Readings — From the June 2008 issue

Our Phony Economy

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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 rate 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.”

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