October 05, 2009

Bowing down to the GDP & other graven images

So in some respects the worship at the altar of the almighty GDP is, indeed, like the South Sea Island cargo cults. The cults took different forms, but were based on the desire of indigenous South Sea Islanders for the material goods of Westerners with whom they came in contact. Sometimes the cultists would imitate the mannerisms and dress of the Westerners, a form of thinking which proceeded on the assumption that the cargo could be conjured through magic.

American economists cling to the precious Gross Domestic Product in the same way. Never mind the still-rising unemployment rate, the continuing decline in house prices, the millions of foreclosed homes, the severe cutback in discretionary spending among the citizenry. Bernanke declared the recession officially over because the GDP stopped going down, and that's what matters.

Alex Berenson wrote an interesting book called The Number a few years ago about corporate governance and the relentless focus on one "metric" to decide whether a corporation was succeeding or failing: its quarterly earnings report. Everything was based upon this one statistic, and if reality did not cooperate, it was manipulated till it did. Thus, the excesses of Enron style "mark to fantasy" accounting, which has gone on to infect the way the Federal Reserve and the U.S. Treasury allow banks to carry worthless mortgage-backed securities on their books at face value to avoid the inevitable markdown to insolvency. The last thing anyone wants is the truth, after all.

The GDP includes government spending as one its four tributaries. Such spending, of course, has gone through the roof, and about half of that is borrowed money. Nevertheless, the spending counts positively in the GDP. No one really talks about the mirage-like quality of this spending. Meanwhile, all the "real" indicators point in the same direction: ordinary Americans are cutting way back on "discretionary" spending. Railway goods traffic is down about 18%; General Motors sales (after the brief flurry of action with Cash for Clunkers, which disproportionately benefited Japan) are down 50%, year-over-year. Airline travel down, highway mileage down, even greenhouse gas emissions are down worldwide 2.6% over the last year, a pace which would meet the Copenhagen goals if it can be maintained.

American wealth, over the last forty years or so, has been based on the encouragement and proliferation of non-essential spending, or for paying way too much for basics (such as housing and health care). While we pay lip service to the "free market economy," what has really happened is that we have built a culture where the individual creates an identity based on consumer spending, and where the "need" for such spending is created in the first instance by the influences of advertising. So we are what we buy. The economy came to depend on this correlation, and it was always in danger of the kind of catastrophic event which has now transpired. Americans can let go of a tremendous amount of superfluous spending without hardship (provided their income remains the same), but the problem is that the economy (and the jobs within it) depend on such superfluous spending, thus contradicting the income condition. Put another way, we don't really need half of all the shit we buy, but if everyone pulls back from that wasteful 50%, the economy tanks and huge numbers of people don't have enough money for anything.

The legions of Americans who have been laid off from crap jobs and jobs which depended on "turnover" were the first casualties of this pull-back: the baristas, the "sales associates" at Target and K-Mart, the auto salesmen, the vast hordes of real estate agents. Take autos, for example. In truth there is no reason that a person needs a new car every three years or so. The "need" is a culturally-induced compulsion which serves the purposes of the manufacturers, not the consumers. A car can be repaired. It can be fully depreciated by driving it into the ground. This makes work for car mechanics instead of car salesmen, but it also means fewer line workers in the factories.

We're in a "square root shaped" recovery. The plunge along the y-axis is steep and unrelenting. The recovery, however, is only partial. The conditions for massive discretionary spending, on which the "consumer economy" came to depend, are gone. The housing bubble, inflated with cheap foreign loans, was used to sustain spending with re-fi and lines of credit when the actual wages of Americans could no longer keep pace. The bubble burst. Now we're dependent on actual earnings, and those were never enough to sustain the old GDP.

The economics profession keeps treating this downturn as if it were simply another cyclical event instead of a paradigm shift. Just keep priming the pump, they say, and consumer confidence will return and spending will be back to normal. Where will people get the money? They borrowed it before, and they can't do that anymore. Facing the inevitable would allow a more intelligent response (the encouragement of more "basic" human activities, for example, such as more small-scale farming and less party-planning), but that would require a supple and responsive political system. That would require, in other words, something which doesn't exist here anymore.

No comments:

Post a Comment