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Wednesday, June 11, 2008

Governor Rounds Celebrates Phony Economy

AP reports that Governor Mike Rounds is touting the achievement of the second goal of the 2010 Initiative: increasing South Dakota's gross state product by $10 billion.

Obviously, the governor doesn't read Harper's. The June 2008 edition runs "Our Phony Economy," a reprint of Jonathan Rowe's March 12 testimony before the U.S. Senate. (A free PDF version of the article is available at PeakWatch. You can also read and hear the testimony here.)

Rowe says gross domestic product (that's the national version of Governor Rounds's happy stat) is a terrible measure of the actual wealth of a nation:

Suppose that the head of a federal agency came before this committee and reported with pride that agency employees had burned 10 percent more calories at work last year than they did the year before. Not only that — they had spent 10 percent more money too. I have a feeling you would want to know more. What were these employees doing when they burned those calories? What did they spend that money on? Most important, what were the results? Expenditure is a means, not an end, and to assess the health of an agency, or system, you need to know what it has accomplished, not just how much motion it has generated and money it has spent [Jonathan Rowe, testimony, U.S. Senate Committee on Commerce, Science, and Transportation, 2008.03.12].

Using GDP (or GSP) as a measure of economic success or general welfare ignores all sorts of damage and loss that can udnermine the well-being of a society. The folks up by Thief River Falls who've had to evacuate their homes due to the stink from the Excel Dairy are probably spending more money on food and lodging this week, but it's unlikely they feel their quality of life has increased. Thousands of people going to the hospital for chemotherapy do wonders for the GDP, but more cancer wouldn't exactly be a mark of positive distinction for a society. I could boost the GDP by running around town smashing windows and thus providing a lot of business for the lumberyard, but I think my neighbors would rather I leave my baseball bat at home.

And imagine this: suppose we all got serious about putting an end to our of our personal deficit spending. Suppose people quit using their credit cards and limited their spending to the cash they have on hand. Perfectly reasonable approach to personal finance... and it would bring GDP growth to a crashing halt.

Rowe reminds us that Stanley Kuznets, one of the inventors of GDP, never intended his mathematical construct to be used the way Governor Rounds and pretty much everyone else in government and the media are using it:

Kuznets concluded his report with words that ought to be inscribed on the wall of every office on Capitol Hill and over every computer screen within a twenty-mile radius: "The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above" [Rowe, 2008.03.12].

The Economist
's Madelaine Drohan notices that same warning from Kuznets in her 2006 CBC News Viewpoint essay. "Beware of Politicians Who Equate Rising GDP with Happiness," Drohan warns. Beware, indeed. Economic development and quality of life are more than the numbers in Governor Rounds's ledger.

For more from Jonathan Rowe, read his 1999 Washington Monthly essay with Judith Silverstein, "The GDP Myth: Why Growth Isn't Always a Good Thing."

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