than results.
    Economists see nothing wrong with this. They see no problem that 
the medical system is expected to produce 30-40 percent of new jobs 
over the next 30 years. ``We have to spend our money on something,'' 
shrugged a Stanford economist to the New York Times. This is more 
insanity. Next we will be hearing about ``disease-led recovery.'' To 
stimulate the economy we will have to encourage people to be sick so 
that the economy can be well.
    These hearings could help to prevent that fate from befalling us. 
They are a big step. Thank you.

    Senator Dorgan. Mr. Rowe, thank you very much. Let me ask 
Dr. Landefeld, you know what we do measure, you've described 
it, and I think the panel has indicated it is not a worthless 
enterprise for us to know what is the classically defined GDP. 
We know what that measures.
    But it occurs to me that, for example, when we next hear 
the quarterly GDP, it will tell us the measurement of either 
growth or retraction in the economy. My guess is--let's assume 
that the next quarterly GDP would be a 3 percent growth. It 
won't be, but let's assume it would be 3 percent growth. That 
number could exist as growth even if there was substantial 
reduction in the value of the housing stock owned by American 
families. Is that correct?
    Dr. Landefeld. That's correct.
    Senator Dorgan. So let's now take a more realistic view. We 
use the GDP to evaluate whether we are in a recession.'' And 
that's just a trigger, or some sort of switch, a recession. We 
measure that by two successive quarters of negative growth, and 
therefore, ergo, we are in an economic recession. Is that 
correct?
    Dr. Landefeld. That's a commonly used definition.
    Senator Dorgan. Let's assume the next quarter--we've had 
one now, I believe--the next quarter gives us negative growth 
of one-half of 1 percent. Wouldn't it be the case that it is 
really much greater than that in terms of negative growth 
because we've had a dramatic reduction in the value of housing 
that bubble bursts the assets owned by the American people, and 
in most cases, the most significant asset is the home which is 
now, in most parts of the country, worth less?
    And that diminished value does not show up in the GDP?
    Dr. Landefeld. I think, as I said at the outset, it's 
important to have a multiplicity of numbers. And we publish all 
the Federal Reserve reports that are integrated in this volume 
I talked about.
    And there is a measure of what's happened to the housing 
wealth, and we publish that as part of our sets of accounts as 
a one-off, but because I think it's important to keep what's 
happening to wealth separate from what's happening to current 
production, and capital gains and losses from current income 
and current production.
    Again, illustrating that I think you need to look at the 
full picture, but I think it's also important that you keep the 
components separate.
    Senator Dorgan. That's a fair point, and I think the point 
that Jonathan Rowe made is that as is the case with so many 
things, the location of the GDP and the timing of it gives our 
24/7 press an opportunity to say, ``Here's a definitive all-
being, all-knowing, all-seeing evaluation of life in America,'' 
which, of course, is not what the GDP is about in any event.
    What would be the consequences if we developed supplemental 
accounts of some type? You indicate we have those now, by 
evaluating housing stock and so on, but Dr. Davis is talking 
about a supplemental account with respect to healthcare.
    Tell me about the consequences of that, and what kind of 
discussions have existed in your agency on that issue.
    Dr. Landefeld. I think outside of the Federal Reserve 
balance sheets and some other accounts, we don't have those 
kinds of satellite accounts. But that's one thing we are 
working on.
    Because, to answer the question Dr. Davis asked about the 
efficacy of healthcare, we really think the current system is 
deficient; because a lot of what we measure as an increased 
cost really isn't an increased cost. We believe we are missing, 
for example, the substitutions, from expensive talk therapy to 
lower-cost drug therapy. Substitution from bypass therapy to 
drug therapies appear to be missed in current measures.
    And so, one of our proposals, which we've done some work 
on, is to look at the cost of an episode of disease, more 
focused, as some of the panelists have talked about, outcome-
type measures for health. Another reason that we need a 
satellite account is that we measure healthcare spending on 
hospitals, physicians, each type of service we think of 
economically, but we don't do that by disease category.
    If we're interested in tracking what's happening to the 
cost of disease, we need to begin to look at it not only by 
type of service, but by types of diseases that are the cost 
drivers. So that's an example of one satellite account that we 
would be working on: that we think would begin to focus more on 
the type of outcomes that I think we need to measure to go 
beyond the GDP-type measures we have now.
    Senator Dorgan. Dr. Frank, and others on the panel who wish 
to comment, again, I don't wish to denigrate the GDP, because 
it is what it is, but isn't it the case that GDP would measure 
prostitution rings, pornography, and heart attacks as a net 
benefit to the economy? Or, at least, a net contributor to the 
GDP growth?
    Dr. Frank. Well, illegal activities sometimes don't make it 
onto the books and get counted, but if everything got counted, 
yes, it'd be counted alongside everything else. That's part of 
the GDP.
    Senator Dorgan. And so, Dr. Landefeld, does your family 
really count these things as a contribution to the economic 
well-being and say, ``Yes, but it's not a perfect 
measurement''?
    Dr. Landefeld. Yes.
    Senator Dorgan. It's an easy criticism of the GDP, and I 
understand that. The question, I think, is what really should 
be an evaluation or some sort of set of measurements that 
describe what kind of place this is in which to live, and how 
are we doing? Some of the Scandinavian countries have very 
different measurements.
    Who could describe some of what was happening in the 
Scandinavian countries or in other countries in the evaluation 
of economic growth or well-being? Who has a summation of that?
    Dr. Frank. I'll mention one small example. The tiny 
Himalayan Kingdom of Bhutan has recently adopted a gross 
national happiness measure. They've attempted to assess the 
happiness of members of the population by direct assessment, 
and then keep track of that over time, in the belief that if 
they measure that and publicize that, that will focus their 
attention on trying to do--adopt policies that will improve 
that measure.
    Senator Dorgan. We have--and anyways, we have a similar 
measurement in this country with respect to the economic side 
of things. We measure what is called consumer confidence, and 
that measurement has actually some impact out there. It kind of 
describes where things are heading in terms of how people see 
the future.
    And the economy itself, as most of us know, this is not the 
engine room of a ship with dials and knobs and gauges and you 
just adjust them all correctly and the economy works. In most 
cases, the economy is about confidence. If people are confident 
in the future, they do things that manifest their confidence.
    They buy a boat, buy a truck, buy a house, take a trip, 
they do all those things because they're confident about the 
future. They have their job, they're secure. If they're not, 
exactly the opposite of that, is they defer the purchase, they 
defer the trip. And so, we have--that's--the first part is 
expansion. The second part is contraction.
    So we all--we have measurement, not of happiness, but we 
have a measurement of consumer confidence.
    Dr. Frank. Now, that, and we also have a measure of 
happiness. They're not necessarily a government measure--
perhaps there are also government measures--but there have been 
various surveys since World War II that have asked American 
citizens, all things considered, how satisfied are you with 
your life these days? And that's been tracked over the decades.
    Senator Dorgan. I thought you were going to say the 
aggregate tickets to Disneyland or something like that. Well, 
Mr. Rowe, what do you think we should do? We have a measurement 
now. We all acknowledge that it doesn't necessarily measure the 
right things; it measures what it does measure.
    The press reports it that way. The policymakers rely on it 
in that way. What should we be doing to add to this 
measurement?
    Mr. Rowe. Well, it would helpful to go back and look at 
what happened in 1932, when what we now call the GDP came into 
being. We know that it was at the beginning of the Depression. 
Congress and the government had absolutely no data. There was 
no real data on employment and unemployment, in production, in 
different parts of the country.
    Then-President Hoover dispatched six people from the 
Commerce Department to go around the country and file reports, 
and those reports, not surprisingly, said that recovery was 
just around the corner. And so, Congress, and the person, then-
Senator Robert LaFollette, introduced a resolution under which 
the Department of Commerce would develop a systemic set--what 
today we would call a spreadsheet--of national accounts.
    The concern back then was just to get the economy going. 
And so, naturally, they were focused primarily on what is now 
included in the GDP. We have a much more complicated situation, 
but I think we can learn from that approach. It's going to take 
the initiative of somebody here in the Senate to introduce a 
resolution like that, or a law, or whatever, and get people 
working.
    It's probably going to take a lot of trial and error, but 
it's going to take some initiative to develop the kinds of 
approaches and accounts. Most of the statistic-gathering system 
of the Federal Government today is geared to the indicators 
that we now have. Until we start having some new indicators and 
taking them seriously, we aren't going to develop the statistic 
and data-gathering necessary to carry those out.
    Senator Dorgan. Dr. Davis, you wanted to comment.
    Dr. Davis. Well, I think Mr. Rowe is right, that policy is 
geared to what we measure and what we have data on. One of the 
measures of health system performance, first of all, is to the 
Eurobarometer survey of public satisfaction. Denmark has the 
highest rating of public satisfaction with the health system of 
any country in Europe.
    And when you really probe why that is, it's easy access to 
a family physician. You can get in at eight o'clock in the 
morning. There's an off-hours system that when you call, the 
doctor answers--a doctor answers the phone from 4 p.m. to 8 
a.m. at night and on weekends.
    So we can do that as something comparable to consumer 
confidence in terms of public satisfaction with healthcare. 
Another measure that's used a lot in other countries is 
preventable mortality amenable to medical care. That's now used 
by the Europeans. We don't use it in the U.S. We've actually 
funded, at The Commonwealth Fund, work to construct those 
indicators. But they ought to be part of standard government 
reporting.
    In our national scorecard on health system performance, we 
have 37 indicators. For the first time, we actually calculated 
what percent of adults are up to date with recommended 
preventive care. Only half of adults are up to date. What 
percent of people with chronic conditions, like hypertension or 
diabetes, have them adequately controlled? There's really no 
standard in reporting that. We need to have measures like that.
    We do have things like the quality in the hospital care for 
heart attack, congestive heart failure, and pneumonia. But we 
really need to broaden that to include much broader measures. 
And then, we need to know how well our care is coordinated. The 
big problem with the U.S. healthcare system is people fall 
through the cracks. They're discharged from the hospital, and 
nobody takes care of them immediately afterwards.
    They don't have an appointment with their own doctor to 
follow up, and so we have high rates of hospital readmissions, 
patients coming back in within 30 days because they don't know 
how to take care of themselves when they go home, or who to 
call when something is troubling.
    Senator Dorgan. Dr. Abraham, what alternative measurements 
do you think are necessary?
    Dr. Abraham. I've already mentioned supplemental accounts 
in the areas of home production, health accounts, and education 
accounts. But the thing that I keep coming back to, I guess, 
and something that Jonathan Rowe mentioned, is the importance 
of time.
    It's hard to think that we can do a good job of evaluating 
how well off we are as a society if, in addition to information 
on jobs and incomes and so on, we don't also have good 
information on how people are spending their time. Do people 
have time to spend with their families? What time do parents 
spend with their children? What time do people spend caring for 
older people?
    It's interesting to me. I think it's correct, again picking 
up on something Jonathan Rowe said, that the priority in the 
statistical system currently is on the economic statistics that 
have been around for a long time, and are rightly viewed as 
important measures. New things tend to get lower priority. That 
was the reason given for eliminating funding for the American 
Time Use Survey, and I think it's a big mistake.
    Senator Dorgan. Dr. Landefeld, do the measurements we now 
have with the Gross Domestic Product reflect increase in 
indebtedness?
    Dr. Landefeld. In--oh, in debt? As a--the same situation 
with respect to wealth, certainly yes, the net worth of 
consumers and how it's changed is presented alongside our 
numbers. But I think you make a valid point. It's more of a 
background set of numbers.
    And I think there is more that we can do to bring those 
numbers up front in our monthly personal income or personal 
consumption reports. It certainly is a very valid point that we 
can do more, and I think the press has critiqued us on that, 
rightfully so, that we can do more to bring those changes in 
debt and net wealth up front.
    If I may, just one point on other countries' measure of 
happiness: happiness is a real tough thing to measure. And when 
you look over time at most developed economies, they all bunch 
together, and they don't change over 20, 30, 40 year time 
horizons. The reason is, people adapt to different 
circumstances. Studies have shown, that while you may think 
that would make a big difference in people's happiness whether 
they're blind or not blind. It doesn't.
    So there's this current interest in measuring happiness in 
place of a gross--GDP type of numbers, and I think there's a 
lot that can be done, but some of it is more difficult because 
it's not----
    Senator Dorgan. The reason I ask about the debt offset or 
the question of debt is that there's a parable offered by 
Warren Buffet--I guess now probably the richest man in the 
world--I think it was just recently declared. He has a really 
interesting parable describing two groups of people living on 
two islands.
    One is Thriftville, and the other Squanderville. And one is 
very thrifty and productive, and the other essentially consumes 
and spends a lot. And you could, for Squanderville, I won't go 
through the parable with you, but you could make a pretty good 
case if we take this measurement that we have now called 
``Gross Domestic Product.''
    Even if Squanderville is consuming at a rate greater than 
its production, and therefore squandering its future 
opportunities, this measurement would measure Squanderville's 
progress as having growth, despite the fact that it is 
consuming its future and mortgaging its very assets to consume 
above its production.
    And so, it seems to me we could take a look at what's 
happening in our economy today with the subprime loan scandal 
and see the unbelievable amount of leverage and speculation, 
and then report whatever the growth figure might be the next 
quarter. Let's say it's positive. That positive figure probably 
has no reality and no attachment at all to what is really 
happening in the economy.
    The dramatic growth of the bubble of risk, dramatic 
reduction in home values, and so on--can that be the case, Dr. 
Landefeld?
    Dr. Landefeld. Yes. I think that the Federal Reserve Board, 
as I said, does produce these numbers, and we try and bring 
them out, but I think they become disconnected from the GDP 
number that comes out in our economic reporting of these data. 
And so, therefore, I think this is one of the reasons why we do 
need to do a better job integrating our various economic 
statistics we produce, because the accumulation of debt is a 
very important thing in terms of wealth effects and household 
spending.
    Even if you only care about the economy, you should care 
about those kind of things, as well.
    Senator Dorgan. Could you have growth of economic activity 
and net reduction in wealth?
    Dr. Landefeld. Actually, we have a measure called Net 
Domestic Product, which tries to measure exactly that, which 
looks at what we're consuming relative to what we're putting 
aside in depreciation through the future. And Net Domestic 
Product has, at times, been negative when Gross Domestic 
Product was positive.
    But once again, it's sort of one of those below-the-line 
numbers that people don't pay a lot of attention to. There are 
times, like hurricanes and other events, when you lose a lot of 
property. Sometimes we do have Net Domestic Product negative, 
while GDP is positive.
    Senator Dorgan. The purpose of this inquiry is to at least 
begin to talk about what we are measuring and what do we 
accomplish and what we understand with that measurement.
    And, perhaps you won't admit it today, but perhaps there 
are some people at your agency who would look at an inquiry of 
whether the GDP is a useful measurement because it measures, as 
I said, a heart attack, as a major asset and contributor to 
growth, and pornography as a contributor to growth. Is it a 
reasonable measurement?
    Some people would view this inquiry as fanciful and kind of 
oddball and really nutty. How do you view it?
    Dr. Landefeld. I don't think so at all, and indeed, I think 
as we've heard today, as far back as the founding of our 
accounts, we've been aware of that problem. But a lot of it 
comes back to we are economists. We feel comfortable in using 
market transactions. We know they have externalities and 
problems. But we don't feel comfortable making some of those 
subjective assessments one would have to make to develop these 
sets of accounts.
    Senator Dorgan. That's a perfectly logical position, and I 
understand it. I would not want you to go off and try to 
measure happiness. I mean, who knows? Who knows what happiness 
is at any given moment?
    But I think the question is, for me, how do you measure 
progress? And what is progress? And progress might be all kinds 
of subjective notions about my personal environment or my 
ability to enjoy life, and all the things that surround me 
personally, and our society. Some of it is economic. Some of it 
has nothing to do with dollars and cents.
    How do we measure progress in this country? People work 
longer hours and have less time. You're probably familiar with 
the essay and then the book by Putnam, Bowling Alone. And 
Bowling Alone was a description of both parents now working in 
the workplace, working longer hours, coming home completely 
exhausted, really unable anymore to join a mixed bowling 
league. Right?
    So Putnam took a look at reductions in the number of people 
participating in league bowling, and reductions in the number 
of people joining fraternal organizations, and described it 
back to the differences in our economy with both people working 
and struggling just to try to make ends meet.
    And that would all be viewed, in most cases, as a positive 
in our GDP numbers because we have two people in the workplace 
that are producing product, they're making income which we 
measure. But in the Bowling Alone description, obviously, it's 
net negatives in terms of the time available to do the things 
that they used to do to recreate. Right?
    So the question for me is, what can we do to better measure 
progress in our country? Making progress in a wide range of 
ways? And again, I'm not ever--nor would I, nor do I think that 
my colleagues would want you to start running off and measuring 
happiness.
    But I think, at least from the descriptions today, the 
suggestion is not that we would stop using a GDP measurement, 
but that we would better describe exactly what it contributes 
to the knowledge base here in this country, and hopefully 
instead create other indices or create other measurements, I 
should say, or find better ways to create measurements that 
measure the things that are left out of GDP.
    Does that sound reasonable to anybody?
    Dr. Frank. There are simple adjustments, too, that I think 
we could make. If you think about the cost of achieving basic 
goals for families, a typical middle-class family, if you look 
at the middle earners, their goal is going to be to send their 
children to schools of at least average quality for--in which 
they live, it would be an unusual parent who didn't aim at 
least that high.
    And we'd have to ask, how much does it cost now for a 
family in that position to meet that goal compared to what it 
did three decades ago? And I think the answer turns out, from 
the evidence we have, to be much--it's much more expensive to 
meet that goal relative to the new environment.
    And that's primarily because, I think, the expenditure 
cascade that's been launched by higher spending, launched in 
turn by higher incomes at the top, has had an effect on the 
average-sized house in the community. It's now about 2,300 
square feet, a median new house built in the U.S. In 1979, it 
was about 1,600 square feet, so a big jump.
    Not because the middle family has more income now than it 
did then. It doesn't have much more real income than before. It 
needs to buy a 2,300 square foot house now in order to send its 
children to an average-quality school, and it can't afford to 
do that. So the measure of what it must spend to achieve that 
goal relative to its income indicates an increased level of 
economic stress.
    Senator Dorgan. Well, now you're talking about geography of 
the school and the house. Right?
    Dr. Frank. Yes. If the good schools are in the more 
expensive neighborhoods, and then people at the top build 
bigger, yes, the people in the middle don't seem to care. They 
don't copy the people at the top. But people just below the top 
are influenced by what the people at the top do. Maybe now it's 
the custom to have the daughter's reception in the home, if 
you're in that circle.
    So they--the people just below the top build bigger, others 
just below them build bigger, too, and so on.
    Senator Dorgan. I mean, we not only have bigger houses, but 
smaller families.
    Dr. Frank. Exactly. So, for me, as the median, in order to 
send my children to a school of average quality, I've got to 
spend substantially more than in the past, and I don't have 
more money. So that's something you can measure and try to 
adjust for, I think, in the data.
    Senator Dorgan. So let me ask another question that's 
probably obvious. In our current measurement, let's say that a 
car accident is a net contributor to GDP. Is that correct?
    Dr. Landefeld. Well, with the correction of the problems 
caused by the car accident.
    Senator Dorgan. Well, but a car accident is going to 
require a car to be taken to a repair shop, and a $2,000 bill, 
and labor and so on. Right?
    Dr. Landefeld. No question. I was just making a point that 
from the viewpoint of the consumer who's had the accident, that 
they're glad to have the repair of the car.
    Senator Dorgan. But the costs that are not covered, and all 
of us have experienced these costs, almost all of us--the 
dramatic amounts of time, the loss of the availability of the 
car while it's being repaired, the time to go get the 
estimates, all of the things that are an unbelievable nuisance 
and that detract in terms of time for the person involved--the 
car accident contributes to the GDP, but one of the problems 
with this measurement is we don't extract the negative 
consequences.
    And that's one of the reasons I was thinking about this 
issue and trying to understand, how can we at least somewhat 
better portray to the American people--with all the numbers we 
have and all the capability of making judgments--how can we 
portray progress? Are we progressing? And if so, how?
    Dr. Landefeld. If I could, you know, we've had some 
setbacks, I'm optimistic--there are some very doable things 
that with leadership and resources, we can do. We have the data 
on distribution of income. We could try and bring that up to 
date, and more prominently feature it.
    We have the American Time Use Survey, which provides data 
on household products and I've done some work on how it would 
change our GDP estimates. That is available to us. We're 
working with a number of people at other agencies on a set of 
healthcare accounts.
    So while some of the more subjective problems you pose, 
such as an accident are harder, it is something we'd rather not 
have, but still, it's a market transaction and we have to count 
it. Some of those problems are more difficult, and it would be 
difficult to make progress in my view.
    But I'm rather optimistic about the range of things which 
have been put forth, and we can make progress on them as long 
as we have leadership and some resources to deal with them.
    Senator Dorgan. I'm going to have to be at another briefing 
in awhile, but I want to make sure that all of you have had the 
opportunity to say what you want to say. And I'm also going to 
mention that we will keep the record open and take additional 
statements that you or others who might be aware of this 
hearing wish to contribute because we don't do a lot of 
hearings like this.
    Most of our hearings, as you know, are in hot pursuit of 
some urgent issue that we have to have a hearing on today. This 
is more of a hearing that tries to think through how we're 
measuring progress in this great country. But I want to know, 
Mr. Rowe, do you have anything that you wish to add at the 
conclusion of the hearing?
    Mr. Rowe. Not--probably not briefly. But thanks.
    Senator Dorgan. Well, if it's not briefly, would you submit 
all of it for the record, and we will make it a part for the--
--
    Mr. Rowe. Well, I'll just say this. I'll just say this. As 
you know, Senator, my wife comes from a small village in the 
Philippines. And the people there are amazingly content. And 
I've never seen--there are two things I've never seen in that 
village: a wastebasket and a clock.
    And I think that if we were to trace back those two 
things--the wastebasket and the clock--and trace those two 
phenomena through the economy, we would have some of the answer 
that we're looking for.
    Senator Dorgan. I understand fully the clock. Describe for 
me the wastebasket.
    Mr. Rowe. Well, if you have pigs, you don't need a 
wastebasket. The idea is, all those activities that produce 
waste----
    Senator Dorgan. Consumable.
    Mr. Rowe. Yes.
    Senator Dorgan. OK.
    Mr. Rowe. Yes.
    Senator Dorgan. Well, all right. I'm probably the only one 
in this room that really understands pigs because I grew up in 
circumstances where we raised livestock and butchered. Dr. 
Davis?
    Dr. Davis. I think we could augment the activities of our 
National Center for Health Statistics that does put out things 
like injuries and car accidents, so we would know whether we're 
getting better or not. We could augment the activities of our 
Agency for Healthcare Research and Quality that does issue a 
national health quality report.
    But I think what we don't have, and one of the reasons I 
called for a Council of Health Advisors with a national health 
system performance report, is how to target our spending on the 
high value, high payoff activities. So what is the cost-
effectiveness of one drug versus another, if we pay twice as 
much for any drug? It doesn't mean it's twice as good; it may 
be equally good or even less good.
    So that's where I think we need our investment, a really 
comprehensive look at health system performance, and at the 
cost effectiveness, and the value that we're getting for what 
we spend.
    Senator Dorgan. Thank you. Dr. Abraham? Do you have 
anything to add?
    Dr. Abraham. I agree with things that other people have 
said. My priority would be ensuring that we find a way to 
continue to be able to look not only at money, but at time.
    Senator Dorgan. An excellent point. Dr. Frank?
    Dr. Frank. I would say there's one very cheap thing that we 
could do, and that would be to put more emphasis on GDP per 
hour, rather than GDP per person. The idea that you're worse 
off if you work 2 hours fewer in the day somehow is 
communicated by focusing on GDP per person.
    France has a higher GDP per hour than we do, I was 
surprised to learn, and it seems to me that they make good use 
of the extra hours of leisure that they take, and it should not 
be in any way a prejudiced view that their decision to take 
additional output in the form of leisure that way means they've 
somehow done less well economically than we have on that 
particular metric.
    And so I think if we emphasize output-per-hour more, we 
would be more inclined to think in terms of the value of time, 
as Professor Abraham suggested.
    Senator Dorgan. Interesting point. Dr. Landefeld?
    Dr. Landefeld. I have nothing to add, but thank you very 
much for having this hearing and opening this dialogue.
    Senator Dorgan. Well, thank you very much. And, Dr. 
Landefeld, thanks for the courtesy of allowing me to put the 
two panels together.
    As I said, we will keep the hearing record open. This is an 
opportunity to begin the seeds of discussion on something that 
I think is very interesting for this country, and we appreciate 
all of you being here. This hearing is adjourned.
    [Whereupon, at 2:42 p.m., the hearing was adjourned.]
                            A P P E N D I X

                     Atlantic Monthly, October 1995

                 If the GDP is Up, Why is America Down?

why we need new measures of progress, why we do not have them, and how 
          they would change the social and political landscape

           by Clifford Cobb, Ted Halstead, and Jonathan Rowe

    Throughout the tumult of the elections last year political 
commentators were perplexed by a stubborn fact. The economy was 
performing splendidly, at least according to the standard measurements. 
Productivity and employment were up; inflation was under control. The 
World Economic Forum, in Switzerland, declared that the United States 
had regained its position as the most competitive economy on earth, 
after years of Japanese dominance.
    The Clinton Administration waited expectantly, but the applause 
never came. Voters didn't feel better, even though economists said they 
should. The economy as economists define it was booming, but the 
individuals who compose it--or a great many of them, at least--were 
not. President Bill Clinton actually sent his economic advisers on the 
road to persuade Americans that their experience was wrong and the 
indicators were right.
    This strange gap between what economists choose to measure and what 
Americans experience became the official conundrum of the campaign 
season. ``PARADOX OF '94: GLOOMY VOTERS IN GOOD TIMES,'' The New York 
Times proclaimed on its front page. ``BOOM FOR WHOM?'' read the cover 
of TIME magazine. Yet reporters never quite got to the basic question--
namely, whether the official indicators are simply wrong, and are 
leading the Nation in the wrong direction.
    The problem goes much deeper than the ``two-tiered'' economy--
prosperity at the top, decline in the middle and at the bottom--that 
received so much attention. It concerns the very definition of 
prosperity itself. In the apt language of the nineteenth-century writer 
John Ruskin, an economy produces ``illth'' as well as wealth; yet the 
conventional measures of well-being lump the two together. Could it be 
that even the upper tier was--and still is--rising on the deck of a 
ship that is sinking slowly into a sea of illth, and that the Nation's 
indicators of economic progress provide barely a clue to that fact?
    Ample attention was paid to the symptoms: People were working 
longer hours for less pay. The middle class was slipping while the rich 
were forging ahead. Commutes were more harried. Crime, congestion, and 
media violence were increasing. More families were falling apart. A 
Business Week/Harris poll in March imparted the not surprising news 
that more than 70 percent of the public was gloomy about the future.
    Sounding much like the guidance department of a progressive New 
York grammar school, the Clinton Administration said that Americans 
were simply suffering the anxieties of adjustment to a wondrous new 
economy. Speaking in similar terms, Alan Greenspan, the chairman of the 
Federal Reserve Board, told a business gathering in San Francisco this 
past February that ``there seemingly inexplicably remains an 
extraordinarily deep-rooted foreboding about the [economic] outlook'' 
among the populace.
    Those silly people. But could it be that the Nation's economic 
experts live in a statistical Potemkin village that hides the economy 
Americans are actually experiencing? Isn't it time to ask some basic 
questions about the gauges that inform expert opinion, and the premises 
on which those gauges are based? Economic indicators are the main 
feedback loop to national policy. They define the economic problems 
that the political arena seeks to address. If the Nation's indicators 
of economic progress are obsolete, then they consign us to continually 
resorting to policies that cannot succeed because they aren't 
addressing the right problems.
    Today the two political parties differ somewhat in regard to means, 
but neither disputes that the ultimate goal of national policy is to 
make the big gauge--the gross domestic product--climb steadily upward. 
Neither questions that a rising GDP will wash away the Nation's ills: 
if Americans feel unsettled despite a rising GDP, then clearly even 
more growth is needed.
    This was clear in the months after the election, as the media 
continued to report economy up, people down stories that never quite 
managed to get to the crucial question: What is ``up,'' anyway? In 
July, Business Week ran a cover story called ``The Wage Squeeze'' that 
got much closer than most. The article showed remarkable skepticism 
regarding the conventional wisdom. But the magazine's editorial writers 
retreated quickly. Why aren't workers doing better even as corporate 
profits and ``the economy'' are up? ``America just may not be growing 
fast enough,'' they said.
    Furthermore, the GDP and its various proxies--rates of growth, 
expansion, recovery--have become the very language of the Nation's 
economic reportage and debate. We literally cannot think about 
economics without them. Yet these terms have increasingly become a 
barricade of abstraction that separates us from economic reality. They 
tell us next to nothing about what is actually going on.
    The GDP is simply a gross measure of market activity, of money 
changing hands. It makes no distinction whatsoever between the 
desirable and the undesirable, or costs and gain. On top of that, it 
looks only at the portion of reality that economists choose to 
acknowledge--the part involved in monetary transactions. The crucial 
economic functions performed in the household and volunteer sectors go 
entirely unreckoned. As a result the GDP not only masks the breakdown 
of the social structure and the natural habitat upon which the 
economy--and life itself--ultimately depend; worse, it actually 
portrays such breakdown as economic gain.
    Yet our politicians, media, and economic commentators dutifully 
continue to trumpet the GDP figures as information of great portent. 
There have been questions regarding the accuracy of the numbers that 
compose the GDP, and some occasional tinkering at the edges. But there 
has been barely a stirring of curiosity regarding the premise that 
underlies its gross statistical summation. Whether from sincere 
conviction or from entrenched professional and financial interests, 
politicians, economists, and the rest have not been eager to see it 
changed.
    There is an urgent need for new indicators of progress, geared to 
the economy that actually exists. We are members of Redefining 
Progress, a new organization whose purpose is to stimulate broad public 
debate over the nature of economic progress and the best means of 
attaining it. Accordingly, we have developed a new indicator ourselves, 
to show both that it can be done and what such an indicator would look 
like. This new scorecard invites a thorough rethinking of economic 
policy and its underlying premises. It suggests strongly that it is not 
the voters who are out of touch with reality.
A Brief History of Economic (Mis)measurement
    The GDP has been the touchstone of economic policy for so long that 
most Americans probably regard it as a kind of universal standard. (In 
1991 the government switched from the old GNP to the GDP, for reasons 
we will discuss later.) Actually the GDP is just an artifact of 
history, a relic of another era. It grew out of the challenges of the 
Depression and the Second World War, when the Nation faced economic 
realities very different from today's. Through history economic 
measurement has grown out of the beliefs and circumstances of the era. 
As Western economies went from agriculture to manufacturing to finance 
and services, modes of measurement generally evolved accordingly. But 
during this century, and especially since the war, the evolutionary 
process has slowed to a crawl. The market economy has continued to 
change radically. In particular it has penetrated deeper and deeper 
into the realms of family, community, and natural habitat that once 
seemed beyond its reach. But even as this change has accelerated, the 
way we measure economic health and progress has been frozen in place.
    The first estimates of national accounts in the Western world were 
the work of one Thomas Petty, in England in 1665. Petty's scope was 
fairly broad; he was trying to ascertain the taxable capacity of the 
Nation. In France, however, a narrower focus emerged. The prevailing 
economic theory was that of the Physiocrats, who maintained that 
agriculture was the true source of a nation's wealth. Not surprisingly, 
their economic measurement focused on agricultural production. There 
was a great diversity of viewpoint, however, even in France. In 
England, a more industrial country, Adam Smith articulated a broader 
theory of national wealth that included the whole swath of 
manufacturers as well.
    But one of many important points overlooked by his ardent followers 
is that Smith excluded what we today call the entertainment and service 
economies, including government and lawyers. Such functions might be 
useful or not, he said. But all are ultimately ``unproductive of any 
value,'' because they don't give rise to a tangible product. That view 
was certainly debatable. But Smith was asking a crucial question--one 
that has pretty much disappeared from economic thought. Is there a 
difference between mere monetary transactions and a genuine addition to 
a nation's well-being?
    By the end of the nineteenth century England's economic center of 
gravity had shifted significantly from manufacturing to trade and 
finance. In this new economy Smith's views on national wealth began to 
pinch. Alfred Marshall, who articulated what is now called neoclassical 
economics, declared that utility, rather than tangibility, was the true 
standard of production and wealth. Lawyers' fees, commissions, all the 
paper shuffling of an abstracted commercial economy, were essentially 
no different from sacks of potatoes or carloads of iron. The economic 
significance of a thing lay not in its nature but simply in its market 
price.
    This yoking of national accounting to the lowest common denominator 
of price was to have large implications. It meant that every item of 
commerce was assumed to add to the national well-being merely by the 
fact--and to the extent--that it was produced and bought. At the same 
time, it meant that only transactions involving money could count in 
the national reckoning. This left out two large realms: the functions 
of family and community on the one hand, and the natural habitat on the 
other. Both are crucial to economic well-being. But because the 
services they perform are outside the price system, they have been 
invisible in our national accounting.
    Long ago this omission was understandable. In Adam Smith's day the 
portion of life called ``the market'' occupied a very small part of 
physical and social space. The habitat seemed to have an infinite 
supply of resources, and an infinite capacity to absorb such wastes as 
the industry of the day might dump. The social structure seemed so 
firmly anchored in history that there was little thought that a growing 
market could set it adrift.
    During this century, however, those assumptions have become 
increasingly untenable. It is not accidental that both the habitat and 
the social structure have suffered severe erosion in recent decades; 
these are precisely the realms that eighteenth- and nineteenth-century 
assumptions precluded from the reckoning of national well-being--in 
capitalist and socialist economies alike. This erosion has been mainly 
invisible in terms of economic policy because our index of progress 
ignores it; as a result, the Nation's policies have made it worse. To 
understand how the national accounts became trapped in the assumptions 
of a bygone era, it is useful to study the era in which the current 
form of economic accounting was wrought.
    In 1931, a group of government and private experts were summoned to 
a Congressional hearing to answer basic questions about the economy. It 
turned out they couldn't: the most recent data were for 1929, and they 
were rudimentary at that. In 1932, the last year of the Hoover 
Administration, the Senate asked the Commerce Department to prepare 
comprehensive estimates of the national income. Soon after, the 
department set a young economist by the name of Simon Kuznets to the 
task of developing a uniform set of national accounts. These became the 
prototype for what we now call the GDP.
    As the thirties wore on, a new kind of economic-policy thinking 
started to take hold among some New Dealers. In their view the role of 
the Federal Government was not to coordinate industry or to prevent 
industrial concentrations, as the New Deal had initially done. Rather, 
the government should serve as a kind of financial carburetor to keep a 
rich mixture of spending power going into the engine, through deficits 
if necessary.
    This theory is generally attributed to John Maynard Keynes, of 
course, but numerous New Dealers had earlier approximated it in an 
instinctive and practical way. Since Keynesian management worked 
through flows of money rather than through bureaucratized programs, the 
new national accounts were essential to it. The Nobel Prize-winner 
Robert Solow, of MIT, has called Kuznets's work the ``anatomy'' for 
Keynes's ``physiology.''
    The two formally came together during the Second World War, and in 
the process the GNP became the primary scorecard for the Nation's 
economic policy. The degree to which the GNP evolved as a war-planning 
tool is hard to exaggerate. Keynes himself played a central role in 
Britain's Treasury during both world wars. At the start of the second 
he co-authored a famous paper called ``The National Income and 
Expenditure of the United Kingdom, and How to Pay for the War,'' which 
provided much conceptual groundwork for the GDP of today.
    In the United States the Manhattan Project got much more glory. But 
as a technical achievement the development of the GNP accounts was no 
less important. The accounts enabled the Nation to locate unused 
capacity, and to exceed by far the production levels that conventional 
opinion thought possible. To their great surprise, American 
investigators learned after the war that Hitler had set much lower 
production targets, partly for lack of sophisticated national accounts.
    Having helped win the war, the Keynesians were giddy with 
confidence. The specter of the Depression still haunted the United 
States; but these economists thought they had found the keys to the 
economic kingdom. With proper fiscal management and detailed knowledge 
of the GNP, they could master the dreaded ``business cycle'' and ensure 
prosperity indefinitely. When John Kenneth Galbraith joined the staff 
of Fortune magazine, his first project was to prepare a blueprint for 
America's transition to a postwar economy. The article was based on 
projections from the GNP accounts. ``One good reason for expecting 
prosperity after the war is the fact that we can lay down its 
specifications,'' the article said. ``For this we can thank a little-
observed but spectacular improvement in the statistical measures of the 
current output of the U.S. plant.''
    The Employment Act of 1946 turned the GNP and the theory it 
embodied into official policy. It established a Council of Economic 
Advisers as ``the high priests of economic management,'' as Allan J. 
Lichtman, a professor of history at the American University, has 
recently put it, and the GNP as their catechism. The production frenzy 
that had pulled the Nation out of the Depression and through the war 
was now the model for the peace as well.
    These developments set the course for economic policy and reportage 
for the next fifty years. The ironies have been many. If it is odd that 
liberal Democrats would turn the principles of a war economy into the 
permanent template for government, it is no less so that Republicans 
would latch fervently onto a measure of well-being that was basically a 
tool of central government planning.
    There have been a number of consequences that few saw clearly at 
the time. One was that economists became the ultimate authorities on 
American public policy. Before the war, economists were rarely quoted 
in news stories except in some official capacity. Now their opinions 
were sought and cited as canonical truth. Moreover, as the party that 
nurtured these economists, the Democrats became adherents of 
technocratic top down management that purported to act for the people, 
even if in ways beyond their ken.
    But the biggest change was in who ``the people'' now were. Because 
the Keynesian approach saw consumption as the drive train of 
prosperity, Washington collectively looked at the public in those terms 
as well. They were no longer primarily farmers, workers, 
businesspeople--that is, producers. Rather, they were consumers, whose 
spending was a solemn national duty for the purpose of warding off the 
return of the dreaded Depression. Our young men had marched off to war; 
now Americans were marching off to the malls that eventually covered 
the land.
    In this atmosphere the GNP, the measure and means of policy, 
rapidly became an end of policy in itself. The nation's social cohesion 
and natural habitat, which the GNP excluded, were taken for granted. 
Each week the host of General Electric Theater, Ronald Reagan, declared 
to the Nation that ``progress is our most important product.'' Products 
were progress, and therefore the GNP was progress too.
The GDP Today: How Down Becomes Up
    If the chief of your local police department were to announce today 
that ``activity'' on the city streets had increased by 15 percent, 
people would not be impressed, reporters least of all. They would 
demand specifics. Exactly what increased? Tree planting or burglaries? 
Volunteerism or muggings? Car wrecks or neighborly acts of kindness?
    The mere quantity of activity, taken alone, says virtually nothing 
about whether life on the streets is getting better or worse. The 
economy is the same way. ``Less'' or ``more'' means very little unless 
you know of what. Yet somehow the GDP manages to induce a kind of 
collective stupor in which such basic questions rarely get asked.
    By itself the GDP tells very little. Simply a measure of total 
output (the dollar value of finished goods and services), it assumes 
that everything produced is by definition ``goods.'' It does not 
distinguish between costs and benefits, between productive and 
destructive activities, or between sustainable and unsustainable ones. 
The nation's central measure of well-being works like a calculating 
machine that adds but cannot subtract. It treats everything that 
happens in the market as a gain for humanity, while ignoring everything 
that happens outside the realm of monetized exchange, regardless of the 
importance to well-being.
    By the curious standard of the GDP, the Nation's economic hero is a 
terminal cancer patient who is going through a costly divorce. The 
happiest event is an earthquake or a hurricane. The most desirable 
habitat is a multibillion-dollar Superfund site. All these add to the 
GDP, because they cause money to change hands. It is as if a business 
kept a balance sheet by merely adding up all ``transactions,'' without 
distinguishing between income and expenses, or between assets and 
liabilities.
    The perversity of the GDP affects virtually all parts of society. 
In 1993 William J. Bennett, who had been the Secretary of Education in 
the Reagan Administration, produced a study of social decline. He 
called it ``The Index of Leading Cultural Indicators,'' a deliberate 
counterpoint to the Commerce Department's similarly named regular 
economic report. His objective was to detail the social erosion that 
has continued even as the Nation's economic indicators have gone up.
    The strange fact that jumps out from Bennett's grim inventory of 
crime, divorce, mass-media addiction, and the rest is that much of it 
actually adds to the GDP. Growth can be social decline by another name. 
Divorce, for example, adds a small fortune in lawyers' bills, the need 
for second households, transportation and counseling for kids, and so 
on. Divorce lawyers alone take in probably several billion dollars a 
year, and possibly a good deal more. Divorce also provides a major 
boost for the real-estate industry. ``Unfortunately, divorce is a big 
part of our business. It means one [home] to sell and sometimes two to 
buy,'' a realtor in suburban Chicago told the Chicago Tribune. 
Similarly, crime has given rise to a burgeoning crime-prevention and 
security industry with revenues of more than $65 billion a year. The 
car-locking device called The Club adds some $100 million a year to the 
GDP all by itself, without counting knock-offs. Even a gruesome event 
like the Oklahoma City bombing becomes an economic uptick by the 
strange reckonings of the GDP. ``Analysts expect the share prices [of 
firms making anti-crime equipment] to gain during the next several 
months,'' The Wall Street Journal reported a short time after the 
bombing, ``as safety concerns translate into more contracts.''
    Bennett cited the chilling statistics that teenagers spend on 
average some 3 hours a day watching television, and about 5 minutes a 
day alone with their fathers. Yet when kids are talking with their 
parents, they aren't adding to the GDP. In contrast, MTV helps turn 
them into ardent, GDP-enhancing consumers. Even those unwed teenage 
mothers are bringing new little consumers into the world (where they 
will quickly join the ``kiddie market'' and after that the ``teen 
market,'' which together influence more than $200 billion in GDP). So 
while social conservatives like Bennett are rightly deploring the 
Nation's social decline, their free-marketeer counterparts are looking 
at the same phenomena through the lens of the GDP and breaking out the 
champagne.
    Something similar happens with the natural habitat. The more the 
Nation depletes its natural resources, the more the GDP increases. This 
violates basic accounting principles, in that it portrays the depletion 
of capital as current income. No businessperson would make such a 
fundamental error. When a small oil company drains an oil well in 
Texas, it gets a generous depletion allowance on its taxes, in 
recognition of the loss. Yet that very same drainage shows up as a gain 
to the Nation in the GDP. When the United States fishes its cod 
populations down to remnants, this appears on the national books as an 
economic boom--until the fisheries collapse. As the former World Bank 
economist Herman Daly puts it, the current national accounting system 
treats the Earth as a business in liquidation.
    Add pollution to the balance sheet and we appear to be doing even 
better. In fact, pollution shows up twice as a gain: once when the 
chemical factory, say, produces it as a by-product, and again when the 
Nation spends billions of dollars to clean up the toxic Superfund site 
that results. Furthermore, the extra costs that come as a consequence 
of that environmental depletion and degradation--such as medical bills 
arising from dirty air--also show up as growth in the GDP.
    This kind of accounting feeds the notion that conserving resources 
and protecting the natural habitat must come at the expense of the 
economy, because the result can be a lower GDP. That is a lot like 
saying that a reserve for capital depreciation must come at the expense 
of the business. On the contrary, a capital reserve is essential to 
ensure the future of the business. To ignore that is to confuse mere 
borrowing from the future with actual profit. Resource conservation 
works the same way, but the perverse accounting of the GDP hides this 
basic fact.
    No less important is the way the GDP ignores the contribution of 
the social realm--that is, the economic role of households and 
communities. This is where much of the Nation's most important work 
gets done, from caring for children and older people to volunteer work 
in its many forms. It is the Nation's social glue. Yet because no money 
changes hands in this realm, it is invisible to conventional economics. 
The GDP doesn't count it at all--which means that the more our families 
and communities decline and a monetized service sector takes their 
place, the more the GDP goes up and the economic pundits cheer.
    Parenting becomes child care, visits on the porch become psychiatry 
and VCRs, the watchful eyes of neighbors become alarm systems and 
police officers, the kitchen table becomes McDonald's--up and down the 
line, the things people used to do for and with one another turn into 
things they have to buy. Day care adds more than $4 billion to the GDP; 
VCRs and kindred entertainment gear add almost $60 billion. Politicians 
generally see this decay through a well-worn ideological lens: 
conservatives root for the market, liberals for the government. But in 
fact these two ``sectors'' are, in this respect at least, merely 
different sides of the same coin: both government and the private 
market grow by cannibalizing the family and community realms that 
ultimately nurture and sustain us.
    These are just the more obvious problems. There are others, no less 
severe. The GDP totally ignores the distribution of income, for 
example, so that enormous gains at the top--as were made during the 
1980s--appear as new bounty for all. It makes no distinction between 
the person in the secure high-tech job and the ``downsized'' white-
collar worker who has to work two jobs at lower pay. The GDP treats 
leisure time and time with family the way it treats air and water: as 
having no value at all. When the need for a second job cuts the time 
available for family or community, the GDP records this loss as an 
economic gain.
    Then there's the question of addictive consumption. Free-market 
fundamentalists are inclined to attack critics of the GDP as 
``elitists.'' People buy things because they want them, they say, and 
who knows better than the people themselves what adds to well-being? It 
makes a good one liner. But is the truth really so simple? Some 40 
percent of the Nation's drinking exceeds the level of ``moderation,'' 
defined as two drinks a day. Credit-card abuse has become so pervasive 
that local chapters of Debtors Anonymous hold forty-five meetings a 
week in the San Francisco Bay area alone. Close to 50 percent of 
Americans consider themselves overweight. When one considers the $32 
billion diet industry, the GDP becomes truly bizarre. It counts the 
food that people wish they didn't eat, and then the billions they spend 
to lose the added pounds that result. The coronary bypass patient 
becomes almost a metaphor for the Nation's measure of progress: shovel 
in the fat, pay the consequences, add the two together, and the economy 
grows some more.
    So, too, the O.J. Simpson trial. When The Wall Street Journal added 
up the Simpson legal team ($20,000 a day), network-news expenses, O.J. 
statuettes, and the rest, it got a total of about $200 million in new 
GDP, for which politicians will be taking credit in 1996. ``GDP of O.J. 
Trial Outruns the Total of, Say, Grenada,'' the Journal's headline 
writer proclaimed. One begins to understand why politicians prefer to 
talk about growth rather than what it actually consists of, and why 
Prozac alone adds more than $1.2 billion to the GDP, as people try to 
feel a little better amid all this progress.
The Politics of Permanence
    Simon Kuznets had deep reservations about the national accounts he 
helped to create. In his very first report to Congress, in 1934, he 
tried to warn the Nation of the limitations of the new system. ``The 
welfare of a nation,'' the report concluded, can ``scarcely be inferred 
from a measurement of national income as defined above.''
    But the GNP proceeded to acquire totemic stature, and Kuznets's 
concerns grew deeper. He rejected the a priori conceptual schemes that 
govern most economic thought. As an economy grows, he said, the concept 
of what it includes must grow as well. Economists must seek to measure 
more and different things. By 1962 Kuznets was writing in The New 
Republic that the national accounting needed to be fundamentally 
rethought: ``Distinctions must be kept in mind between quantity and 
quality of growth, between its costs and return, and between the short 
and the long run,'' he wrote. ``Goals for `more' growth should specify 
more growth of what and for what'' (emphasis added).
    To most of us, that would seem to be only common sense. If the 
government is going to promote something, surely the voters should know 
what that something is. But in the view of most economists, Kuznets was 
proposing a pipe bomb in the basement. Once you start asking ``what'' 
as well as ``how much''--that is, about quality instead of just 
quantity--the premise of the national accounts as an indicator of 
progress begins to disintegrate, and along with it much of the 
conventional economic reasoning on which those accounts are based.
    Unsurprisingly, the profession did not seize eagerly upon Kuznets's 
views. Though he won a Nobel Prize in 1971, many economists dismissed 
him as a kind of glorified statistician. Most are aware of at least 
some of the basic shortcomings of the GDP. But rather than face those 
shortcomings squarely, they have either shrugged their shoulders or 
sought to minimize the implications for their underlying models. In his 
ubiquitous economics text Paul Samuelson and his co-author William 
Nordhaus devote a few pages to possible revisions to the GDP to reflect 
environmental and other concerns. But this is more in the spirit of a 
technical adjustment than a questioning of the underlying premise.
    The effects of the GDP fixation can be seen perhaps most vividly in 
what are called ``developing nations'' (a term that is itself defined 
mainly in terms of GDP)--specifically in the policies of the World 
Bank, which is a kind of development czar for the nations of the South. 
Decades ago Kuznets tried to point out the absurdity of using such a 
measure to assess the economies of less-developed nations, where much 
production takes place in the household economy and is therefore beyond 
the ken of the GNP. A development strategy based on raising the GNP 
might undermine this household economy and therefore diminish the well-
being of the Nation's people, while devastating the habitat to boot.
    In 1989 Barber Conable, then the president of the World Bank, 
acknowledged the problem with respect to environmental issues. 
``Current calculations ignore the degradation of the natural-resource 
base and view the sales of nonrenewable resources entirely as income,'' 
he wrote. ``A better way must be found.'' Yet on the floors beneath him 
the bank's economists continued churning out loan strategies aimed at 
boosting GDP. One recent World Bank publication reaffirmed it as the 
``main criterion for classifying economies.''
    And a wrongheaded one. In a groundbreaking study of Indonesia in 
1989, the World Resources Institute, of Washington, D.C., explored the 
implications for natural resources. Since the 1970s Indonesia had been 
a success story for the conventional development school, achieving an 
exceptional growth rate of 7 percent a year. But such an amphetamine 
pace cannot be sustained forever. Indonesia is selling off precious 
nonrenewable mineral wealth. Clear-cutting its forests and exhausting 
its topsoil with intensive farming, it is in effect robbing the future 
to finance the current boom. After adding in these and other factors, 
the institute found that the country's real, sustainable growth rate 
was only about half the official rate. And that wasn't counting the 
broader spectrum of environmental and social costs, which would have 
brought the growth rate down even more.
    Here was another warning for those disposed to heed it. Yet the 
international development establishment did nothing of the sort. In 
fact, what is being measured has grown more partisan than ever. 
Specifically, in 1991 the GNP was turned into the GDP--a quiet change 
that had very large implications.
    Under the old measure, the gross national product, the earnings of 
a multinational firm were attributed to the country where the firm was 
owned--and where the profits would eventually return. Under the gross 
domestic product, however, the profits are attributed to the country 
where the factory or mine is located, even though they won't stay 
there. This accounting shift has turned many struggling nations into 
statistical boomtowns, while aiding the push for a global economy. 
Conveniently, it has hidden a basic fact: the nations of the North are 
walking off with the South's resources, and calling it a gain for the 
South.
    The more basic defects of the GDP have not gone unnoticed among the 
nations of the world. In France a parliamentary report has called for 
new indicators of progress; the Treasury of Australia has done so as 
well. Both the U.N. and the European Parliament have taken up the 
issue, and there are ripples even at the World Bank.
    But in the United States change will not come easily. The quarterly 
release of the GDP figures has become a Wall Street ritual and 
metronome for the national media, setting the tempo and story line for 
economic reportage. For the media in particular, the GDP serves deep 
institutional cravings, combining the appearance of empirical certitude 
and expert authority with a ready-made story line. It also serves the 
industries that thrive on the kind of policies it reinforces; those 
inclined to deplete and pollute are especially pleased with an 
accounting system that portrays these acts as economic progress. This 
came to light clearly last year when the Clinton Administration 
proposed, sensibly, that resource depletion be subtracted from GDP 
(albeit only in a footnote) instead of added to it.
    The idea had been kicking around the Commerce Department for years, 
and the Administration's actual proposal was modest in the extreme. 
Still, at a House Appropriations Committee hearing in April 1994 two 
representatives from coal states pounced on the department staff. After 
a series of jabberwocky exchanges that illustrated why Members of 
Congress usually leave technical issues to their staffs, Congressman 
Alan Mollohan, of West Virginia, finally got to the heart of the 
matter. If the national accounts were to include the depletion of coal 
reserves and the effects of air pollution (which would be added 
eventually), he said, ``somebody is going to say . . . that the coal 
industry isn't contributing anything to the country.'' Better to keep 
depletion and pollution hidden under the accounting rug called 
``growth.'' The committee demanded an expensive outside review, 
effectively delaying the project. In the Republican Congress its fate 
is by no means assured.
A Genuine Progress Indicator
    Economists have couched their resistance to new indicators mainly 
in philosophical terms. A measure of national progress must be 
scientific and value-free, they say. Any attempt to assess how the 
economy actually affects people would involve too many assumptions and 
imputations, too many value judgments regarding what to include. Better 
to stay on the supposed terra firma of the GDP, which for all its 
faults has acquired an aura of hardheaded empirical science.
    Aura notwithstanding, the current GDP is far from value-free. To 
leave social and environmental costs out of the economic reckoning does 
not avoid value judgments. On the contrary, it makes the enormous value 
judgment that such things as family breakdown and crime, the 
destruction of farmland and entire species, underemployment and the 
loss of free time, count for nothing in the economic balance. The fact 
is, the GDP already does put an arbitrary value on such factors--a big 
zero.
    Conventional economic thinking follows a simple premise in this 
regard: As Paul Samuelson puts it in his textbook, ``economics focuses 
on concepts that can actually be measured.'' If something is hard to 
count, in other words, then it doesn't count. Of course, there will 
never be a way to assign an exact dollar value to our family and 
community life, our oceans and open spaces. This doesn't mean they 
don't have value. It means only that we don't have a way to register 
their value in a form comparable to market prices. Given that, the 
challenge is simply to start to develop values that are more reasonable 
than zero; it is to stop ignoring totally that which is crucial to the 
Nation's economic and social health. An approximation of social and 
habitat costs would be less distorting and perverse than the GDP is 
now; a conservative estimate of, say, the costs of family breakdown and 
crime would produce a more accurate picture of economic progress than 
does ignoring such costs entirely.
    We have a rough sketch of such a picture. On a limited budget, 
using data that the Federal Government and other institutions already 
collect, we have developed estimates for the kinds of factors that the 
economic establishment ignores. The result is a new index that gets 
much closer--not all the way, but closer--to the economy that people 
experience. We call it the ``genuine progress indicator'' (GPI), and it 
provides substance to the gap between the economy limned by the 
commentators and the one that has brought increasing apprehension and 
pain to so many others. It also begins to suggest the kinds of 
measurements that the Federal Government, with its enormous statistical 
resources, could construct.
    The GPI includes more than twenty aspects of our economic lives 
which the GDP ignores. We based this list on available data and on 
common sense. A family does not count every dollar spent as a step 
forward. Rather, it tries to sort out the different kinds of 
expenditures--and that's basically what we did with the national 
accounts. We started with the same consumption data that the GDP is 
based on, but revised them in a number of ways. We adjusted for some 
factors (such as income distribution), added certain others (such as 
the value of housework and community work), and subtracted yet others 
(such as pollution costs and the like). The result is a balance sheet 
for the Nation that starts to distinguish between the costs and 
benefits of ``growth.''
    Here are some of the factors we included:

        The household and volunteer economy. Much of the Nation's most 
        important work--and the work that affects our well-being most 
        directly--gets done in family and community settings. Taking 
        care of children and the elderly, cleaning and repairing, 
        contributing to neighborhood groups--all of these are totally 
        ignored in the GDP when no money changes hands. To overcome 
        this problem, we included, among other things, the value of 
        household work figured at the approximate rate a family would 
        have to pay someone else to do it.

        Crime. The GDP counts as progress the money people spend 
        deterring crime and repairing the damage it causes. However, 
        most people would probably count those costs as necessary 
        defenses against social decline, and that's how the GPI counts 
        them too. We included hospital bills and property losses 
        arising from crime and the locks and electronic devices that 
        people buy to prevent it.

        Other defensive expenditures. Crime-related costs are just one 
        kind of expenditure that seeks to repair past or present 
        damage, as opposed to making people better off. We also 
        incorporated the money spent on repairs after auto accidents 
        and what households pay for water filters, air purification 
        equipment, and the like to defend against the degradation of 
        their physical environment.

        The distribution of income. A rising tide of GDP doesn't 
        necessarily lift all boats--not if the growth of income is 
        mainly at the top. It was in the 1980s: the top 1 percent of 
        households enjoyed a growth in income of more than 60 percent, 
        while the bottom 40 percent of households saw their incomes 
        drop. To take account of this uneven tide, we adjusted the GPI 
        for the extent to which the whole population actually shared in 
        any increase.

        Resource depletion and degradation of the habitat. As the 
        Nation uses up oil and other minerals, this should appear as a 
        cost on the national accounts, just as it does on the books of 
        a private business; yet the GDP treats it as a gain. We 
        reversed that in the GPI. Similarly, the pollution of our air 
        and water represents the using up of nature's capacity to 
        absorb humanity's waste. Therefore we included, among other 
        things, the damage to human health, agriculture, and buildings 
        from air and water pollution, along with such recreational 
        losses as beaches fouled by sewage or medical debris.

        Loss of leisure. If people have to work two jobs or longer 
        hours just to stay even, then they aren't really staying even. 
        They are falling behind, losing time to spend with their 
        families, to further their education, or whatever. The GDP 
        assumes that such time is worth nothing. We included it at an 
        average wage rate.

    To include such factors is to begin to construct a picture of the 
economy that most Americans experience. It clarifies greatly the 
``paradox'' that permeated the reportage during last year's 
Congressional campaigns. The GDP would tell us that life has gotten 
progressively better since the early 1950s--that young adults today are 
entering a better economic world than their parents did. GDP per 
American has more than doubled over that time. The GPI shows a very 
different picture: an upward curve from the early fifties until about 
1970, but a gradual decline of roughly 45 percent since then. This 
strongly suggests that the costs of increased economic activity--at 
least the kind we are locked into now--have begun to outweigh the 
benefits, resulting in growth that is actually uneconomic.
    Specifically, the GPI reveals that much of what we now call growth 
or GDP is really just one of three things in disguise: fixing blunders 
and social decay from the past, borrowing resources from the future, or 
shifting functions from the traditional realm of household and 
community to the realm of the monetized economy.
    Many readers might think of additions to the list of factors that 
the GPI ought to include--thus corroborating both the underlying 
concept and the conservative nature of our calculations. We left out, 
for example, the phenomenon of addictive consumption, which is spending 
that consumers themselves say they wish they didn't do. We also left 
out the destruction of species, since there is not a satisfactory way 
to reckon such loss in economic terms.
    The GPI has been several years in the making, and we will continue 
to refine it. But already it appears to have touched a nerve in the 
economics profession and beyond. More than 400 economists and a growing 
number of opinion leaders, including Robert Eisner, the former 
president of the American Economic Association, and Alvin Toffler, Newt 
Gingrich's favorite futurist, have endorsed it as an important step 
toward the new kinds of indicators that are urgently needed. Research 
institutes in Germany and the United Kingdom have sought to replicate 
it for their countries. Economic measurement is due for a radical 
change, and we hope that the GPI will speed up the process. But 
measurement is a means, not an end. The more important question is how 
an honest set of economic books would change the Nation's economic 
debate and force our leaders out of their Potemkin village.
From Scorecards to Policies
    Imagine Peter Jennings on the network news tonight reciting the 
latest Commerce Department figures with his polished gravity. Instead 
of the GDP, however, he is reporting something more like the GPI. The 
nation's output increased, he says, but parents worked longer hours and 
so had less time with their kids. Consumer spending was ``up sharply,'' 
but much of the difference went for increased medical costs and 
repairing the rubble left by hurricanes and floods. Utility receipts 
were up, but resources declined, meaning that part of today's 
prosperity was taken from our grandchildren. And so on down the line.
    Reports of that kind would have a radical effect. They would break 
through the hermetic economy portrayed by economists and Wall Street 
analysts which dominates the news today--the abstractions that serve as 
a conceptual phalanx against reality. Suddenly reporters and 
politicians alike would have to confront the economy that people 
actually experience. There would be some genuine accountability in 
Washington, a better sense of cause and effect between what Congress 
does and what happens in our lives. New indicators would blast away the 
obfuscatory polemics of growth--and the devious politics that goes 
along with it. Politicians could no longer get away with glib 
assurances that the Nation can grow its way out of family breakdown and 
environmental decay, inequity and debt, when in many cases the Nation 
has been growing its way into them.
    Such assurances have become a kind of political perpetual-motion 
machine. Newt Gingrich rhapsodizes about the entertainment economy and 
the 500 cable channels it will bring to the American living room. (When 
Gingrich and like-minded politicians extol ``growth,'' entertainment is 
one of the things they are talking about; since 1991 it grew twice as 
fast as consumer spending generally.) But when these channels flood the 
family living room with sex and violence, and kids spend more time 
watching TV than they do with their parents or their homework, he 
blames ``McGovernik liberals'' for the breakdown in traditional family 
values. At the same time, he's only too happy to count the new tax 
revenues that arise from that family breakdown toward balancing the 
Federal budget.
    Honest accounting would blow the whistle on these political games. 
It would also bring a new clarity and rigor to any number of policy 
debates--those over trade agreements being a prime example. In the 
recent past these debates have been framed largely in terms of the GDP. 
The General Agreement on Tariffs and Trade means ``percentage points . 
. . of U.S. GDP growth,'' exclaimed Bill Frenzel, a former Congressman 
from Minnesota and a congressional representative to GATT negotiations. 
``It means trillions of dollars in increased world trade.'' This kind 
of talk was typical. In fact the increase means very little--only that 
more things will pass back and forth between nations. Will families and 
communities suffer continuing disruption? Will the increased traffic 
back and forth simply burn up more energy, the price of which is kept 
artificially low by tax subsidies and the like? Will America lose a 
measure of control over decisions that affect the lives of its own 
citizens?
    There were efforts to raise such issues in the trade debates. But 
the polemical playing field was tilted sharply against them by the GDP. 
The result was a perpetuation of free-trade dogma that is based on the 
economy of 200 years ago. Better accounting would not in itself dictate 
a different conclusion. But at least it would level the field, and 
include many factors that now get left out. It would, for example, 
reflect some of the numerous benefits of local production that don't 
show up in the GDP--social stability, job security, energy savings, and 
the like. Free-trade dogma dismisses such thoughts as primitive and 
benighted.
    Better indicators would also strengthen the role of family and 
community values in our policy debates. Rarely does anyone point out 
how the market itself can undermine family values in the name of 
growth. When regional shopping centers replace traditional Main 
Streets, the matrix of community activity is significantly undermined 
as well. Similarly, when mass media replace the storytelling of parents 
and grandparents, the GDP goes up while the role of families declines.
    If factory jobs migrate to low-wage nations, it means cheaper 
products and more efficiency. But it also means severe family 
disruption, and the decline of the informal safety net of churches and 
union halls that once flourished in factory towns and helped families 
in need. The government obscures the impact of such policies by in 
effect keeping two sets of books--a visible one for the market and an 
invisible one for everything else. New indicators would bring the two 
together, and better policy just might result.
    The effect would perhaps be especially direct on tax policy. The 
current tax system is deeply perverse, but not for the reasons that 
economists generally cite. Purveyors of conventional wisdom say that 
the tax system retards growth, by which they mean GDP. But this makes 
no distinction at all between muscle and bloat. They want capital-gains 
tax breaks, but for what? Pop art? Overseas investment funds? They urge 
taxes on consumption. But what kinds do they mean? Work shoes as well 
as Guccis? Recycled paper along with that made from ancient forests?
    Meanwhile, the left argues for ``progressive'' taxes based entirely 
on income, as if income and the activities that produce it were 
inherently worthy of censure, regardless of what those activities are. 
Better accounting would define the issue along an entirely different 
spectrum.
    For example, the current system taxes heavily that which should be 
encouraged--enterprise and human labor. Meanwhile, it taxes lightly or 
even subsidizes the use of the natural resources that humanity needs to 
husband and conserve. Employers pay a heavy fine, in the form of Social 
Security taxes, workers' compensation, and the rest, when they hire 
somebody. But they get big write-offs when they help to drain the 
world's natural resources. New accounting would expose this perversity, 
and point toward a new tax system that defied the stereotyped 
categories of left and right.
    To put it simply, the Nation would cut--or if possible eliminate--
taxes on work and enterprise and replace them with increased taxes on 
the use of natural resources. Such a system would diminish the need for 
environmental regulation, by building a semblance of environmental 
accounting right into the price system. Prices would include 
environmental and social costs. This approach would also be a spur to 
enterprise and employment. With reduced income taxes, the entire 
economy would become a kind of enterprise zone, and the Nation's 
entrepreneurial energies would be deployed much more toward solving 
environmental and social problems than toward creating them. Moreover, 
by doing away with the corporate income tax, we could get rid of the 
whole loophole culture that corrupts the Nation's politics and is a 
primary source of corporate subsidy and waste.
    Closely related is the issue of cost-benefit analysis, which was 
one of the hot topics in Washington this year. Republicans argue, 
sensibly, that environmental and other regulations should bring 
benefits commensurate with the costs involved. But that just begs the 
crucial question: What goes into the accounting? If the GDP defines the 
framework, then cost-benefit analysis becomes a made-in-heaven deal for 
polluters and those who cause social disruption. If nothing counts 
other than what is conventionally counted, then tangible increases in 
production will win out over the less easily quantified--but no less 
real--harm to the natural and social spheres. To broaden the reckoning, 
however, could produce results quite the opposite of what the current 
advocates of cost-benefit analysis intend.
The New Politics of Progress
    It has become almost obligatory in a context such as this to invoke 
the concept of a ``paradigm shift,'' to use Thomas Kuhn's much-cited 
formulation, laid out in The Structure of Scientific Revolution. But 
there is a side to this that is generally overlooked--namely, the 
central role of generational divides. Kuhn quotes the physicist Max 
Planck: ``A new scientific truth does not triumph by convincing its 
opponents and making them see the light, but rather because its 
opponents eventually die.''
    One would wish for a more ceremonious process. But no field has 
grown more tightly shut than economics, whose basic orthodoxies have 
persisted for at least a hundred years. Unless history stops cold, 
these, too, will eventually yield, and the time is now propitious. The 
generation that developed the GDP, and for which the GDP distilled an 
entire world view, is now mainly retired. The students and disciples of 
that generation are well into their middle years, rumbling along on 
mental capital from long ago. For the generation that is replacing 
them, the defining traumas were not the Depression and the Second World 
War but rather the material glut and environmental and social 
disintegration of which many in the old guard served as unwitting 
boosters and engineers.
    To be sure, the old order does not lack acolytes. But for a growing 
number of economists, the conceptual tools and measurements of the 
neoclassical model--Keynesian twists included--are no longer adequate. 
These economists are demanding that their profession start to take 
account of the larger economy in which the market is grounded--the 
natural and social spheres, which they have in the past dismissed as 
the netherworlds of externality. In a survey in the 1980s of economists 
at fifty major universities two-thirds acknowledged a sense of ``lost 
moorings'' in the profession.
    In recent decades this kind of critique has been associated mainly 
with the ecological camp. Herman Daly, Hazel Henderson, Kenneth 
Boulding, and other writers have pointed out that in a world of finite 
physical resources the possibility of endless material expansion is not 
something we should count on. What is new today is that a similar 
argument is coming from certain quarters on the right: specifically 
that the pursuit of GDP has been undermining traditional values and 
social cohesion, much as it has been destroying the natural habitat.
    Americans are conditioned to see ecology and social conservatism as 
occupying opposite ends of the political spectrum. But that is largely 
an optical illusion, reinforced by an antiquated national accounting 
system. The fact is that adherents at both ends deplore the way the 
pursuit of GDP can undermine the realm of their concern. Much as this 
pursuit turns ancient forests into lumber and beaches into sewers, so 
it turns families into nodes of consumption and the living room into a 
marketing free-fire zone. Both camps speak from the standpoint of 
values against the moral relativism and opportunism of the market. ``If 
you read the New Testament or the Pope's encyclical, it's no cheers for 
socialism and one and a half or two for capitalism,'' William Bennett, 
who was Reagan's Secretary of Education, observes. ``Socialism treats 
people as a cog in the machine of the state; capitalism tends to treat 
people as commodities.''
    This strain of conservatism, partly rooted in traditional Christian 
teachings, was largely dormant during the Cold War, when the greater 
enemy communism predominated. But with the fall of the Soviet bloc it 
has reawakened, and the result has been a widening gap on the right 
between social conservatives and libertarian free-marketeers. This gap 
was easily overlooked in the Republican triumph last November, but it 
may well become as important as the one between the Republicans and the 
Democrats they replaced.
    It can be seen, for example, in the diverging views of that 
archetypal Republican era, the Reagan eighties. Martin Anderson, who 
was Reagan's domestic-policy adviser, gave the rapturous libertarian 
view in his book Revolution (1988). ``It was the greatest economic 
expansion in history,'' Anderson wrote. ``Wealth poured from the 
factories of the United States, and Americans got richer and richer.''
    But does richer mean better--even assuming that all Americans 
shared in this bounty, which they didn't? For libertarians, as for many 
Keynesian liberals, the question isn't relevant. For social 
conservatives, however, it is the question. Bennett does not disparage 
the economic achievements of the Reagan years. Nor does he dispute that 
more family income can mean better schooling, medical care, and the 
like. But recently he has been calling attention to the social decay 
that has continued despite (and often in the name of) economic growth. 
``Would you rather have kids raised by rich people with lousy values, 
or by good people who just don't have much money?'' he asks. ``A lot of 
us would say we want the values right.''
    What the right calls ``family values'' is one arena in which the 
latent conflict between market and nonmarket values is coming out into 
the open. In a long article in The Washington Post last November, 
Edward Luttwak, of the Center for Strategic and International Studies, 
a conservative think tank in Washington, D.C., pointed out that much 
family disruption today arises from the ``creative destruction'' of the 
market that free-market economists adore. The failure to acknowledge 
this, Luttwak wrote, is ``the blatant contradiction at the very core of 
what has become mainstream Republican ideology.''
    In an interview Luttwak argued that people need stability more than 
they need much of the new stuff that makes the GDP go up. Yet 
economists talk about stability ``in entirely negative terms,'' he 
said. Conservation becomes a dirty word. One would think that 
conservatives would be the first to point this out; stability, after 
all, is what families and communities are for. But the political right 
is muzzled on these issues, Luttwak said, by the economic interests of 
its major funders. ``Any conservative who wishes to conserve will not 
be funded.''
    This split has a distinct similarity to the tension that arose in 
the Democratic Party in the seventies between environmentalists and the 
growth-boosting Keynesian mainstream. It could betoken the beginning of 
a new politics in which the popular currents represented by social 
conservatives and environmentalists increasingly find common cause. 
Some writers have made the connection already. For example, Fred 
Charles Ikle, who was an undersecretary of defense in the Reagan 
Administration, wrote an article for the National Review in which he 
criticized the ``growth utopians'' of the right. ``Citizens who fear 
for our vanishing patrimony in nature,'' Ikle wrote, ``drink from a 
wellspring of emotions that nourishes the most enduring conservative 
convictions.'' (He also tweaked the magazine's right-wing readers by 
pointing out that economic growth almost invariably leads to bigger 
government.)
    Just a few years ago a confluence of the environmental and social 
conservative impulses would have seemed unlikely. But the political 
seas are changing rapidly. The coalition that came together to oppose 
NAFTA and GATT--environmentalists and anti-corporate populists like 
Ralph Nader on the one hand, and social conservatives like Pat Buchanan 
on the other--seemed an oddity to most pundits. But something similar 
happened when the Walt Disney Company proposed a new theme park near 
the Civil War battlefield in Manassas, Virginia. Buchanan and numerous 
other tradition-minded conservatives joined environmentalists in 
blasting the proposal. In his syndicated newspaper column Buchanan 
demanded, ``Conservatives who worship at the altar of an endlessly 
rising GNP should tell us: What is it they any longer wish to 
conserve?''
    The two camps have converged in opposing the so-called ``takings'' 
bills, which would require the taxpayers to compensate property owners 
for restrictions on the use of their property. The Reverend Donald E. 
Wildemon, the president of the American Family Association, in Tupelo, 
Mississippi, has called such a proposal in his state the ``porn owners' 
relief measure,'' because it could restrict the ability of local 
governments to control such things as topless bars.
    Environmentalists of course worry about the implications for the 
protection of wetlands, open space, and the like. The two camps agree 
that ``growth'' is not an end in itself but must serve larger values 
that are not economic in the usual sense.
    We may be witnessing the opening battles in a new kind of politics 
that will raise basic questions about growth--questions that defy the 
conventional left-right divide. Where the old politics was largely 
concerned with the role of government--with the relation between public 
and private sectors--the emerging one will be more concerned with such 
issues as central versus local, market culture versus family and 
community culture, material accretion versus quality and values. The 
new politics will not be anti-growth, because to be categorically 
against growth is as nonsensical as to be categorically for it. Rather, 
it will begin with Luttwak's sane observation that when your goal is 
simply to increase GDP, then ``what you increase isn't necessarily 
good.'' It will insist that growth--and economics generally--must be a 
means to an end, and not an end in itself.
    This is not to suggest that such a new alliance is around the 
corner. But although the differences between the social-conservative 
and environmentalist camps are still large, they are probably etched 
more sharply among leaders in Washington than in the Nation as a whole. 
These groups are converging on one crucial issue--namely, the ends of 
economic life. In their different ways they are expressing the feeling, 
widespread among the public, that the pronouncements from economic 
experts are fundamentally out of sync with the experience of their own 
lives; that economics must be about more than just the production and 
consumption of stuff; and that we need larger goals and better ways to 
measure our achievements as a nation.
    Of course, this instinct could play out in many ways. But at least 
one thing is clear: boosting the GDP is no longer a sufficient aim for 
a great nation, nor one that America can continue to endure.
    Clifford Cobb, a policy analyst, is the author of Responsive 
Schools, Renewed Communities (1992). Cobb is the research director at 
Redefining Progress, a nonprofit public-policy organization in San 
Francisco.
    Ted Halstead is the founder and executive director of Redefining 
Progress, a nonprofit public-policy organization in San Francisco.
    Jonathan Rowe has been an editor at The Washington Monthly and a 
staff writer for The Christian Science Monitor. He is a co-author, with 
Edgar Cahn, of Time Dollars (1991). Rowe is the program director at 
Redefining Progress, a nonprofit public-policy organization in San 
Francisco.
                                 ______
                                 
  Remarks of Robert F. Kennedy at the University of Kansas, March 18, 
                                  1968
    This text was transcribed for the convenience of readers and 
researchers from a recording in the library's holdings. It reflects 
Robert F. Kennedy's speaking rhythms, the starts and stops and 
repetitions of his oral performance. It is not an exact setting down of 
every utterance Robert F. Kennedy made on the occasion, which would 
include the ``ers'' and ``ums'' and other delay sounds that are an 
inevitable part of an individual's speech patterns. Furthermore, as 
with any transcription, there is an unavoidable element of 
interpretation. Interested researchers are invited and encouraged to 
come in and listen to the recording themselves.
    Thank you very much. Chancellor, Governor and Mrs. Docking, Senator 
and Mrs. Pierson, ladies and gentlemen and my friends, I'm very pleased 
to be here. I'm really not here to make a speech I've come because I 
came from Kansas State and they want to send their love to all of you. 
They did. That's all they talk about over there--how much they love 
you. Actually, I want to establish the fact that I am not an alumnus of 
Villanova.
    I'm very pleased and very touched, as my wife is, at your warm 
reception here. I think of my colleagues in the U.S. Senate, I think of 
my friends there, and I think of the warmth that exists in the Senate 
of the United States--I don't know why you're laughing--I was sick last 
year and I received a message from the Senate of the United States 
which said: ``We hope you recover,'' and the vote was forty-two to 
forty.
    And then they took a poll in one of the financial magazines of five 
hundred of the largest businessmen in the United States, to ask them, 
what political leader they most admired, who they wanted to see as 
President of the United States, and I received one vote, and I 
understand they're looking for him. I could take all my supporters to 
lunch, but I'm--I don't know whether you're going to like what I'm 
going to say today but I just want you to remember, as you look back 
upon this day, and when it comes to a question of who you're going to 
support--that it was a Kennedy who got you out of class.
    I am very pleased to be here with my colleagues, Senator Pierson, 
who I think has contributed so much in the Senate of the United 
States--who has fought for the interests of Kansas and has had a 
distinguished career, and I'm very proud to be associated with him. And 
Senator Carlson who is not here, who is one of the most respected 
members of the Senate of the United States--respected not just on the 
Republican side--by the Democratic side, by all of his colleagues--and 
I'm pleased and proud to be in the Senate with Senator Carlson of the 
State of Kansas.
    And I'm happy to be here with an old friend, Governor Docking. I 
don't think there was anyone that was more committed to President 
Kennedy and made more of an effort under the most adverse circumstances 
and with the most difficult of situations than his father, who was then 
Governor of the State of Kansas--nobody I worked with more closely, 
myself, when I was in Los Angeles. We weren't 100 percent successful, 
but that was a relationship that I will always value, and I know how 
highly President Kennedy valued it and I'm very pleased to see him--and 
to have seen his mother, Mrs. Docking today also, so I'm very pleased 
to be in his State.
    And then I'm pleased to be here because I like to see all of you, 
in addition.
    In 1824, when Thomas Hart Benton was urging in Congress the 
development of Iowa and other western territories, he was opposed by 
Daniel Webster, the Senator from Massachusetts. ``What,'' asked 
Webster, ``what do we want with this vast and worthless area? This 
region of savages and wild beasts. Of deserts of shifting sands and of 
whirlwinds. Of dust, and of cactus and of prairie dogs.''
    ``To what use,'' he said, ``could we ever hope to put these great 
deserts? I will never vote for one-cent from the public treasury, to 
place the west one inch closer to Boston, than it is now.'' And that is 
why, I am here today, instead of my brother Edward.
    I'm glad to come here to the home of the man who publicly wrote: 
``If our colleges and universities do not breed men who riot, who 
rebel, who attack life with all the youthful vision and vigor, then 
there is something wrong with our colleges. The more riots that come 
out of our college campuses, the better the world for tomorrow.'' And 
despite all the accusations against me, those words were not written by 
me, they were written by that notorious seditionist, William Allen 
White. And I know what great affection this university has for him. He 
is an honored man today, here on your campus and around the rest of the 
Nation. But when he lived and wrote, he was reviled as an extremist and 
worse. For he spoke, he spoke as he believed. He did not conceal his 
concern in comforting words. He did not delude his readers or himself 
with false hopes and with illusions. This spirit of honest 
confrontation is what America needs today. It has been missing all too 
often in the recent years and it is one of the reasons that I run for 
President of the United States.
    For we as a people, we as a people, are strong enough, we are brave 
enough to be told the truth of where we stand. This country needs 
honesty and candor in its political life and from the President of the 
United States. But I don't want to run for the presidency--I don't want 
America to make the critical choice of direction and leadership this 
year without confronting that truth. I don't want to win support of 
votes by hiding the American condition in false hopes or illusions. I 
want us to find out the promise of the future, what we can accomplish 
here in the United States, what this country does stand for and what is 
expected of us in the years ahead. And I also want us to know and 
examine where we've gone wrong. And I want all of us, young and old, to 
have a chance to build a better country and change the direction of the 
United States of America.
    This morning I spoke about the war in Vietnam, and I will speak 
briefly about it in a few moments. But there is much more to this 
critical election year than the war in Vietnam.
    It is, at a root, the root of all of it, the national soul of the 
United States. The President calls it ``restlessness.'' Our cabinet 
officers, such as John Gardiner and others tell us that America is deep 
in a malaise of spirit: discouraging initiative, paralyzing will and 
action, and dividing Americans from one another, by their age, their 
views and by the color of their skin and I don't think we have to 
accept that here in the United States of America.
    Demonstrators shout down government officials and the government 
answers by drafting demonstrators. Anarchists threaten to burn the 
country down and some have begun to try, while tanks have patrolled 
American streets and machine guns have fired at American children. I 
don't think this a satisfying situation for the United States of 
America.
    Our young people--the best educated, and the best comforted in our 
history--turn from the Peace Corps and public commitment of a few years 
ago--to lives of disengagement and despair--many of them turned on with 
drugs and turned off on America--none of them here, of course, at 
Kansas--right?
    All around us, all around us--not just on the question of Vietnam, 
not just on the question of the cities, not just the question of 
poverty, not just on the problems of race relations--but all around us, 
and why you are so concerned and why you are so disturbed--the fact is, 
that men have lost confidence in themselves, in each other, it is 
confidence which has sustained us so much in the past--rather than 
answer the cries of deprivation and despair--cries which the 
President's Commission on Civil Disorders tells us could split our 
Nation finally asunder--rather than answer these desperate cries, 
hundreds of communities and millions of citizens are looking for their 
answers, to force and repression and private gun stocks, so that we 
confront our fellow citizen across impossible barriers of hostility and 
mistrust and again, I don't believe that we have to accept that. I 
don't believe that it's necessary in the United States of America. I 
think that we can work together--I don't think that we have to shoot at 
each other, to beat each other, to curse each other and criticize each 
other, I think that we can do better in this country. And that is why I 
run for President of the United States.
    And if we seem powerless to stop this growing division between 
Americans, who at least confront one another, there are millions more 
living in the hidden places, whose names and faces are completely 
unknown--but I have seen these other Americans--I have seen children in 
Mississippi starving, their bodies so crippled from hunger and their 
minds have been so destroyed for their whole life that they will have 
no future. I have seen children in Mississippi--here in the United 
States--with a gross national product of $800 billion--I have seen 
children in the Delta area of Mississippi with distended stomachs, 
whose faces are covered with sores from starvation, and we haven't 
developed a policy so we can get enough food so that they can live, so 
that their children, so that their lives are not destroyed, I don't 
think that's acceptable in the United States of America and I think we 
need a change.
    I have seen Indians living on their bare and meager reservations, 
with no jobs, with an unemployment rate of 80 percent, and with so 
little hope for the future, so little hope for the future that for 
young people, for young men and women in their teens, the greatest 
cause of death amongst them is suicide.
    That they end their lives by killing themselves--I don't think that 
we have to accept that--for the first American, for this minority here 
in the United States. If young boys and girls are so filled with 
despair when they are going to high school and feel that their lives 
are so hopeless and that nobody's going to care for them, nobody's 
going to be involved with them, and nobody's going to bother with them, 
that they either hang themselves, shoot themselves or kill themselves--
I don't think that's acceptable and I think the United States of 
America--I think the American people, I think we can do much, much 
better. And I run for the presidency because of that, I run for the 
presidency because I have seen proud men in the hills of Appalachia, 
who wish only to work in dignity, but they cannot, for the mines are 
closed and their jobs are gone and no one--neither industry, nor labor, 
nor government--has cared enough to help.
    I think we here in this country, with the unselfish spirit that 
exists in the United States of America, I think we can do better here 
also.
    I have seen the people of the black ghetto, listening to ever 
greater promises of equality and of justice, as they sit in the same 
decaying schools and huddled in the same filthy rooms--without heat--
warding off the cold and warding off the rats.
    If we believe that we, as Americans, are bound together by a common 
concern for each other, then an urgent national priority is upon us. We 
must begin to end the disgrace of this other America.
    And this is one of the great tasks of leadership for us, as 
individuals and citizens this year. But even if we act to erase 
material poverty, there is another greater task, it is to confront the 
poverty of satisfaction--purpose and dignity--that afflicts us all. Too 
much and for too long, we seemed to have surrendered personal 
excellence and community values in the mere accumulation of material 
things. Our Gross National Product, now, is over $800 billion a year, 
but that Gross National Product--if we judge the United States of 
America by that--that Gross National Product counts air pollution and 
cigarette advertising, and ambulances to clear our highways of carnage. 
It counts special locks for our doors and the jails for the people who 
break them. It counts the destruction of the redwood and the loss of 
our natural wonder in chaotic sprawl. It counts napalm and counts 
nuclear warheads and armored cars for the police to fight the riots in 
our cities. It counts Whitman's rifle and Speck's knife, and the 
television programs which glorify violence in order to sell toys to our 
children. Yet the gross national product does not allow for the health 
of our children, the quality of their education or the joy of their 
play. 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. It measures neither our wit nor our courage, 
neither our wisdom nor our learning, neither our compassion nor our 
devotion to our country, it measures everything in short, except that 
which makes life worthwhile. And it can tell us everything about 
America except why we are proud that we are Americans.
    If this is true here at home, so it is true elsewhere in world. 
From the beginning our proudest boast has been the promise of 
Jefferson, that we, here in this country would be the best hope of 
mankind. And now, as we look at the war in Vietnam, we wonder if we 
still hold a decent respect for the opinions of mankind and whether the 
opinion maintained a decent respect for us or whether like Athens of 
old, we will forfeit sympathy and support, and ultimately our very 
security, in the single-minded pursuit of our own goals and our own 
objectives. I do not want, and I do believe that most Americans do not 
want, to sell out America's interest to simply withdraw--to raise the 
white flag of surrender in Vietnam--that would be unacceptable to us as 
a people, and unacceptable to us as a country. But I am concerned about 
the course of action that we are presently following in South Vietnam. 
I am concerned, I am concerned about the fact that this has been made 
America's War. It was said, a number of years ago that this is ``their 
war'' ``this is the war of the South Vietnamese'' that ``we can help 
them, but we can't win it for them'' but over the period of the last 3 
years we have made the war and the struggle in South Vietnam our war, 
and I think that's unacceptable.
    I don't accept the idea that this is just a military action, that 
this is just a military effort, and every time we have had difficulties 
in South Vietnam and Southeast Asia we have had only one response, we 
have had only one way to deal with it--month after month--year after 
year we have dealt with it in only one way and that's to send more 
military men and increase our military power and I don't think that's 
what the kind of a struggle that it is in Southeast Asia.
    I think that this is a question of the people of South Vietnam, I 
think its a question of the people of South Vietnam feeling its worth 
their efforts--that they're going to make the sacrifice, that they feel 
that their country and their government is worth fighting for; and I 
think the development of the last several years have shown, have 
demonstrated that the people of South Vietnam feel no association and 
no affiliation for the government of Saigon and I don't think it's up 
to us here in the United States, I don't think it's up to us here in 
the United States, to say that we're going to destroy all of South 
Vietnam because we have a commitment there. The commander of the 
American forces at Ben Tre said we had to destroy that city in order to 
save it. So 38,000 people were wiped out or made refugees. We here in 
the United States--not just the U.S. Government, not just the 
commanders of and forces in South Vietnam, the U.S. Government and 
every human being that's in this room--we are part of that decision and 
I don't think that we need do that any longer and I think we should 
change our policy.
    I don't want to be part of a government, I don't want to be part of 
the United States, I don't want to be part of the American people, and 
have them write of us as they wrote of Rome: ``They made a desert and 
they called it peace.''
    I think that we should go to the negotiating table, and I think we 
should take the steps to go to the negotiating table.
    And I've said it over the period of the last 2 years, I think that 
we have a chance to have negotiations, and the possibility of 
meaningful negotiations, but last February, a year ago, when the 
greatest opportunity existed for negotiations the Administration and 
the President of the United States felt that the military victory was 
right around the corner and we sent a message to Ho Chi Minh, in 
February 8th of 1967 virtually asking for their unconditional 
surrender, we are not going to obtain the unconditional surrender of 
the North Vietnamese and the Viet Cong anymore than they're going to 
obtain the unconditional surrender of the United States of America. 
We're going to have to negotiate, we're going to have to make 
compromises, we're going to have to negotiate with the National 
Liberation Front. But people can argue, ``That's unfortunate that we 
have to negotiate with the National Liberation Front,'' but that is a 
fact of life. We have three choices: We can either pull out of South 
Vietnam unilaterally and raise the white flag, I think that's 
unacceptable.
    Second, we can continue to escalate, we can continue to send more 
men there, until we have millions and millions of more men and we can 
continue to bomb North Vietnam, and in my judgment we will be no nearer 
success, we will be no nearer victory than we are now in February 1968.
    And the third step that we can take is to go to the negotiating 
table. We can go to the negotiating table and not achieve everything 
that we wish. One of the things that we're going to have to accept as 
American people, but the other, the other alternative is so 
unacceptable. One of the things that we're going to have to accept as 
American people and that the U.S. Government must accept, is that the 
National Liberation Front is going to play a role in the future 
political process of South Vietnam.
    And we're going to have to negotiate with them. That they are going 
to play some role in the future political process of South Vietnam, 
that there are going to be elections and the people of South Vietnam, 
are ultimately going to determine and decide their own future.
    That is the course of action, that is the course of action that I 
would like to see. I would like to see the U.S. Government to make it 
clear to the government of Saigon that we are not going to tolerate the 
corruption and the dishonesty. I think that we should make it clear to 
the government of Saigon that if we're going to draft young men, 18 
years of age here in the United States, if we're going to draft young 
men who are 19 years old here in the United States, and we're going to 
send them to fight and die in Khe Sanh, that we want the government of 
South Vietnam to draft their 18-year-olds and their 19-year-olds.
    And I want to make it clear that if the government of Saigon, feels 
Khe Sanh or Que Son and the area in the demilitarized zone are so 
important, if Khe San is so important to the government of Saigon, I 
want to see those American marines out of there and South Vietnamese 
troops in there.
    I want to have an explanation as to why American boys killed, 2 
weeks ago, in South Vietnam, were three times as many--more than three 
times as many, as the soldiers of South Vietnam. I want to understand 
why the casualties and the deaths, over the period of the last 2 weeks, 
at the height of the fighting, should be so heavily American 
casualties, as compared to the South Vietnamese. This is their war. I 
think we have to make the effort to help them; I think that we have to 
make the effort to fight, but I don't think that we should have to 
carry the whole burden of that war, I think the South Vietnamese 
should.
    And if I am elected President of the United States, with help, with 
your help, these are the kinds of policies that I'm going to put into 
operation.
    We can do better here in the United States, we can do better. We 
can do better in our relationships to other countries around the rest 
of the globe. President Kennedy, when he campaigned in 1960, he talked 
about the loss of prestige that the United States had suffered around 
the rest of the globe, but look at what our condition is at the present 
time. The President of the United States goes to a meeting of the OAS 
at Montevideo--can he go into the City of Montevideo? Or can he travel 
through the cities of Latin America where there was such deep love and 
deep respect? He has to stay in a military base at Montevideo, with 
American ships out at sea and American helicopters overhead in order to 
ensure that he's protected, I don't think that that's acceptable.
    I think that we should have conditions here in the United States, 
and support enough for our policies, so that the President of the 
United States can travel freely and clearly across all the cities of 
this country, and not just to military bases.
    I think there's more that we can do internally here, I think 
there's more that we can do in South Vietnam. I don't think we have to 
accept the situation, as we have it at the moment. I think that we can 
do better, and I think the American people think that we can do better.
    George Bernard Shaw once wrote, ``Some people see things as they 
are and say why? I dream things that never were and say, why not?''
    So I come here to Kansas to ask for your help. In the difficult 5 
months ahead, before the convention in Chicago, I ask for your help and 
for your assistance. If you believe that the United States can do 
better. If you believe that we should change our course of action. If 
you believe that the United States stands for something here internally 
as well as elsewhere around the globe, I ask for your help and your 
assistance and your hand over the period of the next 5 months.
    And when we win in November--and when we win in November--and we 
begin a new period of time for the United States of America, I want the 
next generation of Americans to look back upon this period and say as 
they said of Plato: ``Joy was in those days, but to live.'' Thank you 
very much.
                                 ______
                                 

                   The New York Times--March 9, 2008

                Income and Happiness: An Imperfect Link

                           By Robert H. Frank

    Does money buy happiness? This week, Senator Byron Dorgan, Democrat 
of North Dakota, will join a long line of people who have taken serious 
stabs at trying to answer that thorny question. He will hold a hearing 
exploring whether traditional economic measures like per-capita income 
accurately capture people's sense of well-being.
    This has long been a contested issue. Although everyone concedes 
that income is an imperfect welfare measure, conservative economists 
have tended to emphasize its virtues while liberals have been more 
likely to stress its shortcomings.
    The debate is not just of philosophical interest; it also has 
important policy implications. Recent research findings offer support 
for specific arguments on both sides. Mounting evidence suggests, 
however, that per-capita income is a less reliable measure of well-
being when income inequality has been rising rapidly, as it has in 
recent decades.
    First, a few words about how economists measure income: The most 
commonly used metric is gross domestic product, the annual market value 
of all final goods and services produced within a country. Per-capita 
GDP is simply GDP divided by total population. Measured in 2000 
dollars, it was $32,833 in 1998 and $37,832 in 2006. The real value of 
goods and services bought by Americans in 2006 was thus about 15 
percent higher than it was in 1998. In purely economic terms, does that 
mean we were roughly 15 percent better off in 2006?
    Not necessarily. To measure changes in the standard of living over 
time, it is necessary to adjust for inflation. But as conservatives 
stress, traditional inflation adjustments may overstate actual 
inflation because they fail to account adequately for quality 
improvements.
    For example, although the current Honda Civic, a compact car, is 
about the same size as the company's midsize Accord from 1998, it is in 
almost every respect far superior and sells for only slightly more than 
the earlier Accord. Because inflation adjustments for auto prices are 
based on changes for corresponding models, the result is to overstate 
increases in ownership costs--thereby causing per-capita GDP to 
understate the corresponding increases in our standard of living.
    Quality changes are not always positive, by the way. If you had a 
question about your health insurance in 1998, you could talk to a real 
person; today, you may find yourself in an endless phone loop. On 
balance, however, most consumers would probably prefer today's overall 
menu of goods and services in the economy to that of a decade ago.
    Inflation adjustments may introduce further bias if people 
rearrange their spending patterns when prices rise unevenly. When beef 
prices rise twice as fast as chicken prices, people typically eat less 
beef and more chicken. Traditional inflation measures fail to take such 
adjustments fully into account--again, causing per-capita GDP growth to 
understate increases in the standard of living.
    Liberals, for their part, have long objected that many expenditures 
included in GDP reflect reductions, not increases, in our standard of 
living. When crime rates increase, people spend more on burglar alarms, 
purchases that clearly do not signal improved living standards. A 
similar objection applies when tasks once performed at home are now 
more often bought in the marketplace--as when time-pressed parents 
substitute meals at fast-food restaurants for home-cooked meals.
    The bias that results from the inclusion of such expenditures in 
GDP works in the opposite direction from the bias caused by inaccurate 
inflation adjustment. For all anyone knows, the two distortions may 
roughly offset each other.
    But there is a much bigger problem, one that challenges the very 
foundation of the presumed link between per-capita GDP and economic 
welfare. That's the assumption, traditional in economic models, that 
absolute income levels are the primary determinant of individual well-
being.
    This assumption is contradicted by consistent survey findings that 
when everyone's income grows at about the same rate, average levels of 
happiness remain the same. Yet at any given moment, the pattern is that 
wealthy people are happier, on average, than poor people. Together, 
these findings suggest that relative income is a much better predictor 
of well-being than absolute income.
    In the three decades after World War II, the relationship between 
well-being and income distribution was not a big issue, because incomes 
were growing at about the same rate for all income groups. Since the 
mid-1970s, however, income growth has been confined almost entirely to 
top earners. Changes in per-capita GDP, which track only changes in 
average income, are completely silent about the effects of this shift.
    When measuring the economic welfare of the typical family, the 
natural focus is on median, or 50th percentile, family earnings. Per-
capita GDP has grown by more than 85 percent since 1973, while median 
family earnings have grown by less than one-fifth that amount. Changing 
patterns of income growth have thus caused per-capita GDP growth to 
vastly overstate the increase in the typical family's standard of 
living during the past three decades.
    Some economists have advanced an even stronger claim--that there is 
no link, at least in developed countries, between absolute spending and 
well-being. Recent work suggests that this is especially true for 
spending categories in which the link between well-being and relative 
consumption is strongest. For instance, when the rich spend more on 
larger mansions or more elaborate coming-of-age parties for their 
children, the apparent effect is merely to redefine what counts as 
adequate.
    Evidence also suggests that higher spending at the top instigates 
expenditure cascades that pressure middle-income families to spend in 
mutually offsetting ways. Thus, when all spend more on interview suits, 
the same jobs go to the same applicants as before.
    Yet in many other categories, greater levels of absolute income 
clearly promote well-being, even in the richest societies. The 
economist Benjamin Friedman has found that higher rates of GDP growth 
are associated with increased levels of social tolerance and public 
support for the economically disadvantaged. Richer countries also 
typically have cleaner environments and healthier populations than 
their poorer counterparts.
    That per-capita GDP is an imperfect index of economic welfare is 
not news. The lesson of recent work is that its weaknesses are more 
serious than we previously realized.
    And it is an especially uninformative metric when income inequality 
has been rising sharply, as it has been in recent decades. A society 
that aspires to improve needs a better measure of what counts as 
progress.
    Robert H. Frank is an economist at the Johnson School of Management 
at Cornell University.
                                 ______
                                 

                   Los Angeles Times--March 10, 2008

                       Our Three-decade Recession

    the american quality of life has been going downhill since 1975.

                           By Robert Costanza

    The news media and the government are fixated on the fact that the 
U.S. economy may be headed into a recession--defined as two or more 
successive quarters of declining gross domestic product. The situation 
is actually much worse. By some measures of economic performance, the 
United States has been in a recession since 1975--a recession in 
quality of life, or well-being.
    How can this be? One first needs to understand what GDP measures to 
see why it is not an appropriate gauge of our national well-being.
    GDP measures the total market value of all goods and services 
produced in a country in a given period. But it includes only those 
goods and services traded for money. It also adds everything together, 
without discerning desirable, well-being-enhancing economic activity 
from undesirable, well-being-reducing activity. An oil spill, for 
example, increases GDP because someone has to clean it up, but it 
obviously detracts from well-being. More crime, more sickness, more 
war, more pollution, more fires, storms and pestilence are all 
potentially positives for the GDP because they can spur an increase in 
economic activity.
    GDP also ignores activity that may enhance well-being but is 
outside the market. The unpaid work of parents caring for their 
children at home doesn't show up in GDP, but if they decide to work 
outside the home and pay for child care, GDP suddenly increases. And 
even though $1 in income means a lot more to the poor than to the rich, 
GDP takes no account of income distribution.
    In short, GDP was never intended to be a measure of citizens' 
welfare--and it functions poorly as such. Yet it is used as a surrogate 
appraisal of national well-being in far too many circumstances.
    The shortcomings of GDP are well known, and several researchers 
have proposed alternatives that address them, including William 
Nordhaus' and James Tobin's Measure of Economic Welfare, developed in 
1972; Herman Daly's and John Cobb's Index of Sustainable Economic 
Welfare, developed in 1989; and the Redefining Progress think tank's 
more recent variation, the Genuine Progress Indicator. Although these 
alternatives--which, like GDP, are measured in monetary terms--are not 
perfect and need more research and refinement, they are much better 
approximations to a measure of true national well-being.
    The formula for calculating GPI, for instance, starts with personal 
consumption expenditures, a major component of GDP, but makes several 
crucial adjustments. First, it accounts for income distribution. It 
then adds positive contributions that GDP ignores, such as the value of 
household and volunteer work. Finally, it subtracts things that are 
well-being-reducing, such as the loss of leisure time and the costs of 
crime, commuting and pollution.
    While the U.S. GDP has steadily increased since 1950 (with the 
occasional recession), GPI peaked about 1975 and has been relatively 
flat or declining ever since. That's consistent with life-satisfaction 
surveys, which also show flat or dropping scores over the last several 
decades.
    This is a very different picture of the economy from the one we 
normally read about, and it requires different policy responses. We are 
now in a period of what Daly--a former World Bank economist now at the 
University of Maryland--has called ``uneconomic growth,'' in which 
further growth in economic activity (that is, GDP) is actually reducing 
national well-being.
    How can we get out of this 33-year downturn in quality of life? 
Several policies have been suggested that might be thought of as a 
national quality-of-life stimulus package.
    To start, the U.S. needs to make national well-being--not increased 
GDP--its primary policy goal, funding efforts to better measure and 
report it. There's already been some movement in this direction around 
the world. Bhutan, for example, recently made ``gross national 
happiness'' its explicit policy goal. Canada is developing an Index of 
Well-being, and the Australian Treasury considers increasing ``real 
well-being,'' rather than mere GDP, its primary goal.
    Once Americans' well-being becomes the basis for measuring our 
success, other reforms should follow. We should tax bads (carbon 
emissions, depletion of natural resources) rather than goods (labor, 
savings, investment). We should recognize the negative effects of 
growing income disparities and take steps to address them.
    International trade also will have to be reformed so that 
environmental protection, labor rights and democratic self-
determination are not subjugated to the blind pursuit of increased GDP.
    But the most important step may be the first one: Recognizing that 
the U.S. is mired in a 33-year-old quality-of-life recession and that 
our continued national focus on growing GDP is blinding us to the way 
out.
    Robert Costanza is the director of the Gund Institute for 
Ecological Economics at the University of Vermont.

                                  
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