Financial Indicators in the New Economy

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As the challenge to GDP growth gains traction it will become ever more important to build support for the institutional changes needed to eliminate the economic expansion imperative—call it our "growth fetish"—built into our existing economic institutions. This imperative is built into the current design of our financial system. Here are two examples.

  • First, if it appears that wages are rising, the Federal Reserve raises interest rates to slow the economy to increase unemployment and maintain a downward pressure on wages. The announced purpose is to prevent wage “inflation.” The unstated purpose is to make sure that the gains of economic growth and productivity are captured by money people rather than by working people. This means that unless the economy is not growing fast enough to create sufficient new jobs, not only to accommodate for natural population increase but as well to absorb workers whose labor has been made redundant by productivity gains, unemployment will spread, wages will be depressed, and the economy will ultimately collapse unless action is taken to stimulate growth in consumption.
  • Second, because our current financial system depends on private banks to create money by issuing loans at interest, the overall economy must grow fast enough to stimulate sufficient new borrowing to put enough money into the pockets of previous borrowers to allow them to pay the principle and interest due to the bank as payments become due. Otherwise, borrowers are forced into default and the issuing banks face bankruptcy unless bailed out with public funds.

Financial indicators properly serve two useful functions in the New Economy.

  • First, to assess progress toward a more equitable distribution of wealth. Well documented studies suggest that a more equitable distribution of wealth reduces the stress of competition for status and security, and therefore is associated with higher levels of physical and emotional health, increased trust, greater cooperation, and improved environmental health.
  • Second, as a measure of the economic cost of producing a given level of health and well-being. Managing either a firm or an economy to maximize cost is a path to bankruptcy, as the world's current economic path demonstrates. We we properly seek to reduce GDP as we work to increase health and well-being.

Other uses of financial indicators to assess economic performance risk reproducing the same distortions built into GDP indicators and their variants.