The Global Accounting Scam

By Jonathan Rowe

The Gross Domestic Product, the fundamental basis for economic reckoning in this country, is destroying the environment and public health and calling it progress.

Several months ago a professor at the University of North Carolina published findings that turned beliefs about the economy upside down. Health improves, he said, as the economy goes down. When the economy declines, to a point at least, deaths, smoking, obesity, heavy drinking, heart disease and some kinds of back problems all decline as well.

"Sounds unlikely," said the New York Times. And indeed it is, by the standard reckonings at least. We all know that an expanding economy makes us better off -- or do we? Another study, this one in England, found that shopping, which is the drive train of the entire economy, and which is supposed to make people feel good, actually can make them depressed. "For significant numbers, dissatisfaction is now part of the shopping process," one of the authors said. (As though we needed a study to tell us that.)

What's going on here? How could we feel better when the experts say we should feel worse, and worse when they say we should feel better? Could it be that economists don't know up from down to begin with?

This is the nation's hidden accounting scandal, the one that neither government nor media will touch. It concerns the accounting for the entire economy, the way the government purports to determine whether things are getting better or worse. This accounting is called the Gross Domestic Product or GDP. It is central to the big policy debate in Washington, and is the template for the policies the United States projects upon the world. The media regard it with a reverence bordering on awe. The Wall Street Journal recently called the GDP the "world's most reliable economic indicator."

Yet like the books of Enron, Tyco et. al., the federal economic accounting is a sham. It portrays regress as progress and misery as economic advance. If you ever have wondered how you could feel so harried, stressed, maxed out and under siege, even when the government says the economy is doing well, the answer is here. If the president really is looking for chief executives who "cook the books," he might well take a look at the economic books over which he himself presides. They truly are a mess.

Adding It Up - and Adding, and Adding...

Imagine an accountant who can add but can't subtract, and who is so nearsighted he can't see past his nose. That is the mentality behind the GDP. The GDP simply adds up the money Americans spend and calls the result growth and good, regardless of where the money went and why.

By this reckoning, the more medical bills you incur, the more junk food your kids yammer for, the more you sit in traffic and the more your credit card company rips you off with hidden charges, the better the economy is doing and the more the politicians can brag about the nation's "growth."

At the same time the accounting ignores the implications of expenditures that on their face might suggest advance. Perhaps your neighbor loves her SUV. Perhaps she regards it as a step upward in her life. Still, when she drives the thing, she pours gunk into the air and adds to pressures to put oil derricks near coastal beaches. She takes up more space on the road, adding to traffic and causing everyone to burn more gas. Honest accounting would show such costs. The GDP ignores them.

Worse, the federal accounting actually shows such costs as economic gains. All the gas, the fender-benders, the medical bills arising from exposure to bad air get added to the GDP as evidence of the nation's growth. Americans spend over $5 billion on gas they burn while stuck in traffic, going nowhere. That's $5 billion more for the GDP. Cook the planet, cook the books and call the result "growth."

It's this kind of screwy accounting that enables the president to claim that action to address global warming would be bad for "the economy." Define regress as progress, and steps to take us forward look as though they would set us back. What's more, while counting bads as goods, the GDP totally ignores the genuine goods that don't cost money. The air we breathe, the care that parents and grandparents give their children, the games children play with one another, the quiet of the night -- these are invisible in the national accounts.

Only when the economy destroys them and forces us to buy substitutes do the federal accountants spring to life. Day care counts but mom-and-dad care doesn't. Driving a car counts but walking does not. The reason is not that government numbers-people are incompetent or ethically challenged. Actually they are top-notch. The problem is the antiquated system they are forced to use. It is so out of touch with reality it would be comic -- if the consequences weren't so grim.

Thriving on Absurdity

The absurdities of all this have not gone entirely unnoticed. Economists and the media reflect upon them from time to time in a feet-on-the-desk kind of way. But they continue to use the GDP anyway. Observe the news the next time the Commerce Department releases the quarterly GDP numbers. Does a single reporter or economist say, "Wait a minute. Does this accounting really say what people think it says?"
Not likely. And more, they never acknowledge how deep the phony accounting runs. They might remark on occasion upon the unfortunate side effects of consumption, what economists call "externalities," e.g. the way the SUV gunks up the air. But the consumption itself is always positive, another step up the Mountain of More. "A nation is by definition thriving if its major indices [e.g. the GDP] say people are making more things and spending more money on them," a writer in the New York Times opined not long ago. By definition, which means there's no need to observe actual experience and see if it is true.

Yet reporters are supposed to be observers, not theologians, and these talents are desperately needed with regard to the hoary postulates of economic thought. The problem today goes far deeper than externalities. Increasingly the problem is internalities, the supposed cornucopia itself. Is it really thriving when kids nag their parents for junk food, or when credit card companies rip off their customers with billions in hidden charges? Is it thriving when teen magazines induce a pathological body-consciousness in young girls, to the benefit of the cosmetic and plastic surgery industries?

According to a recent test, six of seven brands of SUVs are designed to incur major damage -- upwards of $1400 or more -- from a crash at just 5 miles per hour. That's GDP. But is it really "thriving"? When one actually looks at the economy, instead of thinking abstractly like an economist, one sees less a happy jaunt up the mountain than a slog through a swamp of the economy's own creating.

Integers of Acquisition

But let's face it. The problem is not just the economy. It's also ourselves.

In the belief system called economics, we all are shrewd little integers of acquisition, who go through life with an unfailing calculus of benefit and gain. Since we all are "rational," as economists use that term, the sum total of our buying must be the nation's prosperity and good. That's the belief embedded in the national accounting -- more buying equals more happiness and good.

Leave aside, for the moment, the buying the economy thrusts upon us. Leave aside too whether it is really so "rational" to be obsessed with shopping to begin with. If we simply observe the life around us, what we see is -- surprise -- a lot of bad choices. We see in fact a nation of people who seem in constant lament over the bad choices they have made.

The book stores are full of titles for such people. Support groups proliferate for those who can't stop eating, drinking, smoking, falling for the wrong people, spending money they don't have. The pharmaceutical industry is marketing drugs for people who can't stop shopping. (Some four million Americans are already addicted to prescription drugs.) Counselors are counseling them.

Yet somehow, when the accountants put all of these bad decisions together, the result is supposed to be prosperity and growth, by definition. And when people start to get control of their lives -- when they toss the gin down the toilet, put the credit cards in the freezer and timers on their telephones -- we hear dire warnings of a drop in "consumer confidence" and a "sluggish" GDP.

Rejecting the Hype

It does get a little weird. Yet politically it makes perfect sense. A McDonald's, an Exxon or a General Motors finds great comfort in the GDP. An accounting system that turns obesity and pollution into economic advance turns the perpetrators of these into the heroes of the script. Politicians like the accounting too. It enables them to say that in helping their campaign contributors they are actually helping humankind. Oil drilling in wilderness areas is not a plum for the oil industry, they say. Rather, it's a boost for the GDP.

For the media, meanwhile, the GDP provides a way to turn a complex story into a simple number, one that comes weighted with the combined authority of the federal government and economic expertise. It enables reporters to pontificate on the economies of entire countries without the need to leave their desks. That the GDP aligns economic reporting with the interests of advertisers doesn't hurt either.

These mental grooves are deep, and they are set in concrete. They are not likely to change any time soon. That does not mean we have to follow along, however. The first step to change is to withdraw our consent. The next time we hear Dan Rather, or Tom Lehrer, or the solemn voices on NPR intone about the GDP and "growth," we can just chuckle at how out of it they are. As the corporate corruption exposés have shown to the nation's great pain, phony accounting can't cover up reality forever.

Jonathan Rowe is director of the Tomales Bay Institute and a contributing editor of The Washington Monthly magazine. An even better article about the GDP scam can be found in the June 2008 issue of Harper's Magazine.