Map of life expectancy at birth from Global Education Project.

Thursday, March 12, 2009

Econ 101, my way -- part three

In today's lesson, we move on to macroeconomics. As you have probably noticed, the corporate media treats something called Gross Domestic Product, GDP, as equivalent to the health of the economy. Strong growth in GDP, good; slow growth or (gasp!) shrinkage in GDP, bad. It's true that the current shrinkage in GDP has been accompanied by devastating job losses, and that's certainly bad. On the other hand, however, GDP has grown pretty steadily, with just a couple of hiccups, since the early 1980s and even that was just a blip in steady growth since WWII. And yet, and yet, average workers have not been any better off, and in fact they've had to work ever harder just to keep their standard of living the same. And now, in spite of all that wonderful GDP growth, they're worse off than they have been in a quarter of a century. Something is evidently wrong with this picture.

So, GDP = C + I + G + (X − M)

That means consumption -- but "consumption" doesn't mean "consumption," it means the amount of money people spend to buy consumer goods -- plus investment, plus government spending (here they ignore what it's for) plus net foreign exchange, i.e. exports minus imports.

Okay, now this is a number. It has a formula. Assuming you can measure each of those items accurately (which you can't, but we won't belabor that point) you can compute it. That presumably makes it "scientific." Macroeconomics is mostly concerned with predicting this number and trying to find ways of making it grow as fast as possible over time, which is presumed to be the goal of human existence. (Hey you snotnosed sophomores, I know that economists believe there is a maximum sustainable rate of growth, i.e. that economies can "overheat" which leads to recession, so they aren't looking for the fastest possible rate of growth this year, but rather over the long term. Yeah yeah.)

So what's wrong with this picture? I'm not going to get fancy about it, I'm just going to give you a laundry list.

  1. It takes no account of natural resource depletion. For example, petroleum is pumped out of the ground and sold. The sale price is added to the GDP of the country from which it was extracted. But the oil is gone! Forever! No substraction is made to represent that.

  2. As our old friend B drives around the city inhaling those oxides of nitrogen and ultrafine particles, GDP takes no account of the damage to her lungs and arteries. But as soon as she has a heart attack and goes to the hospital, 100% of the cost is added to GDP. In other words, the more people whose health is damaged by pollution, the wealthier we think we are.

  3. Ditto for social costs. The cost of treating drug addicts and alcoholics, locking up prisoners, burying people killed in gang wars, and prosecuting that cop who shot the guy in the back in Oakland is added to GDP.

  4. It takes no account of goods and services which are produced but don't enter into the market. You can grow your own vegetables, make your own furniture, and build your own house, but none of that will count. On a much larger scale, as long as B stayed home and raised the kids and did the cleaning and cooking and laundry, none of that counted. But once she got a job, put the kids in day care, and started buying take out food and dropping off the laundry, it all gets counted. She's no better off for all that, of course. Although other people now get paid to do what she used to do for free, and you can feel about that however you like, the total value of what the population consumes is no greater, and arguably less.

  5. It takes no account of what the government spends its money on. If the government maintains beautiful parks, pays for health care, educates children, houses poor people, and finds the cure for cancer, it gets exactly the same amount of credit as it does if it purchases $50 million bombers and uses them to drop high explosives on Arabs. But the latter does not leave us better off.

  6. It takes no account of the distribution of wealth. If the CEO of the One Big Investment Bank that owns the world makes $3 trillion, and the rest of us make $1 each, it's no different from each man woman and child getting $33,000.

All of these problems help account for why people don't feel they are any better off even as the GDP keeps growing, although it's the last one that gets most of the attention, and that's also where we seem to get into the most screaming fights here with Glibertarians. So that's where I'll go next -- to the question of justice.


kathy a. said...

i assume that donations and contributions are also counted toward GDP? i'm thinking of churches supported by tithing [although they do not produce a tangible product, they can then spend the money in ordinary ways]; donations to political campaigns; etc.

GDP is a pretty poor proxy for productivity and for assigning importance to work, people, the environment and sustainability, health, educational opportunities, and on and on -- because of the justice questions that you'll get to tomorrow, and because anything outside the immediate dollar stream just does not count.

Cervantes said...

I don't think donations are counted, those are called "transfer payments." But when the church or charity spends the money then of course it is counted.

roger said...

i think that money spent cleaning up disasters is also counted. katrina was good for raising gdp. forest fires burn money to up the gdp. perhaps the unkindest cut of all is that bucks spent on political campaigns make us appear to be more prosperous.

gdp up? stock market up? obviously we're dong fine. ask jim cramer.

kathy a. said...

volunteer efforts during/after a catastrophe don't count, though, because it isn't a money exchange. nor does child-rearing, or unpaid care for elders, disabled folks, friends in crisis.

kathy a. said...

it seems kind of funny, not in that ha-ha way, that the party of "let's make all the help all-volunteer" is also vastly unwilling to admit that volunteer help counts.