GNP versus NNP: which is the better way to measure economic output?

Dec. 7, 2006
The engine troubles of a 1964 Studebaker Avanati made Editor in Chief Paul Studebaker consider the usefulness of GNP and and the Net National Product for measuring economic output.

My sister called the other day. She’d been having trouble starting her prized collector car, a 1964 Studebaker Avanti once owned by our late father. When she finally got the four-barrel V-8 to fire up, it generated what she described as “a lot of smoke.” I asked her about the color of the smoke, whether it seemed to dissipate quickly or hang in the air, the nature of its aroma, and so on.

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The event reminded me of what car exhaust used to smell like – unburned hydrocarbons, mainly — and how seldom you notice it anymore. If you happen to own an old car or a motorcycle, or stop near one at a light, you might catch a whiff, but generally speaking, exhausts are a lot cleaner and the air seems much fresher than it used to be, a fact largely borne out by air quality measurements during the past 40 years. I doubt that automobiles and industrial smokestacks would be nearly as clean as they are today if do-gooders and theoreticians hadn’t informed and agitated the masses to press governments for air pollution regulations.

But corporate average fuel economy (CAFE) standards backfired. Also the brainchild of societal meddlers, this structure of standards and penalties drove manufacturers and the populace from cars into trucks, eventually leading to a decline in new-vehicle average fuel economy. Recently-departed economist Milton Friedman would have called this sort of effect an unintended consequence of interfering with the free market.

Unintended consequences make me uneasy about “green.” A child of the ’60s, I came within about three puffs and four draft lottery numbers of embracing the hippie counterculture before marching off to engineering school, a career in manufacturing and fathering two children. I’m a big fan of conservation and the environment, but reluctantly convinced the only way to make most people change is through their wallets. If a sustainable, green approach costs more, it won’t happen on a significant scale in the real world.

So when I heard about green Net National Product (NNP) as an alternative to GDP for measuring economic output, I was skeptical. But the countercultural revolutionary who still lives in some dark corner of my right frontal lobe insisted I take a closer look.

Plugging it into a search engine will give you all the details you want, but in essence, NNP differs from GDP by taking into account resource depletion and environmental degradation. For example, a country pumping away all its oil might generate a great GDP, where NNP would be adjusted by the consequential depreciation of the country’s assets. GDP might be swelled by low-cost imports, where NNP would subtract the capital loss of domestic production facilities. If high natural gas prices propel a switch to coal, NNP would take into account the dollar value of higher emissions.

Interesting, I thought, but it looks like just some Deadhead’s pipedream. Friedman has convinced the world’s powers that markets must be free, and no free market is going to pay attention to some artificial accounting structure tagged “green” — to do so would surely lead to unintended consequences such as shortages, more expensive production and unnatural redistribution of wealth.

But support for the concept goes beyond old hippies. “Bad accounting frameworks are likely to lead to bad decisions,” says Joseph Stiglitz, former chairman of the Council of Economic Advisers, Nobel-prize-winning economist and author of “Making Globalization Work,” in Fortune magazine. “A government focused on GDP might be encouraged to give away mining or oil concessions; a focus on green NNP might make it realize that the country risks being worse off.”

If GDP is a bad accounting framework and NNP is more accurate, maybe even free-market Friedman would have endorsed the idea.

My sister and I came to the conclusion that when you get an engine from the ’60s to start after it’s been sitting awhile, it might make what seems today like a lot of smoke. She took the car out for a drive and it runs fine.

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