I am one of the few, I suspect, who regards much of our political discourse degraded by the ongoing inability to distinguish between real, actual wealth and income. Because of this, we continue to fall victim to PR shills, and debased media presentations that owe more to pundits with an agenda than to realistic economics. (Well, as noted in earlier blogs, economics must shoulder a lot of the blame for incorporating too many artificial indices such as 'GDP' and embracing one too many anti-human economic imperatives - such as the Pareto Distribution, and "Pareto Optimality")
Consider then GDP or gross domestic product. It's a measure of income, not wealth. If one bases the national welfare exclusively on GDP, one will therefore arrive at a purely distorted picture. As a recent Economist article ('The Real Wealth of Nations', June 30, p. 78) put it:
"Gauging an economy by its GDP is like judging a company by its quarterly profits, without ever peeking at its balance sheet."
Indeed, this artificiality is why stocks (as well as mutual funds) are generally a lousy idea by which to secure income, say for retirement. This was pointedly noted in an expose article (‘A Metaphorical Proposal’, Mar. 13, 2002, p. 11A) by Michael Skapinker in The Financial Times. Skapinker cited remarks by Joseph Berardino (then chief exec of Arthur Andersen) who noted how the current reporting system “fails to communicate essential information about the real risks facing companies” to the small investor.
The system only allows the issuance of ‘pass’ or ‘fail’ judgments on companies – but cannot disclose the red ink being bled by a company that’s been passed. Thus, you get quarterly statements but no insight into the critical balance sheet. You are exposed with your butt hanging in the wind and no protection. (Which is why immediate fixed annuities are a better idea).
University of Maryland Eco-Economist Hermann Daly, meanwhile, has criticized the fact that when it comes to "counting all the beans in the United States the only cookbook that matters is the Gross Domestic Product or GDP". If the Gross Domestic Product is going up, people say the economy is growing. And if the GDP is falling, they say we're in a recession. The GDP is supposed to measure the total production and consumption of goods and services in the United States. But the numbers that make up the Gross Domestic Product by and large only capture the monetary transactions we can put a dollar value on. Almost everything else is left out. And that's why some economists have a problem with this influential accounting system.
The Economist article meanwhile notes that the UN issued a June report which has "finally" published the actual balance sheets for 20 nations. Three kinds of assets are incorporated: 1) manufactured or physical capital (machinery, buildings, infrastructure) 2) human capital (the population's education and skills), and 3) natural capital (including arable land, forests, trees, fossil fuels, minerals).
According to the article:
"By this reckoning America's wealth amounted to almost $118 trillion in 2008 or over ten times its GDP that year. In wealth per person, however, it was lower than Japan's"
WHY is Japan in the superlative position regarding real wealth (also 2.8 times more than China's)? Because it is able to harness much more of its human capital for use! Human capital is nearly as large in the U.S. (75% of its total wealth) but much less is harnessed for positive use. Exhibit A; Look at all the recent grads from university toiling in piddling pot scrape by jobs, wasting all that accumulated brain power serving drinks or entrees. The U.S. allows such wastage because of its adherence to a frightful 'winner take all' ideology where the top jobs, benefits, wages, accrue only the very few. The author of the book 'The Winner Take All Society' puts much of the blame on the capitalistic rage for waste via "creative destruction" and the inability of the country to save very much of its total income. (Even in the depths of the recession, U.S. households barely saved at most 4-5% of income while the Japanese were saving 20-25%).
The latter stats also translated into Japan "depleting less of its natural capital between 1990 and 2008." (op. cit. ) Obviously, a society that saves more will consume less natural capital, since less of it will be earmarked for dvds, ipods, and so forth. Americans could learn a lesson! In addition, the hyper-consumption and lack of rigorous saving ethic feeds and fuels a consumerist society directed to pandering to the lowest common denominator in terms of tastes, products. Logically then, commercial jobs pandering to these LCD tastes will proliferate over any others, including those for artistic or scientific edification. As more tawdry, low level jobs grow with the feverish consumption, more are germinated. Meanwhile, the hyper-spending of 'consumers' (in tandem with gov't tax cuts) starves the creation of more high level opportunities for all. For whatever age....we mutate to become a society of Starbucks baristas or Walmart greeters. Poets, authors and scientists, sorry! Go jump off a bridge!
The Economist article does admit that "natural assets are often hard to price well or at all." However, there have been published attempts to do so, and one of the most noteworthy was the study 'Putting a Price Tag on Nature's Bounty, Science, Vol. 276, p. 1029). There we behold this assay for the planet:
Ecosystem ......Area (10^6 HA),...... Global Value (trillions)
Open Ocean ------ 33,200 -------------------- 8.4
Coastal ----------- 3, 102 ----------------------12.6
Tropical Forest ------1, 900 ----- --------------3.8
Other Forests ------- 2,955 --------------------0.9
Grasslands ------------3,898 --------------------0.9
Wetlands --------- 330 --------------------------4.9
Lakes and Rivers ------ 200 ------ -------------1.7
Cropland -----------1,400 ------------------------0.1
Total Worth $33.3 Trillion
Of course, this was taken more than 20 years ago, and it is estimated at least one tenth of the total has now been destroyed either by climate change, or reckless human overuse and waste. This means it's time to get serious about our planetary stewardship ....now! And to that end, until economists incorporate such "externalities" in terms of assessing costs, they are fooling themselves that they have assessed real wealth!