Marie Leone, CFO.com | US
September 29, 2009
The U.S. Economy has shifted considerably. The GDP measurement has not shifted. The key element in the prior century was the Value Added By Manufacture, whose multiplying effect spread throughout the economy creating through the production of real assets prosperity through the purchasing power of both consumers and the industrial sector -- the latter buying raw materials, intermediate goods and reinvesting profits to improve efficiency.
As we moved into the last quarter century, the financial sector grew more important. Production was shifteed to lower labor cost markets to increase the value of finan cial assets, which had a multiplier of limited effect in the general economy. Profits did multiply to benefit its practitioners but little else.
For the growing middle and lower middle class housing became the preferred investment. As long as housing values increased on paper consumers had no problem acquiring installment debt on depreciating assets.. Should that debt prove burdensome, part of the paper increase in value could be used to pay off long term and with lower interest installment debt.
(Conversely, with the drop in value of homes, consumers have rationally paid don their installment debt rather than continue to buy. The GDP, by the way, does not count the aggregate drop in housing values, there having been no transactions, for the most part..)
The Gray Market, at the other end, remains unmeasured. This underground economy, with its cash or barter transactions may have been as much as 15% of measured GDP -- the recorded numbers having been thus understated. Not only gray market transactions, but also income statement cheating to eliminate the cash used in these transactions for tax purposed have been secreted.
What is needed is reporting of GDP on an accrual not a cash basis. Unfunded pension liabilities accrued during the year need also be an offset to reported GDP. Economists are surely not accountants, but they need to do somewhat better before reliance may be made on the actual -- perhaps actuarial -- situation we find ourseles in.
Posted by Pete Speer | Oct 28, 2009 6:58 PM ET
From it's idealistic beginnings as a free nation after a revolution from colonial oppression, America has since been overcome by greed fueled by an arrogance of power emanating from rapid economic success. Even now for instance the insurance industry with its formidable army of lobbyists and politicians are resisting health care reform. Barak Obama is a new beginning compliments of the better features of the American democratic political process. But as shown by the difficulties of health care reform, the path to change may be a long and difficult process. But the American people should stay the course until the nation is properly returned to its core values of decency and hard work as the way to progress and prosperity rather than through smoke and mirrors. A revision of economic, social, and political paradigms are necessary such as this being presented by Joseph Stigitz. I hope the American people is not distracted by the noisy disciples of the old order and proceed in earnest to securing the future.
Posted by Gico Dayanghirang | Oct 15, 2009 10:51 PM ET
gdp also fails to measure what future benefit a given dollar of production will create, or fail to create. as far as gdp is concerned a dollar spent on nuclear or stem cell research is the same as a dollar spent on hookers and blow (well, it would be if hookers and blow weren't in the underground economy).
for economic policy to be effective we have to examine the real economic worth of what is being produced, not just how much production is occurring.
http://www.theinformationaluniverse.net/~michael/real-economy.shtml
Posted by michael redman | Oct 2, 2009 5:02 PM ET
I cannot believe that there were no economic analysts that "lifted the hood" on the economy to see what was going on in the engine room. Just as in the Enron disaster it seems no one asked the vital question (to paraphrase the movie)where's the money? If a company (or an economy) reports earnings but has no cash flow to support it should one worry? If some entity takes assets off the balance sheet is there any other reason than what is owed on the asset is now greater than what can be got for it in the market?
Come on guys, any economist who didn't see this coming by at least the fall of 2004 had to have had his/her head up their ...!
Posted by James P Savage III | Oct 2, 2009 11:57 AM ET
GDP is not a good measure of how the economy is performing. Look at my country South Africa, GDP has been rising since 1994 but in contrast the inequality gap between the rich and the poor has increased significantly. South Africa now has a higher inequality gap between the rich and poor in the world and has now bypassed Brazil on that regard. If one looks at GDP alone, you will be tempted to conclude that the standard of living in South Africa is improving, yet the reality is that the poor has been getting worse, the wealth indicated by GDP has only been distributed to the few.
Posted by Emmanuel Shongwe | Oct 2, 2009 9:48 AM ET
GDP measures human materialism. No more, no less.
As for another reader posting the following:
Am I missing something, when has massive government intervention lead to (net of unintended consequences) increases in overall prosperity?
Easy: government health care is better in Canada and Europe than privatized health care in the USA. The USA is one of the few developed nations without a large public health care system. In Canada, our health care costs are lower (though our wait times may be a bit longer than in the USA), and if you add USA taxes + health insurance premiums approximately = Canada taxes
So, how is the USA ahead on health care? There are good and bad doctors in both countries. Difference is, on the whole, our doctors are less greedy and care more about quality of service than quantity of service (given absence of the profit motive over a human right of positive health).
Posted by David Newman | Sep 30, 2009 2:31 PM ET
Why do these 2 economists feel the need to bring up CO2 emissions/the need for carbon credit accounting/global warming? What was being presented prior to that part was at least logical.
Anytime people start talking fossil fuel emissions/carbon credits they lose all credibility with me. I see that whole topic as nothing more than a power/money grab.
This planet we live on is 75% covered by water. The roughly 25% of land has less then 15% put to cropland/agricultural uses. And less then 10% industrialized, and only about 30% populated--to think that man is responsible for climate change is ridiculous and insultingly arrogant. It is merely a way to fear monger more governmental-control and take money away from the people.
The economic models used prior to the meltdown certainly need to be retooled the main difficulty is in getting politicians and others to see reality and with a longer-term mentality. I.e. sustainability. On this issue the economists' shined brightly, especially the part about (short-term) profits built mostly on debt.
Best regards.
Posted by Matthew Birmingham | Sep 30, 2009 11:54 AM ET
Messers Stiglitz and Sen clearly do not prepare presentations on the topic of the underlying discrepancies dictated by following GDP and other measures of economic well being and productivity, without a distinct set of recommendations. The article clearly left unstatatd just what exactly Stiglitz and Sen would propose be done to replace the so called overreliance on GDP and other economic measures, but given their prior track records we can assume that massive increases in governmental intervention are at the top of their lists. For example, their statement that GDP and profits as currently measured underestimate the true price of natural resources will obviously be followed by Stiglitz and Sen with a justification for massive new taxes and other intrusions by government into the market for energy.
Whatever the weaknesses are in the current ways economists measure economic growht and properity, I would like to hear these economists explain how such intervention and control would ever lead to greater prosperity? Am I missing something, when has massive government intervention lead to (net of unintended consequences) increases in overall properity?
Posted by Scott Shinners | Sep 30, 2009 10:32 AM ET
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