30 jul. 2008

Some Thoughts of a Layman on Economics

Historically, it is no accident that excessive consumption has profoundly permeated our culture. Gross Domestic Product (GDP), developed by Simon Kuznets in 1941 and the leading economic indicator for measuring the health and prosperity of national economies, is virtually useless in achieving its putative objective. Defined as “the total market value of all final goods and services produced within a given country in a given period of time”, GDP results in economic policies that are formulated to ensure the maximum growth of GDP from year to year. To reduce the concept of GDP to its simplest terms, an economy is defined as healthy only if people consume more.

Forming the basis for many other economic measurements, it weakens their usefulness. For example, when comparing national debt or tax revenue to previous time periods or to other countries, the methodology requires using the ratio of these amounts to GDP because total tax revenues and debt are meaningless without comparing them to the wealth of a country.

Alarmingly, the rate of growth as measured by the GDP has risen by 261% since 1972 based on the current value of the American dollar. The implications for pollution waste, global warming, water, energy are directly related to the growth in consumption.

By only measuring consumption, GDP is rife with flaws that completely undermine its value as a measurement of human well-being financially or otherwise. Consider the Exxon Valdez disaster of 1989 in Prince William Sound where ten million gallons of crude oil were spilt. Estimated total costs of recovery from this disaster were US$7 billion and included cleanup costs, loss of vessel, loss of cargo, salvage costs, fines, penalties, insurance payouts and legal costs. In addition, it is impossible to measure the loss of 33,126 birds, 3,000 sea otters, and the impact on bears, whales, sea lions, salmon and a myriad of other animals.

Every single dollar spent on the Exxon Valdez disaster would have contributed to the GDP as every expense reflected the consumption of a good or service. In other words, US$7 billion was part of the” total market value of all final goods and services produced within a given country [U.S.].” The GDP was boosted by the disaster but there were no benefits to a single citizen of the U.S. (unless you want to count the employment of people in the industries which were part of the recovery in which case you would have to define the US$3 trillion spent on the war and occupation of Iraq as a benefit to society). Referred to as negative counting which includes divorce, cigarettes, alcohol, and automobile accidents, it artificially boosts the value of the GDP without providing any benefits.

As well, GDP fails to reflect the distribution of income in society or who is doing the consuming. Despite the fact that the GDP has been continuously rising over the previous decade, the gap between the rich and poor has widened. In fact, Simon Kuznets predicted income equality for both poor and rich countries with his inverted U-shaped curve. His explanation for the growing inequality in countries with increasing wealth resulted from a shift from agricultural to industrial sectors.

One of the measurements used to calculate the distribution of income is the Gini Coefficient which ranges from zero (perfect equality) to one (all wealth is concentrated in one person). In 1967, the Gini Coefficient was .394 in the U.S. whereas in 2001, it was .466. To emphasize the inefficacy of the GDP, it must be noted that although the United States has the highest GDP among all nations, the United States has the highest Gini Coefficient among thirty of the wealthiest countries.

Using linear regression least-squares analysis comparing the Gini Coefficient to GDP, the regression coefficient for the years between 1992 and 2001 is .679 which shows a fairly strong linear relationship. In other words, as the GDP increased, the gap between the rich and poor increased.

A very significant deficiency in the GDP is the failure to incorporate externalities into its calculation. Externalities are costs that are excluded from the price but paid for either by society or people who suffered as a result of production. Externalities include damage to the environment, health costs borne by those who suffer from the lack of health and safety measures in the workplace or toxic substances used in production or that result from production and depletion of natural resources.

Development of alternatives to the GDP began in 1989 but have been routinely ignored by political leaders and captains of industry inasmuch as GDP does not measure pollution, depletion of resources, or inequitable distribution of income. Recognition of these flaws would pressure the government to adopt policies that actually benefited all members of society and respected the environment.

One of these alternatives is the Genuine Progress Indicator (GPI) which incorporates the following factors: income distribution index, value of household work and parenting, value of higher education, value of volunteer work, cost of crime, loss of leisure time, cost of underemployment, cost of household pollution abatement, cost of automobile accidents, cost of water pollution, cost of air pollution, loss of wetlands, loss of farmland, loss of primary forests, depletion of nonrenewable energy resources, carbon dioxide emissions damage, and costs of ozone depletion.

Comparing the variations in the GDP to GPI from 1982 to 2004 reveals the extent to which incorporating factors related to the quality of life for everyone varies the outcome.
Richard Nixon (1970): “Our gross domestic product will increase $500 billion in the next years.”

  • Year GDP GPI

  • 1982 +4.0% +1.2% Ronald Reagan

  • 1983 +8.7% +4.2%

  • 1984 +11.2% -1.2%

  • 1985 +7.3% +2.3%

  • 1986 +5.7% +0.9%

  • 1987 +6.2% -1.9%

  • 1988 +7.7% +0.6%

  • 1989 +7.5% +1.3% G.H.W. Bush

  • 1990 +5.8% +0.6%

  • 1991 +3.3% -0.8%

  • 1992 +5.7% -0.3%

  • 1993 +5.0% +1.3% Bill Clinton

  • 1994 +6.2% +0.3%

  • 1995 +4.6% +3.8%

  • 1996 +5.7% +1.9%

  • 1997 +6.2% +0.5%

  • 1998 +5.3% +2.2%

  • 1999 +6.0% +5.4%

  • 2000 +5.9% +1.0%

  • 2001 +3.2% -3.9% George Bush

  • 2002 +3.4% +3.5%

  • 2003 +4.7% +1.3%

  • 2004 +6.6% +2.5%

  • Average +5.9% +1.1%

  • An average growth rate of 5.9 in the GDP would be considered a healthy expansion of the economy while a growth rate of 1.13% in the GPI would be considered very poor. In fact, a recession is considered to be two consecutive quarters of negative growth and there were five years of negative growth in the GPI. Business and political leaders would be confronted with a formidable challenge if they were forced to explain the contrast in these two measurements and why they have not implemented policies to correct the problems exposed by the GPI. A genuine answer would divulge the synergistic relationship between big business and government.