Friday, October 8, 2010


This piece, by my colleague and friend Ahsan Habib, recently ran in the (Adrian, Michigan) Daily Telegram. I am posting it here with his permission.

ADRIAN, Mich. — Recently it was announced that the current U.S. recession ended 14 months ago and our Gross Domestic Product (GDP) has started to increase since then. Surprisingly there has been very little improvement in the employment situation. In fact during some of those months of recovery the country actually lost jobs. More surprisingly, despite the end or recession, the Federal Reserve Bank has indicated that the economy needs more support in coming months. This raises the question: Does GDP measure the health of the economy anymore?

In dealing with many situations, economists have stopped looking at GDP as an indicator of economic performance. Concepts like the Human Development Index or Fulfillment of Basic Needs have been created as alternatives. It is high time that we create a new measure of economic performance which reflects the employment and economic conditions more pragmatically.

Changing or switching economic definitions is not new in this country. In 1991 we changed from Gross National Product (GNP) to GDP reporting for political expediency. GNP does not include the income earned by foreigners but GDP does. Therefore, as long as foreigners earned more in the USA than Americans earned abroad, GDP will be to our advantage. There were other political reasons as well. At that time the dollar gained strength in the world market. So American overseas income deflated when converted to dollars for GNP calculation. GDP did not have that problem. Also as America’s overseas debt burden was growing, GDP appeared to be a better choice since income earned by foreign investors in the U.S. is not subtracted from the U.S. GDP.

The essential point is that the federal government has a vested interest in trying to change the definition of sensitive economic terms. The definitions used for budget deficit, unemployment and many more have been modified for political gains. But these “convenient” economic numbers fail to reflect the real picture. So GDP increases but misery continues to grow, budgets show a surplus but national debt rises, and jobs are lost but unemployment stays the same!

We are entitled to vital economic data that are not deemed to be tailored with November in mind. Look at employment numbers. It is being claimed a success that the private sector has added jobs for several months in a row and that it surprised experts by adding 67,000 jobs in August. But that number is not very meaningful. All these 67,000 people could have worked for just one hour per week and no more! Also they all could be hired at minimum wage and with no additional benefits. Surely government economists can devise an employment number that would be simple but convey the real picture of employment. The Bureau of Labor Statistics does report an unemployment number called U6 which counts the discouraged workers — who stopped looking for jobs, and hence are not called “unemployed” in the primary statistics — as unemployed. The question that comes to mind is why that number is not publicized more widely?

The desperate desire of governments to show bright economic numbers has come from a false premise. For a long time governments of all countries including the U.S. have been asking for more power from citizens with a false promise to deliver economic prosperity. But the truth is governments can make noticeable economic impact (good or bad) only in centrally planned economies. In capitalist economies, governments’ power to change the economic landscape is very limited. It is about time that they recognize this and abandon their futile efforts to create economic prosperity.

To show that they can create economic miracles, governments have tried to produce artificial economic results by resorting to bad economic practices; indiscriminate borrowing being one of them. Also a host of benefit seekers who could use their resources elsewhere more productively are misusing it to gain government favor. Most importantly, many government policies have created fundamental distortions in the operation of free market economy.

This is not to suggest that the government should abstain from promising and undertaking every economic activity. They should produce highways, defense services, income safety programs and so on. But they should make it clear that they do not have power to make the economy grow or to fix the private sector employment problems. Of course, if recession strikes, government should step forward to help the people who are suffering, the same way as it steps in to help flood victims. But just as government does not promise good weather, they should not promise a prosperous economy.

An economy is too big for government to handle. Many former socialist countries learned that lesson the hard way. Instead, governments should focus only on specific targets. Then the public will expect less from them and there will be less pressure on them to create and publish politically motivated economic data.

Ahsan Habib is a professor and chair of the economics department at Adrian College.

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