GDP is rubbish!

ScreenHunter_1562 Mar. 07 08.22

By Leith van Onselen

The Australian’s Adam Creighton has written a good article today questioning economist’s infatuation with Gross Domestic Product (GDP), which Creighton argues is next to useless as a measure of economic progress:

At best, gross domestic product is a harmless, if increasingly muddled, artefact of a bygone era; at worst it is a ruse underpinning the fallacy that bureaucrats can measure and politicians can control economic activity…

A higher divorce rate boosts payments for childcare, lawyers and paid housekeeping, so it helps GDP, as do heatwaves and wars because of their demand on power. GDP considers frivolous debt-fuelled consumption as worthy of inclusion in “economic growth” as considered long-term investment, public or private. It treats mindless government spending, valued at cost of provision, with the same reverence as individual purchases valued at prices determined by the free market.

The occasional fool even suggests natural disasters are “good for the economy” because GDP…

Proponents of GDP retort that it’s not meant to be a measure of welfare. Well, what is it meant to be, then?..

The pace of technological change has made it much harder to meaningfully compare incomes or output at more distant periods of time. It’s misleading to say incomes today are some multiple of their level 50 years ago, specified in dollars, when the goods and services those incomes can buy have changed so much?..

Perhaps the biggest GDP-induced disaster in recent times stems from how financial services have been included…

Pandering to vested financial interests suddenly paid political dividends for politicians keen to boost “growth”. Perhaps it isn’t surprising finance’s share of modern economies has surged about fourfold since World War II.

Leaving aside Creighton’s concerns about GDP, which are all valid, there’s also the issue with economists’, media’s, and Government’s infatuation with headline (overall) GDP, while per capita GDP is ignored.

This infatuation has led to spurious policies like the pursuit of endless population growth on the basis that it stimulates headline GDP (more inputs equals more outputs), even though it provides next to no benefits to everyone’s share of the economic pie, as measured by GDP per capita (see next chart), and arguably reduces living standards of the pre-existing population.

ScreenHunter_1563 Mar. 07 08.41

Then there is the focus on the quantity of growth in GDP, rather than the quality (and sustainability) of growth, such as the Government and RBA’s never ending drive to increase house (land) prices and private debt, which creates structural imbalances and damages longer-run productivity.

Finally, there are other anomalies with GDP, as illustrated by the upcoming pick-up in the volume of commodity exports as the mining investment boom ends. The transition from the mining investment boom to an export boom will see the loss of a large number of jobs – up to 100,000 according to NAB. And yet the rising export volumes will largely offset the negative growth impact from falling mining investment, effectively supporting GDP as unemployment rises materially. Moreover, the increase in export volumes will likely lower export prices (i.e. more goods will be sold at lower prices), yet this reduction in income will not be captured in headline GDP, which only measures volumes produced within an economy.

Thankfully, the ABS is developing new ways of measuring Australia’s progress, which includes a bunch of qualitative factors such as health, safety, equality, etc. Let’s hope that it gains greater prominence amongst commentators and policy makers.

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Comments

  1. “The economic impact of the Canterbury earthquake will be positive for gross domestic product, economists say….The earthquake in Christchurch will mean more work for the building sector, which has plenty of spare capacity. ” Say no more….(NZ has a Rockstar economy – Bloxham)

    • Weirdly this is less wrong than you might expect. Classic broken window fallacy but; If the insurers had actually paid out the additional income might well have added more cash to the local economy than was flowing out. Of course this highlights the problems with GDP again. More GDP or money isn’t the same as better.

  2. Population growth is a negative to both quality of life and GDP per capita once excess capacity in any major infrastructure is used up.

    We have a country built on resources, animal carrying capacity and a limited number of fertile acres, the value per person of which is diluted by every additional person.

    We have also had the benefit of the infrastructure boom after the second world war and the excess capacity built into much of our physical infrastructure. That excess has now been utilised to the maximum.

    The low hanging fruit of relatively painless GDP growth was reached when morning and evening clearways need to be extended to Saturdays.

    In Sydney, the cost of additional rail and road infrastructure is now to the stage where it involves mass excavation, tunnelling or elevation.

    Sydney is full and the interests of the citizens in quality of life is being overwhelmed by the interests of companies in a larger market.

    • I’m no fan of rampant population growth either, but what this critique discounts is the value of collaboration, as well as the value of a mass market. If your argument works, then wouldn’t the world have been in more trouble a long time ago? Yeh we’re pushing its limits that’s for sure, but we’ve managed to add more people and do some pretty ingenious things.

      That said, Big Australia needs to make its case better, and adding people because they make the economy bigger, and then ignoring their effects on per capita living standards, is silly.

    • I remember it being said a while ago that Barry O’Farrells most cost effective infrastructure policy is the regional relocation grant which pays people $7K to move out of Sydney.

      When you look at the eyepopping price tags of the M5 east duplication at $5B and M4 East at $10B it’s not hard to see why that is.

  3. “Thankfully, the ABS is developing new ways of measuring Australia’s progress, which includes a bunch of qualitative factors such as health, safety, equality, etc. Let’s hope that it gains greater prominence amongst commentators and policy makers.”

    Trying to maximize such an indicator would be much too difficult for today’s breed of politicians. Perhaps that’s why the government wants to cut it’s budget? 😛

  4. Yeh its a great set of points from Creighton. Important to consider the intellectual foundation on which his article rests, though. Its very much in the Hayekian view of the world, which questions our ability to understand a complex system and design it in ways we wish. MB does at times forget this, with suggestions for levers and designs to make the economy better (e.g., macroprudential – I’ve yet to be convinced this website has really evaluated in any major way potential for unintended consequences). And remember, what we can measure distracts us from thinking about causality from things we can’t measure. It directs us to intervene, and measure those interventions. Often this is just folly.

    • Macroprudential isn’t perfect by any means – in fact if the supply-side worked properly they wouldn’t be needed at all. But given our busted structure, it’s better than the alternative, and I fail to see many downsides.

      • Who do you think will get frozen out of ownership if the macro prudential setting work slowly?

        What do you think will happen to recent purchasers if macro prudential controls work quickly?

        How much bigger will the downsizing be/smaller will the inheritance be if the free cash from downsizing is reduced because of a significant market fall?

        The unintended downsides to macro are obvious.

      • flyingfoxMEMBER

        @Explorer

        Firstly, if it’s your own home. You shouldn’t care what happens to the price and should have thought about all this before signing on the dotted line.

        If it an IP, then welcome to the world of investing. Happens all the time. Policy decisions impact the stock market every second.

        If we start wrapping everything in cotton wool, we will never get reforms.

      • @UE The real alternative to macroprudential reform is surely the hard yards of microeconomic reform. As you say, if the supply side works properly, macroprudential isn’t needed. So fix it. The government already has a list of microeconomic reforms as long as your arm, courtesy of the Productivity Commission. Add a few things like land tax and planning reform, then go out and sell it to the public. Where is Paul Keating when you need him?

        • Macroprudential can be introduced (and take effect) quickly, whereas microeconomic reform takes longer. We should be doing both: taming credit while we work on the supply-side of the economy.

      • Yeh its a solution to a second best world, and I can see why it is attractive – until we can fix supply side, why not reign in demand? Fair enough. But I don’t see much discussion on here about what unseen effects this might have. Such an argument might make MP tools a better sell.

  5. Adam has been producing some quality material lately for the OZ. I especially like his comment on childcare.I know of so many people getting divorced currently. People cant afford to have mum stay home with her babies so she goes to work sends bub to creche and GDP is up, She is pissed at hubby for not making enough cash so she leaves him. Divorce lawyers take them both for everything GDP goes up. Ex hubby buys a Jayco Pop top to live in with what’s left over . Jayco Pop top springs a leak he gets it fixed GDP up.
    We should ditch this measure for one about Disposable income, that doesn’t include that bullshit about imputed rent. To my mind a population becomes better off when they have something left over after paying essentials, increasingly that is not the case in Australia.

    • flyingfoxMEMBER

      One of the best comments in a while. Pretty much sums up whats wrong with the world.

      Should add, wife gets pissed at hubby because he thinks it is ridiculous to buy a decent house at 1M.

      • +1 great comment Rod77.

        And hats off to Adam Creighton and our own UE.

        My heart skipped for joy on seeing that oh so apropos headline, and warmed the further on reading the article and reader comments.

        Now, if only we could all dig a little deeper, to discover for ourselves exactly why the (increasingly desperate) obsession with “GDP”, and “growth” in (any kind of) economic activity, irrespective of its quality, sustainability, or real non-monetary value to human society.

        Hint: the reason is the Usury-based money system; it creates artificial scarcity of “money”, and thus, competition between everyone to find something to “monetise” in order to repay the usurers something which does not exist — the uncreated usury component, of every single “interest”-owing loan ever made — and which thus “demands” ever increasing amounts of lending, or else “growth” will fall and borrowers rendered unable to repay the lenders.

  6. GDP also feeds the official recession measure. Allowing government to claim all is well when the economy is falling apart.
    If we took the houses out of GDP things would not look nearly as good.
    But really GDP is just a terrible measure that enables lazy reporting and economics.

  7. An issue not mentioned by Creighton is the increase in consumer surplus from the availability of free or near-free online data, which if we were using GDP as a measure of welfare should be counted, but is not.

    As noted by Erik Brynjolfsson and Adam Saunders, “we see the influence of the information age everywhere, except in the GDP statistics”.
    http://m.bruegel.org/?url=http://www.bruegel.org%2Fnc%2Fblog%2Fdetail%2Farticle%2F1044-blogs-review-gdp-welfare-and-the-rise-of-data-driven-activities%2F%3Fmobile%3D1

    If this were more transparent, perhaps the welfare destroying nature of efforts to strengthen IP protection and restrict file sharing would be better understood.

  8. Had a bit of a look into how GDP is measured and what goes into National Accounts definitions (5216.0 – Australian National Accounts: Concepts, Sources and Methods, 2000)
    I only have so much time so can only do so much research.
    ———-
    Question: does anyone know whether our resources are included in the accounts?
    ———-
    Might seem like a dumb question, but remember, our govt literally gives away resources to the miners in exchange for exploration fees + royalites + company tax with PAYE taxes a bonus.
    I do not see evidence that the ‘gifting’ of Commonwealth resources enters the equation at all.
    If true, would this not be the biggest example of delusional accounting on the planet?
    ———-
    Links to policy areas that answer this question will be appreciated.

  9. Yeah, I’ve been on about this for years, especially the fact that the deflator number is a bullsh.. Number anyway because it isn’t counting the large increases in the cost to buying a house.

    The other bodgy thing that defies common sense is that our federal government has deficit spent $50,000,000,000 per year for the last 6 years and has the hide to include that in GDP…. hey GDP grew, don’t worry about the fact that we borrowed $50Bn to do it.
    We’re all having our selves on… Emperor’s new clothes..

    • .. and now the Feds have to suck circa $14,000,000,000, rising to (estimated, lol) $18,000,000,000 per annum out of the nation’s “money” supply, just to pay usury only (not principal, that’s extra) on the “money” they have borrowed.

      Oh yes, and that usury bill that must be sucked out of the economy is not simply recycled back into the economy — circa 70% of it is payable to “non-resident” lenders.

      • Yeah Op8, like most people, governments are hopeless with debt.
        If that 300bn Labor wasted had been spent on infrastructure that produced a return to cover the interest, then it would have been good government, but now we are stuck with an interest bill of 14Billion per year and increasing.
        Now the government is not only deficit-spending, but also borrowing to pay the interest.At this rate we will catch up with Spain in only a few years.

        As an aside, the main street in Woy Woy was resealed with bitumen a few years ago…beautiful.
        Then the people doing the NBN came along a few months later and dug it all up to put the cable in.
        Now they’re starting to reseal it again.
        Great for GDP though.

  10. I have always said the size of the “tradables” sector is the real vital measure for long term health.

  11. I can’t resist the old joke…
    Two economists are walking down the street. One of them says to the other: “You see that piece if dog poop over there? I’ll give you a hundred dollars if you eat it.” So he does.
    A little later, the other one says: “Look, I can see another piece of dog poop. This time, it’s your turn to eat it and I’ll give you a hundred dollars.” So he does.
    The second guy then says: “Gee, don’t you feel foolish? I mean, both of us ate dog poop, you gave me a hundred dollars, and I just turned around and gave it right back to you?” The first guy replies: “No, No! We should be proud of ourselves! We just increased the GDP by two hundred dollars!”

  12. brian wooldridge

    Everybody’s tinkering with the present capitalist system when it is fundamentally flawed and unsustainable. The planet is in a irretrievable downward spiral to oblivion and unless something drastic is done or happens it will be drowned by human pressure and our natural heritage which sustains us will be lost .Iacocca asked “how much fresh air do we need? A measure of the arrogance of many.