Using_Income_to_Measure_National_Progress

Using Income to Measure National Progress Governments today continuously talk about increasing growth. However, perpetual growth is impossible. Today’s growth is unsustainable and our prosperity is at the expense of future generations. We need a broader measure of progress that includes environmental sustainability and non-monetary indicators like happiness and quality of life. The most commonly used measure of national income is Gross Domestic Product (GDP), which measures the market value of all final goods and services produced in a country in a year. The traditional circular flow of income model shows real flows of goods and services and money flows between firms and households. But these flows are generated from the stock of capital in the economy: physical capital, social capital, human capital and natural capital. GDP growth that erodes the stock of this capital reduces future prospects. GDP growth can deplete our natural capital through the use of non-renewable resources and the destruction of ecosystems through pollution and deforestation. Growth that increases stress or that increases health problems by encouraging a materialistic lifestyle damages our human capital. The economist Joseph Stiglitz said that GDP judges a country solely on its income without looking at its balance sheet. (European Commission, 2011). A specialised indicator GDP is easy to calculate and it gives a timely indication of the state of the economy. It is usually calculated quarterly and aids governments, central banks and other policymakers in forming policy. There is a strong correlation between GDP and indicators of basic welfare like nutrition and life expectancy. Unlike measurements of happiness or quality of life it is uninfluenced by subjective factors. Many economists have made the point that GDP is a specialised indicator designed to measure national output and have warned against using it as a measure of general well being. The economist Simon Kuznets who played an important role in developing national accounts said, “the welfare of a nation can scarcely be inferred by a measure of national income”(European Commission, 2009). A broader view of our needs The American psychologist Abraham Maslow said humans had a hierarchy of needs . The most basic were physiological including clean water, food, air and sleep. Above that is the need for shelter and security. Next is the need to be loved and to have a feeling of belonging and friendship. Higher still are self-esteem, self-respect and a sense of accomplishment. The summit of the pyramid is self-actualisation which involves reaching one’s full potential (Boeree, Dr C. J., 1998). A certain minimum level of income is required to fulfil our physiological needs and our need for shelter. But our other needs cannot be substituted for increased income. Indeed social problems like stress and alienation that prevent us from fulfilling our higher needs affect the rich world as much as the Third World. Aggressive advertising creates the illusion that rising consumption brings happiness. But it’s only function is to make generate sales and profits. An economy driven by competition and the profit motive requires continuous growth. A fall or even a pause in growth results in crisis. Why is growth so important' Zero growth should mean a stable economy in which living standards remain the same. But in an economy driven by profit and competition, zero growth quickly turns into a slump if growth does not return. Interest is one of the main reasons for this. The only way a loan can be profitable is if the increase in profits as a result of the loan is greater than the rate of interest charged. The easiest way to increase profits is to increase sales. But without growth the only way to increase sales is at the expense of competitors. Before the industrial revolution there was no long run growth. This is why usury (the charging of interest) was banned in both Islam and Catholicism and still is in Islam (Douthwaite, 1999, p.28) Competition between firms leads to the introduction of cost reducing technology. This puts the firm that introduced the technology first at an advantage. Other firms are forced to introduce the new technology or else face closure. Prices will be driven down until profits are back to normal. Sales must increase for the industry overall, or else the investment will have been unprofitable. Some of the profit generated from production must be reinvested each year or else supply will exceed demand and a recession will ensue. This means that profitable opportunities must be found for these funds. Most economists believe a growth rate of 2-3% is healthy. The global economy was worth an estimated $56.3 trillion in 2009 (World Bank Development Report 2009, cited in Harvey, D., 2009, p. 26). Assuming a growth rate of 2% this means that profitable investment opportunities have to be found for funds worth over $1.1 trillion. The bigger the economy grows the larger this figure gets and the more difficult it is to find profitable fields of investment. This is one of the reasons why so much money has been poured into financial speculation recently ( Harvey, D., pp.26-30). The introduction of new technology often leads to redundancies. The introduction of new technology leads to higher unemployment unless the rest of the economy grows quickly enough. Before the industrial revolution, the medieval crafts strictly limited the introduction of new technology. There was no growth so they knew that the introduction of new technology would only lead to unemployment. William Lee, the inventor of the stocking frame knitting machine, and John Kay, the inventor of the flying shuttle both faced opposition to their inventions. A movement of skilled textile workers called the Luddites destroyed mechanized looms in 19th century Britain (Douthwaite, 1999, p.82). Does economic growth increase choice' One of the chief reasons economic growth is promoted is that it increases “consumer choice”. It does in a superficial way. Aggressive brand differentiation creates artificial differences between products. Brand proliferation is common, where one firm produces a number of almost identical goods, but under different brands. However genuine choice is reduced. Competition leads to the domination of markets by multinational corporations and the decline of family businesses. Since 1950 the number of specialist stores like fishmongers, butchers and bakers in Britain has declined by 90%. The four largest chain stores have a market share of 76% (Data cited in Whitby, 2011). This development has been aided by another product of growth: the car. Before the invention of the car, people lived in close knit communities with most services within walking distance of home. The invention of the car has allowed mega stores to be built on the edge of town and the building of sprawling housing estates. This soulless urban sprawl breeds feelings of alienation and isolation as well as being incredibly wasteful. It is far easier to provide public services in a densely populated area. Household Production National income accounts only include economic activity done for the market. This means that it underestimates total output. The work of housewives and mothers who stay at home to look after their children is ignored unless they hire a babysitter and cleaner to do the work. But this increase in income does not take account of the effect on children of being away from their parents all day. In poor countries much economic activity is in the informal economy, which includes street traders, domestic industry and people working informally in the formal sector. The informal sector in the United States was 8.8% for the year 1999/2000 compared to 15.8% in Ireland, 57.9% in Nigeria and 35.6% in Bangladesh (Schneider, F, 2002, pp. 5-20). GDP also overestimates the growth of income. Voluntary work that is of great social benefit is completely ignored. If an economy is becoming more market-oriented and more activities are being done for the market some of the growth in GDP is merely the result of this. Rising Inequality Growth in per capita income can mask increasing inequality. The best measure of the income of the majority of the population is median household income, which gives the level of income that 50% of households earn above and 50% of households earn below. Between 1984 and 2010 the inflation adjusted median income of households in the United States rose by 10.36% (US Census Bureau, 2011). Over the same period inflation adjusted GDP per capita rose by 53.4%. The gap is explained by rising inequality. The share of income received by the top 5% rose from 17.1% to 21.3% and that of the top fifth from 45.2% to 50.2% (US Census Bureau, 2011). According to the AFL-CIO the average CEO earned 42 times the average blue collar worker’s pay in 1980. In 2010 CEO pay had risen to 343 times a worker’s median pay (AFL-CIO, 2012). Most of the increase in national income in recent years has been going in to the pockets of a wealthy elite. The law of diminishing marginal returns applies to income. An increase in income that benefits the wealthy will have less of an impact on overall welfare than an increase that benefits the poorest in society. Leisure or Income' One of the main explanations for the difference in income between the United States in Europe is that Europeans work fewer hours per year than Americans. Once people reach a certain level of income they may prefer time-off to increased income. In 2009 the average hours worked by workers in the US was 1,768 compared to 1,390 in Germany and 1,554 in France (OECD, 2011). Interestingly Greek workers work 600 hours a year more than their counterparts in Germany. This gap partially accounts for the fact that GDP per capita in the US is nearly 37% higher than in the Euro Area (IMF, 2011). Early retirement and a higher unemployment rate in Europe account for the rest. GDP per hour worked which is the best measure of labour productivity shows that Europe is only 20% behind the US (OECD, 2012). Measuring Genuine Progress Economists often point out the difference between their view of costs and an accountant’s. However, using GDP to judge a country is like looking at a company’s revenue before expenses. GDP only includes the benefits of production not the costs. It includes as economic activity the logging that destroys the Amazon Rainforest, as well as the cost of repairing flood damage due to deforestation. As Bobby Kennedy said “it [GNP] counts special locks for our doors and jails for those who break them…it does not include the beauty of our poetry or the strength of our marriages…it measures everything in short except that which makes life worthwhile” (colinatpyramid, 2009). In 2006 Redefining Progress published a report on an indicator called the Genuine Progress Indicator (GPI). Its purpose is to measure sustainable increases in welfare. Expenditure on items that erode national welfare like burglar alarms is excluded. Deductions are made for the depletion of our natural resources and the destruction of our environment. The invaluable work done in the home, in the informal economy and in the voluntary sector is included. Changes are also made to account for social costs like unemployment, commuting and crime. Average GPI growth from 1950 to 2004 was 1.33% while average GDP grew at a rate of 3.81%. GPI has been virtually stagnant since 1978 (Talbeth, Dr J., Cobb, C., Slattery, N., 2006, pp.8-19). It seems that the higher GDP rises, the more unsustainable and less welfare-enhancing it is. Economic Growth and the Environment GDP includes a figure for imputed rent. Home owners are assumed to receive a service from their homes equivalent to what they would pay if they rented the house. The natural world provides us with services of enormous value that support life and economic activity. A 1997 article in Nature put the value of these services at on average $33 trillion a year almost twice the level of global GDP in 1997. The destruction of ecosystems that provide these services is counted as part of GDP. But if nature ceased to provide these services global GDP would have to increase by $33 trillion in order to replace them. This would an increased burden rather than an increase in welfare (Constanza, et al., 1997). According to the Ecological Footprint Sustainability Measure, an independent measurement based on United Nations statistics; if the entire world had the same lifestyle as people in the rich world we would need 2.6 extra planets (United Nations, 2002, p.17). The New Economics Forum (NEF) publishes an index called the Happy Planet Index (HPI). It is based on three indicators, life expectancy, a country’s ecological footprint and life-satisfaction. The countries that fare best in the index are those that use their natural resources sustainably to give their citizens long and happy lives (Abdallah, et al., 2009, p.3). In 2009 Costa Rica topped the table, a country whose GDP per capita is 76th in the world (IMF, 2011). In contrast Ireland and the United States came 78th and 114th respectively (NEF, 2009). When some economists try to value the economic effects of global warming, they use the willingness to pay method. The value of damage caused by global warming is estimated by the amount the people affected would be willing to pay to avoid the damage. Most of the consequences of global warming will be felt in the Third World. These people have a low income compared to the rich world and thus have a low willingness to pay. In one chapter prepared for the Intergovernmental Panel on Climate Change’s (IPCC) Second Assessment Report in 1995, the value of a life saved in Europe and North America was valued at fifteen times the value of a life saved in China or India. The best valuation to use is the minimum compensation people would be willing to accept for the damage caused by global warming. This would value damage done in the Third World equally as damage done in the rich world (Douthwaite, pp.211-13). Fictitious Growth The past thirty years has seen a decline in manufacturing in the rich world and a rise in the service sector, especially the financial sector. However new value cannot be generated by endlessly moving money around the world. Activity in the financial sector is becoming divorced from real economic activity. For example the notional value of the global derivatives market is $1.2 quadrillion, 30 times global GDP (Cohan, 2010). The most successful students are entering these parasitic sectors, starving productive sectors like manufacturing of talent. At the height of the recent boom in 2006 46% of students graduating from Princeton entered the financial services sector compared to 5% in manufacturing (Princeton Office of Career Services, cited in Rampell, 2011). The financial sector acts as a parasite on the productive sector of the economy. This trend is seen in the financial sector’s share of total profits. The share of total profits going to the financial sector averaged 17.4% from 1960 to 1984. But from 1984 to 2008 the share rose to around 30%. It is no surprise that the share of value added made up by investment in real assets fell by 2 percentage points from 1978 (Khatiwada, S., 2010, pp.2-5). Investment in real wealth has fallen while speculation in paper wealth has risen. Development without Growth It is common to equate development, quality of life, and per capita income. However, development is possible without growth. The state of Kerala had a per capita GDP at PPP of $3,350 in 2008 (The Economist, 2011). GDP per capita in the US at PPP was more than 30 times this level in 2008 (IMF, 2011). Kerala’s HDI in 2011 was 0.92 (Data cited in Balaji, J., 2011) on par with many rich nations. Investment in Kerala has been prioritised in sectors like health and education. In the 1960s and 70s land reform was implemented and the large estates were broken up and given to small farmers (Shirin, S., 2008). Using income measure progress assumes that the goal of the majority of the population is becoming as rich as possible when it is happiness. Economic growth should be treated as a means to an end. That end should be providing a long and fulfilled life for as many people as possible, without infringing on the prospects of future generations. Too often we treat growth as an end in itself. When increased income brings us closer to that goal we should pursue it but when it doesn’t we should seek other more sustainable means. References Abdallah, et al., 2009. The Happy Planet Index 2.0: Why good lives don’t have to cost the earth. [pdf] London: New Economics Foundation. Available at: http://www.happyplanetindex.org/public-data/files/happy-planet-index-2-0.pdf [Accessed 25 February 2012] AFL-CIO, 2012. CEO pay: feeding the 1%. [online] Available at: http://archive.aflcio.org/corporatewatch/paywatch/ [Accessed 4 March 2012] Balaji, J., 2011. Kerala tops in literacy rate, health services. The Hindu [online], Available at: http://www.thehindu.com/news/states/kerala/article2562589.ece [Accessed 21 February 2012] Boeree, Dr C. J., 1998. Personalitiy Theories, Abraham Maslow 1908-1970. [online] Available at: http://webspace.ship.edu/cgboer/maslow.html [Accessed 28 February 2012] Cohan, P., 2010. Big Risk: $1.2 Quadrillion Derivatives Market Dwarfs GDP. 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The Enigma of Capital and the Crises of Capitalism. Croydon: Profile Books Ltd. IMF, 2011. GDP per capita at purchasing power parity. World Economic Outlook Database September 2011. [online] Available at: http://www.imf.org/external/pubs/ft/weo/2011/02/weodata/index.aspx [Accessed 3 March 2012] Khatiwada, S., Institute for International Labour Studies, 2010. Did the Financial Sector Profit at the Expense of the rest of the Economy' Evidence from the United States. [pdf] Available at: http://www.ilo.org/public/english/bureau/inst/download/dp206_2010.pdf [Accessed 2 March 2012] New Economics Foundation (NEF), 2009. Happy Planet Index 2.0 Results. [online] Available at: http://www.happyplanetindex.org/public-data/files/hpi-2-0-results.xls [Accessed 27 February 2012] OECD, 2012. Stat.Extract. [online] Available at: http://stats.oecd.org/Index.aspx' Rampell, Catherine, 2011. Out of Harvard and Into Finance. 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[pdf] Available at: http://www.johannesburgsummit.org/html/media_info/press_kit/fact10_consumption.pdf [Accessed 23 February 2012] US Census Bureau, 2011. Table H-2. Share of aggregate income received by each fifth and top 5% of households-All Races. The percentages are based on my own calculations. [online] Available at: http://www.census.gov/hhes/www/income/data/historical/household/2010/H02AR_2010.xls [Accessed 26 February 2012] US Census Bureau, 2011. Table H-6. Regions-All Races by Mean and Median Income: 1967-2010. The percentages are based on my own calculations [online] Available at: http://www.census.gov/hhes/www/income/data/historical/household/2010/H06AR_2010.xlsm [Accessed 24 February 2012] Whitby, P., 2009. Supermarkets kill free markets as well as our communities. The Guardian [online], Available at: http://www.guardian.co.uk/commentisfree/2011/may/03/supermarkets-kill-free-markets-communities [Accessed 25 February 2012]