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Douglas Holtz-Eakin “proof” is flawed to the core in terms of proving that citizens are better off.

Note: I started to respond to Bill’s piece about the Douglas Holtz-Eakin proof that the stimulus worked and I realized that my response might be longer than his piece. Thus this post. For over a year now I have been responding to various claims that use the GDP or GNP as a basis to prove the USA is doing better, or just fine, I will continue to do so, thus, once again:

Why?  Because the GDP is no measure of a nation’s economic health and well-being and it was never intended to be used for that purpose.

It is merely a gross tally of products and services bought and sold, with no distinctions between transactions that add to well-being, and those that diminish it. Instead of separating costs from benefits, and productive activities from destructive ones, the GDP assumes that every monetary transaction adds to well-being, by definition. It is as if a business tried to assess its financial condition by simply adding up all “business activity,” thereby lumping together income and expenses, assets and liabilities.

On top of this, the GDP ignores everything that happens outside the realm of monetized exchange, regardless of its importance to well-being. The crucial economic functions performed in the household and volunteer sectors go entirely ignored. The contributions of the natural habitat in providing the resources that sustain us are not consider as well. As a result, the GDP not only masks the breakdown of the social structure and natural habitat; worse, it actually portrays such breakdown as economic gain.

GDP TREATS CRIME, DIVORCE AND NATURAL DISASTERS AS ECONOMIC GAIN

Since the GDP records every monetary transaction as positive, the costs of social decay and natural disasters are tallied as economic advance. Crime adds billions of dollars to the GDP due to the need for locks and other security measures, increased police protection, property damage, and medical costs. Divorce adds billions of dollars more through lawyer’s fees, the need to establish second households and so forth. Hurricane Andrew was a disaster for Southern Florida. But the GDP recorded it as a boon to the economy of well over $15 billion.

GDP IGNORES THE NON-MARKET ECONOMY OF HOUSEHOLD AND COMMUNITY

The crucial functions of childcare, elder care, other home-based tasks, and volunteer work in the community go completely unreckoned in the GDP because no money changes hands. As the non-market economy declines, and its functions shift to the monetized service sector, the GDP portrays this process as economic advance. The GDP also adds the cost of prisons, social work, drug abuse and psychological counseling that arise from the neglect of the non-market realm.

GDP TREATS THE DEPLETION OF NATURAL CAPITAL AS INCOME

The GDP violates basic accounting principles and common sense by treating the depletion of natural capital as income, rather than as the depreciation of an asset. The Bush Administration made this point in the 1992 report of the Council on Environmental Quality. “Accounting systems used to estimate GDP” the report said, “do not reflect depletion or degradation of the natural resources used to produce goods and services.” As a result, the more the nation depletes its natural resources, the more the GDP goes up.

GDP INCREASES WITH POLLUTING ACTIVITIES AND THEN AGAIN WITH CLEAN-UPS

Superfund clean-up of toxic sites is slated to cost hundreds of billions of dollars over the next thirty years, which gets added to the GDP. Since the GDP first added the economic activity that generated that waste, it creates the illusion that pollution is a double benefit for the economy. This is how the Exxon Valdez oil spill led to an increase in the GDP.

GDP TAKES NO ACCOUNT OF INCOME DISTRIBUTION

By ignoring the distribution of income, the GDP hides the fact that a rising tide does not lift all boats. From 1973 to 1993, while GDP rose by over 50 percent, wages suffered a decline of almost 14 percent. Meanwhile, during the 1980s alone, the top 5 percent of households increased their real income by almost 20 percent. Yet the GDP presents this enormous gain at the top as a bounty to all.

GDP IGNORES THE DRAWBACKS OF LIVING ON FOREIGN ASSETS
In recent years, consumers and government alike have increased their spending by borrowing from abroad. This raises the GDP temporarily, but the need to repay this debt becomes a growing burden on our national economy. To the extent that Americans borrow for consumption rather than for capital investment, they are living beyond their means and incurring a debt that eventually must be repaid. This downside of borrowing from abroad is completely ignored in the GDP.

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Thus, anytime that ANY study done to prove the point the economic health and well-being of a nation is better because its GDP has improved is flawed to the core.

I’m not saying that the stimulus has not worked, but I am saying that the GDP is no proof one way or the other and this is an important point for people to understand in my opinion since the monkeys on mainstream media point to the GDP and the GNP as indicators  of the economic health of our nation daily.

GDP- Gross Domestic Product – is widely used by economists to measure individual countries’ economic performance. However, its value as an indicator for the standard of living is considered to be limited. GDP also does not show how a country’s wealth is distributed.

The indicator was created in the wake of the great depression in the 1930s and experts agree that it alone cannot reflect the economic performance of modern society.

An alternative measurement is the United Nations’ Human Development Index, which is the measure of life expectancy, literacy, education, and standard of living for countries worldwide and in which GDP is a contributing factor in the calculation. Yet another indicator is the World Wildlife Fund for Nature’s (WWF) Ecological Footprint, measuring human demands on nature.

The GDP is a lot like looking at how well the stock market is doing to see how well the country is doing.  Both of these indicators only measure how well the wealthy are doing.  Even Simon Kuznets, one of the main originators of the GDP said:  “The welfare of a nation can scarcely be inferred from a measure of national income.”  Despite being an invaluable tool for economic policy, GDP is unfit to reflect many of today’s challenges such as climate change, public health and the environment.  We cannot face the challenges of the future with the tools of the past.

The Europeans recognized this in November of 2007 and the European Commission organized the “Beyond GDP Conference” which brought together 650 delegates from more than 50 countries to explore how to  improve the measurement of progress, true wealth and well-being of nations.  It fully supported the momentum to go beyond the GDP.

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Final Note: Gross National Product (GNP) is the market value of all products and services produced in one year by labor and property supplied by the residents of a country. Unlike Gross Domestic Product (GDP), which defines production based on the geographical location of production, GNP allocates production based on ownership. [SOURC: WIKI]

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and finally 🙂  Consider the source.

Douglas J. “Doug” Holtz-Eakin (born Douglas J. Eakin on February 3, 1958 in Pittsburgh, Pennsylvania) is an American economist, former professor, former Director of the Congressional Budget Office [under George Bush] and former chief economic policy adviser to U.S. Senator John McCain’s 2008 presidential campaign.Holtz-Eakin drew particular attention when he claimed that, as a U.S. Senator on the Commerce Committee, McCain “helped create” the BlackBerry wireless device. As I recall, McCain’s staff had difficulty getting McCain to use his email. Senate Minority Leader Mitch McConnell appointed Holtz-Eakin to the Financial Crisis Inquiry Commission in 2009. Anyone that McConnell appoints is suspect.[WIKI]

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It is interesting if Holtz-Eakin is promoting that Obama’s stimulus worked.  Perhaps those living in the apex of the pyramid of the multilevel marketing scheme that we call the “American Economy” are becoming frightened enough to promote the few crumbs that the Obama administration has thrown to the people (what with the London riots and all). “See things are improving.”   Interesting to ponder his motivation–especially since he is a pet monkey of Mitch McConnell and John McCain.

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Liz Berry

Liz Berry