Whose GDP is recovering?

Whose GDP Growth is it Anyway?

Craig Dalzell – February 17th 2022

If we look only at the GDP figures, the UK has beaten the pandemic and has already completed its recovery. GDP has “bounced back” to pre-pandemic levels so everything if fine again, isn’t it?

Back at the start of the crisis, economic seers speculated about various shapes of recovery with the most optimistic being one that would be “V-shaped, with no scarring” – essentially that businesses would be shuttered by lockdown but would reopen and nothing would change. I warned at the time that this was an overly mechanistic view of the economy and that there was a real danger that not only would the “scarring” be real – certain sectors of the economy would not recover as fast as others, if at all – but that the “shape” of the “recovery” could well be “K-shaped” – that it would recover for some people but remain suppressed or even continue to decrease for others.

Skip to the present and we’re seeing that “K-shape” now. A great many people are staring down the barrel of the highest rates of inflation in decades and an energy price crisis that threatens to seriously increase fuel poverty. (It’s ironic that the shape of our “energy market” means that, despite paying slightly extra for “100% Green Energy”, my own electricity bill is about to go up dramatically because of the price of oil and gas. If only we had a National Energy Company…) Meanwhile, on the other side, those selling that energy are reporting record profits and the British financial sector is reporting the largest bonuses since the 2008 Financial Crash (albeit many of these bonuses seem to be the result of multinational firms buying up British assets).

How can it be that a growing economy can be presented as a success at the same time that the cost of living is outpacing the finances of many folk in the country?

Since 1979 and the rise of the marketisation of economies, a substantial divergence opened up between the rate of increase in productivity in the economy and the rate of increase of real-terms wages. In essence, workers were able to produce more for their time spent working but they were still getting paid the same amount per hour. Imagine you make a widget that sells for £100 and you get paid £50 to make one (ignore all the other production costs for now). Imagine that automation, better skills and processes allow you to make two widgets in the same time. The company can now sell £200 worth of goods, but they still only pay you £50 for the work. Where does that extra £100 of profit end up? Largely into the pockets of the company’s owners and shareholders. As I mentioned last week, those “record profits” reported by BP are the equivalent of around 40% of the company’s entire payroll. This is what we’ve seen over the past several decades of wage suppression (though the Resolution Foundation points out that impact on UK income has been somewhat less suppressed than the US’s due to a somewhat stronger welfare state – our suppressed wages were more effectively “topped up” by benefits).

Since 2008, a second phenomenon has occurred whereby productivity growth in the UK itself has largely stalled with the ONS estimating that even with the relatively muted link between productivity and wages that the UK sees, this has been the equivalent of the average UK resident losing out on £5,000 a year in wage growth. The reasons for this “productivity puzzle” are still fairly hotly debated but at least one reason lies in the shift from manufacturing to “services” which are much harder to improve via “productivity increases”. For an example, while one can imagine speeding up a production line via automation to improve productivity it’s harder to see how that could be done in something like care. Unless one fudges the numbers by reducing care visits from 30 minutes to 15 minutes so that a carer can double the “number of clients served per shift” – something that erodes the very value of what care means.

What this all means is that while the GDP of the economy is increasing, you’ve never worked harder despite your wages staying static or, at best, is growing less than the inflation that is pushing up prices around you (and how that inflation may well disproportionately affect people on very low incomes) so that your standard of living inevitably falls.

Add to this the fundamental flaws of GDP as a measure of an economy in the first place. It has been well known for decades that GDP fails to count essentially anything that doesn’t have a “price” attached to it. It is particularly bad at measuring the economic value of unpaid work in the home such as cleaning. Barring the cost of cleaning equipment, if you clean your house and I clean my house then neither of those activities contribute to GDP. If, however, you pay me £100 to clean your house and I pay you £100 to clean my house then the same amount of cleaning gets done and the same amount of money ends up in our pockets by the end of the day but now we’ve increased GDP by £200 worth of “work”. The same goes for childcare, other caring responsibilities and more. That many of these activities are disproportionately carried out by women lends an uncomfortably sexist bias to the main measure by which countries measure their “success”.

Discussions like this remind me of why I support alternative measures of the economy such as those promoted by the Wellbeing Economy Alliance. We must start measuring our economy by metrics that show what really matter – social security, wellbeing, inequality, ease of access to services and suchlike. We know that the Scottish Government supports this idea in principle but it’s also apparent that they fall back on the “fantastic news” of GDP Growth without qualification just as soon as their comments on wellbeing have faded from the headlines. Those who face the coming “economic recovery” with a grim sense of foreboding, wondering if they’ll be able to keep their house warm or food in the cupboards may not be feeling so fantastic right now. Whose GDP is growing right now? Because it often doesn’t feel like ours.

2 thoughts on “Whose GDP Growth is it Anyway?”

  1. For the most egregious case of GDP being minimally correlated with wellbeing indicators look no further than Ireland. As soon as governments started targeting GDP as opposed to observing it, its relevance decreased and its utility collapsed. I used to think it should be relegated to one measure of several. I now think it should be abolished.

    1. Yanis Varousfakis once pointing out that if “GDP Growth” is the target then the best way to boost it is to bomb your country flat so that GDP is zero, then rebuild a bit. Any growth on zero is infinite growth.

      I recalled that after seeing the headlines about the UK being the “fastest growing” country coming out of Covid. We were also the ones starting from one of the lowest pandemic impact baselines….

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