Economic growth is a trap
Don’t believe the news, religiously tracking success of a nation based off the growth of its economy is hurting everyone.
If you’ve ever watched the news or heard your politicians speak, you’ll know growing the economy is a good thing. Growth goes up, we’re all richer, cue the confetti! Recession is here, boo, times are bad.
A quick glance at the US economy and all looks well. Lots of blue bars above the 0, fantastic news everyone.
But if that’s the case why are many OECD countries seeing child poverty increase? Why is life expectancy falling in the US and why are cities like San Francisco and Los Angeles overrun with homeless.
Using one numbers movement as a simple good/bad scale is smoke and mirrors. It preys on the uninformed and most vulnerable. The fundamental way we measure and communicate success in the majority of the world is flawed. This is summarized concisely by the NY Times in 2017. Following President Trumps pledge to hit a 4% annual GDP growth figure, they wrote;
“ A fixation on standard (and lately sluggish) measures of growth may obscure more profound advances in the nation’s innovation and well-being.”
So how did we develop this obsession with growth as measured by GDP? To understand this we need to dive into some neo-classical economics. The Majority of economies in the world judges it’s success based off Gross Domestic Product (GDP). GDP has been used extensively since 1654 and is taught in basic economy classes as ;
GDP = private consumption + gross investment + government investment + government spending + (exports — imports).
Essentially this formula means that investing more, spending more and generating more goods and services is seen as a good thing. Institutions base their decisions based off this figure, politicians are elected on it and populations judge their worth from it. Most will struggle to argue that’s a bad thing.
So why isn’t it working?
The biggest problem with using this yardstick for success is that it utterly ignores the distribution of these figures. Distribution takes a variety of shapes and for modern economies is never uniform — e.g. spread equally amongst all.
When GDP rises, one of it’s components (government and private) has moved to create this:
- spending
- investment
- consumption
- exports less imports
Herein lies the issue as these factors are subject to different distributions amongst the population. By these measures the entirety of economic growth could be fueled by a tiny group of heavy spenders or even excessive government spending and borrowing. In no way does this system account for the impact on the average Joe of “growth”. The above factors are never shared equally in a population and the reality of most economies is that the investment, consumption and government spending benefits those who are already the best off.
In short, GDP growth does measure total economic output growth. But that doesn’t mean people’s lives are improving, it’s merely a flawed proxy for this. This is how biggest economies “grow” yet have deep flaws in their societies and rising inequality:
Nowhere is this better seen than in the global powerhouse of economic growth — the United States:
As New Zealand’s Prime Minister Jacinda Arden put it “ GDP does not guarantee improvement to our living standards” and nor does it “take into account who benefits and who is left out.”
So next time you hear the news about your economy growing and how your President has driven GDP growth, think about the rising number of people working multiple jobs, those who can’t afford basic medications and the rising levels of homeless. I’m pretty certain they’re not feeling those figures.
How can we change this?
Before you start penning a latter to your local politician, there’s already a solution. Countries around the world have started to prioritize welfare of all citizens over arbitrary growth figures. Bhutan lead the charge in 2008 after moving to a measure of Gross National Happiness, since first mooting the idea in the 70s. This move meant government made decisions based off mental health, environmental, community social and other factors, as opposed to spending and investing.
“It’s easy to mine the land and fish the seas and get rich. Yet we believe you cannot have a prosperous nation in the long run that does not conserve its natural environment or take care of the wellbeing of its people, which is being borne out by what is happening to the outside world.” Thakur Singh Powdyel, minister of education, Bhutan, 2012
Making such a change in a small, rural economy like Bhutan is of course hard to see scaled up to the largest economies in the world but the movement is gathering momentum. In 2019 New Zealand followed suit, with a swinging range of measures to improve the welfare of it’s citizens. GDP was ditched for Happiness and all new government spending must advance one of five factors:
- improved mental health
- reduced child poverty
- addressing the inequalities faced by indigenous people
- helping NZ in a digital age
- becoming a low-emission, sustainable economy.
Their finance minister Grant Robertson summed it up perfectly:
New Zealand aren’t not the only one either, Saudi Arabia now has a ‘Minister of state for happiness and well-being’ and Ecuador a Minister of ‘understanding of the good life’, to name just a few examples.
Those halcyon days…
The rise of neo-classical economics in the early 1900’s drove economies to focus on profitability and growth . This has dehumanized what should be a system where everyone gains. I challenge the world leaders to follow their peers and change their yardstick of success. Welfare and well-being should be aligned to, not separate to and an assumed byproduct of economic growth. The climate will benefit, the people will benefit and future generations will thank us.
Hans, September 2019
I naively believe in a utopia where humans treat and view each other fairly and as equals. I write on here to vent my frustration at the brutal world we live in which I believe is in a rapid downward spiral of self destruction. Thanks for reading!
