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Personal debt shouldn’t make our economy look good

Blog - March 1, 2010 - By Amy Taylor

Personal debt shouldn’t make our economy look good

When federal finance minister Jim Flaherty recently announced changes to the rules governing mortgage approvals in Canada, he took a first step in recognizing we’ve been spending more than we’re making and increasing our debt loads in an unsustainable way. Debt rates have been soaring in Canada for a number of years but because we rely on narrow measures of economic well-being, such as the Gross Domestic Product (GDP), this trend has gone largely unnoticed. If, instead, we were measuring our economic well-being in a more holistic way, we’d have recognized the unsustainable debt levels long ago and been able to take preventative measures.

Finance Minister Jim Flaherty

Finance Minister Jim Flaherty announces stricter mortgage rules

But we didn’t and so debt levels in Canada are currently at an all time high. In fact, household debt in Canada was already at $1.3 trillion by 2008 and it’s been increasing annually by 4.7 per cent for the past 30 years, outpacing gains in personal disposable income. At the same time, Canadians are saving less than ever before. Our personal saving rate has been declining since the early 1980s, dropping from a high of 20.2 per cent in 1982 to a low of 1.2 per cent in 2005, with one third of us not committing anything to savings at all. The main cause of the rising debt and plummeting savings? Consumption – people are buying stuff with money they don’t actually have. As we pay for day-to-day expenses  by racking up debt, we’re ironically fuelling the growth of Canada’s Gross Domestic Product. Sound backwards? That’s because it is. Using the GDP as a measure of the economic well-being of our nation has created a false sense of security and tricked us into thinking we’re doing better than we actually are.

The GDP, while useful as a measure of economic transactions, is often misused and misunderstood as a measure of economic well-being. It measures the value of all spending, but it doesn’t distinguish between spending that contributes to societal wellbeing and that which detracts from it. Thus, the more debt spending that occurs or the more crime that takes place, the more the GDP increases. Likewise, the GDP increases with automobile accidents, environmental disasters, obesity, liquidation of natural resources and problem gambling. Simon Kuznets, one of the principal architects of the international system of National Accounts (on which the GDP is based) warned the U.S. Congress in 1934 that “the welfare of a nation can scarcely be inferred from a measurement of national income” as defined by the GDP. The GDP, while useful as a measure of the size of the economy, is misused and inappropriate as a measure of total well-being. The Genuine Progress Indicator or GPI, however, was designed as an alternative and more holistic measure of well-being.

Unlike the GDP, the GPI distinguishes between good spending and bad spending. The GPI increases when crime declines, fewer automobile accidents occur, people spend less time commuting, income equality increases and greenhouse gas emissions are reduced. Conversely, the GPI decreases if personal debt loads increase or spending on environmental disasters takes place.

If we were to redefine progress and measure Canada’s true well-being rather than simply tally our economic transactions, we would be recognizing many of the challenges we’re now facing much earlier and there would be a value placed on those things that increase societal well-being. The GPI could prove much more economically advantageous than the GDP and Flaherty could have perhaps saved himself from having to tighten mortgage regulations.

Tags:  Economics, Consulting.

Mandy Simmonds — Aug 06, 2010 - 08:51 AM MT

It seems a shame to read this article and understand that in fact, the country that everyone thought was sensible and had escaped the worst of the 2008 crisis - Canada - is not in fact such a heartland of economic integrity. Still much better than its neighbor to the south, however. GDP calculations are definitely badly skewed from stimulus projects and coupon schemes founded on deficit spending and this is misleading even the most influential figures. Let's hope we can all see through the fog this creates.

Dave Carruth — Mar 03, 2010 - 08:57 AM MT

Hi Amy,
I enjoyed your article. While I did not learn anything new (this subject has interested me for quite some time), I think it is of great value to our society that people such as you are writing on this subject. I often get blank stares when I tell people that the GDP is skewed from stimulus projects based on deficit spending, consumer consumption based on credit card debt, and a housing bubble based on lax lending rules and dirt-cheap interest rates. How can it be that someone can borrow $400,000 to buy a house that sold for $200,000 just 4 years ago, and this $400,000 is tacked on to the GDP as “growth”. Could it be that basic economics and finance are not taught to children in public school, while basic math, science, art, social studies etc. are? Perhaps we should be leaving high school armed with basic knowledge about economics, GDP, GPI, debt, asset bubbles, bankruptcy etc. My opinions often get discredited by the everyday person because I am an engineer and not an economist; however, I feel this subject should be common knowledge to an educated public.
Thanks again for the great article.

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