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Entries tagged "GDP"

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Spending is Not Growth: The Case Against GDP

August 6, 2013 ·

Maryland Governor Martin O'Malley meets with GPI representatives, by Tom Nappi at Annapolis, Maryland / FlickrGross Domestic Product (GDP) is a measure of final market value of goods/services produced by a country in a specific time period—nothing more, nothing less. It is easy, however, to fall under the misconception that GDP is a reliable indicator of economic growth or of a country’s well-being.

One of the core problems with GDP is that it only adds. That is, GDP calculates any kind of spending as improving the health of an economy—a limitation that is clearly problematic.

As an example, how does GDP account for an economic disaster? The oil spill British Petroleum (BP) caused in the Gulf of Mexico in 2010 is a perfect example of the limitations of GDP. The transactions made to replace assets damaged or destroyed by such a disaster are not differentiated in final GDP scores, to the tune of about $20 billion in the 2010 oil spill.

Not to mention, an oil spill negatively affects the local economy in so many ways that GDP does not account for: for instance, fishermen losing their jobs and livelihood, restaurants temporarily closing or going out of business entirely, and tourism in the area rapidly declining. Moreover, the local ecosystem is completely thrown off balance and damaged, sometimes irreparably, for many years to come.

Hurricane Katrina provides another significant example of GDP’s limitations: With about $250 billion in cleanup costs, the hurricane’s effect on GDP certainly did not reflect the well-being of New Orleans citizens or economy in the years following the disaster. Thousands of former residents were permanently displaced, and the city is still struggling to approach pre-Katrina population figures. As of 2012, the city has reached only 80 percent of its former population.

Although Louisiana’s GDP initially dropped off after the disaster, as the cleanup effort began it quickly began to climb, approaching pre-disaster numbers within only five years. Yet while the state’s GDP was rapidly recovering, the city itself was not: Alyson Plyer, the chief demographer at the Greater New Orleans Community Data Center, estimated in 2010 that the city was only “five years into a 10- to 20-year recovery project.” Going by GDP alone, however, the disaster seemed to be a hiccup rather than a monumentally disruptive catastrophe.

Economic disasters like the BP oil spill and Hurricane Katrina demonstrate the inherent limitations of GDP as a measurement of economic growth, health, or the well-being of citizens in an economy. GDP scores are simply not built to accommodate these negative externalities that affect people, wildlife, ecosystems, and communities.

However, alternative methods have been developed to more accurately account for these externalities. The Genuine Progress Indicator (GPI), developed by ecological economists in the 1980s and 90s, is much better equipped to measure activities that diminish financial and social well-being and negatively impact the environment. GPI, for instance, quantifies externalities such as ozone depletion or loss of wetlands as harmful costs—whereas GDP is not able to differentiate these harmful costs from positive economic activity so long as dollars are being spent.

Some states have already started to move away from GDP because of its inherent limitations: Despite early opposition, Maryland—in conjunction with the University of Maryland’s Center for Integrative Environmental Research—developed and implemented a GPI tool for policy-makers in early 2010. The tool, which measures how indicators of well-being interact with and affect each other, uses 26 different indicators from economic, environmental, and social categories to calculate GPI.

Maryland’s successful adoption of GPI will hopefully encourage other states to follow suit and develop similar measurements for a more sustainable economic future—one that values its citizens and the environment more highly than the dollar.

 

Michael Faul is an intern for the New Economy Working Group project.

Beyond the Jobs Report: A Call for a Transformational Economy

November 2, 2012 ·

Don't count on the latest round of good economic news to have much of an impact on the elections. There are very few undecided voters left and these minor changes aren't likely to change anyone's mind.

But it's still worth noting that the Bureau of Labor Statistics found  that the country gained 171,000 jobs and that unemployment inched up to 7.9 percent from 7.8 percent. Both numbers are good. Unemployment only edged up because  so many jobless Americans became confident enough to look for work again.

President Barack Obama can rightly brag about improved economic numbers in recent months. There are more jobs. Gas prices are down. The economy is modestly expanding. Consumer confidence has bounced to a four-year high and the Dow Jones Industrial Average recently hit an all-time high. Clearly, the economy is faring well under his leadership.

But, let's be honest. As tough a row as Obama has had to hoe — inheriting a deep recession and a giant budget deficit — our nation knows how to create jobs at a much greater pace and grow our economy more equitably. It's up to us, we the people, to create a better society by electing better policymakers and lawmakers.

In the 1950s, with a top marginal tax rate of about 90 percent, we had the necessary revenue to help veterans get college diplomas, to create good jobs, and to grow a middle class.

Yes, racism was an even-bigger problem then than it is now. However, the progressive taxation we had at that time generated enough revenue that most of the country's residents regardless of race, gender, or economic status could have been brought into the middle class had it not been for rampant discrimination.

The same potential exists today, even more so because we're an even wealthier country now. We can greatly expand the number of good-paying, full-time jobs with a fair and economically sound approach to our federal budget priorities and long-term debt reduction. It's time our leaders stopped cow-towing to corporate interests by masquerading as adherents to the ideology of government minimalism.

If we cut wasteful Pentagon spending, restore top marginal tax rates to Reagan levels, close corporate tax loopholes, end tax breaks that benefit only the wealthy, cancel subsidies to polluting oil and gas companies, and impose a tiny tax on speculative Wall Street transactions, we will have the revenue we need to rebuild our infrastructure, create sustainable energy sources, improve public schools, expand access to health care, and build a sustainable economy that provides all Americans with a decent standard of living.

Then, not only will we see an expansion in our economy, but the right kind of expansion — one measured by something like a Genuine Progress Indicator (GPI), rather than the Gross Domestic Product (GDP). We need to measure not just general economic expansion but our overall wellbeing.

Either Obama or Romney can do this. Either a Democratic or Republican House and Senate can do this. It's not about politics. Or ideology. This isn't rhetoric and this isn't short-term analysis of monthly jobs numbers. This is common sense. And it's the transformational approach we need.

Karen Dolan is a fellow at the Institute for Policy Studies (www.ips-dc.org), where she's studying alternative metrics to the GDP, such as Maryland's Genuine Progress Indicator.

Shell-shocked Again, this Time because of Aurora

July 27, 2012 ·

The night of Friday, July 20 was destined to make headlines — but never for this.

After three years of spiraling anticipation, the premier of The Dark Knight Rises was supposed to be the pinnacle of the American movie-going experience. But, in the aftermath of the midnight mass shooting in Aurora, Colorado, the nation wasn't enthralled by the big screen. Instead, we were collectively shell-shocked by this latest murderous rampage, which killed 12 dead and wounded 58 others.

As we mourn these senseless deaths, the media is sensationalizing the life and disappointments of James Holmes, the 24-year-old sole suspect behind the tragedy. Was he an obsessive fan with a blurred vision of reality? A lonely boy looking to be heard? Or an ambitious student weighed down by pressures to succeed? An entire narrative is spinning around him. It's a mythology that looks to craft as much fascination with the shooter as there was for the Batman movie itself.

M Glasgow/FlickrBut the particulars of Holmes' biography, riveting as they may be, should not become our take-away from what happened in Colorado. The heart of this story is not the state of James Holmes but the state of our country.

We've become a nation of jumbled values. While parents, politicians and everyone in between declare community safety a sacred right, movies glorify violence. And as we all mourn Colorado's needless deaths, gun-rights groups rail against the thought of stricter gun control.

But beneath the NRA's narrative of freedom and self-defense, "good, traditional American values," lies a simple truth: The gun industry is exactly that — an industry. And theirs is a profit motive so brutal that, according to one study, the gun industry is "working to recruit future customers among America's children…through advertising campaigns and even video games."

They're also working to keep guns ready at hand, pouring over $5,500,000 last year to lobby politicians.

How easy was it for Holmes to buy his weapons? Very. Colorado has some of the flimsiest gun laws in the United States: The assault rifle, shotgun, and handgun Holmes bought in the span of only a few months were all perfectly legal and raised zero flags. And where local distributors failed, there was always the unregulated online market, which outfitted Holmes with thousands of bullets and ballistic gear.

Each gun or bullet sold is profit in someone's eyes, so it's no wonder that every time we talk about gun control, a deafening uproar emerges. And there's little incentive for politicians to take a stand, either. Industry is industry, after all, and any production will raise GDP. Perversely, the more guns we churn out, the better off we call ourselves. Politicians get swelling statistics to market off to voters, the gun industry gets tenuous regulation, and we get ever more gun fatalities.

There's a defect in our priorities. We look at price tags and call it "value." But what of those dozens of victims in Colorado? Or the other estimated 100,000 people killed or injured by guns each year?

If we really must attach a dollar sign to understand, the University of Chicago Crime Lab pegs the annual cost of gun violence at $100 billion. But for all the media attention the Aurora shooting has gotten, most gun crimes flit silently under our radar — out of sight, out of mind. The societal damages they inflict are buried under headlines and forgotten.

For these unheard victims, it's time we get our values straight. We can't simply take gun sales at face-value. We must consider the staggering costs they carry along. The Genuine Progress Indicator (GPI) is one possible step in that direction. The GPI, an alternate measurement to GDP, broadens our concept of wellbeing by integrating social, economic, and environmental indicators in its calculations of progress. One of these indicators, sure enough, is crime.

The Maryland GPI, for example, factors in not only direct out-of-pocket expenses, but also the more profound damages of crime, like trauma and fear, when determining its state-wide wellbeing. That way, when Maryland's legislators evaluate gun policy and regulation, they will realize the deeper, more substantial impacts that will work their way throughout the state.

The Colorado shootings have made one thing certain: We need to reorient our values. We need progress to be defined not by gun sales, but by the safety of our communities. And so we need a yardstick that will show both politicians and the public the true costs of our gun-wielding culture and the dangerous, short-sighted policies they have spawned. Only then will we have taken to heart the true message of Friday's tragedy. Only then will it not have been in vain.

Vicky Plestis is an intern at the Institute for Policy Studies, where she helps research alternative models of measuring economic progress. www.ips-dc.org

Good News and Bad News about GDP Growth

January 27, 2012 ·

The U.S. economy grew at an annualized rate of 2.8 percent in the fourth quarter of 2011, the Bureau of Economic Analysis reported.

With Europe in crisis and the world teetering on the brink of a new global recession, that quarterly growth figure is a welcome ray of sunshine in an otherwise bleak outlook. The nation accounts for 23 percent of total world GDP.

The 2.8 percent headline figure represents the real (adjusted for inflation) growth in gross domestic product (GDP) between the third and fourth quarters of 2011, adjusted to account for ordinary seasonal variability and converted to an annual growth rate.

It compares favorably with both the 1.8 percent figure for the third quarter and the economy's long-term average annual growth rate of 2.5 percent over the past two decades.

Unfortunately for the United States and its trading partners, the news isn't as good as it seems.

Final sales — defined as GDP less change in private inventories — increased at a rate of only 0.8 percent in the fourth quarter.

In other words, only 0.8 percent of the fourth quarter's growth came from actual sales of goods and services. The other 2 percent came from businesses building up their inventories.

What does that mean? Here are two possible interpretations.

The optimistic interpretation is that businesses were accumulating inventory in late 2011 in anticipation of high sales figures in 2012. Seen in this light, inventories can be a leading economic indicator. They suggest stronger economic growth in 2012.

The pessimistic interpretation is that inventories rose in the fourth quarter of 2011 because businesses couldn't sell their goods. With sales slowing, inventories pile up. This view doesn't bode well for 2012.

While either interpretation could be correct, there's strong circumstantial evidence for the pessimistic interpretation.

When measured in actual dollars, without adjusting for inflation, nominal GDP rose at an annual rate of 3.2 percent annual rate in the fourth quarter, compared with a 4.4 percent rate in the third.

The only reason that real GDP (which is adjusted for inflation) rose faster in the fourth quarter was that inflation declined from 2 percent to less than 1 percent.

This means that GDP growth actually slowed in the fourth quarter of 2011, but inflation slowed even more, resulting in a net increase in real GDP growth.

Strong demand causes inflation to rise; weak demand causes inflation to fall. Falling inflation indicates that demand is weak. This suggests that the pessimistic interpretation of rising inventories is probably the right one.

The 27 January fourth quarter GDP figures are only "advance" estimates, not final results. Revised figures will be released on Feb. 29 and final figures on March 29.

GDP figures are often revised downward after the initial estimates have been published. Inventory statistics in particular have been a source of error.

The U.S. economy has shed more than 6 million jobs since the beginning of the recession in December 2007.

Due to a rise in part-time employment, the number of Americans employed in full-time jobs is down more than 8 million.

According to the Bureau of Labor Statistics, the economy is currently creating about 150,000 net new jobs per month. Even accounting for retirees, that barely keeps pace with the rate of new graduates entering the labor market each year.

There is little relief in sight. At the Fed's latest Federal Open Market Committee (FOMC) meeting January 24-25, expectations were muted.

The FOMC said in its official statement that it "currently anticipates that economic conditions — including low rates of resource utilization and a subdued outlook for inflation over the medium run — are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014."

In promising to keep interest rates "exceptionally low" the FOMC indicates that it expects the US economy to remain sluggish for at least the next three years.

Officially, the economy entered recession in December 2007 and emerged into recovery in July 2009. The recovery, however, has been slow and relatively jobless.

In the experience of most ordinary Americans, the recession that started at the end of 2007 is not yet over. If the FOMC expects current economic conditions to continue through the end of 2014, that suggests a grand total of seven years of slow going.

This raises the question: when does a recession become a depression? There's no "official" definition of a depression used by U.S. or international authorities, but the current experience must come close.

Full-year 2011 real GDP growth for the United States stood at 1.7 percent. Factoring in population growth, real GDP-per-capita was roughly the same last year as it was in 2005.

It's certainly good news that the U.S. economy is growing again, but if the Federal Reserve forecasts are right it will be a long time before Americans have anything much to cheer about. Depression or no depression, Americans are in for a long, hard slog.

Salvatore Babones is a senior lecturer in sociology and social policy at the University of Sydney and an associate fellow at the Institute for Policy Studies. An earlier version of this post appeared on the inequality.org website. www.ips-dc.org

A New Set of Tools for Measuring Economic Progress

October 24, 2011 ·

Maryland's government is embracing an alternative way to monitor the state's wellbeing called the Genuine Progress Indicator, which brings depth to the analysis of the state's economic growth. At the Institute for Policy Studies, we are looking for lessons in Maryland, as well as in similar exercises being undertaken elsewhere. This is the second in a series of posts about this work. This was the first one. A longer version is running as an op-ed via the Institute's OtherWords editorial service.

More than 70 years after its emergence, the desirability of GDP growth is so entrenched in our national and international discourse that it's hard to imagine it any other way. The revered indicator's expansion or contraction can swing national elections. Conversely, talk of GDP declines can drive a country to war.

During tough economic times such as these, it's particularly surprising to have a leader bucking the tide. Yet Martin O'Malley is doing just that. Maryland's governor is the first in the United States to embrace a set of alternative indicators that bring depth to the analysis of his state's economic growth. Under O'Malley's leadership, the state's officials are now gathering and annually updating economic, social, and environmental data that help measure the overall wellbeing of Maryland's citizens.

The 26 underlying indicators, which collectively comprise the "Genuine Progress Indicator," are a more meaningful gauge of the overall economic health and wellbeing of Maryland residents than standard economic measuring sticks. For example, the state tracks things like volunteerism, time spent with family and loved ones, and air quality in its quest to gauge its real progress. These indicators may lack concrete economic value, but studies show they help make a society more healthy and vibrant.

GPI assesses what's left behind when the "gross product" expands. Is the landscape more or less toxic than before? Is the air and water cleaner or dirtier? How well-educated is the populace? Is public transportation decent? Is crime more common? Are too many people spending more time commuting to jobs than at home with their kids?

Maryland leads the nation in measuring overall societal wellbeing through the GPI, but there are similar efforts underway elsewhere in the United States, as well as in Canada, France, and even Bhutan. Yes, Bhutan, a tiny country nestled in the Himalayan mountains. There, "gross domestic happiness" carries more weight than the gross domestic product.

It's time to recall Simon Kuznets' warnings about the limitations of the GDP and to pick up where he left off by embracing a new set of tools that will help shape good social, environmental, and economic policy — not just for Maryland, but for our entire country and the world.

Daphne Wysham is a fellow at the Institute for Policy Studies, where she's conducting research around ways in which alternative metrics to the GDP, such as Maryland's "Genuine Progress Indicator," can be used to build a more sustainable society. www.ips-dc.org

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