August 2020, ScientificAmerican.com 29grew somewhat (albeit at a rate markedly lower than
in the decades after World War II), inequality rose pre-
cipitously. Well aware that metrics matter, some mem-
bers of the administration reportedly argued for stop-
ping the collection of statistics on inequality. If Ameri-
cans did not know how bad inequality was, presumably
we would not worry about it.
The Reagan administration also unleashed unprec-
edented assaults on the environment, issuing leases for
fossil-fuel extraction on millions of acres of public lands,
for example. In 1995 I joined the Council of Economic
Advisers for President Bill Clinton. Worrying that our
metrics paid too little attention to resource depletion
and environmental degradation, we worked with the
Department of Commerce to develop a measure of
“green” GDP, which would take such losses into account.
When the congressional representatives from the coal
states got wind of this, however, they threatened to cut
off our funding unless we stopped our work, which we
were obliged to.
The politicians knew that if Americans understood
how bad coal was for our economy correctly measured,
then they would seek the elimination of the hidden sub-
sidies that the coal industry receives. And they might
even seek to move more quickly to renewables. Although
our efforts to broaden our metrics were stymied, the fact
that these representatives were willing to spend so much
political capital on stopping us convinced me that we
were on to something really important. (And it also
meant that when, a decade later, Sarkozy approached
me about heading an international panel to examine
better ways of measuring “economic performance and
social progress,” I leaped at the chance.)
I left the Council of Economic Advisers in 1997, and
in the ensuing years the deregulatory fervor of the Rea-
gan era came to grip the Clinton administration. The
financial sector of the U.S. economy was ballooning,
driving up GDP. As it turned out, many of the profits that
gave that sector such heft were, in a sense, phony. Bank-
ers’ lending practices had generated a real-estate bub-
ble that had artificially enhanced profits—and, with their
pay being linked to profits, had increased their bonuses.
In the ideal free-market economy, an increase in profits
is supposed to reflect an increase in societal well-being,
but the bankers’ takings put the lie to that notion. Much
of their profits resulted from making others worse off,
such as when they engaged in abusive credit-card prac-
tices or manipulated LIBOR (for London Interbank
Offered Rate of interest for international banks lending
to one another) to enhance their earnings.
But GDP figures took these inflated figures at face
value, convincing policy makers that the best way to
grow the economy was to remove any remaining regu-
lations that constrained the finance sector. Long-stand-
ing prohibitions on usury—charging outrageous inter-
est rates to take advantage of the unwary—were stripped
away. In 2000 the so-called Commodity Modernization
Act was passed. It was designed to ensure that deriva-
tives (risky financial products that played a big role inbringing down the financial system just eight years later)
would never be regulated. In 2005 a bankruptcy law
made it more difficult for those having trouble paying
their bills to discharge their debts—making it almost
impossible for those with student loans to do so.
By the early 2000s two fifths of corporate profits came
from the financial sector. That fraction should have sig-
naled that something was wrong: an efficient financial
sector should entail low costs for engaging in financial
transactions and therefore should be small. Ours was
huge. Untethering the market had inflated profits, driv-
ing up GDP—and, as it turned out, instability.OPIOIDS, HURRICANES
the bubble burst in 2008. Banks had been issuing mort-
gages indiscriminately, on the assumption that real-
estate prices would continue to rise. When the housing
bubble broke, so did the economy, falling more than it
had since the immediate aftermath of World War II.
After the U.S. government rescued the banks ( just one
firm, AIG, received a government bailout of $130 bil-
lion), GDP improved, persuading President Barack
Obama and the Federal Reserve to announce that we
were well on the way to recovery. But with 91 percent
of the gains in income in 2009 to 2012 going to the top
1 percent, the majority of Americans experienced none.
As the country slowly emerged from the financial
crisis, others commanded attention: the inequality cri-
sis, the climate crisis and an opioid crisis. Even as GDP
continued to rise, life expectancy and other broader
measures of health worsened. Food companies were
developing and marketing, with great ingenuity, addic-
tive sugar-rich foods, augmenting GDP but precipitat-
ing an epidemic of childhood diabetes. Addictive opi-
oids led to an epidemic of drug deaths, but the profits
of Purdue Pharma and the other villains in that drama
added to GDP. Indeed, the medical expenditures result-
ing from these health crises also boosted GDP. Ameri-
cans were spending twice as much per person on health
care than the French but had lower life expectancy. So,
too, coal mining seemingly boosted the economy, and
although it helped to drive climate change, worsening
the impact of hurricanes such as Harvey, the efforts to
rebuild again added to GDP. The GDP number provided
an optimistic gloss to the worst of events.
These examples illustrate the disjuncture between
GDP and societal well-being and the many ways that
GDP fails to be a good measure of economic perfor-
mance. The growth in GDP before 2008 was not sus-
tainable, and it was not sustained. The increase in bank
profits that seemed to fuel GDP in the years before the
crisis were not only at the expense of the well-being of
the many people whom the financial sector exploited
but also at the expense of GDP in later years. The in -
crease in inequality was by any measure hurting our
society, but GDP was celebrating the banks’ successes.
If there ever was an event that drove home the need for
new ways of measuring economic performance and
societal progress, the 2008 crisis was it.© 2020 Scientific American © 2020 Scientific American