The waning of GDP

A recent article in CFO magazine has useful quotes from Joseph Stiglitz that relate to the reseach he's been commissioned to conduct by President Nicolas Sarkozy. The French President seems to be alone in the cadre of world leaders in calling for a re-evaluation of the measure that we use to define success. For over a generation since the publication Club of Rome's 'Limits to Growth', the use of GDP as a measure of progress or success has been increasingly questioned by experts far enough away from the system to see how it works.

Classical economists still seem largely stuck an a responsive, tax-and-policy based groove that ignores the nature of a realpolitik that is changing by the day. As prices rise anc climate changes, with a 60% increase in oil prices within six years, peak oil within 10 years, and a four degree rise in tempeature within 40 (all forecasts made this week, by UK Energy Watchdog, The UKs Energy Research Centre, and the Met Office, respectivel), the liklihood of 'old school' thinking fixing emerging problems seems increaingly small.

I've highlghted a few comments from the interesting CFO report:

"Simply put, the GDP is a measure of economic performance that represents the value of all the goods and services in an economy based on prices being charged. But there has long been discussion of the metric's alleged deficiencies; namely, that it does not take into account factors such as disparity in the distribution of wealth, depletion of natural resources, underground economies, and the quality of goods and services"

Stiglitz: "In a performance-oriented society, what you measure affects what you do. If you have the wrong measures, you can wind up doing the wrong thing,"

"[Stilitz] noted that, for example, 41% of all corporate profits in 2007 were generated in the financial sector and tied to debt. In other words, the gains were "borrowed from the future," he said"

As a result, the massive subprime-related losses that financial institutions booked in 2008 wiped out not only the profits from 2007 but also those from the preceding five years. "They were not really profits, but we recorded them as fantastic years," asserted Stiglitz.

"Another fundamental measuring mistake relates to household income. Adjusted for inflation, median household income in 2008 fell to $50,303, which was 4% below its 2000 level and continued a downward trend that had been accelerating for some time. That's "a striking statistic," said Stiglitz, because the GDP per capita for the same period climbed from $33,700 in 2000 to $38,100 in 2008 (adjusted for inflation)"

The counterintuitive trend is explained by the increasing financial inequality within American society, which allows the two measures to go in absolutely different directions. The implication, according to Stiglitz, is that most citizens' standard of living goes down while the GDP goes up.

Another problem with the metric is that in some sectors, such as health care, GDP calculations take into consideration input but ignore output. So as an economy becomes less efficient, input and the GDP increase because of higher spending, "but things you care about actually go down," including citizens' health, opined Stiglitz.

Health-care spending currently accounts for 16% of the U.S. GDP, and that percentage is rising steadily. Yet "health outcomes in the U.S. are not commensurate with spending," he said. That means other countries are spending less and getting better results — witness France, which spends 11% of its GDP on health care and is ahead of the United States in life expectancy and other health metrics.

Stiglitz also addressed the issue of sustainability with respect to climate change, in particular the "false prices" that the United States and other countries use when valuing natural resources. "Our price system is based on the assumption that one of the scarcest resources we have has a zero price, and we know that can't be right," he said.

That scarce asset is clean air. Stiglitz's reasoning is that the Earth has a limited amount of capacity in its atmosphere to absorb the CO₂ emissions that are spewed into the air by factories and cars, and are believed to be the main contributor to global warming.

He noted that many experts believe CO₂ emissions should be priced at around $80 to $100 per ton. When the United States eventually factors the cost of carbon into its economy in that way, it will affect everything that emanates from fossil-fired energy production. Until then, prices will remain distorted.

"Our accounting framework affects how you see the world, and our accounting framework is flawed," said Stiglitz, who as a member of the Council of Economic Advisors under President Clinton lobbied for the United States to use metrics incorporating the effects of natural-resource depletion. "I knew we were on to something important when Congress said that if we did this, our funding would be cut. The coal industry was very adamant that we not [put a price on carbon]."

What can you or I do about this? Whilst the problem of changing a global accounting system may beyond the reach of a single individual, there are many steps to take that create learning and action:

Work through your expenditure and see how far you can reduce it without materially reducing your quality of life. Spend less on pettol and cycle more (less cost, more health)

Watch less (or better, no) TV and use the time to do things that create quality for little or no cost - cooking proper food, conversation music

Redesign your life to holiday at home or in your own country, and save the equivalent of years' worth of savings.

Cancel memberships that you don't need (health clubs, networks, business associations) and use the money for something more useful

Enjoy being.