The Great Invention: The Story of GDP and the Making and Unmaking of the Modern World - Ehsan Masood (2016)

Chapter 1. GDP and Its Discontents

The government are very keen on amassing statistics. They collect them, add them, raise them to the nth power, take the cube root and prepare wonderful diagrams. But you must never forget that every one of these figures comes in the first instance from the chowky dar (village watchman in India), who just puts down what he damn pleases.

—Josiah Stamp, Some Economic 
Factors in Modern Life
 (1929)

GDP is the world’s principal measure of economic growth. It is regarded by many as a proxy for prosperity, a single number meant to indicate if countries and their citizens are doing well or badly.

In practical terms (and for the purposes of this book) GDP is defined as an indicator of spending.1 It is the sum of what we spend every day, from the contents of our weekly shopping to large capital spending by businesses. GDP also includes many of the myriad things that our governments pay to produce,2 from relatively inexpensive things such as libraries and streetlamps to naval dockyards and nuclear weapons, whose cost is calculated in the billions.

In most countries GDP is published every quarter, following surveys of households, businesses, and government spending carried out by an arm of the government known as an office for national statistics. These surveys take place on an epic scale. In 2014, the UK’s Office for National Statistics sent out more than 1.5 million survey forms and sampled almost 350,000 businesses. Businesses especially do not have any choice. Under the Statistics for Trade Act 1947 it is compulsory for a business to take part in GDP data collection if asked to do so.3

The Internet heaves with global GDP rankings. If you measure GDP per person, then the countries with the highest GDP tend to be from the Nordic region. If you measure GDP in absolute terms, then the top-ranked nation is the United States. By the end of 2015, America’s GDP was about $18 trillion. China’s was $11 trillion, in second place, though fast catching up. Britain’s was a more modest $4.3 trillion.

Like all league tables, global rankings of GDP are watched hawkishly by those whose futures depend on their position in the table, and that includes presidents and prime ministers, ministers of finance especially, and opposition political parties too. And, as with any kind of ranking—like those of football teams or universities—those being watched make it their business to do what they can to maintain their position and, if possible, to best it.

GDP is also monitored closely by an assortment of outside individuals and organizations, including central banks, whose job it is to manage the nation’s money, as well as financial commentators, and those who make money by predicting what the next quarter’s GDP figures will be. Then there are international institutions such as the OECD, the financial markets, and of course the media in all its varied forms. Last but not least, GDP is a huge topic in economics education, from schools to university seminar rooms.

GDP in Symbols

I first learned about GDP in a high school economics class in the early 1980s. One afternoon our teacher picked up a piece of white chalk and wrote the following six symbols on a blackboard:

Y = C + I + G + (X – M)

C, he told us, is what consumers spend in the shops.

I is what businesses spend.

G is spending by governments.

X is what companies sell to customers abroad.

M is what we buy from sellers overseas.

Put them all together and you get the total of a country’s GDP (Y).

Recently in my parents’ garage I rediscovered my economics lecture notes, still held together in a red ring binder.4 Among the papers was a copy of an examination paper that included a question on GDP. Candidates were asked to define economic growth and then “give one disadvantage” of economic growth. Intriguingly, we were never taught that growth was automatically a good thing. On the contrary, as students we were encouraged to understand and debate the pros and cons and then make up our own minds.

The quarterly announcement of GDP figures ranks as one of the great rituals of modern political life. It is a day infused with drama and theater, both real and manufactured. News of the announcement of GDP figures will be trailed by the media beforehand. If GDP is more than in the previous three months, senior politicians of the party in government will take to the air, crowing about their prowess in economic management. But if GDP drops, even temporarily, or if it flatlines, opposition voices will call for heads to roll.

Even the smallest of falls is seized on by political opponents as evidence of economic incompetence, as George Osborne, the UK’s Conservative minister for finance, learned in 2012. Britain’s GDP figures between April and June 2012 (published at the end of July in that same year) showed that GDP had contracted by 0.7 percent.5 This was no sudden drop, and the figures later recovered, but it was the steepest quarterly fall since 2009 and there was a discernible sense of panic in the country. Many (including a few in the government’s coalition partners from the centrist Liberal Democrat party) seized the opportunity to call for Osborne to resign. Newspaper headline writers were even less kind, with the left-leaning Independent dubbing Osborne, who had been in the role just one year, Britain’s “work-experience chancellor.”6 Osborne and his prime minister, David Cameron, never made the same mistake again. All leaders of all nations know that their electoral success depends in large part on helping their citizens prosper, which means that GDP figures can only point in one direction.

Paradoxically, just as Britain’s GDP took a momentary dive, other economic indicators were heading upward. For example, in the same three months, from April to June 2012, an extra 200,000 people were in jobs compared with the previous quarter and most of these were working in the private sector. Between June and August unemployment fell again by a further 50,000.7 Inflation meanwhile remained historically low, at around 2.4 percent, and more people were taking loans to purchase houses compared with the same period in the previous year.8 Even receipts from value-added tax (an indirect tax on spending) were up by 6 percent, suggesting that consumers were confident enough to spend in the shops.

So, while on the one hand GDP was falling, several other economic indicators were more positive, suggesting that the indicator for falling economic growth was not on its own a sign that everything is going to pot.

The opposite can also be the case, however. Rising GDP does not automatically mean that all is well with a country’s people and their finances.

Take debt, for example. Countries with healthy GDP figures can include large numbers of people in debt. That is in part because all those loans, unpaid credit card bills, and mortgages show that people are spending money somewhere, and higher consumer spending is a positive indicator for GDP. When, in 2013, the UK growth figures began heading back upward, one of the reasons for the turnaround was the introduction of a generous government-funded home-buying scheme called “Help to Buy.” Between April 2013 and December 2014 the scheme helped unlock the sale of houses worth more than $13 billion. In helping their economy to grow, British householders were taking on another $10 billion in debt.9

As in the UK, the average US household, too, owes much more than it earns in a year. Between 2000 and 2011, median household debt increased from $50,000 to $70,000.10 And yet, as former commerce secretary William Daley reminded his audience celebrating the department’s greatest achievement, this was also the nation’s longest period of continuous, uninterrupted economic growth.

In the UK, the Labour government of Tony Blair would similarly trumpet the longest period of uninterrupted growth in modern times.11 The growth figures on their own, however, told us nothing about people in debt; nor did they record the numbers of people receiving free-food handouts from food-aid charities, or from food banks. The numbers of individuals in the UK given emergency food supplies have been climbing steadily. In 2005 there were around 2,800. That increased to 25,000 in 2008–2009. At time of writing, just over a million people needed a three-day supply of food in 2014–2015.12 That is in the world’s sixth-richest economy. One reason, I would argue, why our leading policy makers failed to spot this is because in part they were looking at just one number, and that was economic growth, as measured by GDP.

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As we saw from the crash of 2008, GDP can mask poverty or social unrest, because it is unable to record people in debt but also because it does not measure those who don’t have jobs. For an even more powerful example of a country where healthy GDP figures concealed deep-seated social and economic problems, we need to consider the case of Tunisia.

Tunisia is now famous as the crucible for the uprisings in 2011, commonly referred to as the Arab revolutions, and frequently mischaracterized as the Arab Spring. The revolutions were ignited when Mohamed Bouazizi, a young street vendor, set himself alight on December 17, 2010, in the middle of busy traffic in his hometown of Sidi Bouzid. The young man, his family’s sole breadwinner, took this extreme action because he did not have enough money to bribe his city’s corrupt police; such a bribe would allow him to continue trading. After a fruitless altercation with a state official, he doused himself with gasoline and set himself alight, shouting, “How do you expect me to make a living?” Mohamed Bouazizi died from his burns eighteen days later.

Until the day of Bouazizi’s suicide, Tunisia, according to economists and watchers of world politics, including yours truly, was a prosperous and relatively modern liberal Arab state with a growing economy. To be sure, it was no democracy and had been ruled for the previous twenty-three years by the dictator Zine El Abidine Ben Ali. It didn’t really matter that Ben Ali ran a hated police state. We all loved him because he was an economic liberal who opened up Tunisian markets to international trade, especially from the European Union. Ben Ali’s policies were enriching a small Tunisian middle class, which consequently had the finances to shop for more expensive things. That led to an increase in consumer spending. At the same time, businesses were investing and income from exports was going up, especially in clothing, crude oil, and high technology. In 2010 Tunisia’s GDP stood at around $4,169 per person, considerably higher than the $3,211 it had been in 2005.13 For this Ben Ali was praised by international bodies, including the European Union and the OECD.

What we couldn’t see is that around one person in eight of working age in Tunisia had no job. Among men under the age of twenty-five that figure was as high as one in three, according to some estimates. But because unemployment isn’t recorded in the GDP figures, the country looked to be the model growing economy. The received wisdom was that as long as the GDP figures kept increasing, the country was on the right track. Rising spending was supposed to mean that Tunisians were getting richer, and so it didn’t really matter if there weren’t that many jobs now, as they would inevitably come with the country’s greater wealth.

Of course we now know that nothing of the sort happened. Tunisia’s rate of job creation never kept up with its rising GDP. Its wealth was being concentrated among a small number of people.

This points to another flaw in GDP: it provides no way of demonstrating whether there is rising inequality in a society. Even in America, while GDP has been steadily rising, median household income has not been keeping up. According to data from the US Census Bureau, incomes and GDP were more or less on the same upward curve until 1999, almost a decade before the financial crisis of 2008. And then they diverged. While GDP continued on broadly the same path, household incomes for America’s middle classes stopped growing somewhat abruptly, started to fall and continued to do so until 2004, began to rise again, and then dropped sharply in 2008. In 2013, median household incomes in America were at the same level as they were in the mid to late 1990s.14

The conclusion is that, since 1999, growth in the American economy has not translated into prosperity for the nation’s middle classes. Fifteen percent of Americans, or some 45 million people, are living below the poverty line. The New York Times summed up the Census Bureau’s finding with the headline in its September 16, 2014, edition: “You Can’t Feed a Family with G.D.P.”

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GDP hides other problems too. In spite of repeated criticism and from much earlier times, it has consistently failed to value volunteering. Nor does it value housework, job satisfaction, time with friends and family, or other means through which we experience quality of life.

GDP also fails to include any measure of the economic impact of environmental degradation. For example, countries that are poor in an economic sense but rich in other ways, such as an abundance of plant and animal species, known as biodiversity, will rank low in the GDP tables. At the same time, GDP has the ability to reward countries that destroy environmental resources. For example, if forest land is cleared to grow crops or build houses or factories, then that will result in an increase in GDP, because the acts of building, producing, and farming mean more production, more consumption; more spending. If, for example, more pedestrians are hospitalized because of the effects of inhaling vehicular fumes, then there is more public health spending, and more public health spending helps to increase GDP.

What this means is that GDP could well be acting as an obstacle to tackling some of the pressing environmental needs of our time, such as slowing down climate change or reducing the rate of species loss. While there are more than 100 different international conventions and treaties that promise to protect the environment, we know that climate change is heading into dangerous territory and the rate of species loss is now higher than at any time since the last mass extinction.15 Undoubtedly one reason for this is the desire to maximize growth, as measured by GDP.

For the past two decades, my work as a journalist straddling the boundary between research and policy making has involved conversations with politicians, civil servants, and their advisers on most of the world’s major continents. Increasingly, these conversations have centered on what is becoming known as a global “race.” Nations are desperate to become the most innovative economy by investing more in their science, technology, industries, and so on, with progress measured by GDP. Even those ministers with responsibility for protecting the environment recognize that their efforts will always be constrained by the fact that more senior colleagues (heads of government and ministers of finance) are fixated on growth above all else.

Even as the big international agencies, such as those in the United Nations and the World Bank, continually claim to be working toward a world where people live safer, cleaner, and more fulfilled lives, the central thrust of their policy recommendations is growth. And the main measure of growth, as we have seen, is unable to capture well-being or the environment.

If it is true that GDP remains the only number that influential politicians, the markets, the banks, the media, and the commentators pay attention to, then the solution cannot be more alternative indicators; nor can it be a dashboard. The solution has to be to value the things that matter and then incorporate this value into the GDP accounts.

There will be more on this in later chapters, but let’s begin with the recent history of GDP and how we got to where we are.