Written by Adam Smith Shoe
Ask anyone to share with you what they know about economics and chances are Gross Domestic Product (GDP) will get a mention.
Ask an economist what is GDP in private, and you will hear that it is a lousy measure but better than nothing. GDP has been around long enough to provide relativity for analysts, commentators and joe-public alike. But it is still a lousy way to measure. Here’s why.
I refer to the three letter GDP acronym as a measure that “Grossly Deceives People.” One and all sell it as THE measure of economic health to all and sundry. In reality, it is an easily gamed measure that incentivises poor choice and compounds mal-investment. Take Australia’s record 24+ years of uninterrupted positive GDP. Politicians in government spruik this as a miracle of fiscal government engineering.
How long? Note how the line stays above zero after 1992 in the above chart.
Peel back the GDP numbers, like most economic measures, and the miracle is how miraculous politicians have been in getting away with the GDP deceit. For the average person a good outcome is to be able to get on with life, contribute their bit, have some R&R in between, and accumulate some wealth. Pretty basic stuff. One would “think out loud” (sic.) that a quarter of a century of faultless positive GDP would translate into a citizens paradise. Surely a nation of utopian wonderment? Far from it, and the public is waking up to the GDP deceit; too late for many.
Manipulating the GDP spin is easy. For example, as GDP goes up, so too goes up the nation’s wealth. Great! Take that growing wealth and divide by the population number means not so great for Australia. You see aggregates like GDP are deceitful unless pulled apart and put through comparative analysis.
A stagnant population with upward GDP is a population where the benefits per-capita are going up. That’s a good thing; only that is not what happens in Australia. True, GDP has been positive for 25 years or so, but so too has net immigration. And the “net” of net migration dispersal across Australia is narrowed to two cities; Sydney and Melbourne. That means GDP for these population centres in NSW and Victoria is excellent, per-capita GDP, not so.
Immigration is just another of the three card tricks in the GDP game. Add more people to a country, and you can add the new arrivals as a percentage directly to the GDP number. What? If GDP was stagnant at 0%, but you allow an influx of migrants, adding 1.5% to the population total, guess what? GDP goes from 0% to +1.5%. Clever isn’t it. Population growth through net positive internal population growth plus positive overseas migration to Australia has subsumed any clarity GDP measurements can provide business and the general public. Back out population stuffing from the GDP number and Australia looks like an ossified economy creeping to a halt.
As I type this Australia’s population will reach 25 million souls; 30 years ahead of schedule. Thanks to bringing forward population growth to support the positive GDP narrative, GDP has remained upward, even though Government as a share of the economy now makes up 25% of activity. (Federal – ex-State and Local). Significant manufacturing is all but dead, but for a few outposts, if it wasn’t for extractive industries the whole economy would be transfer payments (welfare), government pork barreling infrastructure like roads, and not much else. What has Australia got to show for 25 years of continuous positive GDP? Infrastructure demand out-weighs the ability of government to deliver or indeed even fund it. One new person requires about $350,000 of immediate infrastructure. Yes, really.
All these new souls have brought the miraculous GDP growth rate to a tipping point where growth can’t keep pace for per capita benefits to wash through. Combine the cost per person in new infrastructure demand and it the word Ponzi scheme comes to mind. GDP based on population stuffing ignores positive and negative “externalities”; a clever economists’ word to describe the unseen impacts of an outcome. Constant positive GDP has given rise, in concert with lower inflation, to cheap interest rates. The negative externality of cheap debt causes the maximalist behaviour in house owners; borrowing up to their eyeballs to “climb the property ladder”.
Population stuffing has created demand for housing, add low-interest rates, and you get a housing boom, great if you are an existing owner, not so if you aspire to be one. For some, owning a home means moving State or relocating to regional centres far away from familiar family and friendship ties. Theoretically possible, but in an age of me, me, me, there’s little chance we will see wholesale migration out of the bulging State capital in NSW or Victoria any time soon. Positive GDP, great for housing but only if you can afford it. GDP masks productivity changes too. Australia’s productivity index is flattening out at 100. That’s terrible news; productivity should be the primary driver of positive GDP (The P is Product).
A quarter of a century of comfortable economic conditions gives rise to inefficiency and idleness. Australia’s workers are going backwards in productivity, at a time when the machine age is encroaching on workers one and all. Not a healthy combination. Negative GDP means recession and recessions are aren’t they? Well, yes recessions are bad, Western Australia has been in one for four years, but thanks to seasonal adjustment revised numbers – another of the card tricks on offer. The data for WA GDP at a State level is massaged monthly so that no two following measures come out negative, thanks to revising the previous one every time the new one comes out. Don’t believe me? Check it out yourself. Laughable.
The recession in WA has left households in negative equity territory, retail sales flat to negative and unemployment at around 6-7% depending on the workforce participation rate changes.
Greater efficiency and less price gouging are positives for WA out of the four-year contraction in the State economy. Want a house built? Now is the time, the fat in the building industry is gone, gone, gone. For WA the GDP con has delivered a recessionary environment that encourages efficient allocation of resources. Not so in the East. Light rail in Sydney, road contract cancellations with billion-dollar penalties etc, the “other side” of the Federated States and Territories is living in an altered universe.
Eventually, the GDP game will be up, no amount of population stuffing and gaming the system can keep it together.
Jobs growth is another favourite. Politicians think politicians create jobs. No, they don’t, sorry for the truth syrup. But in taking the credit for the upside politicians must accept they also take the blame for any contraction too. Insofar as successive Governments have hung their shingle on positive GDP as a thing entirely of their making, any shift to the downside is their fault also. Dream on! But dreams, in this case, will come true, in the next term of Federal Government (3 years) the chances of a recession are pretty high. As such, the winner of the next election might turn out to be the loser if the public doesn’t buy the line that the recession was not their fault. The “Gross Deception of People” is about to get more deceptive.
Watch this space.
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