Strengthening Communities in the Internet Era: Theory and PracticePosted: March 5, 2012 | Author: rjrock | Filed under: Communications, Macroeconomics, Sociology | Tags: bonding social capital, bridging social capital, cognitive surplus, collaboration and communication, community, community development, community leaders, crowdsourcing, economics, endogenous growth theory, idea exchange, innovation, law of comparative advantage, macroeconomics, social capital theory, social construction of technology, social networking, social networks, social shaping theory, sociology, strengthening communities, symbolic interactionsim, the idea economy, weak ties, when ideas have sex | Leave a comment
The problems facing American communities are as varied as the definition of community. While in the midst of recovery from the greatest economic downturn since the Great Depression, local communities are struggling to promote a sense of community and increase civic engagement. The need for community renewal arises from a desire to improve quality of life and to build community-based platforms to address a variety of social issues including urban growth, rural flight, economic growth, sustainability, inequality, and public health to name but a few. In contrast, Fernback (2007) notes that some “social observers have documented the perceived decay of communal life in post-industrial nations” (p. 50). Indeed, dystopian views of the both the postindustrial revolution and globalization often cite the perceived erosion of community and loss of civic engagement as a serious concern for western society (Putnam, 2000; Saguaro Seminar on Civic Engagement, 2001). In addition, Smith (2001) argues that impact of globalization “is a drive towards encouraging people to view themselves as consumers of services, rather than participants, and an associated move towards individualization from more collective concerns” (p. 1). However, postindustrial life also abounds with new capabilities including a global transportation network, global telecommunications infrastructure, the World Wide Web, and electronic social networks that offer new opportunities for community development. How then, can communities take advantage of the capabilities inherent in a networked, globalized, world to increase civic engagement and address persistent social challenges? The basis for answering that question lies in Putnam’s (2000) work on social capital, what Putnam considers the “features of social organization such as networks, norms, and social trust that facilitate coordination and cooperation for mutual benefit” (Claridge, 2004, p. 1). The formation of social capital relies on two distinct strategies, that of bridging and bonding; where bridging uses outward looking networks that connect different kinds of people, and bonding use inward-facing networks that connect similar types of people (Knudsen, Florida, & Rousseau, 2005). Traditional American civic engagement in organizations like the Kiwanis Club, the Knights of Columbus, or even local bowling leagues, operated largely on bonding strategies, as like-minded individuals engaged in community activities. Whereas in a networked world, bridging strategies are far easier to implement, given low barriers to entry and that communities can be disconnected from the traditional boundary of space or place. Indeed, the many-to-many communication paradigm inherent on the World Wide Web, offers new opportunities for communities to prosper by bridging place-based communities to the wider world to increase economic prosperity and improve quality of life. Strengthening communities in the Internet era is a matter of using technology to harness the multitude of weak ties within a diverse community towards collective actions that benefit everyone, in essence, reimagining community by discarding old boundaries and creating new ones based on community engagement.
In order to describe how communities can take advantage of the capabilities inherent in a networked and globalized world to increase civic engagement and improve community outcomes, this paper will delve further into the theoretical underpinnings of the thesis. In addition, the opportunities and benefits of a connected community will be explored. Next, this paper will highlight what a connected community needs in order to be viable. Finally, the role of local government is explored in forming the required policies, practices, and infrastructure to build civic engagement online.
Communities and Cyberspace
A review of the literature on sociological theory of community might reveal that a functional definition of community does not exist given the wide variety of contentious theories of community. Indeed, Cohen (1985) recognized the difficulty, noting that community “has proved to be highly resistant to satisfactory definition in anthropology and sociology” (p. 11). In turn, Cohen (1985) noted that the symbolic nature of community is “essentially enshrined in the concept of boundary” (p. 14); for a boundary implies that participants have something in common and at the same time that the commonalities are also a basis for how members are understood to be different from others. It is relatively easy to apply the notion of boundary to traditional geographical interpretations of community, as geography played a central role in the formation of societal differences in language, culture, and sense of affiliation. In Cohen’s (1985) view, it is no surprise that community has eluded definition for so long, given that people construct the social meaning of community participation based on fluid notions of boundary and affiliation.
The advent of the Internet and the World Wide Web provides additional support for the social construction of community, given the explosive growth of online communities. Baym’s (2010) observations of early online newsgroups suggested the development of rich community-based structures. While Fernback (2007) “advocates a symbolic interactionist perspective on cybercommunity that focuses on the process of community building as an active human endeavor” (p. 50). Communities on the Internet are built on a variety of different technological capabilities based on computer-mediated communication, from bulletin boards, to ecommerce sites, to social network sites. boyd[RR1] and Ellison (2007) “define social network sites as web-based services that allow individuals to (1) construct a public or semi-public profile within a bounded system, (2) articulate a list of other users with whom they share a connection, and (3) view and traverse their list of connections and those made by others within the system” (p. 1). Thus, the ability for users to construct a personalized online community and determine boundaries is consistent with Cohen’s (1985) ideas on the symbolic construction of community.
In some respects, online communities can offer potential members more choice than their geographic counterparts, given the sheer volume of interactions on the Internet. However, dystopian observers are often concerned with the social cost of computer-mediated communication. Baym (2010) notes that “historical changes occurring in conjunction with and facilitated by communication technologies have led many to worry that people are losing meaningful connections to their local communities (p. 73). Rather than view online community as a threat to traditional place-based communities, a more refined view might consider how placed-based communities could prosper by integrating with the wider world using computer-mediated communication, and in particular social network sites.
Internet access and social networking sites can increase both civic and political engagement (Baym, 2010). Hampton and Wellman’s (2003) early study of a Toronto neighborhood that was wired for high-speed Internet access is notable insofar as “Internet use was associated with larger neighborhood networks, more recognition of neighbors, greater frequency of communication (on-and offline), and participation in the public and private realms” (p. 305). Internet use enhanced the local community and increased social capital. In addition, a Pew Internet study found that “those who use blogs and social networking sites as an outlet for civic engagement are far more active in traditional realms of political and nonpolitical participation than are other internet users [and] they are even more active than those who do not use the internet at all (A. Smith, Scholzman, Verba, & Brady, 2009). Indeed, Putnam’s (2000) dystopian warning of the loss of social capital rings hollow in light of recent research, perhaps relating to the differences in the types of social capital afforded by the Internet and social network sites, as compared with the bowling leagues of yesteryear.
Social Network Sites and Bridging
A recent study of Facebook, the world’s most popular social network site, found “a robust connection between Facebook usage and indicators of social capital, especially of the bridging type” (Ellison, Steinfeld, & Lampe, 2007, p. 1). Not only were Facebook users able to accumulate bridging social capital, but Ellison, et al., (2007) also found that Facebook use helped maintain bridging social capital. Moreover, “bridging social capital—which is closely linked to the notion of “weak ties”—seems well-suited to social software applications…because it enables users to maintain such ties cheaply and easily” (Ellison, et al., 2007, p. 1).
The emphasis on bridging is important, because much of the social capital literature finds that bridging is associated with higher economic growth, while lower growth is associated with bonding (de Souza Briggs, 2003; Knudsen, et al., 2005; Putnam, 2000). de Souza Briggs (2003) describes the value bridging has for participants, by “connecting persons and other social ‘sites’ with distinct traits, ties often constitute bridges across roles, status differences, material and symbolic interests, space, norms, and even worldviews” (p. 2). Not only do social network sites appear to help users accumulate and maintain bridging social capital, but also, accumulated bridging social capital may translate to economic growth, and perhaps most importantly, result in the exchange of ideas between diverse groups.
The Economy of Ideas
Neoclassical economic theory holds that trade can make everyone better off despite which trading partner holds an absolute advantage (Mankiw, 2012). Known as the principle of comparative advantage, “trade allows people to specialize in activities in which they have a comparative advantage” (Mankiw, 2012). Ridley (2010) considers specialization and exchange to be at the heart of human prosperity, suggesting that humans are the only species that grow more prosperous as the population grows. The uniquely human processes of communication and cooperation are the basis for trade and extend beyond the realm of objects, into the realm of ideas; where Ridley (2010) suggests that the exchange of ideas is responsible for technological progress and prosperity. To the extent that specialization, by its very structure, defines humanity in terms of their differences, social capital from bridging may result, in part, from the exchange of ideas between heterogeneous sources. Indeed, a recently published studied explored the role of both bridging and bonding social capital in innovation, finding that “social capital is an important predictor of innovative performance after controlling for the ‘traditional’ knowledge inputs” (Crescenzi, Gagliardi, & Percoco, 2011, p. 31). Moreover, Crescenzi, et al., (2011) found that “bridging’ social capital – based on weak ties – can be isolated as the key driver of the process of innovation while ‘bonding’ social capital is generally negative for innovation” (pp. 31-32). The results are perhaps unsurprising given Ridley’s (2010) view that technological process, and hence prosperity, is based on the exchange of ideas, given that bonding groups would share similar information, while bridging groups would have different knowledge and experiences, resulting in Ridley’s notion of “ideas having sex”.
Shirky (2009) contributes to the proposition that social media may be transformational because of the many-to-many communication paradigm; when coupled with the notion of billions of connected human beings, one wonders at the possibilities. Shirky (2010) further observes that there are existing trends that hint at future possibilities, describing how humanity’s ‘cognitive surplus’ or excess brain cycles are generously being put to use in online communities, citing notable examples like development of open-source software or Wikipedia, unexpected open market innovations that turn the traditional profit notions upside-down. What future developments and ideas are possible when another billion people come online? More importantly, what impact will the world’s ‘cognitive surplus’ have on economic growth and prosperity when their ideas have sex?
In the field of economics, Romer (2008) departed from neoclassical economic models with the development of endogenous growth theory, arguing that the level of technological change can be impacted by policy decisions, such as policies that promote openness, competition, encourage education, and protect intellectual property. Notably, Romer’s model reflects the notion that ideas do not reach a point of diminishing returns like other resources, rather ideas build upon one another (Cortright, 2001; Romer, 1994). Therefore, it appears clear that modern economic theory supports the notion that rate of growth for ideas is driven from a policy perspective.
Conceptual Model for a Connected Community
It certainly appears that Cohen’s (1985) view of community in the context of boundaries had deep implications for strengthening communities, for boundaries both bind and differentiate community members. Where Putnam (2000) described the value and positive externalities associated with both types of social capital, numerous scholars have extolled the economic and other benefits of bridging social capital, the social capital that arises from differences (Crescenzi, et al., 2011; de Souza Briggs, 2003; Ellison, et al., 2007; Knudsen, et al., 2005; Putnam, 2000), confirming Granovetter’s (1973) perspective on the strength of weak ties. Ridley (2010) goes a step further, envisioning all of humanity as a collective brain, connected through the Internet and social networks, observing continued innovation and technological process based on the exchange of ideas. Whereas Crescenzi, et al., (2011) confirmed that bridging social capital is an important driver of the innovation process, again owing to differences. In addition, the notion that innovation and technological progress are outcomes of policy decisions gives rise to the idea of what Romer (2008) calls a meta-idea, or an idea “about how to support the production and transmission of other ideas” (p. 1); in this case, driven from a local community context.
The meta-idea, is the notion that local community developers can improve community outcomes through a connected community, focused on the issues of economic growth, sustainability, public health, inequality, and urban growth/rural flight. A connected community enables the flow of bridging social capital via exponential growth of weak ties, enabled by cooperation and communication between diverse community constituents and trading partners in the globalized world. The exponential growth of weak ties and resulting flow of bridging social capital requires the low barriers to entry inherent in social network capabilities. In addition, a connected community requires forward-thinking policies that promote openness, transparency, diversity, and investment in infrastructure, higher education, and R&D. The conceptual model for the connected community is constructed visually in Figure 1:
Figure 1. The figure presents a conceptual model for a connected that highlights how technology, public policy, and both local and global community constituents can improve community outcomes. The model encourages diversity, investment, the growth of weak ties, and flow of social bridging capital to improve community outcomes related to economic growth, sustainability, public health, inequality, and urban growth/rural flight.
The conceptual model for the connected community is not necessarily a new meta-idea, insofar as there are several communities in the United States and elsewhere that already have some form of the model in place. Rather, this may be one of the few times the idea is expressed with a sociological and economic theoretical foundation. In the next section, the paper will explore the practical application of the meta-idea using existing communities as the basis for exploring the benefits and requirements of implementation, as well as risks.
Benefits of a Connected Community
In 2004, the City of Riverside, California collaborated with Riverside Community College, to pull together a high tech task force to in order to gain a larger share of the economic prosperity afforded by California’s high technology industry. Eight years later, Riverside was named one of the top seven intelligent communities by the Intelligent Community Forum, an acknowledgment of Riverside’s ability to build a sustainable, competitive economy and a vibrant society (Intelligent Community Forum, 2012). The outcome of the high tech task force was a roadmap that “focused on promoting technology businesses and creating the information infrastructure they needed, fostering entrepreneurship in higher education, improving the skills of the population and demanding that city government set an example of tech-based innovation” (Intelligent Community Forum, 2012, p. 1). Indeed, the initial roadmap included ideas similar to those found in the conceptual model for a connected community, insofar as the roadmap identified government, business, higher education, and community organizations as key constituents (Tillquist, 2004). In addition, the roadmap targeted policy and investment goals towards strategic use of technology, assurance of advanced Internet access, policy, code and ordinance orientation around high technology, and university system R&D investment transfer into the local community (Tillquist, 2004).
While the roadmap did not call out specific uses of social network technology or include foreign trading partners as key constituents, those elements are found in practice. For instance, there is evidence of foreign trading partner involvement in key initiatives highlighted by the Intelligent Community Forum (2012), including a testing and implementation partnership “with new technologies like thin-film solar cells with researchers at Tohoku University and rare-earth yttrium batteries with Winston Global Energy in Shenzhen, China” (p. 1). In addition, Winston Global Energy company, and local Riverside business SolarMax, are collaborating on the development and construction of a 2MW solar generation project at University of California, Riverside, and a comprehensive 20MW solar energy strategy for Riverside Public Utilities (Intelligent Community Forum, 2012).
On the social networking front, there does not appear to be a specific focus on the use of social networking sites to encourage communication and cooperation, but one can easily image how such capabilities are being used by individuals involved in the program, absent a specific mandate. In addition, there is evidence that the City of Riverside is attempting to engage community members with systems like the “Riverside Resident Connect system for reporting problems by phone, email, or submission of a photo taken with a smartphone” (Intelligent Community Forum, 2012, p. 1). E-government services are also prevalent with an extensive menu of online government services (Riverside City Government, 2012b). There remains considerable opportunity for the City of Riverside to encourage the growth of bridging social capital through more far-sight use of social networking capabilities.
The City of Riverside has proven adept at encouraging the notion of a connected community to improve community outcomes, focusing their efforts on economic growth, sustainability, and urban growth. Their investment and collaboration has resulted in the growth of a high technology community of businesses, higher education institutions, and foreign trading partners, that have spurred economic growth and more than 6,000 new jobs in the last three years (Intelligent Community Forum, 2012; Riverside City Government, 2012a). Of course, their journey continues with upcoming projects focused on both infrastructure improvements and digital inclusion (Intelligent Community Forum, 2012).
Needs of a Connected Community
There are significant resources available to local governments seeking to build connected communities. Commercial technology companies like Cisco and IBM both have established business units with expertise in building digital communities and cities. Cisco’s Smart+ Connected Communities solutions in particular, was central to the City of Riverside’s citywide deployment of Wi-Fi technology. In addition, there are several forums with ideas to guide investments in connected communities, including the Intelligent Community Forum and the Smart Cities collaboration project. Ovum, an international consultancy also recently released a strategy paper that provides high level guidelines for developing a smart city based on two primary strategies, a digital cities strategy for the top down development and investment by government, business, utilities, and a digital society strategy for bottoms up engagement from individuals, community groups, universities, start-up firms, and NGOs (Hodgkinson, 2011). Hodgkinson (2011) defines the critical ingredients for successful digital city initiatives:
- leaders who inspire the pursuits of economic, social, and environmental sustainability,
- governments, industry, cities, and citizens who collaborate,
- cities that leverage proven ideas and solutions to build more city for less,
- cities that consciously nurture a vibrant digital society to strengthen social capital and engender digital inclusion. (p. 3)
The focus on collaboration and the recognition of the need to strengthen social capital and create digital inclusion strategies suggests that industry strategy for connected communities rests solidly on the theoretical backbone of the sociology.
The Role of Government in Developing a Connected Community
Concerned over Putnam’s (2000) observation at the decline of civic and political engagement, leaders in local government might be tempted to direct limited information technology budgets towards increasing the affective commitment of local citizens to their communities, hoping to increase bonding social capital, a strategy at odds with innovation and growth. Rather, local governments should seek to exponentially increase the number of weak ties to the community and oriented their services to harness weak ties of the crowd, improving the exchange of ideas, and thereby using community engagement to lower government costs. In addition, local governments should seek to reduce information technology budgets for maintenance, support, and operations and redirect those funds toward the investments congruent with a connected community, including R&D, education, and infrastructure for advanced Internet access.
In order to lower local government IT spend for maintenance, support, and operations, government IT shops need to transform the way IT departments operate, where possible, moving away from commercial applications and technology, in favor of open source software and cloud computing. Open source software adoption is increasingly a viable option for government entities owing to the free license distribution model and is sometimes supported by major vendors. For example, the State of California recently authorized the use of open source software (Office of the State CIO, 2010). In a related effort to reduce government IT costs, the federal government has adopted a “cloud first” strategy, highlighting a preference for applications and technology deployments in the cloud, thereby reducing the need to maintain IT plumbing and allowing IT departments to manage services, rather that infrastructure (Kundra, 2011). Both the adoption of open source software and cloud computing in local government can free up much needed government IT capital and operating expenditures to fund the development and transmission of government services to community constituents.
Most local governments offer a variety of citizen services available on Internet computing technology, particularly those in large urban centers. Many government services are built in a traditional top-down way intending to cut government labor costs, increase administrative productivity, and make government data available to the public (City and County of Denver, 2012; Riverside City Government, 2012b). While the menu of government services continues to increase and provide incremental improvements in government services, in this author’s opinion, they fail to capture the imagination of their communities, nor leverage the cognitive surplus of their constituencies. The City of San Francisco is notable in leveraging the cognitive surplus of the crowd, perhaps owing to the influence of nearby Silicon Valley. The city is “leading the nation in adapting consumer technologies to improve the way citizens interact with their metro areas” (Feldman, 2010, p. 1). The city has opened up their data sets, and made them available to the public, spurring the development of innovative new applications, deployed on mobile platforms that connect citizens and government. The result is “more than 50 privately produced mobile apps, which work on gadgets such as iPhones and Android cell phones, that track everything in San Francisco from restaurant health codes to the most popular biking routes” (Feldman, 2010, p. 1). San Francisco’s strategy is a live example of Hodgkinson’s (2011) digital society strategy. The open data sets enable third parties to develop valuable IT services at little cost to the local government, while the developed apps increase the number of weak ties to the community. Rather than determining what services community constituents want, where possible, local governments can let them build the apps that will improve their quality of life.
Of course, even given open data and crowdsourcing initiatives, local governments still need to consider how they deploy government services in a way that creates more meaningful community engagement. Hodgkinson (2011) suggests the development of a comprehensive digital strategy that encompasses a variety of digital city services that include digitally enabled transportation, education, healthcare, grids and utilities, and urban planning. However, local government’s role is not simply to use traditional IT planning processes, but rather to open the door to constituent collaboration to inform the planning process, and understand where the opportunities exist to build social capital and spur economic growth. The opportunities for collaboration are numerous with a variety of innovative organizations leading efforts to increase social impact in communities, including TED’s City 2.0, OpenIdeo, the Intelligent Community Forum, Smart Cities and Metropolis.org. In addition, the IT planning process can leverage emerging digital society initiatives including volunteering networks, urban action networks, hyper-local websites, carpooling networks, collective action forums, support networks, and mainstream social networks to “stimulate self-help and co-production behaviors in the community, strengthen social capital, and engender digital inclusion” (Hodgkinson, 2011, p. 2). Rather than suggest there is a proscriptive approach to determining which government services should be prioritized in a planning process, it is more appropriate to assure that the right stakeholders are engaged in the planning process. In addition, the final priorities should reflect an awareness of the need to engage constituents to grow the volume of weak ties needed to create the flow of social capital.
While there is a clear opportunity to reimagine community in the Internet era to promote economic growth, sustainability, and public health, while addressing inequality and improving quality of life, there remain considerable risks. First, government regulations, ordinances, and legal commitments can inhibit the flexibility of local governments to fully embrace the free flow of ideas across constituents. Second, given the importance of diversity to bridging social capital and innovation, policies that promote digital inclusion are considered table-stakes. Yet, even forward-thinking cities like Riverside focus first on efforts that have a more direct connection to economic growth (Intelligent Community Forum, 2012). In addition, the rise of nativist sentiment across the country has created an environment hostile to immigrants and people of color that negatively impact growth (Immigration Policy Center, 2012). Local governments need to create an inclusive environment that encourages diversity, a necessary requirement for bridging social capital. Third, the recent economic challenges, pervasive trade deficits, and outsourcing trends have created anti-trade sentiment in many Americans, in particular towards China. The possibility exists that anti-trade sentiment could result in protectionist policies that could derail efforts by local governments to strengthen local communities through participation in a globalized world. Local politicians need to assure that opportunities to communicate and collaborate with foreign trading partners are realized, a requirement of a connected community.
The sociological imagination is alive and well in an era of remarkable transformation, characterized by simultaneous trends of globalization and localization as community leaders seek to strengthen their communities. Global capabilities like a worldwide transportation network, a global telecommunications network, the Internet, and the World Wide Web offer community leaders an unprecedented opportunity to improve economic growth and quality of life when directed properly. Contributions from the fields of sociology and macroeconomics guide community leaders beyond the notion of the postindustrial revolution and towards an economy of ideas where social capital is as important as more traditional forms of capital. In addition, societies use of technology has transformed the World Wide Web, shaping technology into a decidedly social view as a variety of new social network capabilities are brought to market. Many social networking technologies encourage the accumulation and maintenance of bridging social capital, the type of social capital correlated with both innovation and economic growth. Accordingly, community leaders can steer their efforts to grow bridging social capital by creating powerful, connected and diverse communities designed with the exponential growth of weak ties in mind, perhaps igniting social and economic processes described by both Ridley and Shirky.
There is no reason to hesitate, given the numerous opportunities to collaborate with forward-looking community organizations, industry, academics, and trading partners. The roadmap to build a connected community is clear, based on a strong theoretical foundation, and the groundwork of centuries of human progress. Leaders of vision will embrace the opportunity to drive economic growth and improve quality of life by harnessing the collective efforts of an increasingly connected and diverse constituency. The creation of a vibrant and connected community will help community leaders redraw the boundaries of traditional place-based communities, to engage a broader, and more inclusive constituency to improve both quality of life and create economic growth. The community of the future is here.
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The GDP and Implications for ConsumersPosted: February 9, 2012 | Author: rjrock | Filed under: Macroeconomics | Tags: creative destruction, economics, GDP, macroeconomics, social progress | Leave a comment
Consumption is normally the largest component of the GDP (Bureau of Economic Analysis, 2007), defined as the value of household spending on durable goods, non-durable goods, and services (Mankiw, 2012). Consumption affects households and individuals insofar as it is reflective of the standard of living; meaning that higher consumption generally is indicative of a higher standard of living and vice versa. The major determinants of consumption are income, savings, and expectations of the future and the resulting use of available credit. Of major concern to many critics of the nation’s myopic focus on GDP as the primary measure of national progress, is the focus on consumption has helped create an era of hyper consumption, where many live far beyond their means by most measures, including economically, socially, or environmentally (Cobb, Halstead, & Rowe, 1995). Indeed, the latest financial crisis and subsequent global recession can be laid at the doorstep of hyper consumption as lending institutions made cheap credit available to millions of Americans irrespective of credit worthiness; where the subsequent defaults plunged the nation and the globe into crisis (Nanto, 2009). The focus on consumption distorts the decision-making of households, businesses, and government alike, obfuscating unsustainable practices by not including their impact in the equation, resulting in hyper consumption.
“Investment is the purchase of goods that will be used in the future to produce more goods and services” (Mankiw, 2012, p. 201), including capital equipment, inventories, and structures. Increasingly, businesses pursue lean manufacturing techniques to minimize inventories, because high inventory impacts a firm’s profitability and ability to compete. In addition, high inventories can be a boon to consumers, as prices tend to drop as businesses seek to unload excess inventory.
In 2009, government purchases were nearly three trillion dollars or more than 20% of the nation’s GDP, a significant portion of the economy (Mankiw, 2012). Government purchases are the money the government spends on goods and services, rather than transfer payments that redistribute income (Mankiw, 2012). Government spending is part of governmental fiscal policy and is used as an instrument to improve market outcomes. For example, after the latest global financial crisis, government spending was increased as part of the American Recovery and Reinvestment Act of 2009, where more than $840B in federal stimulus spending was spent in the form of tax breaks, grants, and entitlements (The Recovery Accountability and Transparency Board, 2012). The impact for households and businesses was twofold; first, the economy was injected with money, improving access to credit and lowering expenses, as a strategy to fuel consumption. Second, the spending focused on job creation, awarding grants to projects that created employment for more than 200,000 new job recipients (The Recovery Accountability and Transparency Board, 2012). Government purchases make up a significant portion of the GDP and impact the daily lives of consumers when wielded as an instrument of fiscal policy to improve market outcomes.
Net exports are the final component of the GDP and is “the foreign purchase of domestic goods minus the domestic purchases of foreign goods” (Mankiw, 2012, p. 202); or put more simply, exports less imports. Net exports are removed from the GDP, because imports are counted in the components of consumption, inventories, or government purchases (Mankiw, 2012). Net exports are most commonly discussed as the trade deficit in the media and often in a negative light, as many consider the trade deficit to be the result of poor trade policy, while bemoaning the loss of U.S. manufacturing jobs. Rather, the trade deficit is the result of inflows of foreign capital because of the steep decline in personal and government savings over the last twenty years (Arnold, 2000). In other words, increased consumption and government purchases resulted in historically low savings, increasing foreign capital inflows. Arnold (2000) finds that the trade deficit is both harmful in some respects and helpful in others, but benefitting the U.S. economy in small but important ways; suggesting Congress should not alter trade policies, rather allow the trade deficit to recover naturally, or alternatively, improve incentives to encourage savings. The impact of net exports on consumers and businesses are complicated, but can be considered beneficial on the whole, while both harmful and helpful in specific instances; helpful in the sense that consumers can increase their standard of living by consuming goods at lower costs than domestically purchased products, and harmful insofar as cheaper imports result in manufacturing job loss domestically.
The GDP is the primary measure of a country’s economic growth. Very often, and specifically in the U.S., there is a myopic focus on the GDP as the primary measure of economic well-being. Indeed, Mankiw (2012) indicates that “GDP does not directly measure those things that make life worthwhile, but it does maintain our ability to obtain many of the inputs into a worthwhile life” (p. 209). In business, there is an oft-cited mantra, “if you can measure it, you can manage it”. While the GDP is useful allowing individuals, businesses, and policymakers to manage economic growth, it ignores other critical measures of well-being like sustainability, social health, and national progress.
Arnold, B. (2000). Cause and consequences of the trade deficit: An overview. Washington DC: Congressional Budget Office Retrieved from http://www.cbo.gov/ftpdocs/18xx/doc1897/tradedef.pdf.
Bureau of Economic Analysis. (2007). Measuring the economy: A primer on the GDP and national income and product accounts. Washington DC: BEA Retrieved from http://www.bea.gov/national/pdf/nipa_primer.pdf.
Cobb, C., Halstead, T., & Rowe, J. (1995, October 1995). If the GDP is Up, Why is America Down? Retrieved February 5, 2012, from http://www.glaserfoundation.org/program_areas/pdf/If_the_GDP_is_Up_Why_is_America_Down.pdf
Mankiw, N. G. (2012). Principles of macroeconomics (6th ed.). Mason, OH: South-Western Cengage Learning.
Nanto, D. K. (2009). The Global financial crisis: Analysis and policy implications. Washington, D.C.: Retrieved from http://www.fas.org/sgp/crs/misc/RL34742.pdf.
The Recovery Accountability and Transparency Board. (2012). Recovery.gov: Tracking the money Retrieved February 5,, 2012, from http://www.recovery.gov/Pages/default.aspx