Rankin Topics - GDP Growth and Living Standards 

Keith Rankin - February 12, 2005
 

Why would any government want GDP (Gross Domestic Product) to go up in circumstances that actually reduce our living standards? This is the sort of thing that gives economic growth a bad name. It's as unsustainable as growth by exploiting (and eventually destroying) our natural environment.

There are a couple of plausible-sounding yet nonsensical reasons.

One is that the government's revenue increases when GDP increases. But isn't the government governing for the people and not just for itself; it is supposed to be an agent of the people. And then our government already has huge budget surpluses. Increasing those government surpluses is hardly priority number one for the New Zealand people. (There is a sub-text here though. The principal form of saving that takes place in New Zealand is saving by the government. The budget surplus is the government's savings which is most of the country's savings. So an even bigger budget surplus means even more savings. Problem is that increased savings, by definition, means reduced living standards. A higher savings rate may help a nation to raise its future living standards, but this is only one of a number of possible long-run outcomes. Increased savings can also lead to recession, or to increased inputs but reduced "total factor productivity".)

Another reason is that our government wants New Zealand to climb into the top half of the OECD "league table". That's not a very sensible idea. What matters is that our living standards are high. It doesn’t really matter if others' living standards are also high. Indeed we should be pleased when other countries have high living standards. That goal becomes even sillier if we insist on using GDP per capita as our measure of national living standards, and then choose to raise GDP by reducing living standards. Making parents work a combined total of 80 (or more) hours per week while having their children in fulltime childcare is not raising living standards.

If our goal is to raise average or median living standards, then it is productivity that we must raise, not production. Higher productivity - which is more valuable outputs (ie GDP) relative to inputs - may or may not yield more production. But if we focus on increasing inputs as the principal means of raising outputs, we run the risk of achieving a reduced output:input ratio, which is a reduction in living standards.

It is high time we focussed on raising productivity by reducing inputs (or at least slowing down the input growth rate). Remember - inputs are the negaives in the balance sheet of life; the positives are valuable outputs. Policies to raise the growth of inputs are, in themselves, policies to reduce living standards.

It's a bit more complicated of course, but not much more. Some valuable outputs become inputs - eg public knowledge. These items add more to the positive than to the negative side of the ledger. Indeed, knowledge does not depreciate when used, so it’s a particularly useful input. Parents, on the other hand, do depreciate when overused. The costs of exploiting parents outweighs the benefit of a small addition to GDP.

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