Growing Pains

As our main indicator of economic growth, GDP has major limitations.


Listener: 30 January, 2014.



Keywords: History of Ideas, Methodology & Philosophy; Political Economy & History;


The expectation is for normal economic growth in the coming year. The economy peaked in September 2007 and stagnated (in per-capita terms) through to March 2013. It is now growing at its traditional rate. Even so, the new growth track is about 8% below the old one. You could say that the global financial crisis has permanently cost us around $17 billion of output every year (or about $10 a New Zealander a day) and will do so indefinitely into the future.


The six-year stagnation is slightly shorter than I expected. What I did not foresee was how much the strength of sales to China, especially dairy, would lift the economy; without that free-trade deal, we would be still stagnating. If the Chinese economy goes into a slowdown, we will stagnate again, because the Atlantic economies, North America and Europe, appear to be still in a long recession following the global financial crisis.


There is no real evidence that our growth rate will be higher than the historic one. Politicians keep promising us they are going to accelerate it, but at best they do the things necessary to keep the economy growing at its usual rate.


We like to pretend that the economy naturally grows without government assistance but that is nonsense. It requires judicious government action to keep it on its natural growth rate.

There is a view that the growth of the economy means the National Government will be re-elected at the end of the year. Political commentators were invented to make economists’ forecasts look good. In the context of political forecasting, GDP, our main indicator of economic growth, suffers from two major limitations.


First, the growth may not be inclusive, so some people – enough to swing an election? – may be left out. It looks as though unemployment is going to fall a little, so some workers will be growth beneficiaries. Interest rates are on the rise, so savers will benefit but there will be increasing grumbling from those paying mortgages.


There are many “inclusive” issues – like ethnicity and gender – which are not particularly economic. The big ones on which the economists have some expertise are inequality and poverty. There is certainly much (not always informed) concern about them. An important factor may be that the gains from trading with China seem to have gone almost exclusively to those on upper incomes. In any case, this Government may not be able to do much about reducing inequality (although its PR experts may be able to disguise that).


Another limitation of GDP is that it does not give much indication of the quality of output; it simply records what is produced, without assessing whether we really want it. Measurements of GDP growth do not account for either sustainability or environmental degradation – issues that cause enormous political tension between National and the Greens. GDP values excessive use of alcohol or gambling services exactly the same as feeding a starving child; money spent dealing with crime is as good as money spent on hip operations or opera.


A government particularly influences the quality of GDP by its spending on health; education; sport and recreation; arts, culture and heritage; and the environment and conservation. The National Government has been squeezing its spending, partly because it has had to fund its (inequality-increasing) income-tax cuts and partly because the 8% lower track means less spending on everything.


I will leave it to the political commentators to decide whether the opposition parties can provide a narrative of exclusion and inequality sufficient to convince the electorate. If they bang on with a narrow agenda on economic growth, the Government will outpoint them: better the devil you know.


Peripheral politics may be important. Such names as Banks, Brown, Dunne, Gilmour and Horan, and the odd relationship between the Mana and Maori parties remind us that political kerfuffles seem to occur about every two months. One just before the election could severely damage the associated party. Asked by a journalist what blows a government off-course, British Prime Minister Harold Macmillan is said to have replied, “Events, dear boy, events.”