Problem #1: GDP Disregards Debt

Debt was once an individual and social vice. Individuals and organizations in heavy debt were considered to be inefficient and heading towards disaster.

However, the GDP system has turned this age old system of thrift being a saving and debt being a virtue on it’s head.

The modern day GDP system not only incentivizes debt but also crowns the most indebted nations as being role models for other nations.

An Indebted World!

One does not have to go too far to see the effects of this system. Governments all over the world, small or big, have one thing in common. They are all in debt! It doesn’t matter if it is the mighty federal government of the US or a municipality in a developing nation like India, they all owe more money than they earn.

In fact the governments of the most developed nations i.e. the US, Japan and the Euro zone have dangerous levels of debt. A lot of these nations are simply borrowing to pay off interest due on old debt. The situation is alarming to say the least! Yet when you see the GDP system’s list of the top performing nations, these very nations occupy the top spots on the list!

Debt Is Dangerous:

The above situation is as ironical as it is dangerous. True that the economies of countries like US would be far better off than the economy of a third world nation. Yet it is nowhere close to being strong or robust. In reality all countries, developed and developing have a serious debt crisis emerging. We have seen glimpses of this as minor trouble erupted in Euro zone and Japan. A simple analysis of the underlying facts explains that the worst is yet to come!

The reason why GDP systems calculation of debt is dangerous is because it builds a false sense of complacency. The GDP system is not explaining the gravity of the system. If economies like US and Japan collapse, then many small economies which are based on exporting goods to these countries will also collapse. A full-fledged crisis comparable to the Great Depression may be very near, yet the system provides no warnings!

Governments and Debt:

Debt on an individual level is dangerous. But at a government level, it simply becomes out of control. The reason is that as an individual if you borrow money, then you are the one that is supposed to pay it back. However, as a government, you can borrow the money on behalf of the people. By the time, the money has to be paid back and a crisis emerges, a very different set of people will be in charge.

As the eminent economist Milton Friedman puts it, “No one spends other people’s money like it is their own!” Hence a true barometer of the economy should account for this tendency and should place a heavy penalty for governments which decide to borrow money incessantly and excessively.

Government Debt and Social Inequality:

The GDP system’s tendency to encourage reckless borrowing not only leads to wastage of the government resources but it all leads to social inequality. The system and the blind pursuit of a higher GDP, creates a situation in which the rich get richer and the poor get poorer in the following ways:

• Corruption:

  Countries with the highest GDP today also have the highest government expenditures. This is not a co-incidence but rather a logical outcome of the GDP system. Governments want to ensure that they have control over the GDP and hence tax the general population and then spend the same money themselves. In this manner they can ensure that the expenditure and therefore the GDP always keep rising.

  The problem is that once the money is taxed, it is in the hands of the corrupt politicians, who then claim to use it for social purposes. However, across the world the money intended for the poor never reaches them in full. There is always some amount of leakage due to corruption. If there were no GDP system, the governments would not have a pretext to justify taxation and expenditure and thus corruption could have been avoided to a large extent.

• Inflation:

  Also, governments all over the world resort to monetization i.e. printing money when they face a shortage of funds. The money created benefits the people who have it first. This is because they get to use the money before the price levels in the economy rise.

  The GDP system once again creates pretexts for monetization and inflation. The corrupt politicians and their stooges are the first ones to get their hands on the newly created money. Hence they derive more from it in terms of purchasing power than the average citizen. By the time, the money reaches the average citizen, the prices have already risen.

So How Should We Measure The Economy?

The above factors hint towards an urgent and important need to overhaul the GDP system. The study of monetary history is absolutely clear. Right from the times of Roman empire, debt has been the prime cause behind the fall of nations. Hence an economic barometer cannot afford to ignore debt in its calculations!

A new metric is required to replace the GDP system. This new metric must not blindly focus on increasing production. It must also ensure that minimal debt is taken on reasonable terms. This new metric should warn governments and general people about the possibility of a debt crisis in the future.