Integrating Nature into US Economic Statistics, with Eli Fenichel

Notable Quotes

• Adding nature to the US investment portfolio: “The national income and product accounts mostly are like a checking account, in the sense that it is about current flows of production and consumption. But, when I’m planning, I want to think about what’s in my savings account and what’s in my retirement account if I’m thinking about long-term plans. Fortunately, the nation also has a national balance sheet with its capital holdings—what we’ve invested in. Again, nature is missing from that balance sheet. There’s actually a place on the balance sheet for many of our natural resources. Many countries are starting to fill those out. Now, the United States is, too.” (6:27)
• Investments in nature will show up on the national balance sheet: “The United States has amazing natural resources. We’ve been able to continually borrow from nature and build up and draw down on those resources. Now, as we think about making new investments in infrastructure and in nature-based solutions to combat climate change, if we invest in nature, we want it to show up somewhere. Otherwise, it looks like we’re just spending our money, and we’re not. We’re making real investments in things that can protect us from climate change, help control flooding, provide recreational opportunities, et cetera.” (9:09)
• Estimates for the economic value of natural resources will evolve: “How should cell phones be valued? How should personal computers be valued? These things are so fundamental to our economy; there are still lively debates about how they should be valued and included in GDP. If we’re doing that—still debating the best way to value air quality or improvements in valuing water quality or water quantity or urban green spaces—in seven years, we’re doing something correct, not doing something wrong.” (16:50)

Top of the Stack

• National Strategy to Develop Statistics for Environmental-Economic Decisions: A US System of Natural Capital Accounting and Associated Environmental-Economic Statistics from the Office of Science and Technology Policy, the Office of Management and Budget, and the Department of Commerce
• This Explains Everything by John Brockman

The Full Transcript

Margaret A. Walls: Hello, and welcome to Resources Radio, a weekly podcast from Resources for the Future. I’m your host, Margaret Walls.

A quick note before we begin. If you’re a regular listener to Resources Radio, you might be wondering why you’re hearing my voice. “Where’s Kristin Hayes or Daniel Raimi?” you may ask.

I’ve joined the podcast team and will be hosting one episode per month going forward. I’m a senior fellow at Resources for the Future (RFF), where I work on issues related to climate and disaster risks and resilience, public lands, conservation and parks, and environmental justice. I’m looking forward to covering all of these topics on the podcast.

Today, I’m excited to welcome my first guest, Eli Fenichel. Eli is currently Assistant Director for Natural Resource Economics and Accounting in the White House Office of Science and Technology Policy (OSTP). Eli is on leave from Yale University, where he is the Knobloch Family Professor of Natural Resource Economics in the Yale School of the Environment.

In today’s episode, we’re going to talk to Eli about natural resource accounting and the exciting new development from the Biden-Harris administration about how to build the value of natural resources and the environment into government economic statistics. Stay with us.

Eli, we like to start our podcast with a question to find out a little background about our guests. Can you tell our listeners about your own personal journey toward natural resource economics?

Eli Fenichel: Sure, and thank you for having me on. This is exciting and fun.

It started when I was a freshman in college. I was studying ecology, and I had to take my mandatory economics course. I went home for Thanksgiving, and my father says to me, “You’re studying wildlife management. You can make all the rules you want. It’s not the deer that have to listen.” And I said, “That’s what I’ve been learning in economics.”

I went into the Peace Corps after undergrad and found myself using a lot more of what I’d learned in my economics courses as I was working on environmental problems and in conservation. That put me on this shift to thinking economics was important for those of us who think about the environment.

Margaret A. Walls: Our parents have a lot of influence on us, I guess, is the lesson there.

Let’s talk about what you’re on today for—and let me give a little background to our listeners about what’s happened this year. On Earth Day, back in April, the Biden-Harris administration announced a plan to start developing the first-ever system of natural capital accounts to the United States—official statistics on the value of nature that would be eventually incorporated in some way into the government’s regular reporting of economic statistics, aligned with the national income and product accounts.

After the announcement, an interagency working group was established and co-led by your office, OSTP. Then in June and July, the working group had a series of roundtables with stakeholders and experts to get input. In mid-August, a strategic plan was released, which laid out a path forward.

For our listeners, to give you a guide post here, we’re going to talk about why there’s a need for natural capital accounting in our government statistics. Why and how would or could incorporating nature into these economic accounts make a difference? Where’s it going to change things? What’s in this new national strategy that was just released and the next steps going forward? I’m going to try to get Eli to talk about his own research, because he’s exactly the right person to be leading this effort, and I want to hear what he has to say about his own and other people’s research. Let’s get started.

First, Eli, it might help everyone if you can educate us a bit and set some important background: What are the national income and product accounts? What’s in them? How are they constructed?

Eli Fenichel: That’s an important question, because if you’re going to evolve something or build onto something, it’s helpful to know what you’re starting with. Most people listening in have probably heard the acronym “GDP,” for gross domestic product. Many listeners probably go, “I’ve heard of that, but I’m not quite sure what it is. But it seems to be really important.”

The way I like to think about it, GDP measures the marketable output of the country. Unfortunately, it’s the closest thing we have to measuring economic progress. But if you read the rules on page two or something, it says, “This is not a measure of economic progress, or a measure of economic welfare, or a measure of economic well being. Please don’t use it that way.”

Under the hood of GDP are the national income and product accounts. Those are, if you can imagine this, massive tables of different sectors of the economy: who’s producing what, who’s buying what they’re producing. It’s showing how the economy fits together. This was done because, back in the 1920s, when we tried to measure railcar loadings and measure all these random pieces of the economy, people were starting to understand: “Wait a minute, the economy is this big thing. It’s not just how much stuff we put on railcars. It’s interactive, and we need some way to get our heads around the interactivity of it.” So, the national income and product accounts were started.

When they talk about sectors, they include things that you might think about: the automobile industry, or manufacturing. They also include hospitals and schools, government activities—a wide range of activities. This can be put together a couple different ways. How much are we producing? How much are we consuming and buying? But it’s not just what we buy that’s important for our economic lives and the services or the well-being we experience. Nature plays an important role, but nowhere in there does nature enter those tables.

The other bit of this that’s important to understand is that the national income and product accounts mostly are like a checking account, in the sense that it is about current flows of production and consumption. But, when I’m planning, I want to think about what’s in my savings account and what’s in my retirement account if I’m thinking about long-term plans.

Fortunately, the nation also has a national balance sheet with its capital holdings—what we’ve invested in. Again, nature is missing from that balance sheet. There’s actually a place on the balance sheet for many of our natural resources. Many countries are starting to fill those out. Now, the United States is, too.

Margaret A. Walls: So, nature has been missing. Why is this a big deal? Could you firm that up with some specific examples of exactly what’s missing and how that might affect decisions that the government or even private sector makes? Why is this important?

Eli Fenichel: Let’s think about it this way: We’re trying to manage where we are investing in our future. We could invest in schools, we could invest in new infrastructure, we can put money in a stock market, or we can invest of capital markets and firms. We could also invest in nature or natural infrastructure. We could think about the role of sand dunes in protecting houses. We could think about the role of wetlands in mitigating floods. We can think about the recreational opportunities that nature provides that people might not have to pay an entrance fee for. We can think about the role that fish populations play in both feeding people and in providing recreational opportunities, or the importance of pollinators in growing fruits and vegetables, or the role of forests in providing timber for houses and places for recreation. There’s all these things—how nature is intertwined with the decisions that we make.

If you go back to the checking-account analogy, it’s like if we want to say, “How well are we doing? Let’s look at how much money is in our checking account.” If I can only move money from a savings account into a checking account, but I don’t pay attention to a savings account that, maybe, my parents set up for me—money that I started off with—and I’m always moving money into a checking account, I get a bad indicator of how well I’ll be able to consume, or what I’ll be able to do in the future.

This is what’s going on with nature right now. We have been doing this for 100 years. The United States has amazing natural resources. We’ve been able to continually borrow from nature and build up and draw down on those resources. Now, as we think about making new investments in infrastructure and in nature-based solutions to combat climate change, if we invest in nature, we want it to show up somewhere. Otherwise, it looks like we’re just spending our money, and we’re not. We’re making real investments in things that can protect us from climate change, help control flooding, provide recreational opportunities, et cetera.

Margaret A. Walls: Did any specific examples of the importance of nature come out of your stakeholder engagement process? Were there things that you learned through that process that resonated with you?

Eli Fenichel: There were a lot of interesting things we’ve learned through our stakeholder engagement process. I’ve been engaged with this area for quite a while. A lot of the “What about this?” and “What about that?” questions I’d heard other people bring up. One thing that is interesting is how concerned some of the food-processing industry is around things like pollinators, and how they see changes in natural resources creating supply-chain risk. They want to understand those dependencies better.

But the thing that struck me the most was that we dealt with stakeholders from many different areas, many different backgrounds, political views, et cetera, and they were all enthusiastic about this, often for very different reasons, but they all agreed that it was going to help them have more constructive conversations with people who are coming at resource allocation, whether it was monetary resource allocation or natural-resource allocation. To me, that’s the North Star; that’s what our national income and product accounts do. That’s what GDP does at the end of the day. I don’t think the GDP number itself enters into any specific decision directly, but it helps everybody start and have constructive conversations around the economy. That’s what we want to do with nature, too.

Margaret A. Walls: That’s interesting that the supply chain, which everybody’s talking about now anyway, came out of your discussions.

Let’s talk about what’s in this new strategy that came out in August. There are three high-level recommendations. Can you tell us what those three are?

Eli Fenichel: The three high-level recommendations that came out are, first, that we actually don’t need a new agency. We have a lot of expertise distributed across the federal government. This is one of the things that happens when you ask economists to put together a plan to do something: We try and figure out how to do that as efficiently as possible. It’s in our DNA. But the fact that we have this expertise distributed all across the federal government also helped us identify some of the institutional barriers or challenges of working closely together.

A lot of our plan is aimed at removing some of those barriers. Many of those barriers are informal and cultural, but there are also coordination concerns: making sure that things are prioritized across agencies in a way that people actually have the capacity and the ability to work together. That was one of the first things: focusing in on, “We have the expertise, and let’s use and build on the expertise we have and the research that’s been done.”

The second recommendation was that we needed to do this well and deliberately. That takes time. This should be planned to take place over the next 15 years, not over the next 15 months. We need to, again, look at the fact that researchers and various agencies across the federal government have been doing research on environmental economics statistics and natural capital accounting since at least the 1990s.

The challenge is that our system is really spread out. We want to take that research and use that expertise and coordination to go from research through to experimental accounts, where we’re kicking the tires and making sure things are working the way we think they are, then through to core statistical products that get the stamp of approval of the chief statistician of the United States that says, “These are core statistics that have the backing of the US government, and they’re perfectly fine to use. There are no concerns about using them in policy analysis.” That’s going to take time.

The third recommendation is that putting together those massive tables and connecting the massive tables related to the environment with the massive tables related to the economy is super important, and we don’t want to overlook that; we also recommend having a helpful headline summary indicator to help focus the conversation and be that opening door, just like GDP is. We’re thinking of this as the change in natural-asset wealth over time. The reason we want to focus on this is that, as natural capital becomes more plentiful or increases in value, we want to see this number rise. And as natural resources or the value of natural resources declines—perhaps because they’ve been degraded—we would like to see the number fall.

One idea we have is that if GDP is going up and our wealth and national assets are going up, then we know we’re probably generally avoiding the problem of taking from one pot and sticking it in the other pot to make it look like we’re doing well. If they’re both going up together, that’s great. If they’re both going down, we have an unambiguous problem. If they’re moving in opposite directions, maybe there are some policy tweaks we can do to make them move together, hopefully upward. Then we can have, again, a more informed, multidimensional conversation about the complexity of the country.

This is kind of like flying an airplane, because I don’t want to be in an airplane where the pilot is only looking at one gauge. I certainly think our environment and our economy are probably more complex than any airplane flying today.

Margaret A. Walls: I have a quick question on this statistic about the change in natural asset wealth. I’m wondering if, over time, we’ll get used to seeing that number—if people will have some skepticism about the number. But then they probably had the same feeling about GDP when we first started generating that number; now, we all just look at GDP, and we think we know what it is. What is your feeling about this? Would you think that we’ll get to that point where this will be a regularly reported statistic that we’ll all get used to using and thinking about?

Eli Fenichel: The goal and the plan is to produce that annually. Some stakeholders would like to see it quarterly, others are saying it doesn’t have to be annually, but our initial goal is to get to an annual production and update. The reality is that the statistical community that produces GDP continues to argue about how to value different things.

How should owner-occupied housing be valued to GDP is a big one. How should cell phones be valued? How should personal computers be valued? These things are so fundamental to our economy; there are still lively debates about how they should be valued and included in GDP. If we’re doing that—still debating the best way to value air quality or improvements in valuing water quality or water quantity or urban green spaces—in seven years, we’re doing something correct, not doing something wrong. I do hope that we will get used to saying, “You know, this is useful.”

When GDP started, I think people were more aware of some of the shortcomings and some of the words, if you will. Certainly Simon Kuznets, who was one of the pioneers of the national income and product accounts here in the United States, wrote at length about the shortcomings of GDP and to be careful with how we use it in the 1940s. I certainly see the same thing happening now. The goal here is to be useful and practical.

Margaret A. Walls: What are the next steps in this process?

Eli Fenichel: We had a public comment period, and we’ve gotten a bunch of comments back from engaged citizens and experts about this plan. We are going through those comments and revising. We are also doing more outreach to our agencies in the federal government. We’re somewhere on the order of 20 different agencies now engaged in this work. We are revising the plan; hopefully, for early 2023, we will be able to finalize our 15-year strategic plan.

The caveat with finalizing a 15-year strategic plan is that it’s not setting it in stone. I would be sad if in 5 or 10 years, people aren’t going, “We’ve learned some stuff, and this bit is a little wrong, and we need to tweak." That’s something I’ll expect, so that’s what I mean by final. It’s not set, but it’s going to launch us on a 15-year adventure to move from loosely coordinated research to well-coordinated core statistical products. Those are our next, immediate steps.

While it is a 15-year plan, I also want to be clear that, when you read through the plan, you will see that, as early as the end of 2023, we should start to see some of these research projects get formulated into early-stage experimental accounts. We’re very optimistic about that. We’re not going to wait 15 years to have something useful, but we need to do this in a phased way, because if you look at the phases—for example, in the first phase, we want to produce a land account. The United States is one of the few developed countries that doesn’t have land on its national balance sheet right now.

In the second phase, we want to produce a forest account. Forests are incredibly important in the United States. We’re one of the most forested countries in the world. The challenge of that is we need to know what the land accounts are going to look like so that we understand how to interact with the forest account—so that you don’t wind up double counting. This is why the phasing is also important.

Margaret A. Walls: What other countries are doing this kind of thing in the end? Are they in any way further along than us?

Eli Fenichel: The United States is different than other countries in this respect. There are lots of other countries that are very excited about natural capital accounting and environmental economics statistics, or both. There is a United Nations (UN) statistics division and a UN-coordinated international statistical standard called the System of Environmental Economic Accounting. The first part of that was agreed to in 2012; last year, it was expanded to cover more pieces of the environment—ecosystems, basically. That UN statistics division reports that about 90 countries are implementing some element of that international standard.

Specific countries of interest, for the United States, are the United Kingdom, which has been developing national capital accounts since 2014. We’ve started to be able to see how those accounts have been evolving and have been helping do exactly what we hope our accounts will do here, which is shaping the conversation around how the environment interacts with the economy there.

Australia just released an interesting marine natural capital account that covers things like mangroves, seagrasses, and blue carbon. Canada has launched a census of the environment that’s pulling many of these elements together. The Netherlands, Germany, and Mexico are all developing pieces of these accounts. India has been doing a fair bit of work on environmental economic statistics. I think where the United States is unique is that we have a lot of expertise. We also are one of the few countries now that has a plan out in public that charts a long-term vision for where this is going.

A lot of these other countries have been developing and adhering to the international standard without. They might have a long-term plan, but I haven’t seen one out in public. Maybe they have them internally. I don’t want to throw anyone under the bus.

You could say that a lot of other countries look like they’re out ahead of the United States on this, but again, the United States has a lot of expertise. I’ve been involved in the international community for a number of years, and there are always US folks around at these meetings who seem to be dabbling in helping other countries develop these. So, we have the expertise. We have a lot of great data.

One of the interesting things about the US statistical system is that it is spread out across our entire government. We have 13 principal statistical agencies. This project is co-chaired by the Office of Management and Budget. That is where the chief statistician of the United States sits, and her job is to coordinate the 13 principal statistical agencies. Plus, maybe 100 statistical programs exist across the other agencies. In 2018, there was a new law called the Evidence Act that formalized this all-of-government-approach to our statistical system. We have a lot of coordination challenges, but we also have a lot of expertise. I like to think of this as if it were a race: the United States looks behind, but that’s because we’re on an inside lane.

Margaret A. Walls: Well put. I want to encourage our listeners to go online and read this national strategy document, because it is meaty. It has a lot in it. The title is, the National Strategy to Develop Statistics for Environmental Economic Decisions. When you say we have a lot of expertise, some of that is coming out in this document. It’s good.

I want to ask a quick question about research, because you have a lot of great research in this area. Tell me something about the frontiers of research in this area. What do you think needs to be done? Could you share some thoughts you have about that?

Eli Fenichel: I thought I knew a lot about this before I dove in on this project, and I’ve learned so much. There is work to be done. It’s interesting, because there’s work in many different fields to be done. Administrative research needs to be done, as well as legal research and accounting research. It’s related to the classification and taxonomy systems, and how do you organize useful categories? How do you develop those categories to be rigid enough to provide comparability flexible enough to be operational? This is an important area in accounting research.

There’s some interesting computer science and data engineering research related to interoperability. How do we extract, transform, and load the torrent of amazing environmental data that’s coming in? Agencies like NASA are involved in this automation. How do we allow research to be scalable and replicable? This is a big challenge. How do we use things like our space-based observation and digital transactions to make these statistics meaty?

There are computer science–data research questions in economics. They’re important questions about, How do we adapt tools from benefit-cost analysis, where we have a lot of experience in environmental economics and doing valuation, to the accounting context, which has some different requirements? There are also economic theoretical questions around something called index number theory that we probably don’t have time to get into—that’s just sort of a passion of mine.

There is a lot of great interdisciplinary work about—you know, skate to where the puck is going to be, and let’s think about what models are all economy–all nature models together: what economists might think of as computable general equilibrium models, and what ecologists might think of as ecosystem models.

This type of data will let those two things become one. We’ll be able to make these cool ecological forecasts that tell us what’s going to happen in the economy and economic forecasts that’ll bring nature along, and we will be in a much better forecasting place, but I think there’s research to be done about framing out those models.

Margaret A. Walls: This has been fantastic talking to you, Eli Fenichel. We always like to stop and end our podcast with a question that’s more personal in nature, what we call our Top of the Stack question. We like to find out what it is that you’re reading, watching—a movie, a book. What’s on the top of your stack, Eli?

Eli Fenichel: The thing that’s been on the top of my stack for a while now, because my stack goes down slowly these days, is a book that I got last holidays. It’s called This Explains Everything, and it’s a series of 70 2- to 3-page essays from thinkers around the world—academics, writers, what have you—about the most important theoretical development that’s guided them. It’s super cool. I love the fact that they’re 2–3 pages, and they’re disconnected, so I can put it down and lose the book for a couple weeks and then go back to it and not miss anything. In this job at OSTP, it’s also like, “Oh, wow, that’s a cool idea. Oh, wow, that’s a cool idea.”

One of the ones that has stuck with me lately is that for a system to be intelligent, it has to make mistakes. We seem to have such a small tolerance for error in society today. Everybody wants everything perfect now and yesterday, and what has made the United States great is our ability to innovate and learn, and that means we have to be comfortable with making mistakes and learning from them. I see that in my child, and I see that in society, and I see everybody’s tolerance for that is going down.

But it’s so true for us to have an intelligent system. We’re going to make mistakes, and we need to make those mistakes, because that’s how we learn. It’s a cool observation, and this comes from somebody working on artificial intelligence.

Margaret A. Walls: That’s good. We’ll have to take a look at that.

Eli, thank you so much for joining us today. This has been an exciting conversation, and I hope all of our listeners will take a look at the national strategy. I appreciate your time.

Eli Fenichel: Thank you, Margaret. This has been a lot of fun. I do hope people will look at the national strategy and can get as excited about it as I am.

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