A big part of what happened this decade was that people engaged in excessively risky behavior without realizing the risks associated… It’s true not just among consumers but among regulators, financial institutions, lenders… everyone. ~ Karen Dynan
The global economic crisis has gotten so bad that we need to invoke classic literature to make sense of it. The prominent novel ‘In Search of Lost Time’ or ‘Remembrance of Things Past’ by Marcel Proust was published in France between 1913 and 1927. The novel has had great influence on twentieth-century literature, whether because writers have sought to emulate it, or attempted to parody and discredit some of its traits.
The article ‘Proust Index: In Search of Lost Time’, which appeared in a recent issue of The Economist, assesses how much economic progress has been undone by the recent economic crisis, and constructs a measure of the lost time in economic value for countries that were hard-hit. According to this article, many global economies have gone backwards, by a decade or more, as a result of the recent economic crisis.
There are 14 advanced countries that have gone back in time in value, as measured by the nominal GDP indicator; the group includes, the U.S. and eight members of the European Union (EU), all of which have to repay their debts from an eroded tax base. Measured by real GDP per person, a third of the 184 countries that the IMF collects data for are poorer than they were in 2007. These 61 countries have each lost at least five years of value.
According to the OECD, which publishes wage data for 25 rich countries, found that real wages in ten of these countries was lower in 2010 than in previous years, with an average of four years lost in value. However, it’s expected that economic growth, over time, will reset the economic clock providing new jobs, and the resources to recover. But for some workers, the time lost in value during periods of unemployment will never be recovered.
Other views, in contrast, say that although the idea of a Proust Index is intriguing, there are three main issues with it: First, it proposes the idea that there is a goal for economic value that we are aiming to reach, within a certain time, and because of the crisis we’ve lost some of that time. However, it’s unclear that there is such a final GDP value (goal) that we are all striving to reach by a specific time.
Second, and perhaps more importantly, several of the indices are built based on inflated prices (e.g. stocks, housing…) during a time when there were signs of potential economic bubbles. Building an index on how far down we’ve come from the peak of a bubble does not seem like sound economic thinking.
Finally, the Proust Index is more than anything, an index of collective misery– it measures how we have retreated from a peak, on average. However, it’s not the ‘average’ that is important, but the long tail of people who were ‘below the average’ and they are set back even more. Addressing that would be more relevant for policy makers…
In the article “Can Literature Help Explain Economics?” by Bruce writes: Great literature is brilliant at exploring the human condition through beautiful language. However, its usefulness with regards to economics might well be limited. For example, it may be indisputable that Marcel Proust changed the face of world literature with ‘In Search of Lost Time’. Nevertheless, the utility of The Economist publishing a ‘Proust Index’ is open to question.
If its purpose is to illustrate how much time has been lost in value because of the recent financial crisis, then that’s fine. However, it’s unclear on what lessons can be learned from the index, and how it can be applied as a useful tool. The nostalgic writing of Proust captures a segment of French social life in very poetic prose, whereas, this Proust Index merely highlights the fact that major economies have received a massive economic setback.
One problem with the Proust Index is that it is not possible to think that economic growth in the years before the economic crisis was based on stable foundations. Hence, it is not really possible to imagine a different economic history without recession because things could not have gone smoothly forward.
Defenders of the Proust Index might say that it highlights contrasting economic performance between countries. However, such disparities can be examined in less awkward ways. The real task for policymakers is to look forward.
In the article “Europe in the Crisis, in Search of Lost Time” by Marco Fortis writes: The crisis cannot be measured only using the GDP. There are other, equally crucial, variables that are better indicators than the GDP, which can more fully explain the social hardship generated by the recession. For example, the decrease of consumption or wealth of families, or the increase in the unemployment rate.
In my report at the Edison Foundation, I illustrated very clearly that the rate of unemployment and the decrease in the wealth of families, suffered much more from the economic crisis than appeared from the simple GDP data. Now,
The Economist with its article has created an index, ironically dubbed ‘The Proust Index’ (In Search of Lost Time), that measure seven indicators of economic health, which fall into three broad categories. Household wealth and its main components, financial-asset prices and property prices, are in the first group.
Measures of annual output and private consumption are in the second category. Real wages and unemployment make up the third. A simple average of how much time has been lost in each of the categories produces the overall measure. This all very good but, unfortunately, the index doesn’t solve any problems or make us feel any better.
In the article “Is Your Business Good at Doing Business?” by Jonathan Wilson writes: The Economist has recently published ‘The Proust Index’, which uses seven economic indicators to measure time lost in economic progress. While critics of the index argue about what constitutes progress or the usefulness of the indicators, the fact remains that the self-serving behavior of corporations brings about a tremendous destruction of value.
From 2008 to the present, the ‘Proust Index’ says, that the U.S. has regressed ten years (i.e. the average of the seven indicators places it back to where it was in 2001). The UK has regressed eight years, Greece has regressed twelve, and so on for other countries. Some key triggers that contributed to the economic crisis were corporations (e.g., Lehman…) that self-destructed as a result of their self-interest behavior and destroyed value.
If the corporation wishes to create value, it must serve the needs of all its stakeholders including; customers, employees, shareholders, and by extension being socially responsible for the world at large. Anything else, so the numbers tell us, will bring value destruction. It is my observation that whenever social responsibility is a struggle for business, it is precisely because we have falsely separated the task of the corporation from the task of being human. We have identified social responsibility as something to be considered as secondary to the pursuit of profits.
Milton Friedman’s now famous argument that ‘the social responsibility of business is to increase its profits’ is specious precisely because it divorces from profitability the very thing that drives it: the creation of value. Value increases, I believe, when our products and services are not just socially responsible but socially creative, and in three specific ways:
- Truly improves the life condition and experience of the customer, rather than pander to the human tendency to take the shortest cut to gratification.
- Manifests the very best we have to offer from within the insights, abilities and resources of our companies.
- Accounts for their impact on the customer and the customer’s social and environmental context.
In the article “Aughts Were a Lost Decade for U.S. Economy, Workers” by Neil Irwin writes: For most of the past 70 years, the U.S. economy has grown at a steady clip, generating perpetually higher incomes and wealth for U.S. households. But since 2000, the story is starkly different. The past decade was the worst for the U.S. economy in modern times, a sharp reversal from a long period of prosperity. This is leading economists and policymakers to fundamentally rethink the underpinnings of the nation’s growth.
No previous decade going back to the 1940s had job growth of less than 20%. Economic output rose at its slowest rate of any decade since the 1930s as well. Middle-income households made less in 2008, when adjusted for inflation, than they did in 1999, and the number is sure to have declined further during a difficult 2009. This was the first business cycle where a working-age household ended up worse at the end of it than the beginning, and this is in spite of substantial growth in productivity, which should have been able to improve everyone’s well-being, said Lawrence Mishel.
The first decade of the new century was an experiment in what happens when an economy comes to rely heavily on borrowed money. The experiment has ended badly. The economic crisis that hit the world economy five years ago still has a huge impact on today’s economy. The measure of lost time in economic value, for hard-hit countries as a result of this crisis, constructed by The Economist indicates that many countries’ economic time-clocks have been rewound, and in the most serious case, for over twelve years.
The Economist time-clock uses seven indicators of economic health, which fall into three broad categories. The first group includes: household wealth, which is composed of financial asset prices and property prices. The second group includes: annual output and private consumption. The third includes: real wages and unemployment. Economic loss is evident in stock market and house prices, even though some indicators, one is nominal GDP, are showing a sign of recovery, but very slow.
Lastly, the labor-market indicators show that real wages were lower and unemployment too is at its worst for hard-hit countries, though the situation of unemployment varies. Calculating how many years have been rewound according to the economic clock is very effective in delivering the message that for some, the time lost to the crisis will never be recovered; and even in the countries that are recovering, it will take a very long period of time to fully recover…
Consider the huge and rising debt levels in the U.S., and the very limited extent to which de-leveraging has taken place both in household and government sectors, it would be very nice to see a few years of sustained economic growth.
The problem is that we mismanaged the macro-economy, and that got us in big trouble… The big bad thing that happened was that in the U.S. and parts of Europe, the housing bubbles got out of control. That came back to haunt us big-time. ~ Nariman Behravesh