The New York Times last week published a great article on the folly of using GDP as the primary measure of economic advancement. The essence of the article is captured in the next chart, which shows how real median household income in the US has fallen since the late-1990s, despite reasonable growth in per capita GDP:
From the article:
The 2013 median income remained a whopping 8 percent — about $4,500 per year — below where it was in 2007. The 2008 recession depressed wages for middle-income Americans, and they haven’t recovered in any meaningful way. And 2007 household incomes were actually below the 1999 peak.
…the new evidence that pay is stagnant for middle-income families strikes us as the most important thing contained in this report…
This simple fact may be the most important thing to understand about today’s economy: Around 1999, growth in the United States economy stopped translating to growth in middle-class incomes. In the last 15 years, median income has been more or less flat while there was far sharper growth in, for example, per capita gross domestic product…
But there really is no mystery as to why public opinion has been persistently down on the quality of the economy for years. You can’t eat G.D.P…
Personally, I believe that economists’, the media’s, and the Government’s infatuation with GDP is one of the biggest shortcomings in macro-economics.
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 and arguably reduces living standards of the pre-existing population.
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 and competitiveness.
Finally, there are other anomalies with GDP, as illustrated by the 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.
To add insult to injury, the increase in export volumes has lowered export prices (i.e. more goods are being sold at lower prices), yet this reduction in income is not being captured in headline GDP, which only measures volumes produced within an economy.
In some ways, Australia is now facing a similar situation to the US above, with real per capita national disposable income down 1.9% since December 2011 despite 2.8% growth in real per capita GDP over the same period, with further divergence likely as the terms-of-trade continues to fall (see next chart).
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 alike.