[R-G] [BillTottenWeblog] Our Phony Economy

[Bill Totten]

by Jonathan Rowe

>From testimony delivered March 12 before the Senate Committee on
Commerce, Science, and Transportation, Subcommittee on Interstate
Commerce. Rowe is codirector of West Marin Commons, a
community-organizing group, in California.

Harper's Magazine Essay (June 2008)


Suppose that the head of a federal agency came before this committee and
reported with pride that agency employees had burned ten percent more
calories at work last year than they did the year before. Not only that
- they had spent ten percent more money too. I have a feeling you would
want to know more. What were these employees doing when they burned
those calories? What did they spend that money on? Most important, what
were the results? Expenditure is a means, not an end, and to assess the
health of an agency, or system, you need to know what it has
accomplished, not just how much motion it has generated and money it has
spent. The point seems obvious, yet Congress ignores it every day when
it talks about "the economy". The administration and the media do it,
too. Every time you say that "the economy" is up, or that you want to
"stimulate" it, you are urging more expenditure and motion without
regard to what that expenditure is and what it might accomplish, and
without regard to what it might crowd out or displace in the process.

That term "the economy": what it means, in practice, is the Gross
Domestic Product - a big statistical pot that includes all the money
spent in a given period of time. If the pot is bigger than it was the
previous quarter, or year, then you cheer. If it isn't bigger, or bigger
enough, then you call Federal Reserve Chairman Ben Bernanke up here and
ask him to do some explaining. The what of the economy makes no
difference in these councils. It never seems to come up. The money in
the big pot could be going to cancer treatments or casinos, violent
video games or usurious credit-card rates. It could go toward the $9
billion or so that Americans spend on gas they burn while they sit in
traffic, or the billion plus that goes to such drugs as Ritalin and
Prozac that schools are stuffing into kids to keep them quiet in class.
The money could be the $20 billion or so that Americans spend on divorce
lawyers each year, or the $41 billion on pets, or the $5 billion on
identity theft, or the billions more spent to repair property damage
caused by environmental pollution. The money in the pot could betoken
social and environmental breakdown - misery and distress of all kinds.
It makes no difference. You don't ask. All you want to know is the total
amount, which is the GDP. So long as it is growing then everything is
fine.

I am not talking about an obscure technical measure. This is not stuff
for the folks in the back room. I am talking about what you mean when
you use that term "the economy". Few words induce such a reverential
hush in these halls. Few words are so laden with authority and portent.
When you say "the economy" is up, no news is better. When you argue that
a proposal will help the economy or hurt it, then you have played the
ultimate trump card in your polemical deck, bin Laden possibly excepted.

This, by the way, is not an argument against growth. To be reflexively
against growth is as numb-minded as to be reflexively for it. Those are
theological positions. I am arguing for an empirical one. Find out what
is growing and the effects. Tell us what this growth is, in concrete
terms. Then we can begin to say whether it has been good.

The failure to do this is insane. It is an insanity that is embedded in
the political debate and in media reportage, and it leads to fallacy in
many directions. We hear, for example, that efforts to address climate
change will hurt "the economy". Does that mean that if we clean up the
air we will spend less money treating asthma in young kids? The
atmosphere is part of the economy, too - the real economy, that is,
though not the artificial construct portrayed in the GDP. It does real
work, as we would discover quickly if it were to collapse. Yet the GDP
does not include this work. If we burn more gas, the expenditure gets
added to the GDP. But there is no corresponding subtraction for the toll
this burning takes on the thermostatic and buffering functions that the
atmosphere provides. (Nor is there a subtraction for the oil we take out
of the ground.) Yet if we burn less gas, and thus maintain the crucial
functions of the atmosphere, we say "the economy" has suffered, even
though the real economy has been enhanced.

With families the logic is the same. By the standard of the GDP, the
worst families in America are those that actually function as families -
that cook their own meals, take walks after dinner, and talk together
instead of just farming the kids out to the commercial culture. Cooking
at home, talking with kids, walking instead of driving, involve less
expenditure of money than do their commercial counterparts. Solid
marriages involve less expenditure for counseling and divorce. Thus they
are threats to the economy as portrayed in the GDP. By that standard,
the best kids are the ones who eat the most junk food and exercise the
least, because they will run up the biggest medical bills for obesity
and diabetes.

This assumption has been guiding our economic policies for the past
sixty years at least. Is it surprising that the family structure is
shaky, real community is in decline, and children have become petri
dishes of market-related dysfunction and disease? The nation conceives
of such tilings as growth and therefore good. It is not accidental that
the two major protest movements of recent decades - environmentalist and
pro-family - both deal with parts of the real economy that the GDP
leaves out and that the commercial culture that embodies the GDP tends
to erode. How did we get to this strange pass, where up is down and down
is up? How did it happen that the nation's economic hero is a
terminal-cancer patient going through a costly divorce? How is it that
Congress talks about stimulating "the economy" when much that will
actually be stimulated is the destruction of things it says it cares
about on other days? How did the notion of economy become so totally
uneconomic?


The story begins in Ireland in the 1650s. British troops had just
repressed another uprising there, and the Cromwell government had
devised a final solution to put its Irish problem to rest. The
government would remove a significant portion of the populace -
Catholics in particular - to remote parts of the island. Then it would
redistribute their lands to British troops, thus providing compensation
to them and establishing an occupational presence for the benefit of the
government in London. The task of creating an inventory of the lands
went to an army physician by the name of William Petty, a quick study
and a man with an eye for the main chance. He classified much land as
marginal that actually was quite good. Then he got himself appointed to
the panel that made the distributions and bestowed much of that land
upon himself. Petty's survey was the first known attempt in Western
history to create a total inventory of a nation's wealth. It was not
done for the well-being of the Irish people but rather to take their
land away from them. It was an instrument of government policy, and this
has been true from that time to the present. Governments have sought to
catalogue the national wealth for purposes of taxation, confiscation,
planning, and mobilization in times of war. They have not designed these
catalogues to be measures of national wellbeing or of quality of life.
Yet that is how the national wealth inventories have come to be used,
especially the GDP. Somehow the tool has become the task. This part of
the story begins with the Great Depression.

In the early 1930s, as the United States sank deeper into an economic
slough, Congress faced an absence of data to help guide the way out. It
didn't know exactly what was happening and where. There were no
systematic figures on unemployment or production. President Herbert
Hoover had dispatched six employees from the Commerce Department to
travel around the country and file reports. These were anecdotal and
tended to support Hoover's view that recovery was just around the
corner. Members of Congress wanted more. Senator Robert M La Follette
Jr, a Republican of Wisconsin, introduced a resolution to require the
Commerce Department to develop a spreadsheet - as we would call it today
- of the economy with its component parts. La Follette was a Progressive
in the original sense. He believed in "scientific management and
planning", and the resolution was to produce a tool to that end. It
passed in 1932, and the work fell to one Simon Kuznets, a professor who
was working at the National Bureau of Economic Research in New York.
Kuznets knew that he was producing a policy tool and not a measure of
living standards or well-being. As he put it later in his clinical
prose, the goal was to help understand the "relations and relative
importance of various parts of the productive system and their
responsiveness to various types of stimulae as shown by their changes in
the past". Kuznets had a tiny staff and virtually no budget. Data
sources were fragmentary. But about a year and a half later, Kuznets,
with brevity and candor that are rare today, laid out for Congress the
limitations of the accounts he had constructed. He took particular pains
to tell you why you should not use these accounts the way you - and the
press - have come to use them.

For one thing, the national accounts leave out a crucial dimension of
the economy - the part that exists outside the realm of monetary
exchange. This segment includes both the ecosystem and the social system
- the life-supporting functions of the oceans and atmosphere, for
example, and work within families and communities that is not done for
money. So when the monetized economy displaces these elements - as when
both parents have to work, or when forest clearing eliminates the
cleansing function of trees - the losses are not subtracted against the
market gain. Kuznets was under no such illusion. "The volume of services
rendered by housewives and other members of the household toward the
satisfaction of wants must be imposing indeed", he wrote. There is also
the question of what he called "odd jobs", or what we would call the
"underground economy. "He knew these played a large role in the economy.
He also grasped, more broadly, that the quality and importance of a
function do not depend upon the amount of money paid for it - or whether
any money was paid at all. The care of a mother and father is not
inferior to that of a day-care worker just because they do not charge a
price for their services. This recognition undercuts a basic assumption
behind the GDP - namely, that the contribution of an activity can be
gauged solely by its market price. But there is a practical problem,
Kuznets observed. Accounts require data, and there is by definition
little data on the underground economy and on nonmarket exchange. As a
result, the national accounts include only the slice of economic reality
that falls within the bandwidth that economists are able to grasp -
recorded expenditures of money.


Then there is the thorny question of constructive versus destructive
activities within the realm of monetized exchange. Once you have decided
to count only that which is transacted through money, do you make the
further assumption that everything transacted for money counts on the
plus side of the ledger? The mentality that lies behind the GDP assumes
that you do. We all are "rational", so any choice we make in the market
is by definition one that makes our lives better. Kuznets focused on one
obvious exception: activities that are generally illegal, such as
gambling and selling drugs. To assume that such expenditures add to the
national well-being would undercut the rationale for making them illegal
in the first place. The GDP is an instrument of the state, after all, so
Kuznets drew the line there. He was aware of how arbitrary this line is
from an economic standpoint. Why exactly does legal gambling add to
well-being if the illegal kind does not? Or what about alcohol? Given
the assumption that legality confers benediction, the economy received a
huge boost at the end of Prohibition, simply because the drinking that
formerly was illegal now was deemed permissible. But booze still was
booze. If the government can increase the growth race by jiggering the
metrics in this way, that does not increase confidence in the validity
of measure. But legality is the easy part. Just beneath it lies a deeper
issue - the assumption that every purchase is beneficial simply because
someone has paid the purchase price. The exclusion of illegal
activities, Kuznets said, "does not imply ... that all lawful pursuits
are necessarily serviceable from the social viewpoint". He left the
question there, a chasm that honest inquiry has to plumb.

There are so many examples of expenditures that go into the GDP that
have a questionable claim to the stature of growth and good, even from
the standpoint of those who make them. For example, much consumption is
compulsory, in that buyers have little choice. There is fraud, such as
the way seniors are cheated in reverse-mortgage scams. There are also
products that are designed to lock buyers into an endless stream of
high-priced replacements, such as inkjet-printer cartridges that are
designed to resist refilling. There are car bumpers that are designed
not to bump, so that a mild fender bender turns into a $5,000 repair
bill. There are the usurious charges and fees built into credit cards.
Not all Americans confronted with these expenditures regard them as
"consumption choices" that propel them further up a happy mountain of
more.

The toughest case for the economic mind is addiction. The GDP assumes,
as most economists do, that people are inherently "rational". What they
buy is exactly what they want, and so their purchases must make them
happy in exact proportion to the prices paid. Yet addiction has become
pervasive. It has metastasized far beyond the usual suspects - gambling,
tobacco, alcohol, and drugs - and spread to such things as eating,
credit cards, and shopping itself. Also neglected is what economists
call "distribution". The GDP makes no distinction between a $500 dinner
in Manhattan and the hundreds of more humble meals that could be
provided for the same amount. A socialite who buys a pair of $800 pumps
from Manolo Blahnik appears to contribute forty times more to the
national well-being than does the mother who buys a pair of $20 sneakers
for her son at Payless. "Economic welfare", Kuznets wrote, "cannot be
adequately measured unless the personal distribution of income is
known". As included in the national accounts, an accretion of luxury
buying at the top covers up a lack of necessary buying at the bottom. As
the income scale becomes more skewed, the cover-up becomes even greater.
In this respect the GDP serves as a statistical laundry operation that
hides the suffering at the bottom. Another problem has to do with work
and the toll it takes on those who do it. Kuznets called this the
"reverse side of income, that is, the intensity and unpleasantness of
effort going into the earning of income". That earning comes at a cost
of wear and tear upon the body and psyche. If the GDP subtracts
depreciation on buildings and equipment, should there not be a
corresponding subtraction for the wearing out of people?

What about the loss in the value of their skills as one technology
displaces another? In the current accounting, this toll often gets added
to the GDP rather than subtracted, in the form of medications,
expenditures for retraining, and day care for children as parents work
longer hours. Most workers would regard such outlays as costs, not
gains. Had Kuznets been writing today, moreover, he probably would have
added another kind of depletion - that of natural resources. It sounds
incredible, but when this nation drills its oil and mines its coal, the
national accounts treat this as an addition to the national wealth
rather than a subtraction from it. The result is like a car with a gas
gauge that goes up as the fuel tank empties. The national accounts
portray a nation getting richer when it is in fact draining itself dry.
Kuznets concluded his report with words that ought to be inscribed on
the wall of every office on Capitol Hill and over every computer screen
within a twenty-mile radius: "The welfare of a nation can, therefore,
scarcely be inferred from a measurement of national income as defined
above".


Congress and everybody else have done exactly what Kuznets urged us not
to do. The malpractice began with the gradual seep of the new accounts
into the political arena. In his 1936 reelection campaign, Franklin
Roosevelt noted that the economy - as defined by the national accounts -
had increased under his watch. It was a number: who could resist? The
likely source was FDR's close adviser Harry Hopkins, whose office was a
hub for the young economists who came to Washington to join the New
Deal. But in the passage across 15th Street from the Commerce Department
to the White House, Kuznets's numbers were turning into precisely what
he said they, should not be. Then came World War II, when the national
accounts played a central role in the mobilization effort. A bitter
debate erupted in Washington over the nation's production goals.
Corporate leaders insisted that the mobilization must come out of the
existing level of production. They did not want to be stuck with excess
capacity when the war was over. Kuznets and others argued to the
contrary that the United States had vast troves of untapped capacity;
they used the national accounts to prove it. FDR sided with the
"allouters", as this group was called. They appealed to his belief in
the energizing effects of challenges; Roosevelt took their high
estimates and made them even higher, the better to make his point. (The
planners then had to shift gears to argue the case for system limits,
which the national accounts also helped them do.) Then the accounts
helped to coordinate the war production so as to prevent bottlenecks. By
1944 war production goals alone had surpassed the nation's entire output
just ten years earlier.

It was as close as the nation has ever come to pure economic planning,
and though much reviled, it helped to win the war. Postwar surveys
revealed that Germany had no such planning tool, and Hitler's production
program had been greatly hindered as a result. America had become the
"arsenal for democracy" in part through a top-down approach made
possible by the national accounts. As the war was winding down, the
accounts served again to guide the economy back to peacetime without
relapse into the dreaded Depression. Consumption was essential; the Cold
War, with its Pentagon spending, was not yet in prospect. As war
production diminished, shoppers would have to pick up the slack. The
national accounts showed exactly how it could be done. As John Kenneth
Galbraith put it in Fortune, "One good reason for expecting prosperity
after the war is the fact that we can lay down its specifications".

The new Keynesian economists such as Galbraith were now the Merlins of
prosperity, and the national accounts were their magic wand. Consumption
itself was taking on a heroic stature; the returning troops were handing
off the mantle of national purpose to the shoppers who would replace
them in keeping the industrial machinery in motion. (The heroic imagery
persists in the press today, as when we read that consumers will provide
the "engine" for recovery, or that they will "pull" the nation out of
its recession.) In this atmosphere, it was perhaps inevitable that the
map of the nation's capacity would become a totem to its economic
success. Simon Kuznets watched, it happen with increasing dismay.
(Galbraith came to have second thoughts as well.) Kuznets was a quiet
academic who was loath to mount a soapbox. But he asserted over and over
that those who had seized upon his handiwork had missed the point. In
1962 he wrote in The New Republic that in evaluating growth
"distinctions must be kept in mind between quantity and quality of
growth, between its costs and return, and between the short and the long
run ... Goals for 'more' growth should specify more growth of what and
for what". If you are going to "stimulate" the economy, in other words,
could we at least have a little debate over what exactly you are going
to stimulate?

The purpose of an economy is to meet human needs in such a way that life
becomes in some respect richer and better in the process. It is not
simply to produce a lot of stuff. Stuff is a means, not an end. Yet
current modes of economic measurement focus almost entirely on means.
For example, an automobile is productive if it produces transportation.
But today we look only at the cars produced per hour worked. More cars
can mean more traffic and therefore a transportation system that is less
productive. The medical system is the same. The aim should be healthy
people, not the sale of more medical services and drugs. Now, however,
we assess the economic contribution of the medical system on the basis
of treatments rather than results. Economists see nothing wrong with
this. They see no problem that the medical system is expected to produce
thirty to forty percent of new jobs over the next thirty years. "We have
to spend our money on something", shrugged a Stanford economist to the
New York Times. This is more insanity. Next we will be hearing about
"disease-led recovery". To stimulate the economy we will have to
encourage people to be sick so that the economy can be well.


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