Enlightened Economics

Economics for an Enlightened Age

Posts Tagged ‘OECD’

• Stronger Environmental Policies Do Not Hurt Economic Growth

Posted by Ron Robins on January 16, 2015

“Studies of individual environmental laws, such as the Clean Air Act, have found that they have little impact on employment and productivity… Now, there is hard data showing that more, and more stringent environmental policies do not harm economic growth.

That’s the finding of researchers at the Organisation for Economic Co-operation and Development who have compiled the first comprehensive set of data on environmental strictness and its effect on productivity. The figures cover 24 OECD countries from 1990 to 2012, and draw on the ORBIS database of information on 44 million companies. The report’s conclusion contradicts what governments and companies often believe: that green regulations may be justified in the long run, but that they come with immediate, substantial economic costs. One interesting point: stricter environmental policies may encourage businesses to invest more in efficiencies and innovations than they would have otherwise.”
— John Howell for 3BL Media.

Commentary: Ron Robins
That such a respected economic body like the OECD finds that environmental laws do not hurt economic growth should be become a major plank in the platform of political parties everywhere. That way the idea can be embedded in public consciousness and spur governments and businesses to not be afraid of environmental regulations.

However, I believe a superior way to accomplish this goal would be based on market-based pricing mechanisms that allow for full product costing that includes societal health and environmental costs. I would propose a scaling up over time of the inclusion of such costs and that all trade agreements be amended to account for them. Presently, this is probably impractical, but from a free market perspective might be preferable to government imposed regulations and laws. Such a market-based mechanism might also be less expensive to administer. Just a hunch though…

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• US Healthcare Delivering a Heart Attack!

Posted by Ron Robins on February 16, 2011

By Ron Robins. First published February 10, 2011, in his weekly economics and finance column at alrroya.com

Medical spending could deliver a debilitating heart attack to the US economy, despite the recently passed healthcare legislation that hopes to significantly control costs. Depending on assumptions made, the unfunded US government medical liabilities range as high as $125 trillion, equivalent to about eight times America’s annual gross domestic product (GDP). These unfunded liabilities—money that might have to be borrowed—have the possibility of totally derailing the US economy.

In 2008, Richard Fisher, president and CEO of the Federal Reserve Bank of Dallas cited the US government’s unfunded Medicare program liabilities at $85.6trn over the infinite horizon. He said that including the unfunded liabilities of US Social Security the total rises to $99.2trn. Mr. Fisher further added that were they to be funded, it would require a lump sum payment of $1.3 million per family of four to the US federal treasury! Or alternately, an increase of 68 per cent in federal taxes for all individuals and corporations, for now and forever.

The unfunded liabilities figure of $125trn arose from a conversation I had recently with Boston University’s renowned Professor of Economics, Laurence Kotlikoff, who believes they could range that much also using an infinite horizon time frame.

Now really ‘low-ball’ medical unfunded liability estimates come from the 2010 Annual Report of the Boards of Trustees of the Federal Hospital Insurance Trust Fund and the Federal Supplementary Medical Insurance Trust Fund. They are the reports of the Medicare trustees of the US government. The 2010 estimates of US government medical unfunded liabilities have been shaved dramatically from their prior year reports.

And the Medicare trustees make the following remarks in that regard. They say that, “the Affordable Care Act [the recently passed healthcare legislation] improves the financial outlook for Medicare substantially. However, the effects of some of the new law’s provisions on Medicare are not known at this time, with the result that the projections are much more uncertain than normal, especially in the longer-range future… the actual future costs for Medicare are likely to exceed those shown by the current-law projections.” In other words, their low-ball estimates are based on such flimsy assumptions as to make them untenable.

And the record of government predictions and cost containment in regard to Medicare expenditures is anything but encouraging. As Gary Shilling, a US economist recently remarked, that in 1967 a special committee of the US Congress predicted by 1990 that Medicare would cost $12 billion. It actually cost $110bn. Quite likely the estimates of US government medical unfunded liabilities, by Richard Fisher and Professor Kotlikoff are nearer the reality, barring truly significant program cuts, changes and increases in taxes.

The US government’s Medicare program began in 1965. It primarily covers medical expenses for people over 65 years of age and for certain disabilities for people younger than 65. Medicare was envisaged as being able to pay its own way through payroll deductions, and for many years it did even more than that: it built up surpluses. However, in January 2011 the US Congressional Budget Office (CBO) showed that the cash flows of the Medicare trust funds had now grown significantly negative. Also, the CBO sees US government Medicare related costs jumping from an estimated “$870bn in 2011, or 5.8 per cent of GDP… to $1.8trn in 2021… and 7.4 per cent of GDP.”

Also, the US spends disproportionately higher on its healthcare than other developed countries, yet with frequently poorer outcomes. Mark Pearson, Head, Health Division, of the Organisation for Economic Co-operation and Development (OECD), made these written comments to the US Special Committee on Aging on September 30, 2009. He wrote that, “the United States spent 16 per cent of its national income (GDP) on health in 2007. This is by far the highest share in the OECD… Even France, Switzerland and Germany, the countries which, apart from the United States, spend the greatest proportion of national income on health, spent over 5 percentage points of GDP less: respectively 11.0 per cent, 10.8 per cent and 10.4 per cent of their GDP… For all its spending, the US has lower life expectancy than most OECD countries (78.1; average is 79.1).”

Further illustrating the enormity of the US healthcare spending problem, the US government’s Centers for Medicare and Medicaid Services (CMS) said that total US national health expenditure (NHE) “grew 4.0 per cent to $2.5trn in 2009, or $8,086 per person, and accounted for 17.6 per cent of GDP [up from 16.6 per cent 2008].”

Additionally, CMS found that US government Medicare and affiliated Medicaid 2009 program expenditures grew even faster at 7.9 and 9 per cent respectively, accounting for 35 per cent of NHE. The US federal government’s share of health care spending rose by just over 3 per cent in 2009 over 2008, to 27 per cent.

Reining in the growth of US federal government Medicare and related spending will require huge healthcare industry adjustments, spending cuts and continuing modification of government health funded programs. And it will probably require substantially increased taxes to fund its remnants. In recent polls by CNN/Opinion Research Corp Poll and Gallup, the vast majority of Americans said no to cuts in Medicare. A healthcare expense heart attack could be on the horizon for Americans.

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• Retiring the GDP (Gross Domestic Product)

Posted by Ron Robins on May 8, 2008

The GDP statistic has to be retired. It is like an old shoe that no longer fits. GDP is fatally flawed as a measure of economic and societal well-being and economists know it. Yet it is universally used to compare living standards and economic growth like one compares sports scores. Furthermore, as each nation compiles it a little differently, especially regarding the inflation ‘deflator’ component, such comparisons are nonsensical. What is exciting is that there are some old and new indices getting attention that could replace the GDP. This is most welcome.

Alternatives to the GDP
Technically, GDP is the total market value of all final goods and services sold in an economy in any particular time period. As we progress in an era of Enlightened Economics, it is destined to be superseded by new indices geared to more accurately measure affluence, sustainability and quality of life, generally. Such indices include the Index of Sustainable Economic Welfare (ISEW), the Genuine Progress Indicator (GPI), and variants of them. Other intriguing indices include the Calvert-Henderson Quality of Life Indicators, the UN’s Human Development Index, and the Invincibility Index. The common thread in these indices is that as well as including economic activity, they also account for societal and environmental factors related to real human development – which the GDP does not.

The GDP statistic should be retired because…

  • According to economist Clifford Cobb and colleagues, “Much of what we now call the growth of GDP is really just one of three things in disguise: (1) fixing blunders and social decay from the past [paying for pollution, costs of crime, etc.]; (2) borrowing resources from the future [GDP excludes the costs related to farmland depletion, water, other resources]; or (3) shifting functions from the traditional realm of household and community to the realm of the monetised economy [i.e. eating out, rather than at home].” (Text in parenthesis has been added for additional clarity.) For a fuller explanation, see “What’s wrong with the GDP.”
  • Losses associated with natural and man-made disasters are not deducted from the GDP. For instance, Hurricane Katrina brought mass devastation. Yet the enormous economic losses were not deducted from GDP. But the clean-up costs were added though!
  • GDP does not account for the value of non-monetary, economic, transactions. Such activities would include elder care by family members, and volounteer activities. In 2002, the International Monetary Fund (IMF) found that such activities represented the following shares of economic output: up to 44% of GDP in developing nations, 30% in transition economies, and 16% in Organization for Economic Cooperation and Development (OECD) economies (Schneider and Enste, 2002). See The Genuine Progress Indicator 2006.
  • There is even evidence that a focus on GDP at the expense of other quality of life indicators can lead a society to a false sense of worth and even create unhappiness. In The Loss of Happiness in Market Democracies published in 2000, Emeritus Professor Robert Lane of Yale University compiled exhaustive research data showing the relationship of GDP to increasing unhappiness. He states, “Amidst the satisfaction people feel with their material progress, there is a spirit of unhappiness and depression haunting advanced market democracies throughout the world…” From his perspective, the rigors of modern market economies increasingly create family and relationship break-ups with subsequent loss of companionship and happiness.
  • GDP is short-sighted accounting. Things that bump-up GDP in the short-term often have harmful long-term human and financial consequences and costs.
  • From the foregoing it is clear that the GDP statistic has little relevance as a measure of our present day material and social well-being.

GDP provides a false sense of progress
Comparing the GDP to GPI (Genuine Progress Indicator) numbers illustrates how false is the sense of gain with the GDP in regard to our human condition. Look at this chart comparing the real (inflation adjusted) US per capita GDP and GPI growth between 1950 and 2004. Note how the GPI figure significantly lags GDP. It suggests that when items such as resource depletion, crime costs, and volounteer sector costs,’ etc., are accounted for, the per capita net benefit of a rising GDP is fully negated.

Source: (c) 2007 Redefining Progress

Retire the GDP now
Some of the ways social and non-market costs are included in the ISEW, GPI, etc., are definitely controversial. Perhaps for these reasons such indices have not as yet achieved common usage. But the GDP, created for the very reason of measuring WW11 wartime production, has been badly and wrongly used as a measure of our quality of life. Enlightened Economics demands the GDP be retired and replaced with more enlightened indices!

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© Ron Robins, 2008.

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