Measuring Economic Change

The fallacy of relying on “growth” as a measure of economic health

Many have pointed out that using the Gross Domestic Product as a measure of the economic health of the country gives a false picture. This is because every dollar we spend contributes to the GDP, which we assume to be “growth”, but many of those dollars are spent on things that affect us negatively. For example, California at present is spending about eleven percent of its general fund to house prisoners (and less than that on education). This amounts to roughly $14-billion annually. It is not difficult to understand that this $14-billion is a social cost, not a benefit. Yet it is part of the GDP.

Others have reminded us that we live in finite circumstances. Everything we rely on for life, whether “economic” or not, has a limit. When petroleum is gone, it is gone. When the aquifer runs dry, the water is gone. Everything in our world has a very specific limit. Although the connection of these very specific limits to an abstraction like economic growth is not clearly defined, it is not at all clear that economic growth can simply continue forever.

When a company increases the output of its product more than what it cost to do so, it is said to have grown. Profit has increased, which is always seen as good. But what if this growth came as a result of switching production to a third world country with very low wages and weak environmental laws? In that case, the American workers will all become unemployed, which is an expense to society. How can that be considered growth? If a company fires someone, then divides his or her duties among the remaining employees, that is “growth”, because it’s the same work for less cost.

How about growth in petroleum companies? Oil is one of those things that has a finite limit, and there is pretty good evidence that we are now on the downward slope toward using it all up. So when a petroleum company “grows”, is that good, since it means we are moving faster toward depletion of a resource?

In short, “growth”, as represented by the GDP, is inadequate as a measure of anything good, for the reasons above and more. But we have no well-defined replacement concept, and we desperately need some new way to measure the change in the health of society, one that takes account of many things, such as environmental health, physical health, the health of working conditions, and so on.

New measures aren’t ready yet

At present, the GDP is the only measure in common use. Several organizations have been attempting to develop an economic measure to replace GDP, which is simply every dollar spent for whatever purpose.

The organizations that are developing these new measures of economic progress have been working on them for decades, yet no measure is in widespread use. I believe that at least part of the reason is that all these measures focus too much on small elements and attempt to account for changes that are difficult to put a price on. Further, if we wait for the government to accept one of them, we may be in for an intolerably long wait.

We are more concerned with how our economic picture changes than in how it looks at any particular moment anyway. Did we spend more or less on transportation in the past decade? Accordingly, what counts most is the flow, the change over time.

A quick measure useful now

My proposal would be to count all measures in certain broad classes as negatives, and deduct these from the GDP. Alternatively, all these negatives could become a measure by themselves.

The reason for this quick-n-dirty measure is that a broad calculation is needed now, not at some future date when it is perfected, and we need a figure that shows the changes over time. Using the example of fire fighting, the cost of maintaining fire fighting agencies is a positive contribution, because there will always be a need to put out fires. But there may be years in which major fires cost much more than usual, which is negative, not positive. For those years there would be a relatively higher cost to the economy, so counting all firefighting costs as negative would more properly show the year of higher cost.

The measure can be quickly calculated and released independently of government agencies. This also has the advantage of being useful for calculations of past economic change, which can provide a more realistic picture of what actually happened and how the present compares.

Among the categories of national expenses that could be deducted from our measure of economic change are the following. There are surely more.

  • military expenses
  • police expenses
  • fire-fighting expenses
  • prison costs
  • criminal court costs,
  • national security agencies
  • the cost of natural disasters
  • unemployment costs
  • loss of arable land to development or erosion

Virtually any expense that does not contribute to national wellbeing should be deducted, but only if the data are readily available, because this is a quick estimate only to show trends. Increases of any of these over time would signal the opposite of “growth”.

Most of these things are already calculated with a high degree of accuracy by the Census Bureau and other government agencies. Since we are interested only in how our economic health is changing, deducting these items would give us a quick and more accurate picture of our actual economic health than the raw GDP.

Consider one of the largest expenses we have, military costs. While no one questions the necessity of a strong military, it can hardly be claimed that soaring military costs during times of war contribute to our national wellbeing. These enormous costs gave us our historically highest deficit spending during World War II, yet they became part of the GDP. Likewise, military costs are sharply higher for the past decade because of our response to the 9/11 attacks and the half dozen wars we are presently waging. But none of this contributes to our national wellbeing, and if it were deducted from GDP rather than added, as at present, we would have a better understanding of how such expenses affect our national life over time.

Total military costs for the year 2000 were roughly $300-billion. For the year 2010 the figure was about $700-billion, an increase of 230%. GDP for those two years was 9,952 and 14,256 (billions of dollars), an increase of 43.2%. A measure of national wealth that deducted military costs would show a different picture in those two years from what GDP shows, because GDP includes a $400-billion increase due to military costs over the decade, whereas these costs are more properly deducted. A truer measure of domestic product for those years, therefore, would be 9,652 and 13,556, an increase of 40.4%, rather than 43.2%. This accounts only for the change in military spending.

Our economic wellbeing decreased by 3% over this decade compared to GDP, solely because of our military costs, not counting any other factor. We would have a much truer picture if all such factors were accounted for.

The point is that even with these readily available figures, we can determine a more accurate progression of our national economic health. While it would certainly improve the picture to deduct the cost of things like air pollution, such costs are not so easily determined, and in the meantime this simple procedure could give us a more realistic figure than the GDP we accept today, and we don’t have to wait until the ideal calculation comes along.

This chart presents what a “corrected” GDP might look like compared to the raw GNP, deducting only some very rough estimates for military, prisons, unemployment, and weather disasters.

The next chart shows the percentage of difference between them for each decade, and the changes between decades. Note the increased difference for the 2000-2010 decade, due mostly to the wars in Afghanistan and Iraq. This gives us a different picture than the GDP provides. If these figures were accurate, we could say that the “real” GDP in 2010 showed a difference that was 3% lower than the same measure a decade earlier.

 

It must be again emphasized that these are very rough figures for purposes of illustration. Even so, it is clear that deduction of costs such as military, whose contribution to national wealth is more negative than positive, could provide a more accurate picture of our economy than GDP, in which all expenses are registered as positive, can provide. We could use this measure until the real thing comes along.

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Published in: on 2011/06/20 at 6:06 pm  Leave a Comment  
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