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Saturday, July 26, 2014
In this column, Hazel Henderson, a futurist and economic iconoclast, celebrates that U.S. GDP will finally include intangible production and services which make up around 70 percent of 21st century economies.
As of Aug. 1, 2013, the U.S. Bureau of Economic Analysis (BEA) finally stepped into our new 21st century. Gross Domestic Product (GDP) will now include much of the intangible production and services which actually make up some 70 percent of mature 21st century economies, such as software, research and development, entertainment, trademarks, copyrights, design and other creative innovation.
Thus U.S. GDP rose 1.7 percent (with these changes adding .41 percent) in the second quarter of 2013 while the revision added 0.93 percent of the 1.1 percent increase reported for the first quarter. So far, the shift of these intangibles from “costs” to “investments” is slight, and it will be revised again on Aug. 29.
For decades, critics like me had urged modernising GDP still stuck in the early materialistic Industrial Era, counting manufacturing and obsessed with goods you could drop on your foot.
For fifty years, services and less tangible forms of wealth had been quietly overtaking the total output of maturing economies.
From the 18th and 19th centuries, when farming employed most U.S. workers, the economy had transformed, with agriculture employing only two percent of the workforce.
Today, over 70 percent of the U.S. economy is dominated by intangible production: education, healthcare (now over 17 percent of GDP), innovation, R&D, the rise of the internet, software, media, entertainment, sports, the arts and public sector services, police, firefighters, the legal system, oversight of food safety, environmental quality, financial services, safety of drugs, toxic substances, etc., with more than 21 million U.S. jobs in public sector services at city, state and federal government agencies and military service.
Meanwhile, GDP remained blind to much of this new economy and still over-counted manufactured goods, ignoring the vital role of R&D and misclassifying what new services it did count as “costs” instead of valuable economic output. I and others had criticised GDP for confusing the “goods” with the “bads” (pollution and other social costs of production) and totaling all as valuable output.
This was why Citizens for Clean Air, the NGO I cofounded in New York City in 1964, called for subtracting air pollution “bads” from GDP. We took our then senator, the late Robert F. Kennedy, on a helicopter ride to show him New York’s pollution sources. In his famous speech in 1968, he agreed that GDP gave a grossly distorted picture, “measuring everything except that which makes life worthwhile.”
Now the new revisions to GDP will boost growth totals, and the BEA has started counting R&D and artistic creation as “investments,” back casting this R&D revision from 1959 to 2007. This would have raised annual growth rates by .07 percent – mapping innovation made famous by Joseph Schumpeter as “creative destruction.”
Yet GDP still needs further fixing, and new indicators beyond economics are proliferating, including the OECD’s Better Life Index, the Canadian Index of Wellbeing and others tracked at Ethical Markets’ Beyond GDP.
The fundamental investment all societies make in their future is education of their children. GDP will still treat this as an “expense.” For decades I have called for shifting all education into the “investment” column.
In 2003, I co-convened the First International Conference on Implementing Indicators of Sustainability and Quality of Life (ICONS), in Curitiba, Brazil. Over 700 statisticians and public and private executives called for GDP to also include an asset account so that all democratically mandated public investments in infrastructure (sewers, roads, hospitals, airports, etc.) would be counted as assets to balance their costs, which GDP recorded only as debt.
When these valuable long-term infrastructure assets are added, many countries’ debt to GDP ratios shrink by as much as half!
A step in the right direction toward this capital budgeting was taken in the U.S. administration of Bill Clinton in 1999 when some infrastructure “costs” were also recorded as “savings.” This stroke of the pen, plus cuts in the military budget, contributed to Clinton’s budget surplus. And when Canada began its capital budget, it turned a 50 billion Canadian dollar deficit into a small surplus.
Macroeconomics is now unmasked as normative at its core, with economists’ various “weighting” of the value of a range of goods and services as essentially arbitrary.
If all unpaid production (about 50 percent in most industrial countries and up to 70 percent in traditional and developing countries) were included, they would all appear much richer (the 1995 UN HDI estimated unpaid production at 16 trillion dollars).
And richer still if all the unpaid production of natural ecosystems and biodiversity were included, as the United Nations TEEB research shows. If all those “bads” (pollution; social and cultural disruption) were subtracted, they would make countries look poorer ( Trucost-TEEB reports say by some seven trillion dollars).
No wonder economics is now dismissed as a form of brain damage, as I and E. F. Schumacher joked in the 1970s!