Ross Gittins has joined the growing band of economists questioning the merits of GDP as the key economic measure of progress:
GDP is the most closely watched bottom line of the “national accounts” for the Australian economy…
The critics are right to point out the many respects in which GDP falls short as a measure of human wellbeing. But, though it’s true many people treat GDP as though it is such a measure, it was never designed to be used as such.
I agree with the critics that there’s more to life than economic growth and that politicians and economists should give less attention to growth and more to the many less tangible, less well-measured social factors that also affect our wellbeing.
It’s true, too, that GDP was developed before we became conscious of the need for economic activity to be ecologically sustainable – which the present hellish summer reminds us it certainly isn’t at present. In this sense, GDP is no longer “fit for purpose”.
I have explained previously why I believe that real GDP is a rubbish measure of economic well-being (here, here and here), and have argued 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 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.
GDP also takes no account of environmental damage, and effectively treats the earth as a business in liquidation. Digging up finite resources boosts GDP, but does not account for what was lost.
With GDP, we can bulldoze a perfectly good home to build a new one, and this process will boost GDP. But again, no account is taken of the loss of the old building, even though the asset base did not actually increase.
The Productivity Commission agrees that GDP is a useless measure of wellbeing, noting the following in its Migrant Intake Australia report:
While the economywide modelling suggests that the Australian economy will benefit from immigration in terms of higher output per person, GDP per person is a weak measure of the overall wellbeing of the Australian community and does not capture how gains would be distributed among the community. Whether a particular rate of immigration will deliver an overall benefit to the existing Australian community will crucially depend on the distribution of the gains and the interrelated social and environmental impacts.
The ABS did try to develop new ways of measuring Australia’s progress, which included a bunch of qualitative factors such as health, safety, equality, etc. However, I understand that this development has been shunned.
What a shame.
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