Economic growth. The holy grail of ensuring a prosperous society. However in the 21st century, increasingly economic growth can mean as few as the wealthiest 1% get richer, while others get poorer.
The experience of the general population can be in stark contrast to official figures for economic growth. Sometimes even when political leaders and economists declaring ‘solid economic growth’, most citizens suffer economic hardship. The economic growth is to most people ‘mythical economic growth‘. This is the very type of disconnect that drives ‘populism’ and a mistrust of ‘experts’. This post discusses the concept of ‘mythical economic growth’, where official figures can even show strong economic growth, when a typical citizen experiences economic contraction. So how can official economic growth figures not reflect reality?
In reality, economic data is driven by vested interests. Those vested interests are most are most interested in economic growth for the wealthy and powerful. This can lead to significant dissatisfaction for those living in a society reporting economic growth, while most citizens experience increasing economic hardship. So how can ‘official economic growth figures’ appear so optimistic as to report growth even in a period of economic contraction? How can it be that citizens can be told ‘all is booming’ (and therefore any hardship you are feeling is your fault) when most people facing increased austerity.
- The sources of myth
- GDP vs GDP per capita.
- Why not use GDP per capita?
- Uneven Wealth Distribution
- Economic Growth for an Exclusive Group
- GDP vs GDP per capita.
- Economic Indicators: What do they really measure?
- Result: A Misleading Statistic
- The True Goals of Economic indicators.
- The GDP vs GDP Per Capita
- Why Use Finance Industry Metrics for ‘Recession’ & ‘Prosperity’?
- they have worked sometimes in the past
- they are by the experts (even if wrong experts)
- they ‘feel right’ for governments
- Population Growth and Economic Growth
- Conclusion: Let Them Eat Cake?
Two sources of myth
GDP vs GDP per capita
The first source of ‘myth’ is that recessions and other indicators of economic performance are measured as a total number, rather than a per capita number. If the population is increasing, GDP can report growth even when GDP per capita can falls. A ‘growing economy’ where each person is getting a smaller dividend.
Consider Australia. The government can (and does) claim Australia has ‘enjoyed’ continuous economic growth from 1991 through to 2019. In this time, the population of Australia has increased 46% from 17.2 million in 1991 to over 25.4 million in 2019. This almost 50% increase, means for every 2 people in 1991, there are effectively now three people.
While authorities such as the US Federal reserve have pointed out the flaw in the claim, with clear statistics that there have been 3 per-capita recessions during that period, the Australian Prime Minister Scott Morrison states ‘per-captia recession’ is not a significant economic statistic. In other words, from his perspective, it does not matter what is happening at a per person level. This perspective is discussed below.
Uneven Wealth Distribution.
The per capita example is simple. Clearly increasing the pie by 25% does not give everyone more pie if the number of people has increased by 50%. Any increase needs exceed an increase in population to be a real increase at the individual level. But it turns out moving to a per-capita figure may not solve the problem.
An increase of 25% of GDP per capita should see a real increase 25% for individuals. But this only works if the increase in wealth is from increased GDP is evenly distributed. What if the entire increase is given only to one small group, then everyone else sees no increase at all. This may sound unlikely, but is what actually happens very often.
Consider wealth distribution in the USA. Currently (Oct 2019), (via the Wikipedia article) ‘according to PolitiFact and others, the 400 wealthiest Americans had “more wealth than half of all Americans combined”. This situation reflects extremely uneven wealth distribution. Overall in society, the more wealth an individual has, the greater their opportunity to increase that wealth. Also, wealth inequality is currently increasing, which means the share of wealth being allocated to a small number of very wealth people is increasing.
An percentage increase in the wealth of those 400 wealthiest individual in the USA would more than offset the same percentage decrease of 50% of Americans. So if those 400 people became 5% wealthier (which continues to happen even when the economy is no growing), over 50% of the population could lose 5% of their wealth and the nett effect would still be on average wealth increasing.
So ‘per capita’ only makes the figures real for individuals if the GDP is shared evenly, and this is not reality for most economies.
Economic Indicators: What do they measure?
GDP: A misleading statistic?
As outlined in the points above, GDP reports on a statistic that can be totally at odds with what individuals are experiencing. Economic growth can exist even when no-one is gaining wealth (simply be adding more people), and clearly can also occur when just one small group is gaining wealth even if the majority of people are losing wealth. Why don’t we even try to focus on GDP per capita, or an even more realistic ‘GDP per typical citizen’?
The problem is that using GDP and indicators of recession is taking numbers indicators for the financial markets and investment community and trying to use those figures for another cause. GDP, and GDP growth are statistics for measuring investment performance and national potential. Not a measurement of outcomes of typical citizens.
The True Goals of Economic indicators.
Think in terms of stock markets. The two major indicators for the stock market in the US are the ‘Dow Jones Industrial Average‘, and the S&P 500. The Dow Jones tracks just 30 of the largest companies in the US, the S&P 500 extends this tracking to 500 companies, but all of those companies are valued at over $8.2 billion USDollars. The list of the Dow companies gives some idea of that profile. The only companies in indexes the very wealthiest. There are over 30 million businesses in the US, over 99.9% percent of them small businesses, but the market indexes only consider at most 500 businesses, and all of them huge.
To use these indexes to judge an overall economy is similar to judging how people in the US are doing by asking only those in the top 0.1% wealth tier.
This should make it clear that market indexes are not a reflection of all business, and there is no attempt to make indexes a cross section of all business. The indexes are about the finance industry. Investment is about only the biggest companies, so that is the focus of the finance industry.
The GDP vs GDP per capita & distribution
It is clear the finance industry focuses on the largest companies, which are normally nationwide if not also international. For such companies, sales typically depend on how many dollars are out there to be spent. It matters not if those dollars are now spread over a larger total population, or even if the dollars are very unevenly spread over that population, each dollar in the total community is a potential source of revenue. This is why GDP per capita is not, as stated by the Australian Prime Minister, a significant economic term. Nor is there economic measure trying to measure how GDP flows to the typical person, rather than a simple per capita when most of the capita will not see that share.
Why Use Finance Industry Metrics for ‘Recesion’ & ‘Prosperity’?
They have worked sometimes in the past
The recession of the 1920s was not only previously wealthy investors jumping out of tall buildings due to their financial losses, it was also millions of people out of work and with difficulty being able find sufficient money to eat and survive. Bad news for the finance community can clearly coincide with bad news for all. At least some of the time. However, the connection may also be linked to big business requiring a large labour force, and the that connection may be becoming less and less significant as automation has increased over the decades.
Clearly, there are times when the finance industry indicators have reflected wider problems, although whether they have predicted problems, or lagged behind those problems, is the subject of some debate. Also while severe recession may reflect in both financial metrics and the wider community, clearly there are times (e.g. the three per capita recessions in Australia in the past 27 years that are not detected by these metrics) when economic pain for the wider community is completely missed by these metrics.
The metrics are by the experts (even if wrong experts?)
But the finance industry people are those that know money so it is logical to use their numbers? Experts yes, but are they experts in the right field? As outline above, it is clear that the finance industry is focused the largest, richest corporations, and only those that operate on at least national level. This may not qualify these same people as to measure the economic circumstances of the average citizen, by using metrics refined for use evaluating economic circumstances of the largest national or international enterprises.
These metrics ‘feel right’ for governments
The reality is that government is one of the largest enterprises in the country in most countries, just one that is not listed on the stock exchange. For government, these same metrics optimised for the largest wealthiest national enterprises seem to the measure the circumstances of the government. What they may not measure, is the circumstances of the people.
Conclusion: Let them eat cake!
The Australian prime minister was able to dismiss the economy having again entered ‘per capita’ recession with by dismissing that metric as irrelevant. This has a parallel with the infamous ‘let them eat cake’ as a lack of understanding the economic circumstances of the population. Surely if the richest companies and individuals are gaining more wealth, then all must be fine with economy?
This lack of understanding of the people may be a result of using metrics in an inappropriate manner. The end result of politicians believing all must be going well when the average citizen may see a very different picture could easily feed into the mantra of populism: “the elites are lying to us!”