Economic situation and contemporary context

Economic Situation

Cobb, Halstead and Rowe outline a system of economic measurement called the Genuine Progress Indicator (GPI). They argue that the traditional measure of GDP is not an accurate reflection of genuine progress as a society. The GDP measures the value of transactions, but Cobb et al. argue that GDP does not include value judgment. In other words, by focusing on the GDP society and the politicians place emphasis on generating transactions rather than on generating that which is valuable to society. The GPI is essentially an adjustment of GDP to factor in activities that are counted in the GDP calculation but are do not contribute to the betterment of society; and does count those activities that are not counted in GDP but do contribute to the betterment of society. To examine the economic performance over the past eight years we will consider the GDP and then make adjustments to fit the GPI. We will then analyze the merits of the different systems as a means of measuring economic progress.

The GDP has grown in the past eight years. The pace of growth is higher than that of other developed nations, but was lower than in the previous eight years. This is because of two key shocks to the economic system. One was the bursting of the dot-com bubble, which was followed quickly by 9/11. The other is the emerging subprime crisis. These two events have suppressed GDP growth recently, but the economy has still grown.

The first adjustment that we shall make to the GDP for GPI purposes is to consider wealth transfer. The GDP has grown because of an increase in the value of our transactions. However, the net result of those transactions can be found in the current account deficit. This has grown steadily over the past thirty years, the past eight being no exception. What the transfer of wealth overseas represents is a loss of wealth enjoyed here at home. This can be seen in a number of economic statistics. For example, it can be seen in the decline of the manufacturing sector and rising unemployment rates. Those jobs have shifted overseas. We still buy the products, but instead of having the benefits of those purchases travel entirely down the economic chain domestically, the value of those purchases leaves the country. The net transfer of wealth outside of the country is therefore a loss in GPI terms, even though the transactions are considered a gain in GDP terms.

Contributing to this is the increase in consumer debt. Consumers were already increasing their debt in the 1990s and that trend has continued in the past eight years. Consumer debt is included in the GDP not just in terms of the sales that are recorded, but in the interest recorded by the financial services industry. In GDP terms, interest represents wealth creation. Yet GPI argues that the true value of a country is not in paper wealth but in resources. Therefore, the GPI decreases as consumer debt increases. Eventually it is conceivable that consumer debt will contribute to a decrease in the GDP, should default and credit crunch occur, but until then it will only be considered negative under the GPI measure.

Similarly, the subprime crisis represents well the argument between GDP and GPI. The housing bubble resulted in strong profits for the banking, real estate sales and construction industries. Each contributed to GDP growth. Yet, GPI argues that very little real value was created. The sale of a home from one speculator to another increases the GDP, but it creates no value. If that home is flipped three or four times in a year, it inflates the GDP without creating any real wealth for the nation. Churning the economy and growing it are two different things. Therefore in GPI terms, the housing bubble would be deducted from the GDP figure.

Likewise the Iraq War would be deducted. War spending increases GDP dramatically, but death, destruction and erosion of goodwill are not "progress" as defined by GPI proponents. When the negative forces that have propped up the GDP over the past eight years are removed, economic growth has been negative. The nation has not made progress in the past eight years and indeed is worse off than it was at the turn of the millennium.