The economy shrinks and life gets better

Imagine a world where less money is spent on defense, a world with fewer weapons and bombs to fall into the wrong hands. Would you feel safer?
 

I know some people believe guns buy safety. But more guns, a lot of guns, don’t make society safer. So when less money is spent on military stuff, I consider it good news. But it is not.
 

In fact, the fragile economic recovery has apparently been brought to a virtual halt in the fourth quarter of last year because the U.S. government cut military spending.

So here’s the paradox: Economic growth is good. We need that. Military spending is not so good. We can do with less of that. But when military spending falls, economic growth decreases.
What’s going on?

The problem lies in the way we measure economic growth. We calculate our Gross Domestic Product (GDP)—the total value of all goods and services produced. But GDP provides an inaccurate impression of wealth.

The figure is measured using a calculator that only adds. Costs and benefits are tallied without discriminating between productive and destructive activities. Families and companies know the difference between costs and benefits. When a homeowner has to repair her leaky roof, it’s a setback even if it does mean increased economic activity. When a factory sells machines used to produce goods—its capital—this yields revenue but leads to declines on the balance sheet. After all, the factory can’t produce as much without the machines and therefore earns less in the long run. However at the country level, “capital”—a company’s natural and human resources—is not included on the balance sheet.
 

This means forest fires are good for GDP since they generate economic activity. If Brazil were to cut all the trees in the Amazon rain forest and turn them into matches, the Brazilian economy would get a huge boost. If a country’s crime rate increased, its economy would receive a stimulus derived from anti-crime spending. And if military spending goes down, the economy shrinks.
 

Another shortcoming of GDP is that important activities don’t count. If a mother lovingly cares for her children, the economy stands still. But if parents send their kids to day care, GDP rises. All the work of volunteers, without whom the amateur sports world, for one, would come to a standstill, doesn’t count. It’s bad for the economy if people care for their elderly parents. A nursing home, however, contributes to economic growth.

Redefining Progress, a think tank based in Oakland, California, created the Genuine Progress Indicator (GPI) in 1995 as an alternative to the GDP. The GPI enables policymakers at the national, state, regional and local levels to measure how well their citizens are doing both economically and socially. True economic reality, according to the GPI, differs drastically from the “reality” presented by GDP numbers.

The GPI is calculated much like companies keep their accounts: costs set against earnings. With GPI, use of natural resources is booked as a loss and damages from crime and costs of crime fighting are subtracted. On the assets side, volunteer work is valued and counted. When applied to the U.S., the results are surprising: According to conventional calculations, per capita GDP has almost tripled since 1950 as the rise in material profits (money) is factored against a similar level of intangible losses (diminishment of natural resources, decline in personal security, loss of free time). However, the GPI remained substantially at the same level throughout this period, reflecting the fact that material progress was matched by social and environmental loss.

 

The message from Redefining Progress is that economic growth alone should not be a goal. Former New York senator Robert Kennedy said it long ago: “GDP measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile.”
 

That’s why the world became a bit better place last quarter when the U.S. decreased military spending despite the fact that it led to a decline in economic growth.
 

Jurriaan Kamp

 
Photo: flickr.com/emyanmei/

Solution News Source

The economy shrinks and life gets better

Imagine a world where less money is spent on defense, a world with fewer weapons and bombs to fall into the wrong hands. Would you feel safer?
 

I know some people believe guns buy safety. But more guns, a lot of guns, don’t make society safer. So when less money is spent on military stuff, I consider it good news. But it is not.
 

In fact, the fragile economic recovery has apparently been brought to a virtual halt in the fourth quarter of last year because the U.S. government cut military spending.

So here’s the paradox: Economic growth is good. We need that. Military spending is not so good. We can do with less of that. But when military spending falls, economic growth decreases.
What’s going on?

The problem lies in the way we measure economic growth. We calculate our Gross Domestic Product (GDP)—the total value of all goods and services produced. But GDP provides an inaccurate impression of wealth.

The figure is measured using a calculator that only adds. Costs and benefits are tallied without discriminating between productive and destructive activities. Families and companies know the difference between costs and benefits. When a homeowner has to repair her leaky roof, it’s a setback even if it does mean increased economic activity. When a factory sells machines used to produce goods—its capital—this yields revenue but leads to declines on the balance sheet. After all, the factory can’t produce as much without the machines and therefore earns less in the long run. However at the country level, “capital”—a company’s natural and human resources—is not included on the balance sheet.
 

This means forest fires are good for GDP since they generate economic activity. If Brazil were to cut all the trees in the Amazon rain forest and turn them into matches, the Brazilian economy would get a huge boost. If a country’s crime rate increased, its economy would receive a stimulus derived from anti-crime spending. And if military spending goes down, the economy shrinks.
 

Another shortcoming of GDP is that important activities don’t count. If a mother lovingly cares for her children, the economy stands still. But if parents send their kids to day care, GDP rises. All the work of volunteers, without whom the amateur sports world, for one, would come to a standstill, doesn’t count. It’s bad for the economy if people care for their elderly parents. A nursing home, however, contributes to economic growth.

Redefining Progress, a think tank based in Oakland, California, created the Genuine Progress Indicator (GPI) in 1995 as an alternative to the GDP. The GPI enables policymakers at the national, state, regional and local levels to measure how well their citizens are doing both economically and socially. True economic reality, according to the GPI, differs drastically from the “reality” presented by GDP numbers.

The GPI is calculated much like companies keep their accounts: costs set against earnings. With GPI, use of natural resources is booked as a loss and damages from crime and costs of crime fighting are subtracted. On the assets side, volunteer work is valued and counted. When applied to the U.S., the results are surprising: According to conventional calculations, per capita GDP has almost tripled since 1950 as the rise in material profits (money) is factored against a similar level of intangible losses (diminishment of natural resources, decline in personal security, loss of free time). However, the GPI remained substantially at the same level throughout this period, reflecting the fact that material progress was matched by social and environmental loss.

 

The message from Redefining Progress is that economic growth alone should not be a goal. Former New York senator Robert Kennedy said it long ago: “GDP measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile.”
 

That’s why the world became a bit better place last quarter when the U.S. decreased military spending despite the fact that it led to a decline in economic growth.
 

Jurriaan Kamp

 
Photo: flickr.com/emyanmei/

Solution News Source

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