Commentary

DODGY GDP FAILED TO REVEAL THE SECRET RECESSIONS WE HAD TO HAVE

ADAM CREIGHTON
1,122 words
6 March 2017
The Australian
AUSTLN
Australian
10
English
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Australia’s economy keeps ‘growing’, but not a lot of us know what that means

Australia’s so-called growth miracle isn’t very miraculous. It’s built on a sustained influx of people.

News the economy grew 2.4 per cent in 2016 prompted another bout of backslapping. “Australia is growing
faster than every G7 economy. Our growth continues to be above the OECD average and confirms the
successful change that is occurring in our economy,” Treasurer Scott Morrison gushed last week.

Actually, it confirms our population continues to grow strongly. Indeed in 2014, the latest year of comparable
data, Australia’s population grew faster than that of the 33 other OECD countries, except Israel and tiny
Luxembourg.

Obviously, more people means more buying and selling of goods and services. Australia’s population growth
has averaged more than 1.6 per cent a year for a decade, or between 300,000 and 460,000 people a year,
about half of which is due to immigration.

GDP per person is surely a more relevant criterion for how we’re travelling economically. And far from 25
years of unbroken economic growth, on that measure Australia has had recessions in 2000, 2006, and late
2008. Indeed, Japan, long considered an economic basket case, has achieved almost the same level of GDP
per capita growth as Australia over the past five years.

Japan’s population is falling. Japan also has an unemployment rate of 3 per cent, about half Australia’s, and
vast foreign assets from which it derives income.

Australia’s strong consumption growth by contrast is built on debt, much of it borrowed from overseas, which
naturally is not picked up in GDP figures. Our net foreign liabilities exceed $1 trillion, among the highest levels
in the world.

GDP isn’t a very informative measure.

In fact, it’s a pity there wasn’t a recession last year. Not for any misanthropic reasons, but because it would
have been a good opportunity to highlight how an obscure economic statistic designed in the 1930s to help
the Roosevelt administration meddle with the economy now bears little relationship with anything that really
matters.

Australia’s GDP shrank in the third quarter of last year, prompting fears of a recession, which is arbitrarily
defined as two quarters of falling GDP. As it turned out, GDP bounced back by 1.1 per cent in the final few
months of last year. Per capita it rose only 0.7 per cent. In fact in trend terms, in figures that seek to strip out
volatility, per capita income hasn’t increased at all for six months.

But what does such “growth” mean anyway? Hardly anyone knows. The manual to put GDP together has
blown out to 722 pages from just 53 in 1953, as the difficulty of measuring an exploding variety of goods and
services has overwhelmed statisticians.

GDP does not measure welfare or prosperity, as many assume; it is a clunky attempt to add up the
inflation-adjusted value of final goods and services (intermediate ones are excluded) that are produced (or,

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equivalently, bought) in an economy over a specified period. It doesn’t matter how damaging or wasteful
those expenditures are; everything is treated equally.

The more diabetes, divorce, incarceration, wars and natural disasters, the higher the GDP. The more leisure,
the lower the GDP. Wasteful government spending is tallied along with individuals’ considered purchases
valued at prices determined by the free market. Anything that costs money in the legal economy is a plus,
anything that isn’t priced is a minus.

Many industries that make large positive contributions to GDP aren’t necessarily beneficial. In less amoral
times, lawyers weren’t allowed to advertise, for instance, because of the harm they might cause society.
Banks weren’t allowed to gamble with taxpayer-guaranteed money.

Both practices boost GDP, though, and increasingly.

Economist Diane Coyle points out in her recent book on GDP how the contribution of banking to the British
economy surged in late 2008, just as banks were being bailed out. Apparently, the more risk taken on by
banks, which were once thought of as intermediaries, the more they were “contributing” according to the GDP
rules.

The Nobel prize-winning economist who came up with GDP for the US government, Simon Kuznets, warned
against using it as a measure of prosperity. He wanted government spending (especially military), swaths of
advertising and financial speculation excluded from the calculation. He lost that battle, which has cast a long
shadow.

Just as the Roosevelt administration was determined to show how its fiscal measures were helping the US
economy, the Rudd government splurged $42 billion in 2009 partly to stop GDP from declining and to prevent
it being charged with overseeing a “recession”.

Australia’s GDP growth rate has bobbed about since the financial crisis with little relationship to Australians’
wages, employment status, wealth, or quality of life: the things that matter to most people. Had demand for
iron ore or coal collapsed around Christmas and GDP contracted (net exports are a big part of the
calculation), wages growth would have remained unaffected.

The biggest criticism of GDP is the difficulty of measuring and adding up the quantity of services. Tallying up
the production of farmers, miners and manufacturers is relatively easy.

At its heart, GDP is a measure of output, but services don’t typically produce any. GDP assumes that if we
are paying more for services, we are getting better quality, or at least more of them. But that’s not true. A
recent study in the US showed the share of spending on health, education and housing services had
increased from about 25 per cent to 40 per cent of GDP since the 1980s.

The study by polling company Gallup showed the prices of education, health and housing had soared by
factors of nine, five and four times, respectively. That mirrors trends evident in Australia. Yet in each of these
areas the quality of outcomes had either stagnated or declined.

The quality of housing, factoring in the length of commute times to work (which, by the way, increase GDP),
hadn’t improved. Standardised testing in schools and managerial bloat in universities suggests that the
education system is increasingly less efficient. Meanwhile the massive increase in health spending hasn’t
produced improvements anywhere remotely commensurate, and on some measures, such as obesity, we
have gone backwards.Australia is a vast country that millions more people can and should call home. But
mindlessly adding up the things they buy every three months doesn’t seem to be a good indication of their
prosperity.

Document AUSTLN0020170305ed3600024

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