Wednesday, January 19, 2011

a digression (or, why i hate macroeconomics)

there was an article recently in the economist that laid a fair bit of the blame for the Great Recession at the feet of academic economists, rather than the usual whipping boys of MBAs and financiers. in particular, the author takes on the 'rational expectations hypothesis', which has - as he asserts - fueled economic thinking for the past 30 years because it was logical, mathematical, and fittingly conservative (conservative a la reagan).

in another article in the same magazine, they point out that we will probably cross the 7 billion mark on the planet's population in 2011. remember when we hit 6 billion? that seemed like such a scary milestone in 1999! now we calmly look ahead to predictions of the population stabilizing at almost 9 billion by 2050.

the two are related, really. i'm getting there.

i think the economics problem runs much, much deeper than just the past 30 years, in both macro theory and micro theory. even keynes - who was liberal, claiming that aggregate markets were not self-correcting and advocating for government intervention in markets to keep things running smoothly - was not interested in exploring the long-term effects of the basis of the doctrine.

all of macroeconomics rests on calculations and determinations of gross domestic product. gross domestic product is simply the total sum of all domestic (on our shores) production in an economy. it's easy to calculate, and the government does it all the time, because it is the single most important indicator of overall economic health used.

GDP by country*

at the simplest, you can calculate gdp two ways: you can sum up all of the income in a nation, or you can sum up all the expenditures - all the goods and services purchased - in a nation. it's common knowledge that gdp is a flawed measure. but every so often i am stunned by the depths to which it is a flawed measure. to wit:

activities that raise gdp
a divorce, and the subsequent establishment of another household
buying a new car
buying a new toy for your kids
anything inherently wasteful that requires you to buy something new
ill health - like having cancer
having as many medical tests done as possible
elderly cared for in an institution, rather than by family
taking your kids to disneyland
driving an inefficient vehicle (relative to an efficient one)
getting a new cell phone as often as possible

activities that have no effect* on gdp
saving seeds from your garden and growing food from them
buying a used car from an individual person
swapping used clothes
conserving electricity or water by limiting use
lifelong health
reading to your kids
walking in the woods (if you don't drive to get there)
driving an efficient vehicle (relative to an inefficient one)

*when something has no effect on gdp, that means it has no significance in the national economy. you might as well say it hurts our economy.

we know - i think that this is, in fact, almost irrefutable, no matter how rosily you view the future - that we cannot support two billion additional people on this planet at the level of the total consumption of an average american. hell, most likely, we couldn't even support all the existing people on the planet at our level. not at our current technology, anyway.

yet the single biggest factor in determining our nation's economic health is, in fact, consumption, period. that's the metric we use to both assess economic health and set monetary and fiscal policy. the reliance on this measure means that for us to be better off, we have to consume more - all of us.

there's no way around that conclusion. and, both theory and experience tell us that when gdp falls, unemployment rises. the definition of a recession is a decline in gdp for two or more quarters. and recessions, as we know, cause real and immediate pain for millions of unemployed people and families.

we can't just abandon gdp as a measure. for starters, there's no getting around the fact that production does matter. we have to have some production. not everyone can live off the grid, getting their goods and services through bartering, and walking everywhere. someone has to buy new clothes at some point in time, even if only to pass them along to the other, more sustainable members of the community down below at the bottom of the consumption chain. we also know, we know, that increases in wealth - gdp - lead to healthier, longer lives for everyone. almost unequivocally, as gdp and wealth rise, so do education rates and advances for women. here's an interesting video from the viewpoint of a health professor. at the end of the country-wise progression he illustrates, there's still a large gap in income, and he does point out the inequalities within countries, too, as they march along towards higher health and wealth. but there's no doubt that as we've gotten wealthier, life expectancy has increased - and we're healthier, too.

the united nations, recognizing both the flaws with a measure like gdp as well as its significance, uses gross national income per capita as one of the main indicators in its Human Development Index - which combines the income measure with other, more 'healthy' indicators like education and life expectancy.

united nations human development index components

and i know, for certain, how lucky i am. i know the great benefits being born onto this planet as a white american grants a person. i'm grateful, very grateful, for the technology - the progress, the overall wealth of our nation - that enables me to sleep in a warm house at night, type on my computer whenever i want, go to school in my mid 30s, travel around the world if i want, limit my child-bearing if i want, say whatever the fuck i want, and live past 40 (hopefully).

so what can we do? we have to have some primary production. our reliance on gdp as the metric for our economy will push us to constantly expand consumption and utilization of resources. yet, if we all suddenly brought our consumption down to a more sustainable level, our economy would come to a screeching halt - with millions out of work. as people stop spending, producers stop producing - and then workers stop working.

how can we reconcile the motivation at the national economic level for more consumption, with the constant cultural messages that our planet is coming to an unsustainable collapse? how can we internalize - economically speaking - valuing the things that we need to value, like conservation, wildness, and genuine loving and kind interpersonal relationships?

how can we deal with economics? this is what i just don't know. economics runs our entire country - don't let all the rhetoric about democracy fool you. capitalism is our real state religion, and the entire basis for capitalism is microeconomic & macroeconomic theory. i'll pick on capitalism, and micro theory, later on.

i don't know, maybe it's just a pessimistic month for me right now. but as i sit in macro theory class learning about how the models predict any number of dire outcomes for humanity when consumption falls - and yet i know for certain that consumption must fall if we're to bring up billions of people to an equitable standard of living, let alone add two billion more into the mix, and i see the antiquated, uncreative tools that we use to assess economic success - i can think only one thing:

we're fucked.