How the public is "being deceived" over GDP

What do heroin, “paper” coffee cups that don’t biodegrade for 500 years and Kim Jong-un’s smart new collection of intercontinental ballistic missiles have in common? The answer is that they all contribute to the growth of the economy.

Britain, since 2014, has counted heroin – along with crack cocaine, powder cocaine, cannabis, ecstasy and amphetamines – as part of measured economic activity. So if you take any of those substances, Britain thanks you. In 2014, these activities, plus paid sex work – which is also counted, though not for some peculiar reason if the sex worker is male – added nearly £10bn to the British economy.

Almost anything we produce, so long as we sell it, counts towards gross domestic product, the single-most important way we measure our economy. (Anything like housework or volunteer work, for which no one earns a profit, sadly counts for naught.)

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The paid-for economy – the one we count – includes armaments, such as nuclear bombs, ballistic missiles and chemical weapons. It also includes the 2.5 billion supposedly disposable coffee cups (laminated with plastic) that we throw away in Britain each year, enough to circle the world five-and-a-half  times. These cups contribute to today’s economic growth, even though our children’s children’s children’s children will be fishing them out of the ocean for the next several hundred years.

The key word, as I write in my book The Growth Delusion, in gross domestic product is “gross”. We take nothing away. From the point of view of GDP, the more we produce – of anything – the better (I almost called the book: ‘What’s so gross about gross domestic product?’). That goes for the financial derivatives that helped supercharge growth in the first years of the century – before the 2008 financial meltdown and the inevitable call on taxpayers to bail out the irresponsible banks. It goes for a bloated healthcare service too. In the US, healthcare is a huge contributor to GDP, making up about 17 per cent of the US economy versus only nine per cent in Britain. That is because it is far more expensive. Prices are inflated by private profit, a parasitical insurance industry, unnecessary procedures and litigation. For GDP, bigger is always better.

We take for granted that whatever is good for the economy must be good for us – often without really stopping to wonder why. It has not always been thus. Until the Fifties, the word “economy” did not appear once in a UK political manifesto with its modern meaning. Now it is almost inconceivable – though in these angry times not entirely out of the question – that a politician could stand up and say that she was going to make the economy smaller in pursuit of other goals.

People know instinctively that something is wrong

The decisive moment in the cult of economic growth came with the invention of gross domestic product. Our modern system of national accounts arose as recently as the 1930s from the need to work out how much the economy had shrunk during the Great Depression. Hard as it is to believe now, until Franklin D Roosevelt asked a bright young economist called Simon Kuznets to come up with something, there was no methodical way of measuring the size of an economy or its rate of growth. Policymakers had to rely on a pot pourri of measures, from freight car loadings to stock market prices, to work out what was going on.

Kuznets figured out a way, using sample surveys of businesses and households, to construct an accurate estimate of all the goods and services produced, say in a year. It was a remarkable achievement and has been called, with some justification, one of the greatest inventions of the 20th century. That tells us something important: growth – as we define it – is an “invention”. If we wanted, we could choose to define it differently.

Kuznets himself had doubts. He was in favour of excluding economic activities that he judged did not contribute to human welfare. That included armaments, financial speculation and even advertising, which he saw – perhaps rather paternalistically – as stimulating cravings for useless things. He even wanted to exclude things like spending on commuter roads on the grounds that these were just a means of getting people to their place of work (production). Above all, said the man who practically invented the concept of economic growth, GDP should never be confused with wellbeing. It is a warning we have roundly ignored.

One of the most obvious problems of elevating GDP to the king of measures is that it tells us nothing about distribution. An economy could be roaring along, but that is not much use to ordinary people if all that extra income, production and consumption is being enjoyed by a privileged elite. Until the crash of oil prices in 2014, the Angolan economy was growing at more than 10 per cent a year, a blistering pace it maintained for more than a decade. But at the end of all that growth, the majority of the population remained desperately poor. Angola has among the worst infant mortality and life expectancy in the world. All that oil money had enriched a tiny sliver of society.

Angola may be extreme. But its lessons are recognisable in the rich world too. In the US, median income has barely budged in 30 years. In many respects, the lives of those without a college degree have gone backwards, so much so that life expectancy has actually fallen for the past two years. Much of American growth has gone to the top one per cent, or even the top 0.1 per cent, of the population.

In Britain too, the distribution of income is skewed. The top 10 per cent of the population earns 10.6 times the bottom 10 per cent. In Germany that ratio is a more modest 6.7 times and is just five times in more egalitarian Iceland. If most of the growth of a society is going to a privileged minority – probably making everybody else more miserable in the process – we might stop to ask: what is all that growth for?

A decade ago, Nicolas Sarkozy, former president of France, commissioned a study by leading economists to look into different ways of measuring our economies. In the preface to the final report – Mis-Measuring our Lives: Why GDP Doesn’t Add Up – he wrote that there was a dangerous gulf between the world as presented by experts and that as experienced by ordinary citizens. “The gulf is dangerous because the citizens end up believing that they are being deceived. Nothing is more destructive of democracy.”

One can see that anger spilling out in all sorts of ways. People know instinctively that something is wrong, though it is not always easy to put one’s finger on precisely what. In Britain, a majority voted for Brexit even though many experts warned that this would damage the country’s economic prospects. There has been a groundswell of support for Jeremy Corbyn, a politician who has emphasised the distribution of income and the restoration of public services over the usual recipes for increasing the size of the economic pie: lower taxes, deregulation, privatisation and outsourcing.

The top 10 per cent of the population earns 10.6 times the bottom 10 per cent

There is anger too against the world’s biggest corporations, some of which now wield more power than increasingly feeble states. In Britain, there was a tax revolt in the  Welsh town of Crickhowell, where local shopkeepers made a national stink of the fact that their family-run businesses were paying more tax than the likes of Facebook (2014 corporation tax bill: £4,327) and Caffè Nero, which did not pay a penny of tax in the UK for a decade.

Like nations, many corporations have put growth (of profits and of shareholder returns) ahead of broader goals. This has caused a backlash. People are asking of both their governments and their multinationals, growth at what cost, for whom and to what end? As Kuznets warned more than 70 years ago, growth should always be a means to a desired end. It should never be an end in itself. Anything else is deluded.