Re: The Danger of GDP

["ÁÎ×Ó¹â Henry C.K.Liu ¹ù¤l¥ú" <hliu@xxxxxxxxxxxxxx>]

He Juchang wrote:

> Western economists tend to use GDP (Gross Domestic Product) as a measure of
> the economic status of a country. All models of economic growth are set up
> on the basis of the GDP. They regard an increase in the GDP as a development
> of the economy, or as economic growth, and they calculate the rate of a
> country's economic growth, according to the GDP. This is misleading and
> unscientific and so disguises the actual economic realities.

On a fundamental level, your criticism of Western economic indexes is quite
valid.  You imply correctly that these indexes reflect only the state of
systemic health of economies under capitalism.

The compilation of GDP is governed by statiscal standards stipulated in the
United Nations System of National Accounts (UNSNA). Yet on an operational level,
absent generally accepted alternatives, the reality is that indexes such as GDP
do serve a limited purpose by providing a standardized measurment of how a
particular economy is performing and a measure of comparison between economies.
Like the DOW or the S&P, indexes do not tell the whole story and are not
expected to.

So when China set a growth target of 7% GDP, it still has enormous flexibility
on setting sector piorities and monetary and fiscal mixes.  In a sense GDP
measures only the size of the balloon.  An expanding or shrinking balloon can
both be pushed from many sides into defferent shapes.

GDP is a measure  of the total value of production of all resident units of a
country in a specific period, before deducting allowance for consumption of
fixed capial.  A producing unit is considered as resident in a country if it
maintains a center of economic interest in the economic territory of the
country.  The economic territory of a country consists of the geographic
territory administered by a government within which persons, goods and capial
circulate freely.  Obviously, in the age of electronic commerce, unregulated
global movement of funds, cross border mergers and acquisition, etc, this
simplistic standard is increasingly inadequate.  This inadequacy of the tool of
policy formulation is a general malaise in the dismal science.  The true size
and power of the US economy is much larger than its GDP, or even GNP, suggests
The power of being the market leader in most fileds is not at all reflected in
GDP readings.

Imperfect as it is, GDP compilation is a highly developed technical excercise.
The UNSNA has been developed and is regularly reviewed and updated based on
on-going research and consultations among statistical experts and economists in
many different countries.  Differences in economic structure and commercial
practices in different countries require localized modifications.  There are
different accepted approaches for measuring GDP, and each country makes known
the approaches it uses.  Some countries use the expenditure appraoch for annual
estimates and the production approach for quarterly estimates.   To understand
an economy, one must looks at other indexes besides the GDP, such as the GINI
coefficient on income disparity.


> It perpetuates poverty. It leads to the pollution and destruction of the
> earth. It even leads to war. Why? I'll show you:
>
> (1). It perpetuates poverty and disguises economic realities.
> Nowadays, most countries use the GDP to judge and calculate their economic
> growth.  When there is a large GDP and high economic growth, say 9% per
> year, economists will say that the economy is great and the financial
> officers will be proud, but still the economy is bad. It is bad because the
> living standards of the poor haven't been raised. There are still many
> people suffering from cold and hunger. They can't afford to send their
> children to school, and, as a result, too many children are deprived of
> education.

You are correct in saying that single purpose obssessive pursuit of high GDP
growth does not always add up to the best policy.  It is useful to remember that
all economists and policy analysts and planners aim at  healthy, growing
economies.  The disputes between them are only on ways to achieve this end
state. The logic behind the selection of appropriate policies rests largely on
the philosophical underpin of different economic theories.  For example, on
poverty, there are many ways to deal with the probelm.  One is to kill or
incarcerate all poor people. Some would accuse the US of following this policy
by tciting the coincidence of low income and prison population or the absence of
a national health plan, denying medical care to the porr.  Another is to give
them high income (Keynesian).  Another is to export poverty to other countries
less able to resist it (globalization). Perfectly consistent  policies can be
formulated to achieve any objective, if one is prepared to accept the
corresponding trade offs. The problem is that soietal values are seldomn
single-dimensional.  Thus eonomics has departed from political sicence from
being the art of the possible to the art of the impossible.  Economic concepts,
in order to get political attention, must promise both the cake and its
consumption simultaneously.  Thus a proposal that promises the reduction of
income polarization at the expense of the slow GDP gowth will not get the
attention of the Prime Minister.

> If the economists say things are bad, the government has got to make an
> effort to raise the living standards of poor people. If the economists say
> that the economy is great, there seems no need for the government to raise
> the living standards of poor people.
>
> When there is a small GDP and a negative economic growth rate of, say, -2% a
> year, the economists will say that the economy is bad and the financial
> officers will be ashamed of it.  Then the government has got to make every
> effort to raise GDP, but the living standards of the poor are unaffected.
> Therefore, it appears that GDP is for the rich to fool the poor people and
> keep them poor.

It is entirely possible to keep 7% GDP growth without the level of inconme
polarization that China has permitted by policy in the past decades.  Many on
this lists have suggestd policy options toward that purpose (though not all
directly in theChina context), myself included, as well as Warren Mosler's
Employment of Last Resort proposals.  In general, Keynesian economic theory
focuses on ways to achieve the results you are aiming for.

> (2). It leads to the pollution and destruction of the earth.
> We all know the Earth is getting more and more seriously polluted.  Why?
> Because we are blindly developing the economy. Economists uphold the GDP
> (Gross Domestic Product) as the measure in developing the economy.  All
> activities that increase the GDP are labelled as "development of the
> economy" and as a result some people are wilfully destroying the environment
> merely for the purpose of making money.  Since they can make a lot of money
> by destroying of environment, they employ a large number of workers and say
> that they have decreased the rate of unemployment.  They also say that, with
> the increase of GDP, they have advanced the development of economy. As
> western economists take the GDP to be the measure in developing the economy,
> we find it difficult to lay blame on them for the economic activities that
> lead to the destruction of environment and, as a result, the earth is
> becoming more and more seriously polluted.

The same applies to econvironment policies.

>
> (3). It leads to war.
> Western economists create prosperity by producing weapons and war. Are you
> aware that "the crisis of 1930-39 is generally known as the Great
> Depression"? Keynesians say "the Great Depression was ended by the military
> Keynesianism of the Second World War." Why do they insist that the Great
> Depression can be ended by war? It is because they think that war can
> increase the government's spending. The spending increase means the increase
> of social needs, which can decrease unemployment and increase GDP and
> economic growth rate. Keynesians call it "military Keynesianism". They judge
> a country's economic growth and economic growth rate by means of the GDP.
> (Keynes's Solution to unemployment was higher public spending which would
> add to incomes and through the multiplier process lead to more jobs.)

Military Keynesianism not longer requires actual shooting wars.  Through the
militarization of the peace, a war production economy is maintained perpetually
and demand is generated by technical obsolescence rather than battle field
destruction.  Wars now are mostly politically born rather than economically
driven.

> How can we make a change in these phenomenon? The only way out is to use
> some other economical measure to replace GDP. What is the exact aim of
> developing the economy? The aim of developing the economy is to raise the
> quality of life and improve the standard of living. Therefore only the
> living standards of the people can be used as a measure of
> the economic status of a country. In order to use the living
> standards of the people instead of GDP to measure the whole economic
> situation of a country, I'd like to offer a criterion of how to measure the
> living standards of the people:
>     People's living standard can be divided into four grades. The first
> grade is necessary consumption of education, clothing, food, housing and
> transportation. The second grade is ordinary consumption, which means buying
> some more clothes and purchasing TV sets and washers, etc. The third grade is
> extravagant consumption, which means going to hotels, restaurants and
> dancing-halls and taking cars, etc. The fourth grade is over-extravagant
> consumption.

The US government does collect extensive data on consumption. Economists
aggregate these activities under the category of demand in macroeconomics.  It
all leads back to income. "Income is all" is a fundamental economic truth.  For
China, much of its current problems can be helped by a policy of rising income
to drive domestic demand, and to shift from the distortive policy of
over-emphasizing export and trade surplus.  Mosler made some very good arguments
on this point recently.

Finally, I think you will agree that, given the size of Chinese economy, China
has enormous leverage in affecting the formulation of  international standards.
China should avoid the mistake of Russia in trying to remake the Russian economy
in the Western image as a cure all.  That is a road to chaos and failure.

Henry C.K. Liu