Tuesday, August 9, 2011

GDP IS DEAD: Will the world be happier without it?

Memo to politicians: Stop promising to grow GDP and start targeting social benefits you can actually deliver—or prepare to face angry mobs. Nothing grows forever on a finite planet, not even the US economy.

It’s not surprising that everyone from President Obama to Michele Bachmann is assuring the electorate that he or she can deliver more GDP growth. When GDP numbers are up, more jobs appear and investments reap higher returns. When GDP is down, economic mayhem ensues.

Yet there are signs that more GDP growth may not be in the cards, regardless whose economic remedy is chosen. In fact, the day may have arrived when GDP itself has outlived whatever usefulness it ever had.

GDP (Gross Domestic Product) is a number indicating the total spending occurring in a national economy annually. Since WWII, policy makers have used GDP as their primary index of national economic health. During the late 20th century, with the world awash in cheap energy to fuel ever more industrial output and transport-driven trade, the numbers kept going up—and most economists concluded they’d continue doing so forever.

A few contrarians (including Robert F. Kennedy, in 1968) suggested that relying on GDP wasn’t a good idea. Although soaring numbers lead to financial euphoria, they can hide social ills like growing inequality; moreover, GDP fails to distinguish between waste, luxury, and the satisfaction of basic human needs. Perversely, GDP often rises during wars or after environmental disasters, due to increased government spending.

Despite criticisms, economists and policy makers have stuck with GDP—perhaps because tracking a single number makes their jobs easier.

But now, the US may have reached its practical GDP limit. The bursting of a once-in-a-lifetime credit bubble, the maxing out of consumer borrowing and spending capacity, and tightening global resource constraints (showing up as stubbornly high oil prices) have caught national economic output in an undertow. Much of the rest of the world is being drawn in, with Greece, Ireland, Portugal, Spain, and Italy swirling ever closer to the drain. During the past two years, Americans bought an anemic recovery—a few hundred billion dollars’ worth of GDP growth—but at the cost of trillions in added government debt.

Now, as Washington descends deeper into partisan acrimony, efforts to generate further growth with yet more debt have become political orphans that no Republican and few Democrats will claim as their own. If the “recovery” was all smoke and mirrors, we’ve just run out of mirrors.
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