Thursday 22 March 2018

Brendan Keenan: GDP may be a poor indicator but growth is still the goal

So now it's the fault of GDP. The inadequacies of gross domestic product are being blamed for everything from Donald Trump's election to the Brexit vote. Photo: Stock image
So now it's the fault of GDP. The inadequacies of gross domestic product are being blamed for everything from Donald Trump's election to the Brexit vote. Photo: Stock image
Brendan Keenan

Brendan Keenan

So now it's the fault of GDP. The inadequacies of gross domestic product are being blamed for everything from Donald Trump's election to the Brexit vote.

There was always lot of fun to be had from the vagaries of GDP. Prostitution and drug-dealing are included, if they can be counted, because they add to incomes and employment. As indeed they do.

The Italians, in their pragmatic way, saw no reason to cut the high taxes on tobacco because cigarette-smuggling provided so many jobs, for both smugglers and customs officers.

All of this is well-known. Even the economist who devised GDP in the 1930s pointed out that it should not be regarded as some kind of indicator of everything; especially not living standards. Simon Kuznets was trying to measure US economic recovery in the Great Depression - the sort of thing GDP is rather good at.

(The Cromwellian political economist Sir William Petty is credited with inventing the concept, to defend landlords against unfair taxation during the Anglo-Dutch wars. Before that, he scientifically divided up Ireland for the new conquerors - and himself. Thanks, Wikipedia).

Despite this ancient pedigree, a flood of new books and reports are dissecting GDP as if they had just discovered the Higgs boson. It was a hot topic in Davos. The problem is seen as how to measure a list such as that from University of Manchester economist Diane Coyle: human capital, physical infrastructure, environmental quality, as well as the increasingly important 'intangibles' such as digital data and patents.

The reason they find themselves suddenly centre stage, or at least centre ski slope, is well illustrated in one of the new books: 'The Growth Delusion', by 'Financial Times' associate editor David Pilling.

It tells how Anand Menon, professor of European politics at King's College London, told a meeting in Newcastle-on-Tyne that a vote for Brexit would damage GDP. "That's your bloody GDP, not ours," cried a woman in the audience.

Mr Trump is also playing a role - one of several unexpectedly positive effects. Would the Asian countries and Canada have agreed a trade pact, or the Germans squared up to more defence spending, without the spectre of the Trump presidency?

Or would there be all this fretting about the plight of places like north-east England or West Virginia if they hadn't voted the way they did?

Motive is immaterial if the consequences are beneficial, but it is hardly credible to suggest those regions' plight is due to inadequate ways of measuring the economy.

We in Ireland know more about the failings of GDP than just about anyone.

The best minds in European statistics and accountancy came up with a definition which gives a ludicrous figure for Irish GDP, but alternatives are hard to come by.

Last week's analysis of the economy from Goodbody was hugely positive. The question is how huge? Their preferred measure, 'core domestic demand', which excludes aircraft purchases and R&D investment, suggests that growth slowed quite significantly in 2017, to 2.7pc. Analyst Dermot O'Leary himself was not convinced about that. The CSO's 'modified domestic demand', which counts aircraft-leasing purposes and imports of R&D found that growth accelerated last year to 4.9pc. The difference between the two measures mainly relates to growth in R&D - those tricky intangible assets - which were not imported.

It is absurd to suggest that the failure of policy in so many countries to limit regional imbalances and replace lost jobs is mainly to do with bad measurement.

Given the small size and homogeneity of England, the chasm between north and south is a damning indictment of successive governments.

Irish policy, led by the IDA and without the legacy of smokestack industry, has been a success; as seen in figures on regional incomes and, ahem, GDP. But as the ESRI has warned, the natural tendency of intangible assets to cluster together risks widening the gap between Dublin, one or two other urban centres, and the rest.

The obvious government failure in regional planning is not due to inadequate data, or even political fear of switching investment from Leinster to Connacht. It is more the fear of choosing between Galway and Sligo. Without such choices being made, though, the whole province could lose.

The best argument for widening the focus beyond GDP is that it might make that kind of failure more apparent, beyond even employment and output, such as the absence of things which can increase employment and output.

The new measure most likely to attract attention is the Inclusive Growth and Development index (IGD) from the World Economic Forum - a body most associated with that quintessential old-style measure, competitiveness.

At Davos, the WEF made a fine stab at explaining the problem, saying governments often fail to appreciate the potential of wider policy not only to increase the rate of growth, but to spread its benefits more widely.

"Most citizens evaluate their respective countries' economic progress, not by published GDP growth statistics, but by changes in their households' standard of living," it says. Well, up to a point.

It is also clear that performance in the GDP stakes feeds back into household and business sentiment. As French growth fell below German, French discontent increased and investment and consumption slackened.

The Macron factor is now having the opposite effect. Well-being is a relative feeling: not so much I have a car, as why is the neighbour's car bigger than mine?

It could be helpful if nations started measuring each other with something like IGD. For a start, it might help reduce resentment in rich countries with lower potential growth about poorer ones growing faster - often seen implicitly, but erroneously, as being at their expense.

Finance minister Paschal Donohoe was making this point last weekend, citing Ireland as one of the countries which ought not to be pushed around by the big guys.

But then, little ol' Ireland ranks eighth among advanced economies for IGD. That is less than its fourth place in GDP, and more realistic, but it hardly makes us a poor relation needing the kindness of strangers.

There is no getting away from the growth question, measure it how you like. At Davos, President Macron put on the other green jacket to criticise the emphasis on output growth, rather than those fine achievements which count in the development index.

For a politician, this is perilously close to Keynes's misconception that, past a certain living standard, people would prefer quality of life to quantity of income.

They didn't, and they don't.

Acquiring more goods and services each year requires growth in their output, measure it as you will. A few days later, Macron announced a cut in France's corporation tax.

Less work and a civilised lifestyle was held up as the French ideal but it seems they want a bit more GDP too.

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