GDP Turns 80

Tasked with estimating the income of the U.S., in 1934 Simon Kuznets developed the prototype for Gross Domestic Product (GDP). First used to help increase production during WWII, GDP is now the single most important economic indicator. It is assumed that an increase in GDP benefits everyone; therefore, its growth should be the primary focus of policy.

This is despite Kuznet’s own warnings that, “the welfare of a nation can scarcely be inferred from a measurement of national income.” Later, in 1962, he criticized the scope of GDP’s use, saying, “Distinctions must be kept in mind between quantity and quality of growth.”

As GDP turns 80 this year, it is worth questioning why we measure our economy this way. It is a topic of great interest to me, and I wrote my Master’s thesis (available here) on the topic. But I’ll just make some summative points here.

Namely, GDP growth is wrongly assumed to translate into increased societal well-being. (And yes, well-being can be measured accurately, but I won’t go into those details here.)

Take a look at how GDP growth in the U.S. compares to American life satisfaction.

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This is really the crux of the problem. People are no more satisfied with their lives despite huge advancements in the GDP of the country. The same is true in Canada and other developed nations.

Understanding that well-being and GDP do not correlate (in developed nations), we come across two main issues. First, there is a measurement issue. At the end of the day, the point of economic activity is to improve people’s lives. We want to “grow” the economy because we want to improve the way we live. We want increased well-being. But if we focus on a faulty metric that has no bearing on well-being, we are not measuring real progress. Included in GDP are many things we would not consider “good.” The costs of cleaning up an oil spill, hiring lawyers for divorce proceedings, going to war, increasing debt, smoking cigarettes – these all cause GDP to rise. Whereas air quality, poetry, leisure time, and community are not reflected in GDP and are therefore worthless. Only that which can be obtained in the market is given any value.

A multitude of alternative measurements have already been developed, including the Genuine Progress Indicator (GPI). GPI, and other measurements like it, take into account a wide variety of indicators that influence well-being, including pollution levels, leisure time, governance, and so on. These alternative indices more accurately reflect meaningful societal progress. Developing a superior alternative to GDP is not the problem; the problem is the political will to use such a measurement.

The second issue is that the measurement of an economy affects the direction and priorities of an economy. The famous economists Joseph Stiglitz, Amartya Sen, and Jean-Paul Fitoussi note that, “What we measure affects what we do. If we have the wrong metrics, we will strive for the wrong things.” In other words, changing what we measure changes what we do. If a History teacher began to grade her students’ essays only on their spelling, you would no doubt create students highly proficient in spelling with a low knowledge of history. The nation of Bhutan recently switched from GDP to GNH – Gross National Happiness. And while we can debate how much “happier” the people of Bhutan are today, it has undoubtedly altered the direction of the Bhutanese economy.

People are no happier than they were fifty years ago because they are pursuing the wrong goals. Research can tell us the factors that contribute to well-being – marriage, social relationships, employment, perceived health, religion, quality of government, etc. – and the factors that detract from well-being, including the pursuit of money and material possessions. Unfortunately, societal pressures encourage people to pursue the latter goals, and people are no happier as a result.

Now, I can already hear people criticizing this as subjective. If someone want to buy a Ferrari and work 70 hours a week, who am I to say that that is wrong? People should be free to pursue their happiness as they see fit.

My response is this: not everything is subjective and value relative. Wine is superior to crack, and I can make a strong argument to back this up. Academia in the past few decades has stopped promoting what it sees as the good life, and has instead treated everything as equal. This is a mistake. And while policymakers should not dictate what they believe is good, they can and should – based on evidence – push and encourage society in a direction that leads people to a better life while still respecting individual rights and freedoms. Modern liberal societies already do this. For instance, smoking is heavily taxed, the arts are highly subsidized, and marriage is a legal contract. Governments – and, by extension, the electorate – are making value judgements about what is good. And while mistakes can be made, the principle is not wrong.

I am making claims about well-being because they are proven and objective, not simply subjective matters of opinion. Having a strong relationship with your family is not better than buying a new house just because I say so. Years of research have proven it to be true (you can read my paper for actual citations and proof). Studies have shown that the pursuit of money and material possessions simply do not make people any more satisfied with their lives. What, then, is the point of pursuing them with such ideological fervor?

We do not want a society like the one illustrated in Aldous Huxley’s Brave New World, where citizens are content but deprived of their autonomy. People’s satisfaction with their lives cannot be the ultimate and singular indicator of how society is doing. But still, there is something to be said for the importance of well-being, and the fact that it has gone down while GDP has gone up should give us some cause for concern. In a country where all of our basic needs (and then some) have been met, there is no longer a point in focusing efforts on GDP growth. We need to measure our economy differently in order to a) measure progress more accurately; and, b) focus societal goals on what actually improves people’s lives. Dumping GDP can get us there.

You Don’t Deserve Your Money

Okay, maybe that’s a bit strong. You deserve some of your money. But we need to get over the idea that we deserve everything we have and that it’s all a product of our hard work and ingenuity.

The notion does have some validity of course. In White America, hard work is typically rewarded with wealth because almost all possible opportunities are bestowed upon this demographic. This isn’t, however, the case for everyone. Whether we like to admit it or not, barriers exist for most people. The notion that a single black mother in Detroit has the same opportunity as an upper middle class white man is just not true. Hard work and intellect are not rewarded equally for those two people.

But that’s not really what this post is about.

Taxes have become an increasingly contentious issue, especially in light of growing libertarian movements. And some people actually contend that taxes are akin to stealing. I earned my $100,000 salary, so the government taking 30% is nothing more than theft.

Okay. Well, what if I told you that you didn’t earn $100,000? That, instead, you “earned” about 10% of that, and the rest you owe to government, to society and to people who lived before you? Most wealthy individuals brush this off, as they have come to believe that they deserve their special place in society (which this interesting study proves via a rigged game of Monopoly).

But the truth of the matter is that someone like Bill Gates owes much of his wealth to government (for inventing the Internet), his high school (for providing him with pretty exclusive access to the use of a computer), John Vincent Atanasoff (for inventing the first digital computer), Douglas Englebart (for inventing the mouse), government again (for protecting copyrights), government again (for providing peace and security), and so on. To that end, Warren Buffet is famously quote as saying:

I personally think that society is responsible for a very significant percentage of what I’ve earned. If you stick me down in the middle of Bangladesh or Peru or someplace, you find out how much this talent is going to produce in the wrong kind of soil… I work in a market system that happens to reward what I do very well – disproportionately well.

The Nobel Prize-winning economist Herbert Simon studied this, and found that “social capital” is responsible for about 90% of what a person earns in wealthy societies. On moral grounds, Simon said that we should really be taxing at 90%.

Of course, for policy purposes, we need to keep in mind a tax rate that still encourages people to work hard and take risks. But that is most certainly a tax rate higher than we have now, and it is most definitely higher than the absurd calls for tax rates near or under 10%.

But the point is simply this: you don’t deserve all of your money. Statistically, you deserve about 10%. The rest has come by sheer luck and also by (taxpayer-funded) government investments, including roads, clean water, a police force, copyright enforcement, subsidies, regulations, etc. All of this makes possible the vast wealth that people now acquire in our society. Giving some of that money back is not only a smart long-term investment, but it wasn’t really that person’s to begin with.

Canada, We Need to Talk About Managing our Natural Resources

Prime Minister Harper recently approved the sale of Nexen Inc. – a Calgary-based oil company – by the China National Offshore Oil Company (CNOOC) as well as Progress Energy by the Malaysian firm Petronas. It’s easy enough to make fun of the government’s decision, due to both their hypocritical criticism of “foreign environmental interests” in the oil sands and also the unclear and seemingly arbitrary rules surrounding foreign takeovers. But regardless of what one thinks about these two recent deals, there’s a larger issue at play.

The issue is the way that natural resources are governed in Canada. The free-market system essentially hands over all power and wealth to the highest bidder. In Alberta, companies are able to extract oil with relative ease, giving only a small royalty to the provincial government. The result has been less than spectacular. Alberta, blessed with the second largest deposit of oil in the entire world (in a country where natural resources are provincial jurisdiction), has very little to show for its immense geological good fortune. It has relatively low taxes, low unemployment and higher-than-average salaries. But that’s about it. And when you think of what places like the United Arab Emirates or Norway have done with their respective oil fortunes, it’s downright embarrassing.

Canada/Alberta’s model of giving companies nearly all of the oil revenue is short-sighted and inefficient. Alberta’s population of 3.5 million people have been given the second largest deposit of the world’s most important resource, and yet Albertans have very little to show for it. The benefits have simply not been given to the people; companies have retained most of the wealth.

There’s a better way to manage resources. Canada flirted previously with a national oil company (Petro-Canada), which was eventually privatized. I understand the political impossibility of suggesting the need for a publicly run oil company, but I believe the argument has its merits. Part of Petro-Canada’s problem was that it competed alongside every other oil company, which of course didn’t solve the main issue – that corporations control too much of our country’s natural resources. All Petro-Canada did was give Canadians some ownership of the country’s natural resources, when really citizens should own it all.

Let’s look to Norway in order to see a system that effectively manages its oil resources.

Norway abandoned a royalty system because oil companies regulated their production to keep royalties at a minimum. The country maintains the philosophy that oil ultimately belongs to the nation. Companies, including Statoil (which is primarily owned by the Norwegian government), can help in harnessing natural resources, but the oil is still owned by the country. Norway’s high taxation rate (78% on oil companies’ net profits) has allowed the country to put its oil revenues into a robust sovereign wealth fund.

Norway puts 100% of its oil revenues into this Government Pension Fund. The fund is now worth more than $664 billion (US). Alberta’s Heritage Savings Trust Fund sits at an embarrassing $16 billion (and shrinking).

And yet despite putting every penny of oil revenue into this pension fund, the government is able to provide immense government services to its citizens by using the interest made from the fund. Norway is ranked #1 in the world on the Human Development Index, has zero debt and is a highly generous welfare state.

Norway understands that it can benefit greatly from oil if its system of governance is set up in a certain way. And it also understands that oil does not last forever, which is why it is investing so heavily into its pension (rainy day) fund. To top it all off, Norway is a world leader in alternative energy production, using hydroelectricity (98.5%) as its main source of electricity as well as wind and solar.

Canada can surely take a lesson from Norway’s oil management. We too need our system of natural resource governance to benefit citizens, not just a handful of powerful oil companies.

Elections, Money and the First Amendment

There are many things wrong with American politics today. The electoral college, for one, is an outdated system that results in most of the electorate being completely ignored. If you’re from Ohio, your vote matters. Otherwise, the results are pretty well pre-determined.

But the electoral college pales in comparison to what I think is the biggest issue facing American democracy: money.

How could this be a problem?

Money makes America tick, but its influence in politics is corrosive and undemocratic. It is contrary to the principles of democracy that give every man and woman an equal voice in making the government. Put simply, billionaire Jamie Dimon (CEO of JPMorgan Chase) has more sway in deciding who runs the government and what policies get approved (and not approved) than you or I.

Yeah, this guy.

With great irony, the United States Supreme Court ruled that money is speech. If this doesn’t make sense to you, it’s because it doesn’t.

Look, Americans take free speech very seriously. It’s a value that is enshrined in the First Amendment, and one that the country will never relinquish. Which is great. And this ruling I’m referring to (Citizens United v. Federal Election Commission) was basically an interpretation of the First Amendment. The case determined that money is equivalent to free speech and that it would be unconstitutional to limit corporate campaign donations. This is the same constitution that maintains that corporations are people, but I digress…

Okay, I can see it now.

I’m no Supreme Court judge or constitutional expert, but this makes no sense to me. Money is not speech. Speech is speech. All this ruling did was to make it nearly impossible to have any limit on campaign contributions. Corporations are free to influence candidates and parties as much as they want.

How does that defend free speech? The reality is simply that the wealthiest people and businesses can influence politics, but regular individuals can’t. That limits free speech if anything. It limits the power of the majority of people and gives even greater power, voice and influence to the wealthiest elite.

“Haha, poor people.”

The First Amendment’s defense of free speech was designed to ensure that no person’s opinion would be stifled. But that’s exactly what now happens in American politics. The concerns and opinions of regular people do not matter nearly as much as corporations. Money talks.

And it’s not difficult to see the result. Corporate welfare is higher than welfare for the poor, and the middle class pay a higher tax rate than the wealthiest class. It is also impossible to implement a sensical universal health care system. Obamacare is a start at least, but it is still a watered down version that gives way too much power to private insurance companies.

The influence of money in politics is undemocratic and, in my humble and unprofessional opinion, unconstitutional as well.