Hi,
This week, Morgan Housel made me think about the history of American consumerism and I wrote about whether GDP is still relevant today given its drawbacks,
Let’s get started.
Insights on the U.S. Economy post World War II
Morgan Housel explains some quirks about American consumers. The entire article is fascinating, here is what stood out to me,
Post World War II, the American Federal Reserve made credit more accessible to all.
Progress in the form of credit cards, store credit, and personal loans was possible. With access to low interest rate loans, Americans could borrow more easily, raising their standard of living.This credit and consumption driven growth, increased the flow of money, leading to an economic boom.
Rich and poor alike benefited from this increased access to credit as well as equitable increases in income. This resulted in all classes being able to enjoy a similar lifestyle.
The rich man smokes the same sort of cigarettes as the poor man, shaves with the same sort of razor, uses the same sort of telephone, vacuum cleaner, radio, and TV set, has the same sort of lighting and heating equipment in his house, and so on indefinitely.
This notion of being comfortable with debt and having a lifestyle which might not be supported by their incomes is a mentality which the post World War II baby boomers seem to have passed on to the current generation.
However, circumstances are different now and is it still sustainable?
Read it here→ How This All Happened
Does GDP have a place in the 21st Century?
The creation of Gross Domestic Product (GDP) has been proclaimed as
"One of the greatest inventions of the 20th century,"
"The Manhattan Project of economics,"
But does this metric have a place in the 21st century?
The need for measuring the economy has been around for a while.
In 1665, William Petty a British official wanted to find out if the State had the resources to fight a war & what income/assets citizens held
He wondered, could taxes be raised to finance the war?
The conclusion was that taxes could be raised by £4 mn should the need arise.
Fast forward to the Great Depression of the 1930s,
America’s national income halved between 1929 and 1932,
Till then, the government’s role was primarily as a bystander, to let free markets reign
But now something needed to be done
President Roosevelt planned to revive the economy via government spending
A metric was needed to calculate the effect of government policies on the economy,
To answer-how fast can the recovery be? By how much will output/wage levels increase?
In 1934, economist Simon Kuznets created GDP.
The confluence of Keynesian economic thought-promoting spending & rebuilding post World War II, led to a wider acceptance of GDP across the globe
It validated government spending and allowed them to measure post war growth
But what does GDP measure?
@HowToSpeakMoney explains
GDP measures the movement of money through & around the economy;
If economic activity keeps growing, GDP or the size of the economy keeps growing,
& everyone lives happily ever after, or so the economists like to believe
GDP abstracts complicated information to answer
🔸 Prosperity of an economy over time
🔸 The standing of U.S economy v/s China
🔸 Should the IMF give Ghana more aid?
🔸 Does Pakistan have enough assets to repay its loans?
But there are problems with the way it is measured
1)The more the government spends, the higher GDP is
Everything from creating bombs to biscuits is counted
It calculates only the flow of income, expenditure, production
Wipe out a portion of the assets & the activity of repairing & replacing will ⬆️ GDP
2) There are incentives to game the measure, as it is the one measure which decides,
How much did the economy grow, whether the ruling party will win again, whether the country should receive aid,
By changing the methodology of how it’s calculated, the system can be gamed.
For example -
To borrow more easily, Greece added in estimates for activities such as gambling and drugs, activities which are traditionally hidden from tax authorities
This made the GDP base broader,
Making the deficit to GDP ratio look more attractive to lenders
For millions of Greeks however —would they have jobs? Would they need to join the lines at soup kitchens?
These questions were left unanswered
Other countries have also altered ways in which their GDP is measured
Ghana in 2010 boosted its GDP overnight by 60%
Italy in 2014, added estimates for drugs & prostitution in their GDP numbers
India in 2015 generated controversy over its GDP reporting
GDP is distilled from a vast patchwork of information following a complicated set of rules,
Leaving room for interpretation & abuse
It would count a musician as more productive if she increased the number of performances by giving Mozart concertos at double speed
Plus being a wartime metric, the focus is on Output of goods/economic activity
Aspects like housework, innovation, life expectancy, literacy get ignored
It does not reflect- wealth equality, whether the growth is sustainable in the long run or the effect on the environment
GDP does not account for the negative effect of pollution or the depletion of natural assets,
As it does not measure the welfare of the people
An increase in GDP per capita does not translate into increased happiness, they are linked, just not proportionately over time
GDP was used as a shield by the govt of India when they justified demonetisation
The problem was the effect of the disastrous policy on people working blue collar jobs could not be measured
They are a part of the informal economy, hidden away from official data.
Incomplete numbers harm people as they can't raise their voices for change
How well the economy is doing is a part of everyday politics, & we need a better measure of that.
GDP is designed for the 20th century economy of physical production, not for today’s economy
“GDP measures everything,” as Senator Robert Kennedy famously said, “except that which makes life worthwhile."
Economists say a dashboard which would include metrics for health, sustainability, happiness etc would reflect a more accurate picture of progress
For now, GDP is a very narrow measure- It measures market activity and no more.
Eventually we need something better.
If you enjoyed this insight, go show it some love on Twitter
Currently Pondering
I was genuinely surprised to know that only 38% of households in India own refrigerators. Something which seems so basic and necessary to me is beyond the reach of so many. Reminded me of the privilege I have.
The internet is full of distractions. This thread by @Dickiebush has left me thinking deeper about how I can overcome them to write and think better.
I hope you enjoyed this edition of Filtered Kapi. Do let me know if something struck a chord with you.
Filtered Kapi #32 Someone sent you this?