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The Poison Beer of GDP

 

By Herman Daly, CASSE Economist Emeritus – October 3, 2018

Disaggregating reported GDP growth to reveal the differences in growth by income class, as per the Schumer-Heinrich Bill, is a good idea. After all, telling us, say, that average income grew by 4% is not nearly as informative as telling us that the richest ten percent received the entire growth increment while the bottom ten percent suffered a decline in income. Average income and growth rates are like the famous recipe for “50% rabbit stew”—one rabbit, one horse. We already know the extreme inequality in the distribution of wealth, of income, and of the growth increment, even without the Schumer-Heinrich Bill. However, if that information is incorporated every time new GDP figures are reported it will be much harder to ignore. Of course, that is exactly why the bill will be opposed by those who want us to believe that we are all getting 4% better off every year or that “a rising tide lifts all boats”, when in fact a rising tide in one place means an ebbing tide somewhere else.

Once we correct GDP for ignoring distribution, then perhaps we can go on to correct other defects, such as the fact that it adds defensive expenditures made to protect ourselves from the unwanted costs of growth (pollution, depletion, congestion, crime, etc.) while failing to subtract as a cost the damages that made the defensive expenditures necessary in the first place. For example, damages caused by an oil spill are not deducted, but expenditures to clean up the spill are added; depletion of soil fertility is not deducted, but expenditure on fertilizer is added, etc.

In addition, the very concept of income in economics is defined as the maximum amount that a community can consume this year and still produce and consume the same amount again next year, and the years after. The income from a fishery is its sustainable catch; the income from a forest is its sustainable cut. Consuming more than that is capital consumption, not income. Yet, as far as GDP is concerned, we can cut the entire forest and catch every fish this year and count it all as income—there is no rule against counting consumption of natural capital as income in GDP accounting.

If our main goal is to increase GDP rapidly, then we will not want to slow it down for concern about equity of distribution, or by correcting the asymmetric accounting of defensive expenditures, or by correcting the fundamental economic error of counting capital drawdown as income.  Maximizing GDP growth will lead to less concern for distributional equity, more depletion and pollution, and more consumption of natural capital.

I am reminded of a story told by G. K. Chesterton. A pub was serving poison beer and customers were dying. Alert citizens petitioned the local magistrate to close down the offending establishment. The cautious magistrate said, “You have made a convincing case against the pub. But before we  can do something so drastic as closing it down, you must consider the question of what you propose to put in its place…”.  Contrary to the magistrate you don’t need to put anything in the pub’s place. Nor is it really necessary to put anything in the place of the poison beer of GDP. As it happens, however, there are in fact better things to put in its place, such as the Index of Sustainable Economic Welfare, National Welfare Index, and Genuine Progress Indicator.


Herman DalyHerman Daly is an emeritus professor at the University of Maryland School of Public Affairs and a member of the CASSE executive board. He is co-founder and associate editor of the journal Ecological Economics, and he was a senior economist with the World Bank from 1988 to 1994. His interests in economic development, population, resources and environment have resulted in more than 100 articles in professional journals and anthologies, as well as numerous books.


Storage Nation

by Rob Dietz

It’s beginning to look a lot like Christmas,
Everywhere you go.
Take a look in the storage hut,
Where doors roll open and shut,
And piles of pap and useless crap do grow.

It’s hard to know where to begin a rant about the materialistic mess that our culture has made of Christmastime in the United States. An easy target is the Thanksgiving midnight-madness sales at big-box retail stores. And there’s always those devious marketers who use nostalgia to turn December into a month of mass consumption. But there’s one industry that, more than any other, epitomizes materialism and our seemingly limitless propensity to consume: self storage.

Self-storage businesses are warehouses where people rent garages to hold their excess stuff. In the not-too-distant past, a small number of self-storage businesses catered to homes in transition (for example, when people were moving from one place to another). On the pop culture scene, if self storage made any appearance at all, it was in a macabre role. For instance, in the film The Silence of the Lambs, Clarice Starling searches a storage unit and finds a pickled head in a jar.

Oh how things have changed! Over the past few decades self-storage facilities have popped up faster than Starbucks outlets. The U.S. has over 2.2 billion square feet (78 square miles) of rentable space, more than 3 times the size of Manhattan Island.[1] One out of every 10 American households now leases a unit.[2]

What’s going on here? Two separate currents have come together to form a riptide that drags people under the sea of self storage. The first current is the credit-card-fueled shopping frenzy that has put many Americans in a position of owning too many possessions. The second current is the promotion of self storage as an investment opportunity for entrepreneurs. The first current is pretty well documented,[3] so let’s float along with the second current for a bit.

The place to get started is a bookstore or your local library. There you might be able to find How to Invest in Self-Storage by Scott Duffy and R. K. Kliebenstein (2005), Self-Storage Investments by Richard Stephens (2008), or Rent It Up! Four Steps to Unlocking the Profit Potential in Your Self-Storage Business by Tron Jordheim (2009). Of if you prefer fiction to how-to books, there’s even a novel titled Self Storage (2008) by Gayle Brandeis.

Here’s a quote from the opening of Rent It Up!:

But if you are trying to create as much profit as you can and build a sustainable business, as well as a real estate asset that will increase in value far faster than your competitors’, then you are in the right place and should keep on reading.”

Maybe a row of self-storage units could hold all the books about self storage.

It’s not that easy to define the word “sustainable,” but one wonders what meaning the author ascribes to this term when he refers to building a sustainable self-storage business.

One thing’s certain about sustainability: it doesn’t result from continuous exponential growth. The Self Storage Association (SSA), the trade organization and lobbying arm of the industry, reports that self storage is a $20 billion industry. It has been the “fastest growing segment of the commercial real estate industry over the last 30 years and has been considered by Wall Street analysts to be recession resistant based on its performance since the economic recession of September, 2008.”[4] What has made the industry recession-proof? One answer is that foreclosures encourage the newly homeless to move their stuff into temporary storage. In the age of uneconomic growth, when overall growth is making the U.S. poorer rather than richer, the self-storage industry appears to be an uneconomic leader.

Not everyone has the means to start a self-storage business, but would-be entrepreneurs have another way to get in the game. A cottage industry has developed around auctions from failures in self storage. When a tenant fails to make payments on a self-storage rental, the storage company can auction off the contents of the unit. Another trip to the bookstore or library can catch you up on this trend. These books explain how to exploit such a circumstance: How to Make Boxes of Cash with Self-Storage Auctions by Barbara Rogers (2007), Making Money with Storage Auctions by Edwards Busoni (2008), Mini Storage Auctions: Uncover the Cash Within by L. S. James (2010), and Making Money A-Z with Self Storage Unit Auctions by Glendon Cameron (2011).

It’s a surprise that no one has written How to Make Money Writing and Selling Books about Self-Storage Auctions!

Moving from the unreal to the surreal… self storage has rebounded from its lowly pop-culture status in The Silence of the Lambs. The cable channel A&E broadcasts a program called Storage Wars about people competing for profits in self-storage auctions. A&E’s website says that Storage Wars, “which follows teams of bidders looking to score it big in the high stakes world of storage auctions, ranks as A&E’s number one series of all time among adults 25-54. During its first season, the series averaged 2.8 million viewers per episode and peaked at 3.8 million.”[5]

In the spirit of regaining a positive attitude during this holiday season, I’d like to propose a New Year’s resolution for the nation. Let’s ditch our storage units. It should be a snap for the third-most-popular type of self-storage customers: people storing items they no longer need or want.[6] And for other customers, downsizing can be downright liberating. This Christmas season, the best gift of all is the gift of less cluttered lives.

[1] Self Storage Association Fact Sheet.

[2] Jon Mooallem, “The Self-Storage Self,” New York Times Magazine, September 2, 2009.

[3] For more details see sources such as the Center for a New American Dream and the Story of Stuff Project.

[4] See note 1.

[5] A&E.

[6] See note 2.

A Shift in the Burden of Proof

by Herman Daly

Preface for Sustainable Welfare In The Asia-Pacific: Studies Using the Genuine Progress Indicator, by Philip Lawn and Matthew Clarke, 2008

It is no small thing to shift the burden of proof. Yet that is what Lawn and Clarke, and their colleagues, have done in this remarkable study. The presumption in the “empty world” has been that growth in GDP is “economic” in the sense that it increases benefits faster than costs, as well as in the sense that this thing we call the economy is getting physically bigger. It was not previously considered necessary to distinguish the two meanings of “economic” growth. Lawn and Clarke have shown that in a large part of today’s “full world” growth in GDP often costs more than it is worth at the margin, and thus should be called “uneconomic” growth. (In this book’s language uneconomic growth occurs after a threshold at which the Genuine Progress Indicator (GPI) levels off or declines while GDP keeps on increasing). Advocates of GDP growth, who generally point to Asia as their best success story, heretofore were never asked to prove that such growth was in truth economic. Now, after the theoretical demonstration that uneconomic growth in the macroeconomy is quite possible, followed by the empirical demonstration that it is in fact often the case, the burden of proof in policy arguments must shift from the shoulders of growth critics to the shoulders of growth advocates. This is quite an accomplishment and needs to be strongly claimed and emphasized.

For many years I have worked with ideas that are used in this book — steady state economy, Index of Sustainable Economic Welfare, contradictions between comparative advantage and international capital mobility, and others. It is a pleasure to see these ideas not only applied, but sharpened and polished as well. Although I have very little knowledge of Asia, I cannot resist recounting one relevant episode out of my limited experience. Around 1992 I was part of a World Bank mission to Thailand. This was at the end of a decade in which Thailand’s GDP had doubled. Now doubling is a big change, and ten years was within the easy memory of most adult Thais. In conversations I began to ask people how much their lives had been improved over that decade. Many said that life had been better ten years ago. I suggested that maybe life always feels better when you are ten years younger. They assured me that they had corrected for that! Some thought things were a little better, but the suggestion that life might be twice as good was considered laughable by all. This experience led me to suggest to my bosses at the World Bank that we finance a study — a scientific survey asking people how much life had improved over the decade in which GDP doubled, and to give the main reasons for their answer. History had given us a unique experiment, and we should take advantage of it and learn something. My proposal was turned down, I think because the World Bank, the prime pusher of growth, was worried that it might learn an “inconvenient truth.” In 1992 the burden of proof was on me. Now, with Lawn and Clarke to appeal to I think the burden of proof will be on the World Bank.

The study I had proposed to the World Bank was to look at what is now called “self-evaluated happiness,” whereas Lawn and Clarke look at a more objective index of welfare, the GPI. Studies of self-evaluated happiness have now come into fashion, and generally support the same conclusions that Lawn and Clarke reach on the basis of more objective data. The finding is that self-evaluated happiness rises with absolute income up to a threshold beyond which increases in absolute income do not increase happiness. The emphasis in these studies is on psychological phenomena of satiation and relative position with its self-canceling effects, rather than biophysical phenomena of rising external costs imposed by a full world. The two approaches are not in conflict but in fact are quite complementary. The fact that they yield broadly similar conclusions regarding the futility of growth to increase welfare beyond a threshold is a devastatingly important point worthy of intense study and reflection. But beware; we may have to conclude that growth is becoming uneconomic and that we need a new principle and new policies by which to organize our separate national commonwealths and their international federation. That is a very big problem. Thanks to Lawn and Clarke for suggesting many specific policies rooted in a clear analysis of that very big problem.