Wednesday, February 19, 2020

Of Course 2 % Growth Is "Here To Stay" - So Long As GDP Is Used As The Growth Indicator

First, some basics:

Labor productivity is a measure of economic growth within a country. Labor productivity measures the amount of goods and services produced by one hour of labor; specifically, labor productivity measures the amount of real gross domestic product (GDP) produced by an hour of labor.
What could be wrong with that? Well, plenty! Namely, if the GDP is in error or doesn't measure what is really needed, then the labor productivity will be off too. Hence, one must  look askance at the recent WSJ Business & Finance piece, '2 % Growth Is Here To Stay' (Jan. 31,  p. B14).   According to the piece:

"Economists get plenty wrong but they have been right about one thing: The U.S. economy is stuck in low gear.  On Thursday the Commerce Department reported that gross domestic product (GDP)  grew at an annualized rate of 2.1 percent from the 3rd matching economists' forecasts."


"Most economists and the Fed expect GDP growth will be stuck around 2 percent in the years to come. This is partly due to demographics: the population is growing more slowly than it used to and aging as well. so growth in the labor force has moderated   And since the labor force produces the stuff that goes into GDP, GDP growth will be as well."

But the outside, inquiring economic observer must then ask if the growth index being used is not itself defective. I mean, why use a measure so subject to demographic change and especially population size?  We know, after all, that population cannot keep growing indefinitely, so why even incorporate it as part of the economic growth indicator?

As  Financial Times contributor David Pilling wrote in a 2018  TIME Viewpoint article ('Why GDP Is A Faulty Measure Of Success',  Feb. 5, p. 41):

"Invented in the 1930s, the figure is a child of the manufacturing age - good at measuring physical production but not the services that dominate modern economies. How would GDP measure the quality of mental health care or the availability of day care centers and parks in your area?  Even Simon Kuznets, the Belarussian economist who practically invented GDP, had doubts about his creation."

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: old growth forests that maintain cooling and act as CO2 repositories, watersheds, animal habitats, e.g. the Everglades, and costs of infrastructure maintenance. But ALL of these count toward  the physical security and welfare of a society. If bridges collapse owing to maintenance failure and hundreds or thousands of drivers are inconvenienced, delayed  - then that has a cost and hence an economic impact!

In addition, there are hundreds of other contributions not registered that arguably have  major economic repercussions. For example, a 2015 Forbes article highlighted how 40 million family caregivers in the U.S. are putting their own careers on hold to provide unpaid care — sometimes for decades.   The estimated  total value of the care has been put at nearly $1 trillion. This isn't reckoned into the GDP but IF it were,  the labor productivity cited in the WSJ would surely be much higher in the years since 2007 - maybe even double or (1.2%) x 2  2.4 %. Which would then exceed the rate cited since 1947.

Related to this - as reported in the WSJ three days ago- is the dearth of volunteers at senior care centers to help (e.g. in interactions with dementia patients, e.g. using games, coloring books and puzzles) to help caregivers at such facilities.  Surely, the assistance of such potential volunteers ought to be factored into the economic equation.

What to use in place of GDP? The Index of Sustainable Economic Welfare which was first proposed by Eco-economist Herman Daly of the University of Maryland. is a prime alternative  Daly's point was that the GDP was too artificial and narrow an indicator of economic health. He argued that if one incorporated all the "externalities" usually dismissed or ignored by standard economic models, people would be more parsimonious in how they consume which would yield a better world.

Ignoring these externalities leads us into a fool's paradise where we come to believe things are much better than the GDP numbers show. Similarly with energy, conveniently ignoring externalities of cost and demand leads too many to envisage a pie-eyed future of never-ending growth (based on producing material output)  and ever more intense energy consumption.

All this translates inexorably into “growth” and woe betide you if you dare intimate (as Prof. Daly has done) that a zero or negative growth index may be a lot better for humans, if they hope not to outstrip their resource support base. Right now, indeed, we already know that humans are consuming the equivalent of 1.5 Earths every year. See, e.g.

This is obviously unsustainable, which means we desperately need to replace the industrial age GDP and sooner rather than later. Retaining it as a practical measure of real growth is a fool's errand and counterproductive, to say the least.

No surprise that a decade ago a panel headed by Nobel Prize winning economist Joseph Stiglitz concluded we are  "mismeasuring our lives" using GDP.

If indeed it is true (and it is) that the millions of man-hours that go into Wikipedia  (which brings human knowledge to  virtually everyone) "adds not a cent to GDP" then something is seriously amiss. Because if that's so then it also doesn't add a single extra unit to labor productivity. Hence, those millions of man hours of research, writing, editing go unrecorded in our grand economic metric.  This is absurd.

We can't keep using this antiquated metric which is totally detached from reality.  "Production" simply cannot be measured in output of material units of slim Jims, Barbie dolls, Legos, Ipads, Ipods or X Boxes alone. Apart from being skewed toward one type of production it omits an entire other (admittedly less tangible) universe that now needs to be reckoned in - including for things like Wikipedia, unpaid care giving and creative expression in the generation of art or music, as well as abstract (basic) scientific research.

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