How Sex, Politics, Money and Religion are Killing Planet Earth

Wednesday, August 26, 2009

Notes on the Economy – Part II

Much of the world is currently experiencing the “Great Recession.” The standard definition of an economic recession is a period of two financial quarters when the Gross Domestic Product (GDP) contracts or declines. Recently, economists are adopting a broader definition that defines a recession as the period of time between when the economy reaches its peak and begins to fall and when it bottoms out and begins to grow again, usually lasting about a year. If the GDP declines more than 10%, then the economic downturn is considered a depression.

The above definitions are based on the exclusive factor of “growth” in the economy with GDP representing the magical figure that reveals all. What is this mysterious entity GDP? Politicians and governments are a slave to it, and global economies hang in the balance of its power. In a nutshell, the GDP is a measure of all the goods and services sold in a country during an economic cycle. In this way, GDP is a good measurement of monetary economic activities, but GDP alone fails to address a number of significant issues:

- The GDP does not measure or account for depleted natural resources. For example, the price gasoline sold is counted, but there is no subtraction to account for the barrels of crude oil that no longer exist.

- Depreciation of goods is not included. It only matters if you buy a new car. The old car sitting in your driveway losing value does not factor in.

- The cost of environmental damage sometimes and ironically appears as a positive for GDP as cleanup services are included in the plus column. The Exxon Valdez disaster was a windfall adding $1.28 Billion to the GDP. The ruination of the regional fisheries industry did not factor at all in the math.

- The vast majority of services provided by people on earth, like care giving to children and the elderly by family members and subsistence farming, do not get monetary compensation, so these efforts in terms of GDP have no value.

The prevailing neoclassical economic sentiment is GDP growth is always good and desirable. For much of capitalism’s history, it must be conceded that growth was generally good. Up until the post World War II era most people on a global scale struggled to obtain the basic necessities of life. After the post war economic boom, a burgeoning middle class developed, and for the first time in history, many individuals found themselves with the luxury of disposable income. People were able to spend money on toys and enjoy vacations and fun. Conventional wisdom is that as wealth increases, so does welfare; however, recent studies indicate that once basic needs are met, people are not happier simply by virtue of having more money and stuff. Happiness can increase slightly if you have more toys than your neighbor, but then his happiness decreases, which in turn balances out the overall equation. If getting richer after a point doesn’t improve our overall quality of life, perhaps it is time to review and revise our economic strategy.

Conversely, not having enough to meet basic human needs definitely makes one unhappy, and as a self-proclaimed morally righteous culture, Americans should definitely be concerned that billions of people on earth still fall into this category including some within our own national boundaries. Ensuring the welfare of all people needs to be a large component of the overall strategy.

Neoclassical economists insist that the continued GDP growth of developed countries like the United States will eventually spread the wealth to the less privileged citizens of the world, i.e. a rising tide will lift all boats. However, in recent years, it has become increasingly apparent that this promise is not playing out.

During the economic cycle dating from 2000-2007, GDP increased, albeit at a pathetic 2.85%, but job growth for women and African Americans decreased, real income levels fell for all Americans and 5.7 million Americans fell into poverty. Clearly the rising tide sank a few boats instead of lifting them. Furthermore, the systematic deregulation of the banking and other industries, in the interest of free trade, resulted in the greatest economic calamity since the Great Depression. Our blind faith in our own economic dogma is offering questionable salvation.

Additionally, contrary to the faulty accounting of the current economic orthodoxy, growth does not occur in a vacuum and has consequences. Going back to the limitations of GDP analyses, the Exxon Valdez incident clearly illustrates a glaring problem with neoclassical logic. If unconstrained economic growth across the globe resulted in a series of environmental disasters that ultimately destroyed vast quantities of natural resources costing tax payers trillions of dollars in environmental cleanup costs, adherents to the GDP growth gospel would be convinced the global environmental situation is rosy contrary to all scientific evidence to the contrary. Oh wait, that is what is already happening.

To be continued…

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