GDP: Still a rockstar?

 

All the rockstar headlines are being wheeled out again after official GDP figures indicating “the economy grew this year by 3.6 per cent” – “growth this quarter ... being driven by strong domestic and export demand. Household spending was up 1.9 percent, with Kiwis spending more on going away, eating out, and furnishing their houses.”

Great news, especially while dairy prices are low, huh? Well, not so fast. Let’s look at how we did it.

How did we do it? Well, here’s a clue: remember that despite what the acronym stands for GDP doesn’t measure production, it measures spending. It measures consumption – stuff like going away, eating out, and furnishing our houses. So despite the number of times you’ve heard it said, it doesn’t measure how much the economy is “growing,” which if it means anything means that we’re adding value and creating wealth: instead it measures how much you and I and the goverment are spending, which tells us nothing about either wealth or value.

To put it in rockstar terms, it doesn’t measure how many great songs you’ve produced and sold, but how many lines of coke you’ve put up your nose. And to paraphrase our sober statistician, New Zealanders have been doing the blow like there’s no tomorrow.

But where did all the money come from to spend on holidays, restaurants, soft furnishings and new en-suites? Simple: on the back of exploding house prices NZers have been borrowing to spend, and borrowing at record levels (household debt is now a whopping and unustainable 162.9 percent of gross income!). No surprise then that this “growth is driven by strong domestic demand...” when its made possible by of a virtual gold-medal in housing unaffordability.

The central bankers have blown up an asset bubble which has blown out the debt bubble. Crowing about that is like a rockstar crowing about the size of his drug bill.

And we might notice midst all the crowing that while this borrowing itself is growing at a record rate (an 8.6 percent increase in money borrowed into existence in this way last year alone), the “payoff” in the figures is only a 1.9 percent increase in the GDP number – 8.6 dollars to produce just one. Turns out that even the consumption of capital has diminishing returns. (And that credit creation does not create credible growth.)

Note too that “service industries” were another contributor to GPD which “continued to grow, with a 0.7 percent increase. The main drivers [here] were rental, hiring, and real estate services; retail trade; and health care.” All, you will have undoubtedly noticed, examples of more consumption spending – only in this case with an even more diminished return.

But exports, what about exports? The figures say that

Strong international demand saw exports increase 4.0 percent, with exports of goods posting its biggest quarterly increase in nearly 20 years. This increase was driven by exports of dairy products, meat, and fruit.

Great news? Not necessarily.

A fixture of GDP is the mercantilist mentality of treating exports positively and imports negatively. Why are exports additive to GDP while imports are deductive? If the goal of GDP is to measure the goods and services provided to people within a geographic region, then importsare the real benefit— not exports. Exports are but payment for imports.

So it’s the imports that really matter, and how we pay for them. But that’s not what GDP really measures (like most business-to-business spending these numbers too are netted out), so we can’t be clear whether this is win or losss.

The fact is

The textbook GDP equation is not false; it is a tautology and so of course it is true. Nonetheless, it is a destructive framework for thinking about macroeconomic events. Abuse of the equation leads economists and pundits to blame savings and praise reckless consumption, to hate imports and love exports, and (in principle) to attribute a doubling in the flow of goods coming out of factories to a nonchange in the level of a nonexistent stock of inventory.

And more: it allows us to think we’re doing well when we’re not, and politicians to crow about achievements which they haven’t.

Here’s Amanda Palmer.

 

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