GDP and the Bigger Picture of Life

We try to measure well-being in terms of economics and encounter some conflicting social issues not measured by GDP. Clifford Cobb, Ted Halstead and Jonathan Rowe point out that teenagers spend 5-10 minutes a day talking to dad and watch television three hours a day. Talking to their parents adds nothing to the GDP, but watchig MTV turns them into ardent GDP enhancing consumers. They write:

″The strange fact that jumps out from Bennett’s grim inventory of crime, divorce, mass-media addiction, and the rest is that much of it actually adds to the GDP. Growth can be social decline by another name. Divorce, for example, adds a small fortune in lawyers’ bills, the need for second households, transportation and counseling for kids, and so on. Divorce lawyers alone take in probably several billion dollars a year, and possibly a good deal more. Divorce also provides a major boost for the real-estate industry. “Unfortunately, divorce is a big part of our business. It means one [home] to sell and sometimes two to buy,”a realtor in suburban Chicago told the Chicago Tribune. Similarly, crime has given rise to a burgeoning crime-prevention and security industry with revenues of more than $65 billion a year. The car-locking device called The Club adds some $100 million a year to the GDP all by itself, without counting knock-offs.

Even those unwed teenage mothers are bringing new little consumers into the world (where they will quickly join the “kiddie market” and after that the “teen market,” which together influence more than $200 billion in GDP). So while social conservatives like Bennett are rightly deploring the nation’s social decline, their free-marketeer counterparts are looking at the same phenomena through the lens of the GDP and breaking out the champagne.

Add pollution to the balance sheet and we appear to be doing even better. In fact, pollution shows up twice as a gain: once when the chemical factory, say, produces it as a by-product, and again when the nation spends billions of dollars to clean up the toxic Superfund site that results. Furthermore, the extra costs that come as a consequence of that environmental depletion and degradation–such as medical bills arising from dirty air–also show up as growth in the GDP.

When we went to the Czech Republic in 2002, going to the store included bringing your own shopping bag. A very common sight was, and still is, to see shoppers pulling a fold-up cart on wheels or having a big shopping bag hanging over their shoulder. Should you forget, you needed to buy a shopping bag. There were no little plastic bags in which the cashier would automatically put your groceries! Plastic soft drink bottles were not thrown out. You would see them re-used for all kind of purposes. When the supermarkets gradually made their way into town, they started to offer the small plastic baggies for free, just like in California. The local grocers had to follow suit, creating the same plastic garbage as we already have in the USA.

Recently California passed a law where the use of the small plastic baggies will become illegal in, I believe 2016. The manufacturers lobbied for the later implementation so they won’t lose money and can look for alternatives. So, money is more important than reducing waste, as I read it.



2 + 2 = 4 vs. GDP

Economists seem to love equations and mathematical formulas to show their point. Since GDP appears to be a measuring stick used to determine how severe national debt is, we need to understand in more detail what GDP is. It is a formula that looks simple. Kahn Academy has a very nice depiction:

Screen Shot 2014-08-29 at 4.25.25 PM

Starting with the “I,” it needs explaining what that means. The “I” stands for what firms invest to get their product (widget) out. Labor to make the widget, as well as machinery, a building, supplies to construct it are the all factors. The “C” stands for what households buy and NX is the difference between imports and exports. NX can be a positive or negative.

United States GDP Growth Rate 1947-2014

The Gross Domestic Product (GDP) in the United States expanded by a seasonally adjusted annual rate of 4.2 percent in the second quarter of 2014 over the previous quarter. GDP Growth Rate in the United States averaged 3.27 Percent from 1947 until 2014, reaching an all time high of 16.90 Percent in the first quarter of 1950 and a record low of -10 Percent in the first quarter of 1958. GDP Growth Rate in the United States is reported by the U.S. Bureau of Economic Analysis.



The USA has by far the biggest GDP growth rate at 4.2 %. Germany at -0.2, Canada at 0.8, Netherlands at 0.5, Russia at -0.3. That is one reason I believe America is not too concerned about the national debt.

There are various forms of GDP (and other mathematical equations in economics), which in the media get used to the advantage of whatever the writer wants to prove or disprove. More about that later. The fact is: GDP ≠ GDP, like 2+2=4. It all depends on the premise used for a particular GDP equation as to what the outcome will be. That is why I always look for the definition used in an economical article but cannot always find it.


Correlation Between spending limit and GDP

While a few reductions have been made to the debt limit, the ceiling has generally continued to rise. According to the U.S. Treasury Department, Congress has acted 78 separate times since 1960 to permanently raise, temporarily extend, or revise the definition of the debt limit.

The limit currently stands at around 75 percent of U.S. gross domestic product (GDP).

“It’s only in recent times, as U.S. debt has been allowed to approach the ceiling, that it has been used for rather blatant political leverage purposes,” says Kirkegaard.

In the past few years, opposition Republicans have made support for raising the debt limit contingent upon spending cuts and other policy changes.

This year’s standoff, which pushed Washington closer to the brink than ever before, generated consternation among many Americans. Markets and nations around the world — including China, Washington’s top creditor — also might have wished that the debt ceiling were scrapped. But don’t expect that any time soon, Kirkegaard says.

So, what is GDP?

Following Khan’s Academy economics lessons, the diagram below shows how GDP is defined. It includes all labor, parts, and production stages in say, a year. To not double count, only the final product (jeans in blue) made within the country counts toward the GDP. Otherwise we would be double or triple counting. Notice how each component of the definition is sketched out.

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Gross Domestic Product is just that: domestic, as described in the (blue) definition in the graph above. This means that products from (American) companies who go international with their production, are not included in the GDP.  Yet the American stock market is doing very well. It seems to me that all this talk of shaming American companies to go overseas with their production only represents a small % of what would have been part of the US GDP if it had been produced in the USA. I will look at that figure in a later blog. Does anybody know?

What GDP does not reveal
It is also important to understand what GDP cannot tell us. GDP is not a measure of the overall standard of living or well-being of a country. Although changes in the output of goods and services per person (GDP per capita) are often used as a measure of whether the average citizen in a country is better or worse off, it does not capture things that may be deemed important to general well-being. So, for example, increased output may come at the cost of environmental damage or other external costssuch as noise. Or it might involve the reduction of leisure time or the depletion of nonrenewable natural resources. The quality of life may also depend on the distribution of GDP among the residents of a country, not just the overall level. To try to account for such factors, the United Nations computes a Human Development Index, which ranks countries not only based on GDP per capita, but on other factors, such as life expectancy, literacy, and school enrollment. Other attempts have been made to account for some of the shortcomings of GDP, such as the Genuine Progress Indicator and the Gross National Happiness Index, but these too have their critics.      Tim Callen is an Assistant Director in the IMF’s External Relations Department.

A Political Side to the National Debt

This is not a forum for political debates without getting the big picture. “Political” can mean many things, but here I mean it as related to government. Most articles I read about a position, by say a Democrat or Republican, are so narrowly defined in order to show their point. The “facts” are more noted for what is omitted than what it all entails, just to reach the conclusion of the writer.

But in discussing the National Debt, “politics” is unavoidable and some factors need to be addressed.

One thing I never knew is that Denmark is the only democratic nation other than the United States that has a debt ceiling and borrowing system separate from its spending policies. What does that mean?

By this process, spending bills like budgets are passed and then a separate battle is fought over whether the debt ceiling should be raised to accommodate borrowing to allow such spending. There is nothing to require a correlation between the two. However, in nations like Canada, Sweden, the United Kingdom, and New Zealand, spending is directly tied to the national debt limit. The government in Canada is allowed to borrow only as much money as is approved to be spent in the yearly budget. In the UK and New Zealand, the Treasury departments can borrow only as much as isapproved by parliament. These countries tie their debt limits to their spending numbers.   (Radio Free Europe article, August 26, 2014)

Where else is a borrowing system separated from spending? That is not something I learned in kindergarten.

This is a good example of where the facts end and “politics” starts. Shutting down the government because there is no budget since congress can not agree on a spending limit has nothing to do with economics anymore. “Unfortunately, the likelihood of the debt ceiling being abolished is very, very small,” Kirkegaards says. “Political parties very rarely sign away their own political leverage.”  It is all about political leverage and not about balancing budgets.

I will end this blog with a graph about when and how debt limits are set to give an idea of the size and frequency.