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The U.S. is developing sustainably: Re-measuring wealth redefines economic growth and sustainable development

Why has sustainable development been so hard to achieve? It turns out we have been measuring it incorrectly.

An ongoing debate within academic and development institutions is whether or not economic growth, generally measured as an economy’s net income from production, is equitable, good for the environment, and sustainable. The answer may depend on how three subjective terms – growth, wealth, and sustainability – are defined and measured. 
 
In a recent working paper, published by the National Bureau of Economic Research, researchers from Stanford University, Purdue University, and the University of Cambridge discuss a new measure of wealth. They claim it is a comprehensive measure of well-being rather than simply a measure of production. For a society’s actions to be considered sustainable (sustainable development), well-being must be sustained or improved across generations. However, it is not easy to develop a comprehensive measure of well-being and it is even harder to project well-being into the future. They develop the broadest measure of wealth to date and find that the U.S. is developing sustainably. But this does not imply that the U.S. is off the hook on environmental issues.
 
The authors argue that growth, measured as gross domestic product (GDP), is limited. Gross domestic product ignores resources and goods not sold in traditional markets, like the water quality produced by healthy forests, public knowledge, and general health. These limitations of GDP have long been understood, even when Simon Kuznets developed the idea for the U.S. Congress in 1934. 
 
In order to develop a completely comprehensive measure of wealth and GDP, economists would have to find ways to measure all goods, services, and values that provide well-being. But measuring all of these values in an economy may not be possible because many goods and services have non-market or non-use values. Non-use values are values for places or things with which a person has had no direct or indirect physical involvement (existence value) or a value for preservation of a place for their own or other’s future use and enjoyment. Without these values, wealth and well-being are not comprehensive.
 
The authors argue that “intergenerational well-being would not decline if and only if an economy’s comprehensive wealth was not to decline over the same period.”  That is, sustainability is occurring if wealth is comprehensively measuring well-being and it is not declining over time. From this definition, it is clear that sustainable development and its compatibility with economic growth revolve around the measurement of wealth and well-being.
 
With growth and sustainability in mind, the authors redefine the measure of wealth to encompass a society’s entire productive base or range of capital assets, including many non-market goods. This comprehensive look at wealth includes the standard measures of wealth such as reproducible goods (infrastructure), human capital (health, education, and skills), and natural capital (ecosystems, minerals, and fossil fuels). Additionally, it includes public knowledge and the “formal and informal institutions that influence the allocation of resources.” 
 
By this new measure, the researchers contend that the United States, China, and India are developing sustainably. In other words, the comprehensive measure of wealth in these countries is predicted to remain the same or increase over time. Under this interpretation, the United States’ investments in things like health and education significantly outweigh negative criteria like natural resource depletion. Notably, investments in health capital are valued more than twice as much as investments in all other capital combined. Similarly, China’s investment in reproducible infrastructure such as buildings and bridges outweighs the negative impacts of natural resource depletion. Brazil is also developing sustainably but by a narrower margin.  Venezuela, on the other hand, is not developing sustainably because the extent of natural resource depletion in Venezuela outweighs the benefits of other capital and assets. 
 
Growth could be redefined to say that any given set of practices is sustainable. But changing the way we measure wealth and growth could also shift support from policies that support resource depletion to policies that conserve natural resources. For example, if national or international growth estimates showed that Venezuela was not developing sustainably due to depletion of natural resources, policy makers may be able to garner support for conservation. Conversely, this measure of wealth suggests that countries like the United States can achieve sustainable development solely by improving health, even while being negligent of natural resource depletion. These and many other considerations will need to be kept in mind as economists continue to improve measures of well-being and growth to evaluate whether or not countries are creating equitable, sustainable, and environmentally beneficial policies.

 
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Kenneth J. Arrow, Partha Dasgupta, Lawrence H. Goulder, Kevin J. Mumford, and Kirsten Oleson, “Sustainability and the Measurement of Wealth,” National Bureau of Economic Research Working Paper Series No. 16599 (2010).
 

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