GDP: misguiding the prosperity narrative
Authors: Nina Lo (Vice President of Student Engagement), Julian Scaturchio (Initiatives Consultant) & Connie Gamble (National Affairs Director)
October 29, 1929 marked the beginning of the Great Depression. In a search to comprehend the evolution of what was the greatest global contraction in the 20th century, governments scrambled to form a holistic view of the state of their own economies; there was no encompassing metric that reflected the health of an economy.
A quantifiable measure for the health of national economies would allow governments to track progress and more rigorously pursue industrial development. Accordingly, the gross domestic product (GDP) was proposed by Simon Kuznets, taking into account the economic activity of both the private and public sector. Post-WWII, GDP growth was observed to parallel a steady increase in standard of living. The allure of an economic metric that seemingly promised a raise in wellbeing was, at the time, an incredibly convincing case to make GDP growth a core national policy goal.
Over time, however, a growing number of economists have raised concerns about the extent to which state governments are influenced by GDP targets. Modern economists take issue with the fact that GDP fails to account for an array of factors, including unpaid work, happiness and mental wellbeing. Importantly, both critics and neoclassical economists, to different extents, admit that GDP fails to adequately allow us to understand wellbeing and visualise progress. In 1934, Kuznets himself stressed "the welfare of a nation can scarcely be inferred from a measurement of national income".
Yet, this mutual acknowledgement between economists by no means reflects the narrative or rhetoric adopted by the media and politicians. The influence of the media cannot be overstated: the public and political agenda are both subject to the media’s ability to frame problems to its readership.
What does this have to do with GDP? Put simply, liberal democratic governments would not pursue GDP growth so relentlessly if it wasn’t going to get them elected. As voters, our election choices are an opportunity to express our own opinions, desires and values. These values, however, are heavily influenced by media exposure and its ability to shape public discourse. By extension, the way we number the ballot box come election time is a distillation of what we have come.
Countries we define as ‘great powers’ virtually always bear the label of ‘advanced economies’. In the same vein, the terms ‘emerging powers’ and ‘emerging economies’ are often used interchangeably. At the state level, our pursuit of prosperity seems to have blended with the national interest of sustained economic growth somewhere along the way.
While a deeper media analysis sits beyond the scope of this piece, it is important to acknowledge the subtleties of public and political discourse as captured by the media sphere. This, over decades, has created strong public buy-in to the belief that GDP growth will ultimately benefit individuals, families and communities.
The framing of economic growth by news sources and politicians often means the oversights of GDP go unnoticed, or at the very least, unquestioned.
Using a metric which derives personal wellbeing from an accumulation of material wealth fails to capture the multidimensional nature of human beings. Many empirical studies have alluded to the idea that GDP only comprises a small portion of welfare. This is evident in cross-country data modelled by the UN which analyses the most important factors contributing to national happiness. Costa Rica for example, surpasses the US by five places in a ranking of country happiness, at 13th place globally, yet US aggregate GDP is approximately 341 times greater than Costa Rica’s1. Evidently, GDP is only loosely tied to the overall happiness of those whose economic output it intends to measure. Instead, the UN identified that variables such as life expectancy, freedom of choice, freedom from corruption, generosity and social support, contribute to nearly 75% of the variance in happiness. This evidence exposes GDP’s insufficiency to provide a consistent measure of happiness.
Another significant oversight of GDP is its failure to account for within country income inequality, which has been steadily rising since 1980. Twenty out of the twenty-two OECD countries experienced a rise in the Gini coefficient (a prominent measure of inequality) from 0.29 in the 1980s to 0.32 in 20132. Over the same period the OECD countries have experienced a rise in economic growth, with annual GDP per capita growing at 1-2% (disregarding the sharp decline to approximately -4.23% during the height of the Global Financial Crisis in 2009). The negative correlation between GDP per capita and the growing polarisation in wealth distribution worldwide, defines a glaring limitation in its ability to accurately reflect the economic standing of individuals.
GDP also disregards negative externalities on the environment, which has been of growing concern in the last half-century in light of irrefutable scientific evidence for anthropogenic climate change. The US has prevailed as the most prolific contributor to atmospheric pollution, accounting for 25% of accumulated global carbon dioxide emissions which is higher than any other country3. The US also constitutes 15% of world GDP, highlighting the positive correlation between carbon emissions and economic growth. This has triggered the need for more inclusive indicators which allows us to measure prosperity in conjunction with ecological sustainability and wellbeing.
Beyond GDP’s misalignment with social values and issues, its interpretation is often misleading and poorly understood. At a glance, recent GDP growth figures (pre-COVID-19) overwhelmingly support a narrative of continual economic prosperity; but despite the presumption that such trends necessarily translate to improvements in quality of life, many are instead reporting otherwise. This disparity in the narratives reported by the ABS and mainstream media, compared to real Australian households, is perhaps best captured by the Melbourne Institute in its annual ‘Household, Income and Labour Dynamics in Australia Survey’ – HILDA for short, which has examined a group of more than 17,000 Australians over time since 2001. HILDA’s most recent publication consists of data dating up to 2017; its statistics on household annual disposable incomes are summarised in the graph below.
Source: Household, Income and Labour Dynamics in Australia Survey 2001-2017
Source: Digital Financial Analytics
Evidently, despite small increases in mean disposable income; median disposable income peaked in 2009 and has since flatlined, sadly suggesting that the ordinary Australian household is in fact worse off than in 2009. Extending this to the present, Digital Finance Analytics’ survey of over 52,000 Australian households, revealed a similar trend, with a significant majority of Australian households reporting a levelling or decrease in their real income. Taking a closer look, our supposed run of financial stability and prosperity marked by consistent GDP growth seems dubious to say the least.
A possible explanation for the disconnect between GDP as a widely adopted measurement of prosperity, and the experiences of everyday people, may be found in the calculation of the metric itself – a measure of total consumer, government, investment and net export spending. Consequently, it is in theory possible that GDP increases may occur irrespective of poor results in important indicators of economic health such as consumer spending; or put simply, our economic struggles may indeed be shrouded by surges in deficit spending by a government attempting to further pump money into an economic bubble.
Though unsettling, the reality of such a state of affairs appears highly plausible upon closer inspection. In 2007, the rate of government debt to GDP was 9.7%, in 2019 it was 45.1%; it would seem highly unlikely that the government has chosen to take up such a massive amount of debt for the sole purpose of structural spending. As a result, total government spending as a percent of GDP has now soared to an all-time high, meaning the private sector has contracted in relative terms, exposing clear inefficiencies in ‘rehabilitation’ methods adopted by the government, and cracks in the state of the sector itself. Clearly, the picture is not as pretty as the seemingly ever-positive GDP growth rate would paint.
Additionally, data released regarding contributions to year-on-year quarterly GDP growth further evidence the fact that a GDP increase is not necessarily representative of economic prosperity. Despite GDP increasing 1.4% in the first quarter of 2020, Australians were spending less on general consumption, less on housing and other investments, and exporting less. However, this was made up for with a large increase in government spending and a lower value of imports – both factors concerning when put into context.
In response to these compounding concerns, multiple alternative metrics and frameworks seeking more holistic conceptions of prosperity have been designed, and to an extent, implemented.
The Genuine Progress Index (GPI) stands as one proposed alternative to GDP. Where GDP only has eyes for marketed economic activity, GPI actively integrates social and environmental activity which would otherwise go unaccounted. This negative or harmful activity can include ecological damage and destruction, pollution and resource depletion. Equally, it considers unpaid work, the cost of crime, and social inequity, allowing these aspects of the public sphere to influence the final metric. As such, a rise in GPI should indicate a rise in the standard of living and prosperity of society. While GDP is often assumed to do the same, certain scenarios suggest otherwise: GDP typically rises following a natural disaster, and continues to derive profit from structures such as the American military-industrial complex.
Of course, GPI too has faced its share of criticism, and has limited success. For example, in the United States, certain states have adopted the GPI as a consideration factor for budgeting decisions, though lacks universal adoption. The process of quantifying and attributing positive or negative qualities to economic events ultimately is an attempt to demarcate between good and bad, giving way to complex questions of morality.
Nonetheless, the GPI speaks more broadly to efforts of economists and social scientists to shift our perceptions of growth and prosperity. In recent decades, the words green economy has become increasingly familiar as the complexity and threat of climate change becomes increasingly apparent. As such, the field of ecological (or environmental) economics has also gained traction, underscoring the need for environmental considerations as we strive for sustained economic growth.
At its core, ecological economics recognises the existential importance of global environmental limits. In acknowledging the harrowing severity of climate impacts, such economists seek to mobilise economic policy planning as a means of working towards an economy that is zero- (or low-) carbon, resilient to climate threats, and still capable of providing a high standard of living. With regard to this standard of living, however, the vulnerability of future generations to climate variability is understood to be a direct product of policies enacted today. Ultimately, the concept of prosperity is redefined as one that must place social and environmental considerations on par with our economic growth; equitable and sustainable growth should not compromise the former two for the latter.
While such alternatives do not necessarily provide an all-encompassing solution to the myriad of issues masked by the promotion of GDP as the yardstick of prosperity, they represent a positive reallocation of values - where the interests of individuals are placed alongside big corporations, and where social and environmental impacts are measured against profit. As such, may this article extend further than just an appeal for the abandonment of GDP as a measure of prosperity; may it also inspire a greater scrutiny for the official narrative, and whether the definition of prosperity supposedly being pursued is one that is centred around what really matters.