Readings — From the June 2008 issue

Our Phony Economy

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.

Suppose that the head of a federal agency came before this committee and reported with pride that agency employees had burned 10 percent more calories at work last year than they did the year before. Not only that–they had spent 10 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 things 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 well-being 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.

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