The GDP delusion – don’t pop the corks just yet

by on April 1, 2017

Yesterday (31 March 2016), Australia equalled the Netherlands’ record of 103 consecutive quarters of economic growth, as measured by Gross Domestic Product, without a recession. So why aren’t the champagne corks popping? The Netherlands’ boom came with gas in 1982 and ended with the Global Financial Crisis in 2008.

Australia’s boom began in 1991 after “the recession we had to have” followed by economic reform, a mining boom and a Keynesian boost in government spending to prove the Global Financial Crisis would amount to a recession we did not need to have.

So why are so many people feeling anxious and worse off? Why don’t they accept the conclusion of then British Prime Minister Harold MacMillan who asserted in 1957: “Most of our people have never had it so good”?

Of course, quite a few people in Australia (those on higher incomes and wealth) are enjoying the long period without a recession, but not the majority.

We are not having it so good because, even if you accept GDP as a measure of “good” life, the figure itself is a mirage. It has up to half a dozen major flaws.

POPULATION: In the Netherlands’ boom of 1982 to 2008, its population increased by just 13 per cent. In the Australian boom from 1991 to 2017, on the other hand, the population rose an astonishing 42 per cent. So we may have had an ever-increasing size of the cake, but there were so many more mouths to feed it to that often many people were not getting any more cake than they had in the past.

Indeed, when you adjust for that factor alone, Australia has not had 103 quarters without a recession. On a per head basis, Australia had recessions (two or more consecutive quarters of GDP contraction per head) in 2000, 2006 and 2008.

In those years people, on average, went backwards.

EQUALITY: The next trouble with GDP is that it is a national figure. It would be a mistake to think that everyone is better off if that figure rises. To the contrary. Whereas the fruits of the Dutch boom were spread evenly and equality increased, in Australia the opposite has been the case.

A test of inequality is the difference between the average income and the median income. To get the average you add up everyone’s income and divide by the number of people. To get the median income you find the income of the person in the middle who has half the population earning less and half earning more.

Let’s take a simple example to illustrate the point. Let’s take a nation with five people each earning $5. The average income is $5 and the median income is $5. Now let’s spread the income more unevenly with our five people getting $0, $1, $1, $10, and $13. The average income is still $5 but the media income just $1 because the two rich people at the top are hogging it all. The top end sucks up the income from the bottom making the median income lower and lower while the average remains misleadingly the same, or even higher as in Australia’s case.

The latest Australian data shows a large, and increasing, difference between average and median income. In 2013, median household income was $80,704 but the average was a much higher $107,276. A few rich people at the top are pulling the wealth in and the average income up while the middle and lower ground is being stretched.

Obviously complete equality of income would be incentive-destroying, but too much inequality causes resentment and disincentive.

DEBT: Australia’s household debt is now the largest in our history, a lot of it fuelled by the housing boom and banks’ poor lending policies which allow people to use mortgage raisings for consumption of consumer durables and the like. Some debt finances productive investment, but an increasing amount does not. We are buying our GDP growth with debt. It happened during our 103-quarter “boom”, and we should not be too self-congratulatory about it. A reckoning will come.

REPAIR: As if we needed last week’s Cyclone Debbie to remind us, climate change will cause weather events to be increasingly. Bizarrely, work done to repair the damage from cyclones and bushfires is counted in GDP. Small wonder people feel they are staying in the same place while GDP rises. GDP does not subtract environmental destruction from the national account; it only adds the repair bill.

FINANCIAL HOGGING: The hogging by the financial sector in the past 25 years is notorious. The growth of the sector and its “profitability” is notorious. But it does not produce real wealth. It is just the speculative movement of money by leeches who can spend the money they gain in the real economy. They have produced no real goods or constructive services (medical, educational, architectural and so on).

Far from creating new wealth, the finance sector produces destructive speculative bubbles, but it adds to GDP and the illusion that we are better off as GDP rises.

OVERALL: Despite GDP increases, real wages are not rising. Profits at the top are, but they are not being shared. People don’t just “feel” worse off, they are worse off. The increasing cost of housing, electricity, water, food and fuel is outstripping wage growth.

Associate Professor Ben Phillips, of the ANU Centre for Social Research and Methods, has done the figures. Allowing for inflation and population growth, “on average we find that living standards in Australia peaked in June 2012 with living standards increasing by 53.5 per cent since March 1990. Since this peak, living standards have declined by 0.6 per cent to March 2016.”

Tragically, the Australian Bureau of Statistics has been squeezed so much that it gave up its series “Measuring Australia’s Progress” which took into account all the things that really matter to people’s well-being. And we plod on with the deeply flawed and delusional GDP measure. And no doubt, when the figures come in confirming the 103-quarter “record”, some of our deeply flawed and delusional ministers will take the credit.
This article first appeared in The Canberra Times and other Fairfax Media on 1 April 2017.

{ 2 comments… read them below or add one }

Stephen S 04.01.17 at 11:09 am

Or take prosperous Sweden, its population dawdling from ~ 8m in 1970 to ~ 10m now. Unlike us, they put quality ahead of quantity.

We’re already OECD champs at population growth and housing unaffordability. To bake in GDP Growth 4Eva and Rising House Prices 4Eva, ScoMo will prop up his budget with the usual ~ 200k migration underlying the usual ~ 350k population growth. With a straight face, the ex Property Council chief will also announce a ‘housing package’.

Janet McBain 04.01.17 at 12:48 pm

So, apart from limiting population growth, what do you suggest as the solution?

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