A change in focus is
needed to make a real difference when measuring economic growth
Measuring the economy can be a bit like estimating the
length of the proverbial piece of string.
Even pinning down what to measure before taking out your tape measure is
tricky. What is measured takes on even
more importance when it is tied into government policy which aims to make us
all better off. This is a sobering
thought at a time when improvements according to the traditional yardstick of
GDP often fail to make a difference to the lives of many of us. Changing what is used as a gauge for economic
improvement can have significant consequences for the outcome of economic
policy.
Being strung along by
GDP
Rising inequality is a hot topic among economists at the
moment. Data shows that the wealth of the
rich has increased considerably faster than for the less well-off over the past
few decades. Much of this can be
attributed to the forces of globalization - a shortage of
skilled workers in
the global marketplace has pushed up their pay while the opening up of
countries such as China has resulted in a glut of low-skilled workers which has
depressed their wages. Technology has also
added to this trend with computers reducing the clerical and administration
work that had been a source of jobs for middle class workers.
Some see inequality as a necessary part of a capitalist economy
with industrious people earning more due to their own hard work. Others point to the social costs of
inequality such as higher crime and more health problems and call for more
policies to stem this trend. The lack of
advances in the earning power of a large portion of the population will
inevitably have serious political consequences such as the rise of populist movements
or a growing mistrust of capitalism among young people.
The issue is all the more urgent as it comes at a time when Western countries
are struggling to maintain their place at the top of the global pecking order.
The combination of austerity measures and loose monetary
policy in most countries is not doing much to address this issue and may be
making the situation worse. Cuts to
government spending disproportionately hurt the less well-off while the wealthy
have benefitted as quantitative easing has driven up stock prices.
These policies are based on the premise that creating growth in the
overall economy will benefit us all. But
the data shows that, for example, while GDP in the UK is expected to reach its
previous 2008 high this year, it will take a few more years for average earnings
to recover lost ground.
A different piece of
string
The overall size of the economy is becoming increasingly difficult to measure. So it might be better to focus more on the
bit that matters most to people – what they earn and can spend. Using median (real) earnings as a gauge of
the economy would mean that economic growth would be more tangible for more
people. It is also a more simplistic
measure which would require less manipulation although it would require some
adjustments (to take into account changes in what we spend our money on and whether
those goods change in price).
It would be a simple alteration that would have major
implications for economic policy. The
welfare of normal people would be the central focus with other related issues
such as unemployment also taking on greater importance. Yet, this would not be a license for wages to
rise inexorably as businesses would suffer and any artificially manufactured gains
would only be temporary. On the other
hand, measures to help companies, such as lower corporate taxes, would also need
to have a positive effect on wages.
Increasing the median wage would have a more profound effect
on the health of the economy and would involve more than simply boosting
spending through an increase in debt.
Making progress on this goal would require more long-term policies such
as investment in education and reskilling workers in declining sectors. Lifting earnings would be hard work but the positive
results would be genuinely worth the effort.
