How economists misuse per capita GDP to depict income decline as income growth

Sat, 2011-01-01 01:07 by James Sinnamon

Simon Kuznets who, devised the GDP in the
early 1930's for US President Roosevelt for a
purpose almost entirely different to what it has
since been used for.

Bandicoot's otherwise excellent article What is Australia's population "carrying capacity"? suffers from one minor flaw. Of the Gross Domestic Product (GDP), which economists have insisted upon using to tell us how our prosperity has increased, Bandicoot writes:

Also, GDP per capita is a better measure of the economic well-being of a country than total GDP, as it takes into account population size – very populous countries may have very large overall GDP, but when divided by population size the resultant GDP per capita figure will give a much clearer indication of the country’s comparable wealth.

Of course it is plainly ridiculous to use Gross Domestic Product and not per capita GDP as a measure of prosperity, particularly, prosperity economists dishonestly claim to be the result of population growth.

The Australian Bureau of Statistics (ABS) graph at:

http://www.abs.gov.au/AUSSTATS/[email protected]/Lookup/1383.0.55.001Main+Features132009

... makes even per capita GDP figures, and not just Gross Domestic Product (GDP) figures, look good. According to this, per capita GDP "went up from $41,000 to $51,000 in real (chain volume) terms, an annual average increase of 2.2%."

So, either Bandicoot is wrong about population growth reducing per capita GDP (whilst allowing gross GDP to grow) or there is something badly flawed about the GDP, even when used on a per capita basis.

In fact, the GDP has been used and is being used by the ABS and most orthodox Australian economists in a way different from what its originator Simon Kuznets intended. In his very first report to the US Congress in 1934, he wrote:

...the welfare of a nation can, therefore, scarcely be inferred from a measure of national income..._#main-fn1">1

One of the things wrong with the way that the GDP is used by the ABS and orthodox economists is that it doesn't accurately measure many increases in the cost of living. Many it ignores completely.

30 or 40 years ago one car per family would have been adequate. Today, the same family needs two or three cars in order to be able to travel around to all the places they could once get to in plenty of time in one car, on foot, on bicycle or on public transport.

So, a family which earns enough to buy two cars today looks substantially wealthier in per capita GDP terms than a family of 30 or 40 years ago who could afford only one car, but in real quality of life terms, I would argue that they are not and any family which could afford to buy one car, but which could not afford a second car, would, in real quality of life terms, be poorer.

Much car parking which used to be free is no longer so. Our local shopping mall charges a minimum of $1 for less than one hour's parking up to a maximum of $10 per day. Parking charges in CBDs of major cities such as Brisbane are vastly more extortionate, being of the order $50 in order to park your car just long enough to see a movie.

There are a large number of additional things on which people need to spend money, which they didn't have to 30 or 40 years ago.

The most obvious is shelter. Real housing costs, the massive increases of which have impoverished broad layers of previously prosperous Australians, cannot possibly have been accurately taken into account in the above GDP figures.

Those no longer able to afford secure shelter must also bear a range of costs caused by substandard accommodation or frequent changes of abode, which I doubt that economist/propagandists take into account: time and money spent searching for new accommodation, time and money spent changing residence, rent or bond money that one is often forced to forego as a result of residence change, loss of possessions that can't be fitted into or transported to a new residence, having to secure your possessions against incompatible people you may have to share a roof with.

How much more income is consumed in buying alarms, stronger padlocks, deadlocks, etc? How much more needs to be spent on insurance of household items against theft?

How about mobile phones and the Internet? Whilst I think these are good things on the whole, it is not good that so many must have these things and pay for them in order to go about life and work.

I think that if all the increases in costs of living, including costs that we didn't have to meet in the past, and all the losses in quality of life were taken into account by the GDP, I think it would show a massive decline in average income instead of the claimed $10,000 annual increase, and that is not even taking into account our non-renewable natural capital, which is being destroyed at an increased rate.

So, it appears that even the per-capita GDP figures are being fraudulently used to cover up a massive decline in our standard of living caused by our politicians in the service of Australia's wealthy elite. This fraud must be brought to the attention of ordinary Australians. Any economist or any other public figure who uses this fraud to justify they way they are running the country must be judged accordingly.

See also: Living standards and our material prosperity of 6 Sep 07 and comments, What is Australia's population "carrying capacity"? of 31 Dec 10.

Footnotes

#main-fn1" id="main-fn1">1. #main-fn1-txt">back I first learnt of this, from memory, on page 6 of Australian author Geoff Davies' Economia, published in 2003.

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Comments

Matilda B (not verified)

Sat, 2011-01-01 11:01

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Diseconomies of scale reverses benefits of growth

Economists and politicians like to work with quantitative data to assess their success and effectiveness, not subjective things like access to public services, general well-being of the community, living spaces, amenities, environmental health, or public satisfaction. Once the elections are over, individual concerns are readily dismissed. Economists assume that the Economy must continually grow, and government success is measured in monetary terms. Economic growth can be to our detriment, especially if it means endless population growth. The GDP may appear "healthy", but not living standards, housing, air quality, and general well-being. China and India are expanding with vibrant economies, but the immigration flow is towards Australia, not the contrary. Over the next two decades, India's working-age population will increase by 240 million -- four times the entire population of Britain. 800 million people living on under 20 rupees (45 cents) a day, according to official data, and a growing Maoist revolt in poor areas shut out from the nation's economic boom. With such high population growth rates, any efforts towards economic development could easily be swallowed up by needs rather than spendable money. While China's living standards have dramatically risen over the past 30 years, the gap between rich and poor has sharply widened. Income distribution has remained skewed in favor of the rich for too long, and the government has failed to provide decent public goods. According to Ross Gittins, "There's no doubt a bigger population leads to a bigger economy; the question is whether it leads to higher real income per person, thereby raising average living standards." The twist to the argument is: "we need to grow more and do more damage to the natural environment because when we're richer we'll be able to afford to fix the damage we've done to the environment." Business people have a case for supporting increased population, because the larger the market the lower the average cost of the good or service being sold and this means greater profits and ( assuming the market is competitive) lower prices for the consumer. Beware of anyone wanting to sell you on the idea of population growth dressed up as "good" for the economy. At the turn of the 18th century, the Reverend Thomas Malthus stated that the human population would outstrip our ability to feed ourselves. Had it not been for the "green revolution" developed by Norman Borlaug, our population would have stalled at about half its present number. However, there are limits to how far Nature can be manipulated to grow more food and resources. Economics drives population numbers - not the other way round. The Economy has become an end in itself! This our politicians don’t understand. Economies of scale has produced cheaper food, and this has encouraged population growth, But, as population has expanded to take advantage of the economies of scale, it has moved into the area of diseconomies of scale for the other goods of life - for freedom of movement, and for freedom from crime and other forms of social disorder. As natural resources move toward exhaustion, the costs of pollution control rise, and traffic become worse. Crime rates are made worse by population growth. In California, more funds are spent on prisons now than on higher education. As the blessings of economies of scale are exhausted, humanity becomes entrapped in diseconomies of scale, and these do not cure themselves. Malthus argued in a 1798 that population increases geometrically, while the means of subsistence increases arithmetically. Crime, disease and war are necessary checks on population, he said. We are already in "ecological overshoot". "Diseconomies of scale" affect things connected with transportation and space. The larger the population that has to adjust to the unstretchable space available, the worse (or the more expensive) the functions or products become.

Enne K (not verified)

Sat, 2011-01-01 18:10

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Big is not always better

It is always argued that bigger councils can provide services at lower costs than their smaller counterparts. This argument typically asserts that local councils with larger populations can provide municipal services at lower costs per unit of output than local authorities with smaller population bases. Policy makers thus merge small spatially adjacent local authorities into bigger geographical entities with larger population masses in order to reap assumed scale economies in service provision. The notion that population can be employed as a measure of scale carries the implicit presumption that population size and service output are very closely positively correlated. Some services exhibit significant scale of economies, most notably domestic water provision, IT services and regional economic development. However, many other services, especially human services, do not have economies of scale. There is evidence that most local services show diseconomies of scale at relatively low levels. For Australia, distance often means it is simply physically impossible to provide service from a single centre to a huge spread of country towns. In his doctoral thesis, Stephen Soul (2000) examined the effect of council size (as measured by population) on gross expenditure per capita. He concluded that increasing population yields a lower level of gross expenditure per capita up to a council size somewhere between 100,000 and 316,000 people, at which point ‘scale diseconomies’ begin. Council rates, with economies of scale, should be now cheaper, but costs are spiraling. From the day ex-Treasurer, Peter Costello, made the extraordinary plea “to have one for the country”, we have politicians on both sides, business leaders and media commentators calling for population growth. We are trying to provide goods and services to more and more people and we run into barriers. When we notice increasing costs for goods and services, diseconomies of scale has set in. There are limits to growth. Editorial comment: See also Cate Molloy : Forced council amalgamations planned by Property Council of Australia of 7 Sep 07. Federal election and Queensland local council amalgamations (of Sep 2007(?)).

Anonymous (not verified)

Sat, 2011-01-01 12:34

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People as economic units

According to a government source, migration has a meaningful impact on the rate of growth of per capita GDP. "From 2013 to 2020, the rate of growth of GDP per capita would be about 0.15 percentage points higher with migration of 180,000 than with zero migration. This is equivalent to an upward shift in productivity of 0.15 percentage points which, if it were to be achieved through productivity improvement, would be considered to be a very desirable result". However, population growth is not "productivity". Also, "Whatever immigration or participation strategy is followed, the modeling shows that, with constant productivity, a sharp fall in Australia’s per capita GDP growth is inevitable from 2010 to 2020. After that, per capita GDP growth starts to rise again reaching a new peak around 2040 and thereafter remaining relatively high". People are simply being imported as "production" and as economic units. There is no consideration of our dependence on finite resources, our environment, of crowding, climate change or peak oil. It is based on conclusions from extrapolation of abstract economic theories. However, real life is more complex and multi-dimensional, and intrinsic values can't be ignored.

quark

Sat, 2011-01-01 15:20

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A September media release of Sustainable Population Australia

A September media release of Sustainable Population Australia points out that per capita economic growth as measured by per capita State Domestic Product based on ABS figures grew less or declined in the states with the highest population growth www.population.org.au/index.php/publications/media-releases/media-releases-2010/652-population-growth-damages-standard-of-living It seems self evident that a per capita figure of anything will tell us more about how individuals are affected by what is being measured than an over all national figure and will give more of a picture of how life is in a given country however one figure has to be a very crude indication of anything meaningful or qualitative. I totally take the point of the author of the article that ownership of stuff e.g multi cars in one family are not an indication of being better off than e.g a family 40 years ago with one car if it only gets the family to achieving the same as it did with the one car back then. Real wealth and quality of life are better assessed by comparing hours worked to achieve A, B or C. or time spent to get to Place D or E rather than the relative $ cost of an item or trip between decades. Then of course so much cannot be measured unless distilled from the complexity of our society and reported as a statistic e.g. level of stress and frustration with everyday life, hope and excitement for the future, feeling of belonging, ease of finding solitude in nature, joy of childhood. Much of this information will live on only as memories, diary entries , old letters and stories.

Anonymous (not verified)

Mon, 2011-01-03 20:01

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Thanks for article exposing gdp measure

Good article James, glad you're back in the saddle. This GDP lurk needs constant exposure.

James Sinnamon

Sun, 2011-01-09 22:17

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Victorian Bushfires also increased Australia's GDP!?

On a National Interest program about population first broadcast in April 2009, it was pointed out that the Victorian Bushfires actually added to the GDP and did not reduce the GDP as one would think. Why? Because only the economic activity of rebuilding following the damage is added to the GDP by accounts. The destruction caused by the bushfires was not subtracted from the GDP. Surely we would have to be wealthier as a nation if we did not have those bushfires. Activity not required to rebuild burnt property would surely have allowed other activity which would have truly added to our wealth to have happened. Yet the same economists who tell us that population growth adds to our prosperity, if they followed the same methodology that they apply to draw that conclusion, would tell us that the bushfires added to our prosperity. To be consistent, they should also advocate the lighting of more bushfires and the reduction in spending on fire fighting to further increase or national wealth.

nimby

Mon, 2011-01-10 16:52

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High mortality would stimulate the GDP too.

The ageing population is also a hindrance to the GDP. Older people are a burden on society as they are not big consumers. They get sick and need nursing care - besides the massive bonds or fees needed to be paid to nursing homes - and even though many are self-funded retirees. Long lives inhibit economic growth as younger people work, pay taxes, need to buy cars, houses, baby goods, household furniture and white goods. A plague effecting mainly older, useless people, would also be an economic benefit, and allow more younger people to immigrate and become consumers. Obsession for economic growth requires constant consumption of resources and goods and services. A stable and healthy population, of people with high longevity, is a threat to economic growth. Economic growth has become an end in itself rather than a means to support our lifestyles and insure an inheritance to pass on to future generations. We will eat away our futures with this fatalistic, myopic policy.

Tony Ryan (not verified)

Wed, 2012-08-22 23:07

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economics

I was not aware that Kuznets conceived the GNP/GDP equation, but I am bloody glad you drew attention to how it is being twisted to misrepresent median incomes and fictional employment/prosperity. Great article James. My gidday to Sheila. I finally got back to oziz4oziz.com affter my brilliant campaign to recruit manufacturers fell on its face. The site is much expanded and will soon feature my own music and news. Cheers Tony

How economists misuse per capita GDP to depict income decline as income growth

Footnotes

Topic:

Comments

Diseconomies of scale reverses benefits of growth

Big is not always better

People as economic units

A September media release of Sustainable Population Australia

Thanks for article exposing gdp measure

Victorian Bushfires also increased Australia's GDP!?

High mortality would stimulate the GDP too.

economics

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