Gross domestic product (GDP) has lost its lustre as a measure of wellbeing. Nobel Prize winning economist Joseph Stiglitz is running a project to explore its shortcomings. The Economist noted pithily that GDP ‘was (and is) a measure of production, not of welfare’. Western nations probably won’t follow Bhutan in adopting a ‘gross national happiness’ index, but they do need to understand why more and more people believe capitalism has failed them. GDP has grown but why do they feel worse off?
The hard truth is we are actually better off as a population but too many of us are worse off as individuals. For policy, it is not about selling the story of growth better, it is about changing policy – to make it more ‘human’.
Underpinning the primacy of GDP as a policy target is a presumption that this measure of growth is the most effective way to deliver the greatest benefit to the greatest number – particularly when supported by a conventional, neo-liberal economic policy that emphasises competition and globalisation. This approach has lifted millions out of poverty. But it is also clear economic growth no longer resonates as a policy target. So do people no longer believe? Or are people responding to changed circumstances by demanding more than just an increase in an economy-wide measure of economic output?
Growth in GDP and genuine gains in living standards are not the same, even though they are related. At low rates of sustained economic growth, the differences between the two become starker. Moreover, the difference between growth in GDP and growth in GDP per person also become more important.
For any aggregate measure of living standards, some people will do better than average, some worse. Some will even see their standards go backwards. This is where we are at present. In Australia and many advanced economies, GDP growth has slowed since the financial crisis. In per capita terms – the most relevant metric for individuals – it is not far from zero in many economies.
As such, personal circumstances in many cases are stagnating or getting worse, even before considering the specific nature of the GDP growth in the current cycle. The growth is increasingly occurring in new sectors, where the gains accrue more to capital than to labour, and where disruptive change in the jobs market is widespread.
The numbers are stark: even with the present pickup, the average rate of GDP growth is expected to remain below previous decades. In Australia, for instance, per capita GDP growth will struggle to edge much above 1% once we account for the narrowly-based gains from liquefied natural gas exports. Remember that population growth of around 1.5% has accounted for the bulk of GDP growth in recent years.
This slower profile reflects a range of influences, including less investment intensity in the economy, financial stability limits on monetary policy (which mean interest rate cuts are harder to come by), bank regulation that effectively squeezes bank credit as a driver of growth (in exchange for worthwhile structural benefits) and a global economy that is growing at a slower average rate. Additionally, as gains in income - or personal GDP - are closer to zero, the differences in the level of wealth, already pronounced, should be expected to become a greater source of concern.
Whether you think people simply no longer believe in GDP growth as the optimal policy objective or that they are responding in actual falls in their personal GDP, change is needed.
Economic policy needs to be more inclusive of the distributional issues, not only focussed on aggregate GDP growth outcomes. Transparency is needed, recognising that GDP growth driven by population change will not help this underlying disquiet because it does not imply gains in income at the individual level (even if it does result in gains for those who run businesses that depend on volume).
We need to reinforce that per capita GDP growth is unlikely to be sufficient to bail us out of the structural challenges that many countries face on issues such as fiscal sustainability and housing affordability. Serious action is needed on these policy challenges, rather than tinkering and waiting for the cycle to bail us out as it has so often done in the past.
Kate Raworth suggests in her book Doughnut Economics “today we have economies that need to grow, whether or not they make us thrive; what we need are economies that make us thrive, whether or not they grow”. That might go too far, but at the end of the day we do need to tilt the policy focus, or the level of disquiet will continue to grow.