Bill Totten's Weblog

Monday, November 24, 2008

It's the economists, stupid

Conventional wisdom interprets the economy all wrong, says Jonathan Rowe - don't follow the money

by Don Speich (October 17 2008)

West Marin's Jonathan Rowe strongly believes that the economists, the Federal Reserve, Congress, the White House - all who have anything to do with measuring and reporting the health of the economy - have it all wrong.

Rowe - co-founder of West Marin Commons, a community organizing group - is not an economist. But he spent many years as a staffer on Capitol Hill listening to scores of economists expound and pronounce at Senate committee meetings - and came away not very impressed.

Economists - those whom politicians listen to and learn from and then introduce bills reflecting what these experts think - are stuck, Rowe believes, in a system centuries old. It's a system that, clinically and using outdated formulas, tells us everything we need to know except what effect money has on the middle class, the environment and social services.

It is the state of these elements, Rowe believes, from which we can gain an accurate assessment of the true economic health of the nation.

Rowe, who lives in Point Reyes, received a bachelor's degree in history from Harvard University and attended the University of Pennsylvania law school. While impressive academic credentials, they are not enough to break through the doors of the elite establishment of noted economists. So he has branched out on his own to challenge economic orthodoxy and the policies it yields.

And people are listening. He testified last March before a Senate subcommittee and turned his testimony into an article that was published in April in Harper's Magazine.

He fuels his arguments with questions that he answers with almost painfully simple ideas - the kind that tend to prompt responses like, "Why didn't I think of that?"

Does increased oil production, which results in more fuel for cars at cheaper prices (all usually good signs in the economic measuring stick, the gross domestic product) include calculations about how much more fuel emissions are going to foul the air we breathe and the amount of money it will cost to clean up the air so we don't suffocate in it?

No, he says, if you include that latter cost you more than likely find that the so-called improvement more fuel adds to the GDP is considerably less than reflected in the "good news" often trumpeted by economists, politicians and journalists. In this case, more, he says, is often considerably less and the less usually means the detrimental effects these types of gains in the GDP have on us all.

Testifying before Congress last March (and in an articles based on that testimony), Rowe stated:

"By the standard of the GDP, the worst families in America are those that actually function as families that cook their own meals, take walks after dinner and talk together instead of just farming the kids out to the commercial culture. Cooking at home, talking with kids, walking instead of driving, involve less expenditure of money than do their commercial counterparts.

"Solid marriages involve less expenditure for counseling and divorce. Thus they are threats to the economy as portrayed in the GDP. By that standard, the best kids are the ones who eat the most junk food and exercise the least, because they will run up the biggest medical bills for obesity and diabetes."

These are all hidden costs which should be subtracted from the GDP, but aren't - not out of malice or malfeasance or incompetence, but because they never have been. But they should be, he believes, to get a clear picture of the economic forces at work in this country and the impact of not calibrating them into a formula which declares whether the country is economically and socially healthy or unhealthy.

In the Harper's article, he stated that the assumption that all spending is good "has been guiding our economic policies for the past sixty years at least. Is it surprising that the family structure is shaky, real community is in decline, and children have become petri dishes of market-related dysfunction and disease? The nation conceives of such things as growth and therefore good".

The upshot of all of this, he says, is at best a distorted view of the economy. It's never as good as it looks in the best of times and it is most likely worse than we are told in the worst of economic times -
like now.

With the economy in critical condition, we asked Rowe his thoughts on what happens next - can another Great Depression possibly be on the horizon, and what does the crisis mean close to home in Marin?

. . . . .

When did you first develop your theories about the erroneous way economists measure growth and progress?

First off, we aren't talking here about an arcane technical measure. It's about the economy, and what we mean by that term. Reporters and politicians recite the word thousands of times a day. The economy is up. The economy is down. Over and over. Yet when was the last time you heard a reporter stop and ask, "What does that really mean, 'the economy'?"

It turns out that what they mean is the gross domestic product, or GDP. The GDP is basically just a tally of all the money that Americans spend over a given period of time. The more money we spend the more the GDP goes up, and vice versa. In Washington, the parties fight over who can make the GDP grow more. I worked as a staffer on Capitol Hill and listened to those debates. I sat at hearings while Alan Greenspan talked about growth, and a part of me was saying, "There's something wrong with the assumptions here". I've been chewing on that question ever since.

So what's wrong? Isn't spending money a sign of prosperity?

Let's think about that. If your family has a big increase in expenditures, is that always a sign that life is getting better? Very likely it means the opposite - big medical or dental bills, a car crash, flood damage to the basement. It could mean usurious credit card interest payments, or a costly divorce.

The assumption that more expenditure of money automatically means a better life is totally out to lunch. This goes way beyond the environmentalist critique by the way. That critique often lapses into moralism. We are indulging ourselves with too many happy jaunts to the mall with disastrous consequences for the earth. Well, that might be true, but there's a more basic truth, which is that the jaunt often isn't so happy to begin with.

Is this really the way economists think?

If you call it "thinking", which is a stretch. It all comes down to the incapacity of the professional economic mind to deal with the world as people actually experience it. Instead, what happens is they package the world in a system of abstraction that lends itself to quantification and sophisticated math. That way they can present themselves as "scientists", win Nobel prizes, advise presidents and strut around as though they know something the rest of us don't.

Among economists, it's the math that matters. Reality is second, and pretty far back. That sounds harsh, I know. But it's true.

What are the specific problems with the GDP and the way economists think about the economy?

The first problem is that this view sees only the part of life that is transacted through money. Economy equals money to them. If most economists were fish, money would be the water. Yet money defines just a part of the actual economy that sustains us. We don't pay for sunlight, or the many functions of the atmosphere. We don't pay to breathe. The same is true in the social realm. We don't pay for the help and company of neighbors, or to walk to school or to the store.

A healthy economy is one in which much gets done without the need for money. It is when this non-market economy ceases to function that we have to buy substitutes. We have to buy air conditioners for lack of trees, gasoline because our built environment is designed to make driving so necessary and on and on. Increasingly, what is called economic function is really social and ecological dysfunction.

There's another problem that's even more basic. It has to do with a theology of stuff - and stuff equivalents called "services". Stuff is always and forever good, and more of it is always better. This assumption is embedded in the language. The economy, we are told, consists of "goods" and "services". There are no bads, and no disservices. Shoddy or hurtful products, the lawyer or credit card company that gouges us - in the theology of the GDP, these cannot exist.

Are you saying that the GDP - or some other measure - should try to distinguish between good consumption versus bad - which would in effect be a value judgment?

No. I'm just saying that economists should acknowledge the value judgment that they are making now - which is that every expenditure means life is getting better. If economics is a science, then it needs to deal with reality, and the reality is that much expenditure today betokens a worsening standard of living - not an improving one. More traffic means more fender benders, and more money spent on gas while we sit and go nowhere. Americans now spend over $9 billion a year that way. Does it really make sense to say that a drop in traffic would mean a diminished "standard of living"? For masochists perhaps, but not many others.

It sounds like we should be rethinking our definition of "growth".

When you get down to it, much that is called "growth" today isn't growth at all, as that term usually is understood. It is rather a kind of iatrogenic spiral, in which the economy itself creates problems that more expenditure seems necessary to address. Corporations push junk food at kids. Kids become obese and develop diabetes. Medical treatments are summoned to address those. On and on it goes.

So what difference does all this make? Isn't it just economic theory?

If only. Unfortunately - and unbelievably - this is the thinking that drives the economic debate. It's what politicians mean when they say we have to get the economy "moving again" or some such thing. It's the metric the media and experts use to determine whether things are getting better or worse - and also whether a particular proposal will help or hurt. For example, we often hear that measures to slow climate change will "cripple the economy". Do they mean that if the air is cleaner we'll spend less money treating asthma in kids, and less on gas to sit in traffic and go nowhere? That's where the logic leads.

Where did this way of thinking about "the economy" originate?

It's a long story. It begins only partly with [18th-century economics philosopher] Adam Smith. Smith thought of himself as a political economist and moral philosopher, not an "economist" in the modern sense. He made no pretense of reducing the economy to mathematical equations. The pseudo-physics came in during the next century. Science had become the ticket to prominence and respectability, and economists reworked the theory to get in on the action. Any distinctions between kinds of "product" had to go out the window, along with a lot of other things. All expenditures had to be equated through the metric of price in order to render the theory amenable to math.

In the latter part of the 19th century there was a big battle in the fledgling American Economics Association between these pseudo-scientists, and another group that has been called "ethical economists". The latter were concerned about such things as child labor, municipal utilities, the distribution of wealth - dangerous questions. They were beaten down in large part by university boards of trustees. It got pretty ugly. People lost their jobs. The mathematicians prevailed, and have to this day.

What about the GDP?

The GDP was developed during the Depression as a planning tool. That's the role it played during World War Two, when it helped the planners in Washington far exceed the production levels that the captains of industry thought possible. Simon Kuznets, the economist who constructed what is now the GDP, emphasized in his report to Congress in 1933 that he had not produced a measure of economic performance or progress. Kuznets repeated that over and over, as he watched politicians and the media turn the statistic into exactly what it wasn't. Of course nobody listened.

What role has the media played in presenting what you feel is a distorted view of the economy?

A central role. If the media didn't hype these numbers so much - economy up! Economy down! - then they wouldn't matter so much. Look, the GDP is valid in a limited way. Bankers and corporate planners need to know how much expenditure is sloshing around in the economy. The government needs to estimate tax revenues. Things like that. It's a valid story, but a technical one. It has very little to do with the health and well-being of most Americans.

Why are reporters so stuck on this number?

It's an easy prefab story, and it comes with an aura of both government authority and professional expertise.

What does all this have to do with the current financial meltdown?

More than most people realize. The GDP registers interest payments - and debt generally - as pluses for the economy, not minuses. So as Americans sank deeper into the debt spiral, the main gauge on the dashboard in Washington showed an economy that was purring. By the way, financial debt is not the only kind that the GDP portrays as growth and good. Ecological debt is the same. As the nation depletes its reserves of oil and other resources, for example, the GDP shows this as an addition to the national wealth rather than a subtraction from it. In effect, it's like a gas gauge that goes up as the tank runs dry.

Are there economists who see the problem - and are they doing anything about it?

A growing number. But it's tough. They have to bow to the orthodoxy to get their degrees and tenure, and then to be taken seriously within the profession. A few can get away with transgression, such as John Kenneth Galbraith, who wrote past his peers to a popular audience. Galbraith's book The Affluent Society (1958) was written half a century ago, but it was prescient. Economists curse him to this day.

Despite all this, the embedded narrative of the GDP is starting to yield. I'd say that within 25 years it will be pretty much done. The Clinton administration actually tried to add footnotes to the GDP to take account of such things as resource depletion. The coal industry killed that. A number of independent groups have produced alternative indexes on their own. Data is a big problem. My own view is that there's not going to be a single master index of well-being. We need to look at a lot of different things.

What should journalists be doing?

They should be reporting - by which I mean they should look at people's lives in concrete terms. Where is the money going and why? What needs are being met off the grid of monetary exchange? Reporters need to shed the theological abstractions of economics - "consumption", "product", "growth" and so on - with all the built-in assumptions, and just look at the world through clear, uncluttered eyes.

When kids buy junk food and get fat, and then their parents have to pay for treatments for obesity and diabetes, reporters shouldn't just recite a statistic that adds the two together and call it a rising "standard of living", the way the GDP does. They should not consent to regard breast-feeding as a threat to "the economy", just because it means less expenditure on infant formula, and thus a drop in GDP.

What does all this have to do with a solution to the current financial meltdown?

The economy was failing before the meltdown. It was failing when the experts said it was booming. They tell us that in the foreseeable future, the medical system will constitute a quarter of "the economy". We will have to be more sick so that the economy - that is, the GDP - can be well. Is that a future we want our kids to be part of?

The finance people will deal with the finance mess. For the rest of us this could be a chance to rediscover the kind of real economy that tends to languish when there's lots of money. People revert instinctively to that in tough times. It happened in the Depression - for example, the large-scale co-ops that emerged in the Bay Area and elsewhere, based on a work-barter principle. The United Exchange Association (UXA) in the East Bay had farms, factories, trucks, all operating outside the cash market and what we now would call the GDP.

There are going to be lots of efforts along that line today. Here in West Marin, I helped found a group called West Marin Commons that is serving as a hub for ride-sharing, sharing of surplus from fruit trees and gardens - a real community-based economics. The ride- and errand-sharing board has been bustling since gas prices began to soar. I don't wish tough times on anyone - but you know what? The financial meltdown actually could help us remember the kind of real economics that the growth bubble of the last fifty years helped us to forget.

How much blame should fall on the Bush administration for the financial mess we are in?

It's pretty obvious that they were the prime enablers. Any time you think the money changers can do no wrong, they will prove you wrong. This is a recurring pattern. Republicans set them loose; Democrats have to clean up the mess. It happened in 1929, again in the late 1980s and now it's happening again. As Galbraith once pointed out, every new generation of financial hustlers thinks it has found a way to defy economic gravity and leverage its way to money heaven.

What's the biggest misunderstanding people have about the crisis?

Hard to say. Not many of us really understand, from a technical standpoint, the kinky financial arcana that got us into this mess. In terms of the big picture, I'd say the misunderstanding is the belief that when the banks are stable and credit starts to flow then things will be OK.

Are comparisons to a possible Great Depression hyperbolic?

Also hard to say. The comparisons could be understated. Back then there were actual needs for the industrial economy to fill once it got going again. Today we are looking at an "economy" that must redefine normal states and stages as pathology so that people will buy more drugs, and that generally must create problems to bestir more buying of supposed remedies. We are draining ourselves physically and emotionally, much as we are draining the ecosystem, and this thing we call "the economy" depends on that. So going forward - if that's the word - is going to have to look a lot different than it once did.

Is Marin going to feel this in a different way than other parts of the country?

Another tough one. We've all heard that the real estate market here probably won't collapse to the extent it could elsewhere. Location, location, but who knows? We don't have the heating costs of colder climates. On the plus side, we still are close to farmland, and lots of people have home gardens. That might sound small, but it became large in the Depression. There also is a growing culture of self-sufficiency - in energy for example - that could serve us well. People also are receptive to such things as new local currencies, which also blossomed in the Depression.

Will tapping the sources needed to pay for the bailout have a detrimental impact on the very things you believe should be included in assessing the country's fiscal health - such as quality of life, the environment and social services?

We aren't talking just about "fiscal" health. We are talking about health, period. Of course, the impact is going to be huge. The library here in Point Reyes Station has short hours as it is. There are kids in town who depend upon it for a computer and a quiet place to study, yet very likely the hours will be cut further. The local clinic likely will suffer more cuts. Anything that depends upon public revenues will have tough-going. In the bigger picture, the economic collapse of the late 1920s produced the New Deal on the one hand and the Third Reich on the other. The authoritarian clouds have been gathering in Washington for the last eight years. These things usually get pretty far along before people start to see the picture.

Bill Totten


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