THE SUBTERFUGE OF USING THE GDP AS A MEASURE OF ECONOMIC WELL-BEING

Meet Mr. GDP. He claims to be the definitive measure of the health of our economy. He's not very good at subtraction, but he really excels at addition. What most citizens would consider to be catastrophic losses, according to Mr. GDP's calculations are actually really good things. Mr. GDP treats  increases in public and private debt, oil spills, tailings pond breaches, floods, forest fires and tornadoes and the like the same as he would economic activities that actually add to and increase the number of  available goods or services. He makes no distinction between replacing a burnt down house and building a new one. That little accounting trick really makes our economic growth rate look good! Our elected officials really love his way of doing math because it makes the economic growth rate look higher than it actually is. And higher economic growth rates make politicians  and their economic policies look much better than they actually are. 

 

 

This way of calculating the Gross Domesdtic Product (GDP) should never be used as the only, nor primary way of measuring a nation's economic well-being. It is in large part subterfuge. Nevertheless the GDP has become the primary, often the only, measure used by governments and financial institutions across the globe to calculate economic growth and decline. This practice masks many very serious problems. It paints the citizens of any country with a far rosier picture of reality than warranted. The image is grossly distorted because all expenditures, for whatever reason, are assumed to contribute to economic growth and the creation of wealth. Nothing could be further from the truth.

This is how GDP and economic growth rates are calculated: 

GDP = Consumer spending  + Government Spending + investments + Net Exports.

Economic growth is calculated  from  changes in the GDP over time: 

Economic growth =  ( GDP2  -  GDP1)  /   GDP1   

Here are but a few of the reasons that the use of the GDP and economic growth rate derived from the GDP give us a very distorted image of improvements or declines in the economic health of a nation:

1. GDP and Debt: The GDP makes no distinction between expenditures financed through debt (both public and private), and expenditures financed by savings and the spending or reinvestment of profits. Therefore an increase in the debt load of individuals and/or governments is misconstrued as economic growth and therefore desirable and encouraged. Governments often misleadingly portray an increase in private borrowing as an indicator of improved consumer/investor confidence. Many households are but two paychecks away from bankruptcy. Yet the GDP discounts the possibility that even a small down-turn in the economy may result in many of these borrowers unable to finance their debts. Never mind the number of devastating bankruptcies something like a global pandemic might cause! Yet the GDP puts volatile debt-financed expenditures on par with the investment of savings and the reinvestment of profits/earnings.

2. GDP and Destruction: Another major shortcoming of measuring economic growth using the GDP is that something citizens consider to be a catastrophic event –for instance a flood, a forest fire, a hurricane, an oil-spill, or a war-- registers as a positive economic boom by the GDP; such catastrophes result in major expenditures to rebuild and replace everything that was destroyed. Despite the jobs created by the clean-up and reconstruction efforts, most reasonable citizens experience all this as a net loss to the country. At best they might recoup much of what they had before, but reasonable citizens would not consider themselves or their nation to be further ahead, however much the GDP may have increased as a result.

3. GDP's Failure to Distinguish Between Wasteful and Useful Spending: Perhaps the most poignant way to illustrate this point is to use the example of the US criminal justice system. The US has one of the highest incarceration rates on the planet. Instead of spending money on providing supports for drug addicts, homeless people, education, programs to help offenders reintegrate and reduce recidivism are all eschewed in favour of investing in mega prisons. The annual cost of incarcerating a male is roughly $100,000 per year, and a female often twice that amount. Most of these prisoners on the outside would have earned and spent and contributed less than $20,000 per year to the GDP. Once incarcerated they are worth five times that much! It is in the interests of both the privately-owned mega-prison lobby and the government to spend the money on incarceration rather than social programs. The former reap the profits while the latter can boast economic growth based on the resulting increase in the GDP. The same can be said of preventative medicare vs. treating ill patients, private vs. universal healthcare, private vs. universal drug plans, etc. In all cases the former may be more cost effective and produce more desirable outcomes, but the latter contribute more to the GDP.

4. GDP's Failure to Include the Contribution of Unpaid Household Services: The GDP completely disregards unpaid work. Using strictly the GDP as an indicator, the unpaid work of stay-at-home home-makers, care-providers, garden-growers, all volunteers in whatever capacity, contribute absolutely nothing to the economic well-being of a nation. Nothing.  Zilch. Hiring a maid, or paying a daycare centre for these very same services, however, does contribute to the GDP.

5. GDP's Complete Indifference to the Distribution of Wealth Created. There is an increasing awareness that wages and income of the majority of citizens have stagnating or are in decline, despite a steady increase in the GDP. People are cluing in to the fact that national economic growth is meaningless if they don't have a share in it. Similarly an increase in the GDP will result in an increase in the per capita income even while people's incomes have stagnated or are in decline. Here we see that the errors in using GDP as a measure of economic well-being are compounded when used to calculate per capita income. The increased profits of Bill Gates, Mark Zuckerberg and Jeff Bazos are more than enough to offset the decline in wages of everyone else, so the GDP and per capita income continue to climb. Absurdly we are expected to celebrate and consider the increase in the already obscene profits of 1% of our fellow citizens as an improvement in our personal and national economic well-being. In fact per capita income and GDP figures tell us very little unless the are accompanied by distribution of wealth data. (The genie-coefficient is a very good tool for measuring wealth distribution.)

6. The GDP vs. the True Basis of the Economy: Every economy, regardless of ideology, has its base in the biosphere. Domestic as well as foreign products are produced by the processing of raw materials we find in nature. The GDP disregards the value of natural wealth until it is extracted, processed, and can be bought or sold. A pristine lake has no value unless you can attract tourist and fishermen to it, or convert it into a tailings pond for some mine, or allow Nestles to “buy” the water, or until an oil spill occurs in it and it has to be cleaned up. In its natural estate it contributes nothing to the GDP and is therefore, like a mother looking after children and making a home, not considered to be of any value at all. Air is of value if it can be compressed and sold; water is of value if Nestle sells it to you; land, along with everything growing on it or buried beneath it, is of value only if it can be fenced off and the resources contained in it bought or sold. For these reasons governments are reluctant to pass or enforce laws that protect our natural environment. Taking away DaBeer's tailings pond would hurt the GDP, and therefore the economy.

Decision making and government policy based on the distortions of reality resulting from the continued use of the GDP as the measure of economic well-being has caused, is still causing, and will continue to cause a lot of short-sighted, ill-conceived, often destructive policy and investment decisions that will detract from, rather than contribute to an increase in our collective and national economic and social well-being.

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For more detailed information on the the GDP and the limitations and shortcomings of using GDP as a measure of economic well-being I refer you to the MSG website “Common Sense vs. GDP”.