Can’t Pay? Won’t Pay!

Edward Barbier

What do the worldwide debt crisis and global warming have in common?

They both represent economies drawing down assets faster than they can replenish them.

In the case of the debt crisis, economies are spending more wealth than they are accumulating.  In the case of global warming and other symptoms of ecological scarcity, we are using up nature’s capital and its vital services at an alarming rate (see my forthcoming book, Capitalizing on Nature: Ecosystems as Natural Assets).  Rather than adding to wealth – both financial and natural – economies are squandering it.  This is not a new problem but has occurred throughout history, although this tendency has accelerated in recent times, as I show in my recent book, Scarcity and Frontiers: How Economies Have Developed Through Natural Resource Scarcity.

The connection between economic and natural debt is revealed if our conventional measure of economic progress – Gross Domestic Product (GDP) per capita – is replaced with an alternative indicator – Adjusted Net Domestic Product (ANDP) per capita.  As explained in my article, “Tracking the Sputnik Economy” in The Economists’ Voice, calculating ADNP per capita for most economies is straightforward.  ANDP is also a better indicator than GDP per capita of whether or not an economy’s real income is spent on adding to capital – human, reproducible and environmental.

Almost all countries use real per capita Gross Domestic Product (GDP), the market value of all final goods and services produced, as the basis for measuring growth in the economy.  The problem with GDP as an economic indicator, however, is that it does not reflect changes in the capital stock underlying the production of goods and services.  Since the purpose of new investment is to increase the net quantity and quality of the economy’s total capital stock, adjusting GDP for net new investment (after depreciation) would measure more accurately whether new additions to wealth are occurring.

However, the total stock of economic assets should be much broader than conventional reproducible (or fixed) assets, such as roads, buildings, machinery and factories.  Investments in human capital, such as education and skills training, are also essential to sustaining development. Similarly, an economy’s endowment of natural resources is an important form of “natural wealth”.  Thus, a better indicator of an economy’s progress would be an expanded measure of GDP that is “adjusted” for real depreciation in reproducible and natural capital, as well as any net additions to human capital, such as through real education expenditures in the economy.

Adjusted Net Domestic Product (ANDP) per capita can be approximated from the World Bank’s World Development Indicators.  The WDI includes consumption of fixed capital, total education expenditures, and depreciation of some natural resources, such as fossil fuels, minerals and timber from 1970 to the present for many economies.  In my article, I show how such an ANDP per capita can be easily constructed from 1970 to 2008 for the United States.

Although the two measures generally follow the same long-run trend, ANDP per capita has been consistently lower than GDP per capita since 1970.  The reasons are straightforward: investments in human and reproducible capital are not keeping pace with natural capital depreciation.  Especially in the 1970s and again over 2000 to 2008, energy and mineral depletion grew much faster than educational expenditures and fixed capital formation.

In addition, the gap between the two indicators has been widening.  In 1970 real GDP per capita was $18,229, and ANDP per capita was $17,786, but by 1990, GDP per capita had risen to $28,299 whereas ANDP per capita was $26,288.  By the 2000s, the gap had increased further; by 2007, real GDP per capita reached $38,701, and ANDP per capita was only $35,497.  Both indicators fell in 2008, signaling the start of the Great Recession. However, the decline in ANDP per capita was significantly greater than the fall in GDP per capita.

These comparisons of GDP and ANDP per capita for the United States are revealing in several respects.  First, ANDP is a better indicator of whether or not current increases in an economy’s real income from domestic production is leading to net additions to capital.  Second, the US economy remains dependent on depreciating its mineral and energy assets.  Reducing this dependence through clean energy, improving energy efficiency and other resource saving investments is not just an urgent priority; it may be an economic necessity.