Too much tosh about GDP versus Wellbeing

Dr Bryce Wilkinson
26 June, 2019

There is too much critical tosh in the public domain these days about GDP (gross domestic product). 

GDP is being criticised because it does not measure wellbeing. Even the outgoing Secretary to the Treasury has been decrying GDP for this reason. He has approvingly cited a misguided assertion by Robert F. Kennedy, or more likely his speechwriter, that GDP measures nothing useful. 

A couple of weeks ago, seven Massey University academics published a substantial report proposing a Genuine Progress Indicator that “seeks to overcome the limitations in GDP”. The problem they seek to overcome is that GDP “is a woeful measure of wellbeing”.

Both assertions appear to utterly misunderstand GDP, which is one of many measures developed by the United Nation’s System of National Accounts (SNA). These accounts are enormously informative. They measure the extent of each country’s economic transactions in goods and services.  

What is produced and sold produces market income. The values for domestic production spending and income are intimately related. The SNA reconciles them with commendable clarity.

To say that GDP measures nothing useful is to say market income measures nothing useful. No one believes that, least of all those pressuring governments to spend more and more of national income on this or that. 

The cumulative effect of this pressure is shown by increased government spending. Labour’s pre-election fiscal plan proposed to increase Crown operating spending by $12 billion in the five years to 2022. Budget 2019 has upped that to $31 billion. With additional capital spending the total increase could be $42 billion. That represents $24,000 per household.

What is obvious to the lay person but is being obscured by too many advocates of wellbeing measures is that income is very important for wellbeing. Income is what makes shelter, food, clothing and much else affordable. 

Income growth has produced a middle-class out of what was peasantry. A recent research paper found that income growth across more than a century and many countries had been more important than health care spending in raising life expectancy from birth. That makes sense: think of car safety, waste disposal, potable water, and diet for a start.

To criticise GDP because it is not a wellbeing measure is to criticise it for something it is not intended to be. One might as well criticise a car for not being a submarine.

Income is what makes higher levels of wellbeing, including a cleaner environment, more affordable. That is why national income growth per capita is so important for future wellbeing. 

Certainly, there are difficulties with the measures of national income. There always will be. But on the evidence, they are not major. 

Existing measures of income growth are highly correlated with measures of improving wellbeing, such as life expectancy, child mortality and a cleaner environment. In 2017, the simple correlation coefficient between GDP per capita and surveyed life satisfaction across 143 countries was material, at 0.73.

In 1998, Bjorn Lomborg’s The Skeptical Environmentalist exhaustively documented the environmental and other gains from a century of rising prosperity among industrialised countries.

A 2015 New Zealand Initiative report, The Case for Economic Growth by Eric Crampton and Jenesa Jeram, decried the current fashion of belittling the importance of per capita income growth.

None of this is to argue that governments should seek to maximise measured economic growth. That would be wrong. Leisure time has value, too. Government should not try to force people living within their means to work longer hours or shorter hours. It does not know their full situation. 

What it does mean is that Government should be careful not to stifle the means by which people can legitimately increase their incomes. Anyone who professes to care about the overall future wellbeing of New Zealanders should have a strong focus on facilitating per capita income growth through productivity growth.

That focus was lacking in Budget 2019. The Minister of Finance’s Budget Speech set no accountable targets for wellbeing improvements from all the additional billions of spending. It did not even seem to see a need to persuade taxpayers that the money would be well spent. 

Each additional dollar spent by government is a dollar less that can be spent by the person who earned that dollar. Unless the government can spend each dollar better than the person who earned it, overall wellbeing will fall.

The problem of poor value-for-money from much government spending is decades old. When billions of dollars are being spent without any clarity about what the problem is for which the spending is a solution or what is to be achieved, great waste is assured but hard to quantify.

Last year, a New Zealand Initiative report, Fit for Purpose?: Are Kiwis Getting the Government They Pay For?, cited a broad brush Canadian cross-country study that suggested the annual waste in government spending in New Zealand could be of the order of 13 percent of GDP, or $20,000 per household.

It is all too easy to blame the politicians for the inveterate failure to ensure value for money in government spending. Arguably, the blame should fall more on “what’s-in-it-for me” voters and lobbyists than on the politicians. Political parties are not political eunuchs.

As for the bureaucrats, how often does one see them offering to cut their own budgets by stopping ineffectual programmes? Last Thursday, Treasury’s former deputy chief economist publicly lamented the sorry state of senior leadership in the public sector. Apparently, clear evidence of ineffectual spending on labour market programmes was simply shelved through lack of will to shake the tree.

Certainly, as individuals, politicians and public servants commonly do have the overall wellbeing of New Zealanders at heart. Their problem is the partisan priorities of the institutions they are part of.

Low per capita income growth has long been the weak point of New Zealand’s economic performance. Attempts to belittle the best measures we have of national income do not help. 

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