What’s wrong with GDP? Everything

The ABC’s business editor, Ian Verrender, is the latest commentator to question the usefulness of Gross Domestic Product (GDP) as a welfare measure:

When it comes to mainstream economists, there’s nothing they enjoy more than a good old-fashioned disaster.

It’s here the dark clouds evaporate, leaving nothing but silver linings.

Cast your minds back just a little. Remember Fukushima? Economists across the globe were quick to point out that the disaster may help lift Japan out of its ongoing economic slump.

How? Rebuilding Japan’s power sector and rehabilitating the toxic countryside, not to mention reconstruction from the devastating losses wreaked by the tsunami, would boost activity.

How about the Christchurch earthquakes? Again, they were banging on about how all those house rebuilds and construction jobs would turbocharge GDP.

Now, finally, we have our own and, already, we’ve been hearing just how this may help us down the track.

If you believe most of our mainstream economists, including the Reserve Bank, the bushfires — while a terrible tragedy — will provide a boost later on.

Take this argument to its logical and ludicrous extreme and you could argue we could be the poster-child economy for a new and exciting growth model.

If we are subject to increasingly horrendous fire seasons, according to this perverse logic, we might just be able to tap into a new economic growth paradigm…

The idea that there are benefits to a disaster like our fire crisis tells you there’s something horribly wrong with the way we measure economic growth and performance…

GDP captures short-term growth but ignores many of the longer-term costs…

Even the accounting is flawed. GDP measures productive activity. It measures the changes in our output. But it doesn’t put a value on what we already have…

When fires consume hard assets — the houses, the infrastructure, the businesses, the livestock — there is no recorded loss of value. It instead records the loss of income those assets produce.

But when those houses and infrastructure are replaced, that’s considered economic activity and output, and so that is lodged as a gain. And that’s why you’ll repeatedly hear in coming months how our economy has been given a lift by the rebuilding efforts.

What is ignored is that all that effort, investment and time could have been devoted to something far more constructive and positive than simply replacing what we already had…

You’ll get no argument from me. For years MB has slammed GDP as the primary measure of economic progress. We have also 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 same goes for natural disasters like bush fires. GDP perversely benefits from these because it does not account for what is lost and only captures the ‘benefits’ from rebuilding lost assets.

Even 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 sooner the economics profession, media and policy makers moves beyond GDP as the key measure of economic progress, the better.

Though, I’m not holding my breath.

Unconventional Economist
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