Don't be obsessed with the GDP

For years, lefties have complained about the preoccupation with the Gross Domestic Product (GDP).  About how, for instance, how hiring more police officers adds to the GDP, when this is something that should actually warn us that there are some serious problems in society--instead of addressing those problems, we are hiring police officers, with the perverse effect of increasing the GDP!  That is merely one example of what is screwed up with the GDP.

Such thinking, more so when it came to poorer countries that were trying to figure out solutions to a slew of problems, led to alternative measures of how well countries are doing.  Thus was born, for example, the Human Development Report and its Human Development Index.  The king of Bhutan went one step more and called for Gross National Happiness.  I appreciated his idea, but thought it was a contradition of sorts to have the word "gross" in it :-)

Now, we are in a worldwide economic recession that seems to be getting deeper and deeper with every passing day.  A recession is, of course, by definition tied to the GDP--a contraction in the GDP for at least two consecutive quarters.  So, now once again people are thinking about whether GDP is a good measure .... Including the Financial Times!  It recognizes some of the shortfalls, such as:

GDP was never meant to be an overall measure of how well a society is doing. It is a measure of production not even designed to capture all economic output. GDP is blind to non-monetised production – it includes care given in crèches and old people’s homes but not the same care given by family members for free. And a country that whittles down its non-renewable resources may record high GDP growth while really just using up its wealth.

And then the paper points out, correctly, that governments have a restricted role in making decisions on tradeoffs:

In spite of this, GDP remains, fetish like, the yardstick for economic performance. Attempts to improve on it must distinguish the technical question of how to measure what we care about from the political question of whatwe (and governments) should care about. We can measure economic production better and Mr Sarkozy has recruited some of the world’s best economists to tackle the technical part.

But we should not pretend to engineer a figure that will tell us how important economic production and wealth are relative to other values. We ought to resist turning “happiness” – which one of the commission’s working groups is looking at – into a new fetish for governments. Instead, elevate other objective indicators of human well-being (such as already existing health, education and environmental sustainability measures) to the status now enjoyed by GDP.

Material wealth remains crucial; most of the world has too little of it. It is governments’ duty to promote growth while securing non-material values voters hold dear. Better statistics can help voters force politicians to make the best trade-offs. They cannot choose on their behalf

Spending our way into economic prosperity?

An excerpt from a FT opinion piece by David Walker, who was the head of the Government Accountability Office from 1998 to 2008.  I especially like his point on stimulus as a down payment on the future.

In fairness, we cannot assign all the blame to Mr Bush. Congress bears some responsibility, as do the American people. After all, in our constitutional republic it is “We the People” who are ultimately account able for what happens in Washington.

....

Any stimulus proposal should be timely, targeted and temporary. It should be large enough to make a difference, but not too large, and be properly structured in order to minimise waste. It should be designed to stimulate job growth and make targeted infrastructure and other investments to make America more competitive.

While some stimulus is called for, we cannot spend our way into economic prosperity, especially when all new spending is debt-financed. It was troubling to see one prominent incoming senior economic official refer to the Obama administration’s planned stimulus proposal as a “down payment” on the future. How can something be a down payment when there is no equity involved? This is an example of how words used in Washington do not always fit Webster’s definitions.

The president and Congress must put a process in place that will enable elected officials to reimpose tough statutory budget controls and reform our nation’s Social Security, Medicare, healthcare and tax systems. All these require significant reforms that Washington has delayed for too long. We also need a baseline review of all main spending and tax choices to re prioritise them to reflect 21st-century realities. 

The ultimate worry about the global economic collapse?

Remember how much members of the House and Senate seem to be rattled after their meeting with Paulson and Bernanke a couple of weeks ago? I don't know what happened behind those doors, but at least this commentary on how things are unfolding in Iceland suggests that members of Congress might have been briefed on some really scary, and probable, scenarios:

[They] couldn't anticipate that when a tiny country bails out a bank whose assets vastly exceed the country's own GDP, then the sovereign itself loses much creditworthiness. One scary datapoint: the assets of Kaupthing Bank amount to 623% of Iceland's GDP, which is possibly why its own credit default swaps are trading somewhere over 2500bp.
How bad can things get in Iceland?
Here's what one local emailed Tom Braithwaite:
They are fighting powers that they are powerless to fight. It's like tackling a storm raging in the sea with a teaspoon.The main supermarket can't get imported goods because they have no currency. The shops are half empty. One of the store managers has advised people to start hoarding. We're running out of oil. And winter came last night - about a month early.

Tyler Cowen has a link to the Financial Times that has a list of European banks with assets greater than the gdp of their respective home countries. UBS, which was one of the earliest banks to admit to its messed up books, had assets that were 484% of the Swiss GDP!

Paulson's plans across the Atlantic

Interesting comments by Wolfgang Münchau in the Financial Times:

What about the lesson from the US to Europe? It is that bank bail-outs require a swift political response. When you look at the eurozone, it is not clear at all where this response could come from.
By the time European ministers have travelled for a meeting in Brussels, let alone reached or implemented a decision, the financial markets would have long melted.
Peer Steinbrück, the German finance minister, who last week told the Bundestag that the US would soon be finished as an economic superpower, should show more humility. He was lucky that last week’s crisis did not happen in Berlin or Paris or Rome. He and his colleagues would have been totally unprepared. ...
While the Americans need a better rescue plan, the Europeans need a lot more: a system that could produce a rescue plan in the first place.

And, in the same paper, Larry Summers writes,

[The] worst possible actions in the current context would be steps that have relatively modest budget impacts in the short run but that cut taxes or increase spending by growing amounts over time. Examples would include new entitlement programmes or exploding tax measures. The best measures would be those that represent short-run investments that will pay back to the government over time or those that are packaged with longer-term actions to improve the budget. Examples would include investments in healthcare restructuring or steps to enable states and localities to accelerate, or at least not slow down, their investments.

The end of laisser faire capitalism?

As we learnt from Francis Fukuyama's "The End of History", and later from John Horgan's "The End of Science?", it is not a good idea to talk about the end of anything, I guess. But, "the end of X" always works as an attractive title though, as this piece from the Financial Times shows. But, don't be fooled by the title--some pretty neat observations there. A few excerpts:

Europe is headed towards the end of laisser faire capitalism. Nicolas Sarkozy is only the latest leader to toll the bell on principles that have delivered, over the past 30 years, unparallelled global prosperity – and now a tremendous bust. “The all-powerful market which is always right is finished,” said Mr Sarkozy. Even Hank Paulson, former Goldman Sachs boss, has said “raw capitalism is a dead end”.
Before everyone dons Mao suits, however, it is not clear how raw that capitalism really was. The economic freedoms of the recent past were more of a tremendous party than a defendable principle, fuelled by cheap credit and state support.

That cheap credit and extensive state support is what has come back to bite us big time. I can imagine that the left will use this to bolster their argument that more state intervention (regulation) is needed, and the right will argue that too much of state intervention was why the markets got it so wrong. I tell you, ne'er the twain shall meet!

The economic agenda for the next administration

Larry Summers:
Nations are increasingly preoccupied with their relative economic standing, not the living standards of citizens. Issues of strategic leverage and vulnerability now play a bigger role in economic policy discussions.

At the same time, it is unclear which underlying driver of global growth will replace the one in place for the past decade – the US as importer of last resort. Global growth has depended on US growth, which has depended on the US consumer; and the US consumer has depended on rising asset values first of stocks and more recently of real estate. With falling house prices and a challenged financial system, US consumer spending is falling. The US is no longer in a position to be a net source of demand for the rest of the world. Indeed, with the drop in value of the dollar, US growth – which had been focused on imports and which had enabled the export-led growth of other countries – is a thing of the past. Already, Europe and Japan are in or are very close to being in recession.

The current global policy debate is a cacophony. It is all very well to advocate increased US saving and a cut in the US current account deficit but the process for bringing it about will mean less US demand for foreign products. That will put pressure on jobs and output growth in other countries if no countervailing measures are put in place. Conversely, the return of a stronger dollar without other policy changes will raise US demand for exports but at the price of cutting demand for domestically produced goods and compounding the recession.

These problems will be with us for some time. They may not be at the top of anyone’s agenda right now. But the success of the next administration could depend on its ability to engage with a wider range of global economic stakeholders, on a broader agenda, at a time when disagreements are increasing not just about means but also about ultimate ends.

A Democractic landslide in November?

At least that is what Clive Crook writes in FT.

Alan Abramowitz, a politics scholar at Emory University, has shown that summer head-to-head polls convey almost no information about the forthcoming election. (Subsequent head-to-head polls are not much better.) Instead, he has a simple “electoral barometer” that weighs together the approval rating of the incumbent president, the economy’s economic growth rate and whether the president’s party has controlled the White House for two terms (the “time for a change” factor). This laughably simple metric has correctly forecast the winner of the popular vote in 14 out of 15 postwar presidential elections.

... The barometer not only picks winners but pretty accurately points to winning margins, too. In 1980, Jimmy Carter had the biggest postwar negative reading (–66); Ronald Reagan beat him by nearly 10 percentage points.

President George W. Bush’s net approval rating (favourable minus unfavourable) is currently –40; the economy grew at a 1 per cent annual rate in the first quarter; and Republicans have had two terms in the White House. Plugging the numbers into Mr Abramowitz’s formula gives the Republican candidate a score of –60, about as bad as it gets: second only to Mr Carter’s in the annals of doomed postwar candidacies. The barometer says Mr Obama is going to waltz to victory.

The meaningless G8 summits

FT's Gideon Rachman writes in his blog about the generic column that his colleague Alan Beattie forwarded to him. It is awesome. All one needs to do is make appropriate substitutions for the name of the international gathering and other related stuff, and, voila, the news report. What a pathetic joke these summits have become. When will the media call this bluff?