by Merlin Hernandez
Recession is measured by a fall in GDP when fewer units of output are sold, leading to production cutbacks, a rise in unemployment, and drastic reduction in total spending. Conversely, when GDP rises, there is increased spending, higher productivity, and employment is expected to rise. Many observers assert that this recession does not lend itself to the rules of traditional analysis. Current economic indicators, while showing some GDP growth also illustrate that the normally symbiotic relationship between GDP and employment/spending levels seems to be askew. The imbalance may be ascribed to the technological revolution and the subsequent rise in outsourcing to overseas economies. The interlocking of world financial systems has also seen shared recession as each participating economy faces a similar conundrum in its capital markets.
Even as pre-recession GDP remained relatively high, the employment slide had already begun. Consequently, the rise in unemployment this time around may not have been intrinsically tied to a decline in GDP in the first place but was a feature of technological advances that increased output, ramped up communication capabilities, and made outsourcing feasible. The speed, applications, and reach of technological innovations have forever altered the relationships among the means of production, and traditional approaches to analysis of economic growth may need to be re-visited.
Overseas production brings into question the measures used to determine GDP when goods and services are produced outside of the economy but sold within it for a possible trade deficit that would erode national income. But this inherent anomaly is not seen as such – the domestic economy is not the producer but the consumer – the US economy derives no benefit from the production of these goods in the form of taxes, or unemployment and social security withholdings. GDP data would pick up outsourced production which would in fact inflate national productivity to give an indication of growth without the full aggregates of growth. Mere ownership of the means of production is not enough to place that type of productivity within the GDP of the country of the parent company (US) – US workers are not performing those jobs, wages are not cycled within the US economy, national coffers are not enriched, and consumption outweighs capital formation.
On another level of analysis, the re-tooling of the economy places a strong emphasis on technological innovation and capabilities. Greater applied technology means that output can increase exponentially with fewer workers and while real GDP is rising, there is a technical recovery that bypasses employment considerations. Strong elements of recession like high unemployment and depressed spending will still remain evident. With significant numbers of the population falling through those cracks, national priorities must acknowledge the necessity for incentives for new businesses within fiscal and monetary policies.
The situation will also give rise to increased spending on social services, education, and health care, as well as possible tax increases on those who have jobs that earn beyond a certain amount. But a critical overhaul of the tax structure as it pertains to corporations engaged in outsourcing is long overdue. Many corporations transfer operations overseas to legally avoid their tax obligations. But their administrative infrastructure remains on mainland America. These companies do pay much reduced taxes in the countries in which they operate but they should also be taxed proportionately on the aspects of their operations that remain in the US to relieve some of the pressure outsourcing places on national income levels.
This is not about raising revenues for “ ill-conceived” bailouts to the business sector (although a few of these remain open to question) or giving handouts to the growing number of Americans who find themselves effectively disenfranchised by the new economic imperatives. More to the point, it is about maintaining productivity levels through business stimulus, and sustaining spending so that manufacturing output does not suffer poor sales that would lead to more production cutbacks and deeper recession.
Outsourcing skews GDP as a measure of economic health, overstates output growth, and misaligns its aggregates so that a direct correlation to employment levels and wage growth can no longer be made. Though output is up, individual real income that translates into consumer spending has not improved at a commensurate rate. The three basic measures of recovery and expansion – increased output, rising employment and increased spending are essentially at odds. The tools and processes for measuring growth or contraction appear to be mechanistic rather than organic and may just be outdated.
The misalignment of the GDP measure of economic reversal, in combination with technological innovation that leads to increased productivity which may not impact employment and spending levels, throws up questions about whether the recession is truly over. What is needed is some kind of conscious balance to the analysis that factors both the new process patterns and previous economic measurements. But more specifically, there ought to be the inclusion of the labor surplus, the cost of relief programs, and real national income for a more meaningful measure of economic growth.