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Monday, October 8, 2018

Strategic CSR - Economic wellbeing

The article in the url below presents an interesting take on how key economic indicators are created. In general, the author argues that new indicators arise following a major economic crisis, when the government realizes the current indicators did not allow it to predict the that the economy was in trouble and a crisis was imminent:
"The unemployment rate was invented in the 1870s in response to concerns about mass joblessness after the Panic of 1873. The government's measure of national output, now called G.D.P., began during the Great Depression."
As such, the author suggests that, ten years on from the most recent financial crisis, the level of frustration at the economy by the general public (a frustration that "has helped create a threat to Western liberal democracy that would have been hard to imagine a decade ago"), warrants the development of different indicators to the ones we currently have:
"Look around, and you can see the lingering effects of the financial crisis just about everywhere — everywhere, that is, except in the most commonly cited economic statistics. So who are you going to believe: those statistics, or your own eyes?"
The problem is not that the current indicators are flawed, but that they measure the wrong things in ways that cause us to have a distorted view of the current economic situation. This leads us to conclude that, on the surface, the economy looks strong when, in reality, we are just not looking in the right places:
"The main reason is inequality. A small, affluent segment of the population receives a large and growing share of the economy's bounty. It was true before Lehman Brothers collapsed on Sept. 15, 2008, and it has become even more so since. As a result, statistics that sound as if they describe the broad American economy — like G.D.P. and the Dow Jones industrial average — end up mostly describing the experiences of the affluent."
The best example of this is the health of the stock market. While it is undeniably stronger today than ten years ago, it is not clear that most people benefit from this health:
"The stock market, for example, has completely recovered from the financial crisis, and then some. Stocks are now worth almost 60 percent more than when the crisis began in 2007, according to an inflation-adjusted measure from Moody's Analytics. But wealthy households own the bulk of stocks. Most Americans are much more dependent on their houses. That's why the net worth of the median household is still about 20 percent lower than it was in early 2007. When television commentators drone on about the Dow, they're not talking about a good measure of most people's wealth."
The unemployment rate is another example of an indicator that used to measure the health of the economy, but does not do so nearly as effectively today:
"In recent decades, the number of idle working-age adults has surged. They are not working, not looking for work, not going to school and not taking care of children. Many of them would like to work, but they can't find a decent-paying job and have given up looking. They are not counted in the official unemployment rate."
The chart in the article highlighting the gap between the official unemployment rate and the percentage of men who have dropped out of the workforce demonstrates this issue particularly effectively, but also how it has become more of an issue over time:
In response, the author highlights an initiative to develop an alternative measure of GDP that focuses more on general wellbeing:
"And there is no reason that data reform needs to be limited to G.D.P. The Labor Department could change the monthly jobs report to give more attention to other unemployment numbers. It could also provide more data on wages, rather than only broad averages. The Federal Reserve, for its part, could publish quarterly estimates of household wealth by economic class. …  [Other potential] numbers include: the overall share of working-age adults who are actually working; pay at different points on the income distribution; and the same sort of distribution for net worth (which includes stock holdings, home values and other assets and debts)."
The point is not that we do not have alternatives, but that the political will is not there to develop and establish them as broadly accepted measures. This is no doubt partly due to the resources necessary to do so; it may also be because the story they would tell is much less politically palatable
Take care
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We're Measuring the Economy All Wrong
By David Leonhardt
September 16, 2018
The New York Times
Late Edition – Final