Wealth of a country: We need to rethink GDP
About 80 years ago, academics and policymakers in the US wondered if the country’s wealth was improving every year or not. They decided that the “added value” that was created in a country was the appropriate measure for wealth creation.
These policymakers looked at the quantity and price of goods sold by agriculture, deducted the value of goods acquired, like chemicals, tractors and fuel, to define the added value of agriculture in the economy. They did the same for the manufacturing and building industries and for services provided by bankers, hair dressers, restaurants and shops.
True, the wealth provided by a restaurant is short-lived, but industrial products do not last forever either. What you pay for a product or service is probably the best possible practical measure of its value. It all made sense.
Then they wondered what to do with services consumers didn’t pay for, like police and public administration. Those services were added to the “wealth of the country” at cost, since they were definitely contributing to our welfare by avoiding chaos. In 1930, public employment in the US was only seven percent of the total work force.
The Gross Domestic Product, GDP, became a faith of the “Labour Church”. That it is faith and not reason was illustrated the last years by the huge impact on financial markets by statistically irrelevant changes of China’s growing GDP, like 0.5 percent, while its measuring inaccuracy is around 2.5 percent (see publications of Harry Wu, economics professor at Hitotsubashi University in Tokyo).
Since 1970 machines, robots and computers have massively reduced the work force in agriculture and industry, considerably reducing the “added value” in those sectors.
I will now give examples of why GDP is not a good measure of wealth anymore.
- During the seventies, many European countries tried to solve rising unemployment following productivity gains in industry by creating new jobs in public service. Whether the newly appointed public servant did useful things or not, it supposedly increased the wealth of the country, since its cost, not its value, was counted in the GDP,
- Imagine that parents living in a village of the US have organised themselves to collectively watch their young kids and organise festivities for the community. That sort of work is not a part of the GDP. In Sweden, it is. Towns there enroll parents to take care of kids and organise parties and other events. This way, voluntary work is converted into paid work and thus GDP.
- If a country, for example Greece, drastically increases the number of its public servants and increases their salaries, they boost their GDP and make the IMF, the EU and creditors happy until the deadline comes to pay the loans used to fund the fantasy-growth of their GDP.
The examples show the same root cause of the problem, being the belief that unpaid labour has no value and paid labour has value even if the work is useless.
The approximation to count public services at cost is a design error in the GDP. It induces some countries to implement wrong policies to get a “better” GDP, at least for a short time, the time to get re-elected.
A nation is wealthy if it takes care of its people. For example, Belgium distributes an average of €550 in cash and another €420 pay-in-kind (free education and health care) per month per citizen. Many countries are now distributing a lot of money to the population (see this Economist graph). All of them do that in an incredibly complex way because the system grew over decades without being re-engineered. It is very likely that most wealthy countries will streamline their social security systems to make them more efficient and fair, like Finland is currently doing. No doubt that version 2.0 of our social security systems will contain a “basic income” core.
Shortly, my friends, within a few decades, the purchasing power distributed by a country to its citizens will replace the GDP as the measure of their wealth.