Guest Post: Are We Setting The Wrong Economic Baseline for Recovery?

Yves here. Doug Smith, the author of On Value and Values: Thinking Differently About We In An Age Of Me, raised some interesting questions about how the debate about recovery is being framed. The most common approach is to look it in terms of GDP, and look at various indicators to see is progress towards resumption of GDP growth is being made. But how useful is looking primarily through a GDP framework? Various economists, more prominently, Joseph Stiglitz and Amartya Sen, have questioned the utility of GDP as a measure of collective welfare. Even discussions around our dubious “recovery” include some odd constructs (which are really defenses of the status quo), like a “job loss recovery.”

From Doug Smith:

When looking at the recent deterioration in economic indicators, I was reminded of a question raised at dinner several months ago: What is the actual bar or threshold for a ‘real recovery’?

Now, put aside for the moment the important question about ‘rates of change’. They are critical to determining recovery — indeed, the most basic indicator that is used. The conversation at dinner, however, was grounded in a different concept/question: Do we need to return to heights of, say, 2005 or 2006 to have a true recovery?

Think about it this way. Pick a year when the economy — at least according to those in power — was really humming. Ignore for the moment whether that was the financial sector or the ‘real’ economy. Just pick some year when it was all good. Conceptually, take that year and make it “100”.

Do we need to get back to “100” for there to be a real recovery?

This is worth asking because many would maintain that “100” was and is an unsustainable illusion. A sleight of hand. In part, again, this illusion was due in part to the financiailization of the economy — the increasing dependence of GDP et al on a house of cards (credit etc), asset inflation and all that.

The point here though is more forward looking in order to raise issues about the nature of the objectives being pursued. If “100” is not sustainable in any way, then isn’t setting an objective — explicitly or implicitly — to get back to “100” also an illusion? And, if so, isn’t that a destructive red herring that can only lead to poor choices? What if, say, “90” is the best possible sustainable level we might get back to for, again, say the next 5 to 10 years? If that’s so, then it means seeking “100” is seeking to be more than 10% beyond sustainable. Is that wise?

Instead, what if there is some “90” that is consistent with sounder foundations for the real economy, real growth and real futures — something that might be characterized by such things as (1) jobs with living/good wages; (2) reductions in sources of uncertainty such as illness, job loss and so forth; (3) a rise in ‘utility’ banking that’s focused on investments in growth tied to real business, real innovation and so forth; (4) a shrinking of the casino activities of the financial sector; (5) bringing heretofore externalities (e.g. environment) into full pricing; (5) a different balance of distribution in wealth and income …. and so on?

What if we should be seeking that “90” instead of the 2006 “100”?” We can always shoot to beat that benchmark, but a 90 that corresponds to what in an accounting sense is higher quality “earnings” seems like a sounder long term goal than trying to restore a smoke and mirrors 100.

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  1. Mogden

    This whole question is rather ridiculous. An economy made up of 300 million independently optimizing intelligent beings cannot be summarized by a number.

    Instead, I would focus on values. Are we a banana republic or do we have the rule of law? Do individuals have freedom and liberty, or are they the wards of the state? Is there a politician anywhere with any credibility?

    1. Tao Jonesing


      Let me answer you.

      We are a banana republic, and we do not live by the rule of law. That is what you get when you follow neoliberal (aka libertarian) dogma for thirty years. The goal of neoliberalism is a new feudal order, and by your choice of terms, you are a house serf.

      Freedom and liberty are wonderful buzzwords, but the neoliberal/libertarian triangulation of those words leads inexorably to serfdom. This is exactly what Hayek, Mises and Friedman intended.

      As to honest politicians, I think Dennis Kucinich (kinda loopy) and Bernie Sanders (self-identifying socialist) fit the bill. Ron Paul comes close, but he is the worst kind of liar (aka somebody who sells shackles while marketing liberty).

    2. F. Beard

      Bingo! We should aim for a principled economy and let the numbers fall where they may. Out current system is based on systematic theft of purchasing power by banks and the “credit worthy” from the poor and helpless, supposedly for their own good.

    3. Costard

      Banana republics have the greater public appeal. Any schmuck might be the next despot. Perhaps Doug Smith will have the chance to reinvent the economy in his image – or maybe it will be one of the other petty idealogues that make up the 300 million.

      We live in a time of unbridled power. At this meal liberty is the scraps left over. There are no values; there is only the state.

      1. Anonymous Jones

        Wow. If you think this is unbridled power, you are in for a *rude* awakening if things deteriorate. Read a history book. You don’t even have to go back half a century. Seriously, nutcases is the operative word of the week, isn’t it?

  2. MyLessThanPrimeBeef

    I am not sure if this is easy to calculte, but if you set this year to be 100, what value do you assign to the year 100,000 BC when we were all Neaderthals in terms of 1) sustianable living 2) social equality 3) qualiity family time 4) clean air/clean water 5) security about keeping one’s job ?

    1. attempter

      It’s a straw man the way this is usually represented as all or nothing in terms of material development.

      We know that hunter-gatherers (including biologically modern homo sapiens far advanced beyond Neanderthals) were physically healthier, and had far greater freedom and leisure, than most people under the reign of agriculture. It was agriculture that introduced social stratification, rooted societies where the stronger could claim “ownership” of land, and where non-laboring parasites first asserted their aggressive indolence.

      But like in so many other ways, here too we have the lessons of experience such that in theory we could maintain agriculture while divesting it of the socially malevolent features it first generated.

      We could still have as many of the material things as will be physically possible post-fossil fuels, while purging the crime and parasitism.

      An economic metric which included only productive work (and deducted all externalities and wealth destruction) and a productivity ratio which included time freed up for leisure (which is what all the impresarios of “technology” and “capitalism” originally promised us) could be a useful tool toward that goal.

      Would such a metric leave out the value of ideas? Not at all – if the ideas are valuable, they’ll manifest in a more humanistic production/leisure ratio, which is the only measure of an economy’s, indeed a civilization’s, true health and benevolence.

      Most of all, our ideas, our thinking for its own sake, are supposed to be part of the reason for living as human beings in the first place, not the tools and weapons of the economic process which itself was only ever supposed to be a tool toward life.

      That we’ve let the servant become the master, let it enslave us and destroy our very humanity, and all for the benefit of a handful of criminals, is the true metric of the evil of this pseudo-“civilization”.

    1. MyLessThanPrimeBeef

      Not a bad idea, but I think instead of ‘Gross,’ perhaps we should say ‘Excellent’ or something like that.

      Excellent National Happiness.

  3. doc holiday

    See: Wolf’s frustration bodes ill for investment flock

    The scale of this change can be seen in the inflation options market. Back in January 2008, British investors thought there was less than a 10 per cent chance that in six to seven years we would have either deflation or inflation of more than 5 per cent (measured on retail prices). That combined probability now stands at more than 30 per cent.

    In the less-developed US options market, the risk of consumer price deflation in three years is priced at 23.7 per cent, according to Royal Bank of Scotland calculations. Yet there is about an equal chance of inflation of 4 per cent, more than double the Fed’s unofficial target, suggesting investors are even more divided in the US than in the UK.

    ==> While I’m here; check something fast:

    1. In 1929, federal expenditures constituted only 3% of the GDP. The national debt as a proportion of GNP rose under Hoover from 20% to 40%. Roosevelt kept it at 40% until the war began, when it soared to 128%.

    ==> “The figures for the U.S. are staggering. Public debt includes not only the federal government’s current $13.2 trillion, but another $3 trillion owed by America’s states, counties, and cities. In addition, there is the $3.9 trillion in debt owed by America’s government-backed housing- finance agencies (Fannie Mae, Freddie Mac, and others), which currently underwrite more than 90 percent of all U.S. mortgages. As a result, America’s public debt has reached roughly 140 percent of GDP”

    2. Wiki: The United States public debt is in excess of $13 trillion and continues to grow at a rate of about $3.83 billion each day.[17] Total public and private debt was $50.2 trillion at the end of the first quarter of 2010, or 3.5 times GDP.[18] Domestic financial assets totaled $131 trillion and domestic financial liabilities totaled $106 trillion.

    The federal government’s debt rose by almost $1.4 trillion in 2009, and now stands at $12.1 trillion.[115] While the U.S. public debt is the world’s largest in absolute size, another measure is its size relative to the nation’s GDP. As of 2009 the debt was 83 percent of GDP. This debt, as a percent of GDP, is still less than the debt of Japan (192%) (the overwhelming number of owners of JGBs are Japanese)[116] and roughly equivalent to those of a few western European nations, including Greece.[117]

    …. I forget what the point was.. something about GDP and deflation … oh, I know, it was about the possibilty that GDP increased during the Great Depression .. maybe??? *

    * The author is lost in another world…

  4. Tao Jonesing

    As a fundamental matter, we can no longer accept a “jobless” recovery as a recovery. Ever since Saint Ronny and Sir Volcker, two men who ruined our economy and our future, we’ve accepted failure as success.

    In other words, success depends on full employment, not on an arbitrary year of a debt-fueled boom time (like 2005, which showed almost zero growth without the mortgage churn:

    1. Mickey Marzick in Akron, Ohio

      “Success depends on full employment…”

      Bingo! However reductionist/simplistic Tao’s comment may seem, it would signal a sea change in policy frought with ramifications for aggregate demand, consumption, housing, the deficit, you name it…

      INVOLUNTARY UNEMPLOYMENT is the most destructive/debilitating form of AUSTERITY imposed on an individual in a capitalist society where his/her labor power is the only commodity he/she has to procure the necessities – food, shelter, health, and education – of life. The commodification of labor enables those – the minority – who purchase labor to CONTROL those – the majority – who sell it. But that’s another issue…

      Full employment is the immediate goal we should all concentrate our efforts on.

    2. attempter

      We do indeed have the right to full employment.

      The only conceivable justification for allowing a handful of elites to enclose resources was the always-dubious contention that the “trickling down” from this elitist dispensation would be to the greater aggregate good. That’s the core of both supply-side conservatism and supply-side liberalism (as enshrined by the liberals’ definitive philosopher John Rawls and his “difference principle”).

      Today we know that was all a lie, and trickle down a fraud. The fact that this society has not achieved and sustained full improvement is the ultimate “market failure”. We know as an empirical fact that the elitist dispensation does not work and will never work.

      Therefore, since the elites failed to organize the work and thus unilaterally defaulted on the social contract, all property reverts to the people, and is waiting for us to pick it up. We can organize our own full employment whenever we choose to.

      1. Doug Terpstra

        Always illuminating, you have a way of turning one’s dim sense of an off-kilter worldwiew into an epiphany. In leading the sheep astray, the Scamway trickle-down apologists sold their souls to the moneychangers.

  5. Francois T

    “Instead, what if there is some “90″ that is consistent with sounder foundations for the real economy, real growth and real futures…”

    I’ll take that any day of the week instead of the broken crony capitalism system we have now.

    That said, I think many observers of the financial scene are missing a crucial point: the financial industry is very dependent on the legislative and political system to thrive. Right now, they’re thriving at the expense of the real economy, and the polity does not have the inclination, nor the kahunas, and even less the leadership needed to change this sorry state of affairs. This is not surprising, given the immense monetary benefits the politicians derive from this arrangement.

    Bottom Line: As long as the present political culture/system prevails, nothing will change. Sucks to no end, but that’s the way it is.

    Let’s keep in mind that the change may come too late to avoid much more pain down the road.

    1. Jimmy Z

      I agree in that the problems are cultural, political and social… though I suspect that Capitalism can no longer afford a Middle Class.

  6. Paul Tioxon

    What is the debt of the private sector? Business and individual debt. Isn’t it 5 times total public debt? Public debt for wars, private debt for home mortgages, car loans, credit card debt, helocs, college loans and business debt for what? Stock buy backs and bonuses? If the public debt is uncontrolled spending what is the fact that to own anything, you need to get a loan and try not to get downsized as you are paying off your personal debt. Could business be seeing quite clearly that there is no need to expand capacity and hire again, because not only is the government battling over austerity, debt reduction or more pump priming stimulus, but even if the government holds the line for another year or two, most people who still can, pay down debt and do not consume. Self imposed austerity out of real fear of not having the ability to do the debt service if fired, laid off or faced with wage concessions. There seems to be a double barreled shotgun of austerity escalating in the private and public sector at the same time.

    1. eric anderson

      If the public decides permanently to spend less, to embrace frugality, it is doubtful that Washington can effectively counter it. If Helicopter Ben drops cash on my neighborhood, I will save it. Most people already have too much “stuff.” It is starting to dawn on more people that their lives have not been enhanced by the excess size of their homes, autos, freezers, and closets.

      Also, how much of the pullback in borrowing, spending and small business hiring might be a “vote with your feet” (or in this case your wallet) political statement? “Starve the beast.” Self-imposed austerity due to hatred of what the Ruling Class is doing re expansion of government spending and regulation? Probably not a large percentage of the population, but enough to make a measurable difference.

      Welcome to the New Normal.

      1. Stan


        I share the hope for a new normal, for people to evaluate consumerism and I think that will happen to a small subset but not the many. There are just many more people who have internalized consumption as self worth who haven’t the ability to see that they are giving away their freedom for stuff. I fight it myself sometime.

        GDP has always been a poor measure. You can’t discuss the output of an economy without a measure of composition of growth and its distribution. Some would call this statement cynical but if you have a measure of composition or the quality of growth then people start asking inconvenient questions about why a certain percentage of output goes to what many would undoubtedly find to be a maladaptive end.

  7. Hugh

    I criticized the GDP metric in one of the recent guest posts. I like the list of proposed changes. I would just add along the lines of Tao Jonesing that the economy has been out of whack for at least 30 years. A lot of our problems come from the crazy redistribution of wealth to the top few percent. There can be no sustainable return to anything as long as you have the kind of wealth inequalities we have.

  8. Toby

    I think simple things like air quality, water quality and abundance, literacy, crime rate, soil fertility over time, the extent of the use of renewable energies, and any other factors I’ve forgotten which strongly contribute to the foundations of human (and by extension) planetary health, should be measured first, should have top priority. I remember some scale which measured people’s sense of how safe they feel in and outside their homes, that would be very important too, how supported by and supporting of their community they feel themselves to be.

    Generally we’ve demoted the above essentials by promoting monetary factors in the mistaken belief that money is a good measure of value, and that it stores value. Having consequently given finances our total cultural attention we are miles behind on those measures that actually matter, and falling increasingly into arrears. If we don’t change the way we assess our success, we are going to sicken the golden goose (our environment) to such an extent that no amount of money can possibly have any value, utility or otherwise, at all. The world is The World Bank.

  9. stefanie

    Not only the word ‘job loss recovery’ is odd, what about the term ‘negative growth’?! It’s either growth or it is not. The neoliberal, neo-classical propagandists use a language that is dangerously misleading. We should be aware that what kind of language is used, heavily influences our way of thinking. They know that very well.

  10. Tom Crowl

    Yes! GDP is antiquated and distorted as a measure of the health of a nation.

    Currencies have always been necessary but imperfect stores of social energy* (the actual foundational root of any social body)

    *social energy: a civilization or any social organism is quite literally is a product of countless Decisions (Decision = an Idea + an Action) by individuals and groups operating within limits of physical reality. We then can see culture as an expression of net social energy. But unlike the other forms of energy we’re familiar with social energy requires agreement on a whole collection of underlying values and assumptions to operate efficiently for the benefit of the organism as a whole.

    Unfortunately our financial and political leaders are not only making bad decisions… they are degrading the ability of US to make decisions as well.

    Our political parties don’t encourage the sort of independent thinking that ‘crowd-sourcing’ decision requires.

    I believe there are things that can be done… relatively simply and not dependent on the oligarchy for implementation. One of them is discussed here:

    Political Fundraising: Act Blue, Facebook and the Missing Network Imperative

    The resultant network, paradoxically via the medium of currency… begins to change the relationship between the individual and ‘social decision’.

    Credit Creation and the Building of Sustainable Economic Ecologies

    1. Toby

      Hi Tom,

      the ideas you present remind me of the work of Niklas Luhmann, who sees social systems as autpoietic; that is, alive. In his theory social systems are composed of communications, which in organisations take the form of decisions.

      As to money and economics—money being the binary coding medium of the functional system economics—money codes for have/have not, rich/poor, or rather can only see shortage and scarcity to be competed over, hence the snug fit of darwinian survival-of-the-fittest with finance, hence the meme that ‘free’ markets are ‘natural’ and good. Money actually creates scarcity where previously there was none, and therefore creates and exacerbates social stratification too. Can any currency ‘fairly’ distribute goods and services which are necessarily scarce? How societally detrimental is it to rely exclusively on money as a measure of value and arbiter of success?

      Leaving Luhmann to one side, if we see money as society’s blood or metabolising element, then recognise it fails in its current construct to flow in sufficient quantities to all society’s corners, perhaps a redesign would revitalise a sick society. To keep it flowing we would have to make hoarding it counter-productive. Enter Silvio Gessel’s demurrage currency, currency which devalues, which ‘suffers’ a negative interest. To make this work much else would have to change, and profoundly, perhaps including retirement structures as we have them now, and much else besides. However, whatever we do to money it needs to be demoted somehow, be restructured so that it cannot play such a central and dominant role. Looking at reality through its lens we miss far too much of essential value. The most obvious example is air, which has an economic value of zero.

  11. Doc at the Radar Station

    The metrics of arriving at “100” are important. If you want to exclude the lurid, credit-fueled caricature of the economy of recent times I would say “100” years for me would be 1972, 1977, 1986, even as late as 1996. Everything since has been air.

  12. rd

    Other than GDP, my primary other measures are income distribution and trade deficit.

    A broad income distribution with much less concentrated in the top 5% inherently implies decent jobs a relatively high employment. More importantly it also indicates that most people will be able to save while still spending money to spur the economy on.

    A much lower trade deficit would imply that we are buying less imported oil, thereby financing fewer terrorists and states that don’t like us as well as implying that we are making more of our own goods in the US. Ideally, most of the trade deficit we would have would be with other countries in the Americas implying a vibrant hemisphere.

    During 2008 and early 2009, I thought that the actions by Treasury and the Fed were necessary in order to stabilize the system and provide time to rethink the system structure, particularly reducing the casino aspect of the financial sector. It is clear to me now that Washington and Wall Street intend nothing of the sort, but instead mean to lock in current income inequality and get it while you can mentality on Wall Street. As a result, the short-term GDP measurements are becoming less and less meaningful due to the Ponzi nature of the financing of the GDP at this time. My focus on economic success is shifting much more to the employment reports, trade deficit numbers, and periodic info on income distribution. To my mind, these are much better indicators as to whether or not a permanent recovery is likely to be taking hold.

  13. Blurtman

    As is happening now in real time, you can have increasing GDP with increasing unemployment and decreasing standard of living.

  14. Thomas Williams


    Thanks for sharing this with us. The fixation economists have with growth is problematic, especially since it glosses over real issues such as overpopulation and environmental issues.

    An excellent book on this is “Limits To Growth” by Meadows, et al.

  15. john bougearel

    This article by Doug Smith ‘On Value and Values’ reminds me of an observation on the ‘presumed’ rationality of the consumer’ pointed out by Yves Smith in her book Econned.

    According to mainstream economic theory, Adam Smith’s Invisible Hand and free market ideology, we are hedonistic rational beings and as such we will always choose what is most optimal. The ideology suggests we are hard-wired that way.

    But Yves Smith shreds that concept by pointing to behavioral studies performed by behavioral economists. Quoting from Econned: “Nobel price winner Herbert Simon argued that people and companies do not maximize, as theorists hold, but instead ‘sacrifice’ that is they look for outcomes that are good enough rather than optimal.”

    To Doug Smith’s point, an economy that is humming along at optimality is also an economy that is humming along at an unsustainable rate. Long-term socio-economic outcomes would be better served if policy makers would shoot for an economy that operates at 80% or 90% of what is optimal.

    Running at 100%, or even above 100% of optimality (this happens when banksters exceed their social utility with excessive risk-taking behaviors and excessive leverage) only benefits those at the top, leaving everyone else to suffer the consequences when the merry-go-round stops. Then you have double-digit unemployment, jobless recoveries and all the attendant woes that go with the unsustainable boom-bust cycle.

    Running at or above optimality is a value engenders instability, something the same mainstream economic theory holds doesn’t exist in an economic system. Their economic models assumes equilibrium and stability, something that doesn’t exist in the real world and is amplified when the behavior corporate bad actors ‘rationally’ exploit outcomes that suit their own personal optimality.

    Policymakers need to set policies that constrains or straightjackets corporate bad behaviors of this nature.

  16. Siggy

    GDP is a mediocre measure of economic well being and sustainability. Growth itself is not always a desirable condition.

    What genuinely matters is your ability to afford food, shelter, clothing, education and entertainments. I admire the Amish in their observance of simplicity to a fault. Now the menonites have, in my view, a better outlook. Yes there shall be electricity etc. For all that, the lesson is that you make your comfort and happiness out of what you will.

    The problem with our current need for a recovery is about employment. The reestablishment of fair markets as opposed to some inane free markets canard. The problem at hand is enervated by a fiat currency, fractional reserve banking and regulators who do not regulate and financial service industry minions who know that no fraud worth doing will be prosecuted.

    It’s not rocket science and you really don’t need a special metric to generate a recovery. In fact, regardless of the the metric that might be employed, you have to deal with the fallacy of a fiat currency system and the unprosecuted fraud that has been and continues to be committed.

  17. constantnormal

    This strikes me as the “settle for less” approach to economic recovery, something akin to the “let them eat cake” sympathies toward the middle classes in pre-revolution France.

    One can turn this around and view it as “don’t let the top 1% relinquish more than 10% of their ill-gotten gains”.

    In an expanding national economy, we should be able to grow our way past the previous peaks. It may take a while, but if we can sell to the developing economies — which there seem to be plenty of — then we should have adequate markets to sell into. The Germans are certainly doing this.

    But if we have the “Green Acres for Billionaires” economy, where they bleed the middle class dry, and allow this economy to grind to a halt, then a vibrant and expanding national economy is out of the question.

    I have no stomach for the “settle for less” economy. Restructure and Reform are the only acceptable approaches.

  18. anon48

    “Do we need to get back to “100″ for there to be a real recovery?… Instead, what if there is some “90″ that is consistent with sounder foundations for the real economy, real growth and real futures…”

    The entire discussion presumes that economic health should be based solely upon output metrics (e.g. GDP, number of newly constructed homes per month, number of new cars sold per year, etc.). The logic of the argument is not complete, just as the author implies. Smart companies and healthy industries don’t operate this way. They try to anticipate customer demand and then structure themselves to meet the anticipated level of demand. To them, the plan for constructing a record number of homes within a given year turns out to be an abject failure if they wind up sitting on a huge number of unsold units at year end.

    Further, 25 or 30 years ago, I would have to see a physician to just to be able to interpret the symptoms I might be experiencing at a particular time. Today, with the wealth of resources available, I can interpret much more on my own (especially what I should eat and drink), so I don’t have to see a physician as often. Where does this economic benefit get captured using an output focused framework other than as a decrease?

    Zooming in upon a specific number- 100, 90, or whatever- as a measure of economic health completely misses the point. The flows of information, capital, materials, services, etc. around the world, make for measuring the economic health of a particular country extraordinarily difficult. There are so many tiers of assumptions necessary to be made along the way, that the end number becomes almost meaningless anyway. Trust me as someone who’s submitted US census data on behalf of small business over the years, there can be a tremendous amount of estimating that goes into the process at the micro level.

    If however, there is some truth to output numbers, then it seems we should be peering through the looking glass and also trying to see things from the other side.

    There should be a focus upon metrics that describe the current state of consumers. What is the best measure of consumer wealth, health and levels of satiation vis-a-vis various products and services as of a particular moment in time? If those types of metrics are available, then the key would be for relationship measures to be developed between current customer status measures and particular output measures. Viewing changes in the the relationship of output AND customer measures over time would be a much more meaningful way to measure economic health. In fact, not doing this economy-wide would be akin to trying to measure the economic health of a particular company by just looking at its historical profit and loss statement (output) and ignoring its balance sheet (current status), which experiences analysts know gives a rather incomplete picture.

  19. Hershel Wieman

    Great post as usual – here is a little something that made me smile :)
    Old aunts used to come up to me at weddings, poke me in the ribs and cackle, telling me, “You’re next.” They stopped after I started doing the same thing to them at funerals. :)

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