Climate crisis, GDP and the working people – Part II: GDP

16/09/2022

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gdp growth

As is known, GDP, dating back to the 1930s, and innovated by Simon Kuznets, appraises the value of goods and services produced in an economy in a given period. At the same time, it’s now well-accepted that GDP, a Bretton Woods tool, doesn’t tell the whole fact.

John Smith discusses the issue:

“The ‘GDP Illusion’ is a fault in perception caused by defects in the construction and interpretation of standard economic data. Its main symptom is a systematic underestimation of the real contribution of low-wage workers in the global South to global wealth, and a corresponding exaggerated measure of the domestic product of the United States and other imperialist countries. These defects and distorted perceptions spring from the neoclassical concepts of price, value, and value added which inform how GDP, trade, and productivity statistics are devised and comprehended. The result is that supposedly objective and untarnished raw data on GDP, productivity, and trade are anything but; and standard interpretations conceal at least as much as they reveal about the sources of value and profit in the global economy.”⁸

John Smith argues further:

“GDP and trade data measure the results of transactions in the marketplace. Yet nothing is produced in markets, the world of the exchange of money and titles of ownership; production takes place elsewhere, behind high walls, on private property, in production processes. Values are created in production processes and captured in markets and have a prior and separate existence from the prices finally realized when they are sold.”

While the issue of climate and climate crisis comes, the GDP approach turns further problematic.

Tristan Bove’s position on GDP is:

# “GDP fails to address the negative impacts of externalities such as climate change and inequalities.”⁹

# “How GDP interprets the impacts of climate change shapes governmental response and policy. GDP does not leave much room for factors other than transactional activity, and therefore climate change impacts are considered externalities, in that the effects of production and consumption on the environment are not considered in economic evaluations or market mechanisms.”

# “Without supplementary social progress indicators that can integrate externalities, GDP ignores factors that have devastating effects on social conditions. GDP does not highlight climate change, inequality and unhappiness as indications of negative economic and social development.”

Tristan Bove argues: Climate change is exacerbating the frequency and/or intensity of natural disasters incurring a tragic human cost. However, in terms of GDP growth, the impacts of natural disasters as a result of climate change can often appear as positive. Studies have shown that economic output and GDP are often unaffected or higher after a natural disaster strikes. In these circumstances, government spending increases as disaster relief programmes are enacted, and the rebuilding of infrastructure with more modern technology creates new construction jobs. Consumer spending also increases due to insurance policies spent on replacing lost property. Investments and net exports will presumably fall slightly, but the substantial increases in consumer and government spending will indicate GDP growth.

Refering to the French economist Frédéric Bastiat’s “parable of broken windows” or the broken window fallacy, Tristan Bove writes: “The broken window fallacy has been used to describe the opportunity costs of disasters and other climate change impacts. While relief programs will stimulate the economy and provide jobs in the short-term, a myriad of unintended and unknowable consequences of the redirected capital will exist. Had the disaster not occurred, the government could have spent its money elsewhere. The quality of life of those affected by the disaster has also not improved, since expenditures only replace lost or damaged property, comparable to the maintenance expense of repairing a broken window.”

Tristan Bove’s further argument: “GDP’s interpretation of climate change is similar. By categorizing environmental impacts as externalities and focusing on output and production, economic foresight is limited. GDP also fails to account for the very real human cost of climate change, namely the loss of life or livelihoods that are difficult to appropriately quantify. While climate change can induce growth as far as GDP is concerned, it elicits a considerable loss of social welfare and well-being.”

However, Tristan Bove doesn’t go for discarding GDP: “GDP has a role to play when discussing development policy and transitional economic planning. [….] GDP should not be discarded completely, rather, governments must understand how to incorporate what is missing into standards of economic success. [….] To achieve truly sustainable growth and an economy that works for its people, GDP will need to be supplemented with other measures of social progress.”

Frank Van Gansbeke tells about GDP in an interesting way: “Per the methodology, GDP improves with increases in COVID-19 deaths. GDP gets a boost from waging foreign wars with domestically produced armaments and supplies. The GDP measure is positively correlated with both deaths from car accidents as well as opioid overdose. The more climate change triggered typhoons, hurricanes and wildfires […] occur, the more GDP would stand to benefit from repairs and restructuring undertakings. The more prisons are built, the more massive the uptick in GDP. The metric doesn’t distinguish at all between investment in fossil fuel, prison infrastructure or pre-schooling facilities. Or more succinctly put, it fails to discern between sustainable development and prudential care of our commons on the one hand and abusive market behavior and extraction activity triggering behavioral and environmental externalities on the other.”¹⁰

His observation: “From a policy perspective, the GDP measure is as efficient as a blunt butcher knife in holographic laser brain surgery.”

Vikram Mansharamani says:

GDP “says nothing about how income is distributed. And considering distribution, like overall income growth, is crucial for assessing an economy’s health. This is especially true since incremental dollars are not valued the same by each person; $100 is worth more to a poor person than to a wealthy one.”¹¹

# “As Simon Kuznets, the architect of GDP, put it in 1934, ‘economic welfare can scarcely be adequately measured unless the personal distribution of income is known.’”

# “Take wealth, for example, which GDP figures tell us nothing about.”

# “GDP tells us nothing about the size of the stock they have to draw from — it merely measures the income flow.”

# “[I]n narrowly focusing on income, our national accounts leave out the value of leisure. This can distort our conception of the relative flourishing of countries. For instance, while the United States’ GDP per capita is roughly 15 percent higher than the Netherlands,’ American workers work 26 percent more hours than their Dutch counterparts. Which country is better off?”

# “GDP does not directly measure subjective well-being and economists disagree about whether it is a decent proxy.”

An International Finance article said:

# “Tracking gross domestic product is important because it provides a general assessment of the state of a country’s economy. Generally, if the GDP is growing, companies are expanding and there are more jobs available.”¹²

# “There is a strong correlation between high GDP growth in a society and the reduction of poverty, particularly severe poverty.”

# “While rapid GDP growth is associated with reduced poverty, it has also been linked to rising disparities in income and wealth – creating a greater divide between the rich and poor – which could affect political stability.”

# “Though jobs have increased in Asia with economic growth, many workers earn too little to lift their families out of poverty and those without formal work exceed 40% of the total employed in 18 countries in Asia. In India and Bangladesh, it is over 80%.”

John Smith’s argument: “GDP is frequently criticized for what it leaves out of its calculation of ‘domestic product’— so-called ‘externalities’, e.g., pollution, the depletion of non-renewable resources, and the destruction of traditional societies; as well as for where it draws the ‘production boundary’, excluding all those productive activities that take place outside of the commodity economy, especially household labor.”¹³

John Smith identifies a fact that can should never be brushed out: “Labor’s share of GDP within a country is not directly and simply related to the prevailing rate of exploitation in that country, since a large component of ‘GDP’ in the imperialist nations represents the proceeds of exploited southern labor.”¹⁴

Tristan Bove tells another fact: “[A] higher GDP per capita generally indicates a higher rate of per capita CO2 emissions. This trend is symptomatic of classifying environmental impacts as an externality, as rising emissions are not defined as detrimental to economic growth.”¹⁵

Note:

“The GDP Illusion, Value Added versus Value Capture”, Monthly Review, vol. 64, issue 3, July-August, 2012
“How GDP Negatively Affects Climate Change Policy”, Earth.Org, January 7, 2021, https://earth.org/gdp-climate-change/

Tristan Bove explains:

GDP is not effective while measuring prosperity […] GDP addresses four forms of spending on goods and services: consumer spending, government spending, investments that will maintain or accumulate value over time and a country’s net profits from exports; and it has proven effective at measuring figures such as productive capacity, tax revenues and inflation. By focusing exclusively on these factors, GDP can encourage economic trends in unsustainable directions. The metric’s fixture in conventional political discourse and economic thinking can severely skew government priorities, by ignoring external factors of extreme relevance to sustainability and quality of life.

Tristan Bove’s arguments include:

# “In 1962, Kuznets himself bemoaned GDP’s seemingly directionless growth, saying, ‘Distinctions must be kept in mind between quantity and quality of growth, between its costs and returns, and between the short and the long term. Goals for more growth should specify more growth of what and for what.’

# “Kuznets, like other economists, feared that economic growth policies would be purely for the sake of growth, and not for the betterment of countries’ citizenry’s tangible quality of life.

# “GDP only requires a simple aggregate of transactional activities in an economy […]”

# GDP can oversimplify the experiences of individuals and obscure inequalities. In 1962, American economist Arthur Okun crafted what is now known as Okun’s Law, an empirical observation on this correlation – a rule established a statistical relationship between a rise in GDP and a fall in unemployment. In developed economies, unemployment rates generally do not reflect the workforce participation rate. Low unemployment rates can also indicate a lack of productivity, or slack. Prior to the COVID-19 outbreak, the US boasted one of the lowest unemployment rates in history, however fewer than 50% of American workers felt satisfied with their job. GDP fails to address certain critical sectors of an economy, such as the value generated by the informal economy. GDP only incorporates the final transactional value of a product, and not the value of work done during the various production steps, the value of that product’s raw materials or the impact of extracting them. When GDP fails to account for critical sectors of an economy, the perceived performance of that country’s economy tends to become inflated and misrepresentative of quality of life. This characteristic of GDP can be especially damaging in developing countries, where most of the workforce participates in the informal economy. When the majority of a country’s workforce is not represented in GDP calculations, it becomes problematic when all economic policy decisions are made with GDP numbers in mind. Multinational corporations can also skew GDP numbers and hamper development in low-income countries. When major corporations cheaply extract resources from developing countries, the activity is registered as an economic boon for the country in GDP terms. The country’s resources will normally be exported and consumed in developed countries, and these activities are often taxed, the lion’s share of dividends and profits will primarily be enjoyed by the corporation, not by the developing country’s population. Growth in GDP and perceived performance of the economy does not naturally lead to material improvement in the quality of life of a country’s citizens, who will be burdened by a dependence on foreign actors and environmental degradation. GDP favors high spending from consumers and governments. While differing political and economic ideologies will disagree on how much each group should contribute to overall spending, the ultimate goal is to have a high rate of consumption and expenditures. These are the key factors to keep in mind when discussing the effect of GDP on the environment, and how the macroeconomic interpretation of climate change as an externality affects government response. Viewing the impacts of climate change through a macroeconomic lens that only focuses on production and consumption is short-sighted and unsustainable. Similarly to how GDP does not account for job satisfaction or quality of life, the impact of climate change on individuals is left unaccounted for.