By Hazel Henderson* – Ethical Markets
The simmering debate has now exploded about whether GDP the ubiquitous index, is a correct measure of overall progress, but still used by governments, financial markets, mass media, companies, and everyone else. Our Ethical Markets global ”Beyond GDP“ surveys with GlobeScan conducted since 2007, still find an average 72% favor expanding GDP to include statistics on health, education and environment. Thus, the people are still ahead of the economists and politicians in this debate.
Why is this debate catching fire now? Many new ways now measure society’s progress since 2000, with the United Nations Human Development Index (HDI) www.undp.org and the Quality of Life Indicators launched by the Calvert group of socially responsible mutual funds and this author. www.ethicalmarketsqualityoflife.com.
The answer also embraces growing recognition in all countries that global problems facing humanity may be exacerbated by reliance on GDP: pollution, dwindling freshwater, climate-driven floods, fires, superstorms, rising sea levels, as well as widening inequality, job losses, insecurity and wage stagnation. Meanwhile, stock markets soar, Main Street suffers and in 2020 the global coronavirus pandemic arrived. All these afflictions, affecting so many have raised fundamental questions even in democracies about fairness, equity and competence of governments and corporations dominating human affairs.
In the USA and European countries, the virus shook the ruling consensus in market economies, democratized by social rules, contracts, and secure safety-nets for public services, improving health education and environmental quality. In the 1980s and the Reagan-Thatcher “big bang” globalization of finance arrived with its privatization and economic textbook orthodoxy of GDP-measured progress: balancing government budgets, limiting public spending, deficits and austerity — all were seen as moral imperatives for our children’s wellbeing.
In 2020, the pandemic upended this ruling consensus. In the US Congress, Republican members and their economists shifted from their habitual calls for austerity, balanced budgets, cuts in public services, food stamps, as well as privatizing social security and the US Postal Service. Suddenly these Republicans voted with Democrats in both Houses for stimulus and over $4 trillion of new spending to replace the lost businesses, incomes, and jobs of the millions due to the pandemic and related economic lockdowns.
Meanwhile, the economic orthodoxy of textbooks fell behind in offering rationales for this 180-degree shift from austerity and deficit warnings to these new realities of multi-trillion-dollar stimulus packages. Suddenly deficits did not matter! Inflation fears were turned toward battling deflation as GDP kept sinking and unemployment fell to Depression levels. Suddenly the problem for the US economy driven by 70% consumption, was how to maintain purchasing power to prop up the GDP. This meant putting cash directly into purchasing power in consumers’ pockets. Even orthodox economist Milton Friedman since the 1960s advocated in financial crises and recessions for “helicopter money” and “negative income taxes”!
The situation in 2020 required giving new money to poor people and the middle class who needed to spend it into the economy. Policymakers knew that rich people would save any new money or send it to their tax havens, while companies would simply buy back their stock, all fueling asset bubbles on Wall Street.
Central banks were also caught with their paradigms down! Their monetary policies were still based on the old time religion of deficit and inflation worries, as well as the mysteries of the NAIRU (the non-accelerating inflation rate of unemployment) measured by the Phillips Curve. Yet, as I pointed out to “Building a Win Win World” (1996 eBook) even Prof. Phillips didn’t believe in the Phillips Curve! Central Banks were supposed to control these problems using these mysterious tools and by adjusting interest rates. Instead, the pandemic’s ravages of their economies could no longer be overcome by simply lowering interest rates — even to below zero. They too, like their respective government’s fiscal policymakers’ trillion-dollar stimulus programs, had to add to money-supplies by simply printing more in their successive rounds of “quantitative easing” (QE). Wall Street boomed, cheered, and became dependent on this easy money, and complained with stocks falling whenever the Fed tried to taper off its QE or increase interest rates back to traditional levels. Insiders and media analysts called this “taper tantrums “.
Missing was a new set of explanations proving new rationales for this 180 degree reversal of decades of economic textbook orthodoxy —— all hinged on controlling expenditures, inflation, debts, and the immorality of deficits.
So this long-simmering debate surfaced about the accuracy of GDP and all the other money-based macroeconomic statistics and mysterious formulas governing our economic lives: inflation and unemployment rates, the NAIRU, levels of debt as measured in debt-to-GDP ratios. Uncounted social and environmental costs that accounting protocols allowed companies and government agencies to “externalize“ from their balance-sheets and pass on to the public, were hiding the buildup of pollution and environmental threats to our future. Economic formulas were finally challenged by real world physical risks measured by scientific data.
Currently, the counterattacks are rising from the ranks of economic orthodoxy and the deficit hawks. Their familiar arguments of disastrous inflation and burdening our children with unrepayable debts challenged even deeper analysis: how is our money created and why is it distributed by our private banks? How is credit issued and allocated by whom and to whom? Across the US political spectrum, both the Tea Party right wingers and the Occupy Wall Street protesters displayed similar signs: “WHERE’S MY BAILOUT?”
Today, the public in most countries see their currencies being printed on TV shows! They learn of the trillions of the new fiscal and money stimulus, and now realize the truth: there is no shortage of money! Money is just one form of information, a metric (like inches, feet, centimeters, or hectares), tokens of our trust — whether in the physical form of paper notes, coins, or electronically in our credit cards or digital wallets. Money is seen at last, not as wealth, but merely an agreed way of tracking and scoring real wealth: human activities and ingenuity and the uses of nature’s ecological resources. Currencies rise and fall on global FOREX markets based on the extent to which they maintain users’ trust. Even accountants now measure six distinct kinds of “capital”: financial, intellectual, built factories, social, human, and natural forms of capital. (www.cimaglobal.com/vision).
A new school of economists has been quietly growing: the modern monetary theorists (MMT), many at the Levy Institute at Bard College in New York, www.levyinstitute.org. Stephanie Kelton, the former chief financial economist at the US Senate budget committee, explores these unprecedented circumstances and issues in her “The Deficit Myth”, (2019) which engages in a frontal attack on the beliefs about deficits still held by the old school economists. Of course deficits matter —– but so do the assets these expenditures create! These include public sector goods and services, infrastructure that undergirds our cities and private sectors: from the interstate highway system to the Hoover Dam (without which Los Angeles would still be a village).
All these public infrastructure projects, including “moonshots” like NASA’s space program which achieved the US landing on the moon, were created not by passing the hat around to taxpayers, but by Congress with its constitutional power of the purse in its budgets. These budget resolutions engender US government guarantees, bonds, and contracts which are let to private companies who win bids to construct these massive projects, necessary to undergird a major country and its 320 million people. Far from burdening our children, these public infrastructure investments, social goods, and services produced the new assets and widespread growth of our economies and societies until the 1980s.
As MMT economists point out, there are two kinds of money, that officially issued by sovereign governments, such as US dollars, British pounds, Japanese yen, and China’s yuan. The other kind is that same money obtained by users of this sovereign currency: companies, workers, investors, cities, states, and any country that does not issue its own currency or is borrowing in dollars, or other sovereign currencies they do not control. Thus government budgets are not at all like our familiar household budgets, to which traditional economists liken them. Sovereign governments do not run out of money, they issue it, as needed to allow their citizens, investors and companies and all other users to trade and do business with each other, beyond barter. States and cities can run out of money, because they cannot issue their own, and are forced to balance their budgets and limit their deficits.
As we know, deficits also create private assets: from those contracts won by infrastructure builders, weapons companies from the Department of Defense budgets, or by tax cuts, such as those in the USA in 2017, largely benefiting corporations. This deficit debate relates to GDP since it is a cash-flow statement without any asset budget account, as on a normal balance-sheet. So GDP accounts for all the public expenditures as “debt” while ignoring the value of the assets they created. Thus, all countries are judged by investors, bondholders, and other governments by their debt-to-GDP ratios. If GDP were to be corrected by including the missing asset account, these debt-to-GDP ratios would be cut by up to 50% — with a few keystrokes!
For example, in the 2003 “First International Conference on Implementing Indicators of Sustainability and Quality of Life ( ICONS ) in Brazil over 700 statisticians from many countries convened by the Chamber of Commerce of the state of Panama in Curitiba, shared all their statistics on wealth, education, environment, and poverty gaps (see my “Statisticians of the World Unite”, IPS, Oct 2003). All these corrections to GDP including adding the missing asset account were conveyed to media editors and the new Brazilian government. As a result, Brazil’s new finance minister (a medical doctor) persuaded the IMF to re-vamp its GDP statistics to account for Brazil’s infrastructure investments needed in this rapidly- urbanizing nation. One result was that Wall Street, which shunned Brazilian bonds based on debt-to-GDP ratios, suddenly fell in love with them after this corrected valuation!
This is but one example of how our post-pandemic evaluation of what is valuable, is leading to the explosive paradigm-shifting new debate brewing for decades as seen in our “Beyond GDP“ surveys. People understand the need to overhaul GDP before it steers societies even closer to precipices of unsustainability! In 2015, 193 country members of the UN ratified their Sustainable Development Goals (SDGs). Today, GDP is being eclipsed by widespread approval and adoption of the SDGs. GDP incentivizes bad behavior (the 7 Deadly Sins!) while the SDGs, ratified by grassroots input worldwide, rewards systemic cultural norms we learned and teach our children: The Golden Rule.
*Hazel Henderson, former cabinet-level science policy advisor to the US National Science Foundation, Office of Technology Assessment and the National Academy of Engineering, author of many books, is CEO of Ethical Markets Media Certified B. Corporation, publishers of the Green Transition Scoreboard© and the forthcoming textbook, “Mapping the Global Green Transition: 2009-2020“ and producer of the global TV series “Transforming Finance“. www.ethicalmarkets.com and www.hazel.henderson.com