It’s true that there are some signs of “stabilization.” The unemployment rate is not getting badder as fast as it was a few months ago. And house prices seem to have stopped falling – for the moment.

It’s also true that the economy managed to register positive ‘growth’ in the last quarter… mostly thanks to government spending and inventory restocking.

The trouble is, all of these things are consistent with a depression — especially a depression that the feds are fighting every inch of the way. In the 1930s, there were several years of growth… and there were great years for the stock market too. Then, things fell apart again. The nation ended the ‘30s not one penny richer than it had been when it began them.

And Japan has seen some good years and some bad years, too, since its depression began in 1990. Oddly, Japan’s population is falling… so in per capita terms, Japan’s downturn hasn’t really been so bad. Per person, the Japanese got richer over the last 10 years.

It’s also true that we use the term ‘depression’ a bit differently than most economists. Most economists believe GDP growth represents increasing prosperity. They think a depression is merely a recession, with negative GDP growth, that lasts longer and goes more deeply than normal.

Our definitions are better:

A recession is a pause during a period of growth. A depression marks the end of the period of growth… giving the economy a chance to make adjustments so that a new period of growth may begin.

GDP growth alone is a fraud. The gross number just doesn’t tell you anything worth knowing. It doesn’t really matter how fast an economy is growing. What counts is how fast it is growing per person… and whether that ‘growth’ is real or phony.

Growth is not the same as prosperity…

Someday, we promise you, modern economists will be ranked below doctors who bled their patients to death and jungle tribes who threw maidens into volcanoes. They are quacks.

These imposter economists think they can fix a recession and prevent a depression. When the private sector stops spending they urge the public sector to step in and replace the missing private spending. That, in a nutshell, is Keynes’ theory.

A nutshell is the appropriate container. Because there’s a world of difference between private spending and government spending. Private spending is voluntary; people choose to spend their money on things they really want. When the government spends, on the other hand, it is merely squandering stolen property. It may look like private spending. But it’s not at all the same thing. You can hand out checks to people; it’s not the same as when people earn money. You can build bridges and airports too… but they are only valuable to the extent that they are used efficiently. And you can hire all the government employees you want; they don’t necessarily add to the sum of human happiness or wealth (most likely they subtract from it!).

Just look at societies that put everyone to work. There was no unemployment in Cambodia under the Khmer Rouge! Or in the Soviet Union. North Korea is another good example today. They all show that putting people to work for the government doesn’t make them rich… it makes them poor.

Yet, these modern economists — Martin Wolf at The Financial Times, Paul Krugman at The New York Times, Bernanke, Summers and Geithner in Washington — believe that they can control and cure a depression. All they have to do is to keep the GDP expanding… and keep unemployment from rising. How? Just spend money!

The GDP calculators can’t tell a phony expense from a real one. Whether the government spends money to do something that is not worth doing… or hire someone who is not worth hiring… or just gives away money to someone who is not worth giving money to… the GDP quants don’t know the difference. They think one dollar spent is as good as any other…

… Even if it is a dollar that didn’t exist! (Don’t get us started on that one… )

And who knows if a job is worth doing? Only the person who pays for it. That’s the trouble with government employment; the people who pay the bills don’t make the hiring decisions.

Modern economists don’t even bother to think about it. All they care about is the unemployment rate… not about whether the job is actually useful or efficient. Want to boost the job rate? Easy. Just hire people. Does this make people better off? Of course not.

The Financial Times had a full page in its Wednesday edition devoted to China’s empty towns. Bloomberg has been on the story too.

It is the story of what actually happens when government meddles in an economy.

Last year, China ordered its banks to lend money to infrastructure programs in order to offset the worldwide financial meltdown. The banks responded, doubling their lending.

Observers in the West were stunned… and envious. If only we could ‘get things done’ like that, they lamented. If only our governments had more authority and control over the economy!

But let us go back a year and put ourselves in the shoes of the bankers. They must have had loan requests. Some of them they must have judged worthy of funding, others not. But how was it possible that the number of project deemed creditworthy doubled in the space of a few months?

Well, it didn’t happen. Instead, the Chinese government merely changed the rules of the game. The banks, under pressure to loan out money, reacted by lending it out… to marginal projects. Now, we’re beginning to read about them in the paper — mostly towns without any people. Just wait until China blows up. Then, we’ll read about banks without money. Stores without customers. And businesses without a prayer.

Regards,
Bill Bonner
The Daily Reckoning

February 24, 2010

Quack Economists and the Fraud of GDP was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

The GDP includes, to generalize, everything produced and consumed within a country or exported to other countries. In this “everything in one pot” view, everything counts, regardless of its causes or its effects on society. You contract an illness and buy medical care, you’re in a wreck and pay for car repairs, you buy cigarettes or alcohol based on an addiction, factories are rebuilt after a war, shells and fighter planes are built to destroy those factories, a lumber company cuts down a forest down to the last tree, the government spends billions on a new boondoggle, a corporation charges you monopoly prices, there’s a gas discount and everyone’s filling up. Even though all these things are symptomatic of social problems, they are counted as part of “the economy.” The genocide in Iraq is a boon to “the economy” (although, in the long term, war spending has a persistent negative effect on GDP and employment, either through inflation, higher interest rates, or increased taxes). Mindless consumption is a boon to “the economy.”

“The money in the big pot could be going to cancer treatments or casinos, violent video games or usurious credit-card rates. It could go towards the $9 billion or so that Americans spend on gas they burn while they sit in traffic, or the billion plus that goes to such drugs as Ritalin and Prozac that schools are stuffing into kids to keep them quiet in class. The money could be the $20 billion or so that Americans spend on divorce lawyers each year, or the $41 billion on pets, or the $5 billion on identity theft, or the billions more spent to repair property damage caused by environmental pollution. The money in the pot could betoken social and environmental breakdown- misery and distress of all kinds. It makes no difference. You don’t ask. All you want to know is the total amount, which is the GDP. So long as it is growing then everything is fine.”

– Jonathan Rowe, co-director of West Marin Commons

One might reply that this is a misguided criticism, since the GDP is precisely meant as a “kitchen sink” metric for all production. But the GDP is also often criticized for omitting to count many vast areas of trade, including housekeeping, production for self-consumption, black markets and underground economies (which in some societies are bigger than the white market), crime, and barter. The only logical conclusion is that the subject most conducive to growth is a person who is perpetually just sick enough to need medical care but not enough to stop working, morbidly obese from constant eating, always drives everywhere, hires maids instead of cleaning his own house, and does not interact with anyone but Wal-Mart workers.

Retail sales is another metric that gets trotted out in the mainstream media, especially around Christmas. The assumption here is that the more money people spend during the year, the better off “the economy” is. But this is counter-intuitive, as spending can be motivated by all sorts of reasons, including inflation, short-term biases, and outright fraud. People are tricked into buying goods by marketing campaigns and a panoply of retail tricks and lies. Retail sales do not take into account the quality of products or what they may do to our quality of life, and under that point I could repeat a lot of the things I said above. They also do not include the consequences of depending on big retail corporations for our livelihood, or the consequences of globalization on the third world.

Saving money is actually a very positive thing for the well-being of the individual, and yet increased savings (as we are seeing right now) wreak havoc on “the economy.” Unfortunately, people generally under-save and get in debt too easily for their own good, partially due to human psychology and partially due to the centralized banking system which causes scarcity of credit.

Measuring employment suffers from the same general flaws, as it does not take into account the nature of the jobs in question: not only the quality of the work environment, the wage, or the work structure (especially how hierarchical it is), but also what the work itself entails. It’s easy to see what a CEO, a commodities trader or a monopoly banker contribute to the corporatist system, but very difficult to see their contribution to the well-being of society. Even though they are “employed,” it’s hard to say that a soldier, a policeman or a bureaucrat, on the whole, contribute anything positive to society. Employment statistics, therefore, are at best very incomplete, and at worst completely misleading.

If these three metrics do not measure general well-being, or even how well the economy fulfills our needs, what do they measure? The GDP measures how much is produced and consumed. Retail sales measure how much is consumed, and how much surplus is generated. Employment measures how many people are participating to production. It is not the nature of production or consumption that is examined, but the concept of production and consumption themselves. The only possible conclusion we can arrive at, is that these metrics measure the health of the corporatist system, not well-being or the fulfillment of needs.

The underlying premise behind the use of these metrics is shared by all parties and ideologies on the mainstream political spectrum: growth is inherently good. Not all of these ideologies support the idea that growth should be completely unlimited and unchecked (Greenies, for instance, believe that growth should be tempered with environmental considerations), but they all judge growth as a primary objective. Not only that, but they believe that growth alone can solve socio-economic problems, the good old tried-and-true statist technique of “if we project enough force and throw enough money at a problem, it will eventually disappear.” If “the economy” keeps growing, goes the argument, then we’ll have more money to pump into health care, we’ll have more money to pump into education, we’ll have more money to pump into social programs, and everything will correct itself. A shining example of this insanity, Mosler’s Law, states that “there is no financial crisis so deep that a sufficiently large increase in public spending cannot deal with it.”

This is the same kind of argument that statists use when talking about government and corporatism, of the “we just need to put good people in charge” type. Putting better people or more money in a broken system won’t fix it. Solely producing more goods cannot change the balance of power in a society and cannot correct inefficiencies and immoralities caused by the very fabric of the economy that produces them. On the contrary, one can only expect it to make the problems worse, because it maintains the viability of the current capital-democratic system.

We must therefore question our belief in economic growth as a solution, as a necessity, as an inherent good, as a progressive factor. If it’s only useful to measure the cost of goods that are made and sold, then it has little relation to human life.

The real question is not “how much stuff is traded” but rather “how stuff is traded.” In the corporatist system, labour is traded under a highly hierarchical, authoritarian, central-planning oriented structure. The people at the top of this fictional legal structure reap the surplus, which they steal from their inferiors through the latter’s “voluntary” surrender of their freedom of labour, which concentrates wealth and therefore economic power. These imaginary structures then sell the produced goods, generally to individual customers who have very little economic power. They also generally get their raw materials from dispersed third-world entities, which have far less economic power than they do.

It should be easy, in fact it should be child’s play, for anyone to realize that such a system cannot serve anyone’s interests but those of the people at the top, and that its elite will necessarily try and succeed at subverting people’s desires for their own interests, in the same way that the elite in a democratic system always eventually succeeds at subverting moral values for its own power. Capital and guns have always been, throughout history, mutually dependent and mutually beneficial. Inequality of wealth or power cannot lead to anything but a loss of freedom in the long term, for the same reason that loss of freedom must lead to inequality of wealth or power in the long term.

Once again, I must emphasize that these are systemic features and do not depend on the bad intentions of any number of people. The vast majority of people have good intentions, and very few people (except very aberrated cases like serial killers) believe they are doing evil. We must therefore banish from our heads the image of the maniacal politician or executive rubbing his hands together, or tenting them à la Mr. Burns, saying “my eeee-vil plan is working perfectly.” The fact is that they are simply doing their jobs. That’s all that the system’s survival depends on, or the survival of any system whatsoever.

I already mentioned the concept of surplus. In the corporatist system, accumulating surplus is the goal of the vast majority of economic entities, and drives growth. In an economy where actual human needs, not hierarchies of wealth, direct action, the accumulation of surplus, and therefore growth, would no longer be priorities. We must see economic activity, not as an end in itself, but as the extension of how we see each other and what we consider to be proper ethics. Hierarchies betray a pessimistic, authoritarian and dogmatic view of human existence. Its consequences are to turn moral agents into tools of production and consumption (to spend beyond their means, to become trained consumers, and to produce more consumers). Efforts to counter this immorality must pass through counter-economic activities, personal de-growth based on our values, and a refusal to position our lives as part of a production/consumption framework.

Regards,
Francois Tremblay

February 11, 2009

Unlimited Economic Growth: What Is the Economy? was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

“The father lifts his face, and his serene eyes look straight at me.

“‘He died on Oct. 22, 1896.’

“Silence.

“‘No one lasts very long in this climate, sir.’”

— Journey Toward the Cradle of Mankind by Guido Gozzano

“WALKING IN THIS CLIMATE IS SUCH GENTLE AGONY,” wrote Gozzano to open his book on India.

Guido Gozzano (1883-1916), a distinguished Italian poet, visited India in 1912. He spent six weeks on the subcontinent and wrote letters about his travels. He made many observations about the heat. “Never have I been so glad not to be overweight in this climate,” he wrote. “India is truly infernal for anyone with a few extra pounds.”

Later, he went on to write about how the heat “creates mirages, dissolves in the air, makes it quiver and flutter on the horizon.”

Wonder what Gozzano would make of India today, where on most days you can’t even see the horizon. It’s still hot as hell and humid in Bombay, for example, where many travelers begin their tour of India. (I know the official name is Mumbai, but I found almost all the locals kept referring to the city as Bombay. Plus, the name Bombay conjures up all those familiar images of a long ago past).

Today, the soupy thick smog of pollution makes the air even worse. Visibility is incredibly poor most of the time. For days, I never saw the sun except blurred through a gray screen of smog. You could smell the pollution when you landed and when you stepped outside, and in some places — say, near a standing body of water — the air is so foul, even some locals cover their noses as they walk by.

It’s more than just an anecdote about India, or some irritant for travelers. It’s a serious health issue for the people living there. According to In Spite of the Gods , Edward Luce’s excellent book on India, air pollution causes about one-eighth of premature deaths in India. Hundreds of thousands of children die due to exposure to contaminated water.

China’s Problem, Too…

Of course, India is not alone in this. China, the other big rapidly industrializing nation on the stage, has big problems with pollution of all kinds, too. Air quality in China is awful. I spent some time in China in 2005, and I remember the stink when I opened my suitcase back home. It smelled like I had lived in a bar for three weeks.

Robyn Meredith, in her recent book on China and India, titled The Elephant and the Dragon , also comments on China’s poor air quality. She writes one section from the city of Chongqing, an industrial city of 30 million people. (For perspective, that’s about the number of people that live in the whole state of California.) “Sunlight barely reaches the ground, dimmed by thick, gray smog,” she writes. “Skyscrapers just three blocks away are mere outlines because of the air pollution.”

Meredith cites the World Health Organization (WHO), which says that 200 cities in China fail to meet WHO standards for airborne particulates that cause respiratory diseases. “All but two of the world’s 20 most polluted cities are in India or China.”

Writer James Kynge calls the environmental degradation a “concealed debt” — which people will pay for eventually. Already, 16 of the top 20 most polluted cities are in China. Kynge writes in China Shakes the World — another terrific book on China — “acid rain falls over 30% of [China's] territory.”

I think you get the idea… The rapid rise of China and India has come with a cost: Serious environmental damage, on many levels.

But the governments know about the problem. Things are starting to change. Delhi was the worst polluted city in the world in 2004, but the government has since taken steps to clean it up. Today, all buses run on natural gas, for example.

In China, too, officials are pushing companies to adopt greener methods. A recent story from the Wall Street Journal talked about some of China’s new tougher stance: “Worried that China’s boom is bringing with it supply gluts and high pollution, the government has spent the year trying to rein in the expansion of many industries.”

The WSJ goes on to give examples, including the cement industry. “In cement, for instance, officials are pushing companies to adopt newer and costlier production methods that are less polluting, which should help the meet new environmental goals.”

It’s not an isolated story. Another recent headline reads: “China Shifts Pollution Fight, New Rules Target Export Industry With Stiff Penalties.”

So let’s recap. There is clearly a big problem. We also have some action and policies mandating cleanup and imposing clean air standards. The whole issue is also starting to attract some serious money. Recently, the Wall Street Journal reported General Motors’ announcement that it would invest in green technologies in China, “as concerns about pollution and fossil fuels deepen in the world’s fastest-growing auto market.” GM will put $250 million into building a research facility in Shanghai.

As big of a problem as pollution is, I’m betting there are some fortunes out there for those who have good solutions.

And that’s where I’m turning my eye right now…

But There’s More…

It’s also not just an issue in these rapidly industrializing countries. Let’s look at the biggest economy of them all: The United States. You know it’s an election year. “Green” is in. The global warming issue — regardless of what you think of its merits — is a popular one with voters. So politicians need green credentials. That means pushing forward measures to reduce carbon emissions, for instance.

There has already been growing opposition to building new coal plants. Utilities have already shelved a number of these projects. Others are in the process of hashing out deals with state and federal regulators.

Coal provides about half of our electricity. And coal is a dirty fuel in the eyes of the greenies, who fret about the emission of carbon dioxides (so-called greenhouse gases) and other pollutants.

So basically, the utility industry is under siege. It can only do so much with alternative energy. The nation isn’t going to get the bulk of its electricity from wind, solar or nuclear power anytime soon. Coal is still king. And utilities must find a way to work with it.

Complying with clean air regulations will cost a bundle. The Environmental Protection Agency estimates that the power industry will spend $2.7-6.1 billion annually between 2010-2020 to comply with the clean air regulations. Those figures will probably prove conservative.

This is the overwhelming issue facing the power industry today: reducing its carbon emissions. This is a difficult issue to tackle and may take some time before real change occurs. Keep looking into this area of the world and you’ll notice that change will have to come before things get too far out of hand.

Regards,
Chris Mayer

December 19, 2007

India’s Biggest Problem was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.