It feels almost trite to say that GDP growth is not everything. For years, this was the mantra of people who objected to the concept of economic growth at all — and who thought we should ignore quantitative metrics in favour of vague, intangible measurements of wellbeing, like Bhutan’s “Gross National Happiness”. These people usually abandoned such mysticism the moment the economy actually began to contract, and had a firmly materialistic approach to public spending. (That, if nothing else, should always be growing.)
But to be sceptical of the value of GDP growth as a measurement is not to be sceptical of the concept of economic growth in itself. GDP is a proxy that we use to roughly estimate the total value created across the economy — and like any proxy it can be useful so long as we’re clear about what it is and isn’t telling us. Very crudely, GDP is to a country what the sum of the profits and the wage bill would be for a corporation. But in something as large and complex as a major national economy, there’s an awful lot that gets left out.
The realities of the modern world mean that we need to take a more discerning look at what the figures are telling us nowadays
Historically, GDP growth was a reasonable indicator as to how different places at comparable levels of economic development were performing in relation to one another. They were also a fairly useful indicator of a country’s performance over time, and whether its growth was picking up or slowing down. However, the realities of the modern world mean that we need to take a more discerning look at what the figures are telling us nowadays. For example, statisticians have long taken Ireland’s headline and per capita GDP figures with a pinch of salt, due to the country’s favourable corporation tax rates encouraging multinational firms to attribute a greater share of their profits to their Irish-domiciled activities. But while statisticians are rightly sceptical of Ireland’s official GDP figures for research purposes, there are other metrics we can use to tell that Ireland’s economy has been doing reasonably well, such as the growing median salary, or the overall shrinking of its public debt.
Of course, international companies accounting for their profit-generating activities to low-tax jurisdictions is just one of the ways that globalisation can interfere with the reliability of GDP as an analytical metric.
In an economy in which labour shortages are a major constraint on industrial development, immigration can be a critical element of a nation’s growth strategy. This was arguably the case in the United States at the turn of the 20th century, when a ready supply of new workers from Germany, Ireland or Italy enabled companies like Ford and General Electric and Eastman Kodak to scale up quickly, which in turn drove the huge growth in American productivity and prosperity during that period.
As with endogenous population growth, there is a simple way to check whether workforce growth via immigration is actually improving a country’s economic prospects rather than merely making it slightly bigger. This is obviously to divide total output by the population, and thus generate the per capita figure. That is the figure that links GDP to the average standard of living of the individual participant in the economy, notwithstanding distortions such as unequal distribution of resource rents, or Irish style sleights of cross-border accountancy. After all, anybody would prefer to live in Luxembourg with its $95bn economy rather than India with its $3,150bn economy if they had to take their chances as the median wage earner.
The problem in Britain today, as with a number of European countries, is that the government has bound itself to the headline GDP figure through a raft of budgetary discipline rules. Given that the government is permanently bumping along the upper ceiling of its self-imposed debt to GDP rules, it has a huge incentive to make the headline GDP figure go up in any way it can — regardless of its likely impact on the per capita figure. The economic models used by the Office for Budgetary Responsibility assume a positive correlation between immigration and headline GDP growth, with no heed paid to the law of diminishing returns. Whether or not that correlation is as close in reality as the models assume, it is no exaggeration to say that the government is required to maintain high levels of immigration in order to get permission from the OBR to go on borrowing money.
Whilst it probably is a good idea to constrain government borrowing, de-politicising the issue by handing authority to a nominally independent agency has created a perverse incentive. Rather than capturing economic performance which might affect the standard of living, or examining the government’s ability to meet future debt obligations, any figure relying on Britain’s headline GDP has now been corrupted as a metric by target chasing. The only exception to this is the per capita GDP figure, which tells us what is really going on.
This is hardly the only way in which legislation — intended at the time it was announced to “send a message” about the priorities of the government of the day — has come to assume a quasi-constitutional role with unintended consequences. But such is the fixation of British journalists with headline GDP and the quarterly GDP growth rate that the problem is completely overlooked. During the New Labour era, some journalists briefly got wise to the fact that as soon as the government imposed a target based on a particular statistic, that statistic would become irrelevant as public sector managers fiddled everything else to meet it. But that is now long forgotten.
This is by no means limited to slavish defenders of one party or the other; it’s a lazy reflex that spans the whole lumpen spectrum of establishment commentary. In his defence of the Conservatives’ record in government over 14 years, Andrew Neil noted that GDP had risen consistently if not quite spectacularly throughout that era, even with the sudden collapse during the pandemic. Yes, he threw in casually at the end that per capita GDP had stagnated entirely — but you can’t have everything, can you?
Since the financial crisis of 2008, the engines of productivity in Britain have stopped
This encapsulates the entire “red line go up” attitude toward GDP that makes people question what the point of focusing on economic growth is at all. Ultimately, it is supposed to mean allocating the resources we have more effectively. In an advanced, industrial, capitalist economy like ours, “growth” should mean that the wealth that was generated by the work that was done yesterday is deployed to make the work that is done tomorrow more fruitful. This can be done by investing in equipment that reduces the toil required to accomplish the same objective, or by eliminating less efficient means of accomplishing the same goal, in order to free that labour to accomplish yet more fruitful objectives.
But since the financial crisis of 2008, the engines of productivity in Britain have stopped. Throughout the entire postwar era — even during the well-remembered malaise of the 1970s — the productivity rate of the median worker in the UK maintained a steady rate of growth. This translated into a continually increasing standard of living, and a general decrease in the physical strenuity of work. This is no longer true.
There are various theories as to why. Initially, it was suggested that it was because George Osborne had put a stop to the practice of signing people off as long-term unwell in order to massage the headline unemployment figure. Supposedly, people who had previously been on the sick were now drawing salaries, thus reducing the average productivity of the median worker. But if that had been the cause, we would have expected productivity to have shot back up since Covid, as that process was reversed.
On the other hand, many migration sceptics put it entirely down to immigration, claiming that a glut of cheap migrant labour has robbed employers of the incentive to invest capital in productivity-boosting plants and equipment. Despite British academia going into overdrive to produce research that “proves” that a huge increase in the supply of immigrant labour has exerted no downward pressure on wages, this still seems like a partly plausible explanation. But while immigration has certainly played a role in the plateauing of British worker productivity over the last 17 years, it has not been alone in forging the tectonics of these years of lead.
Britain now combines the limited marginal returns and market saturation of a highly developed economy, with the regulatory instability and supply chain costs and risks of a frontier market. Disastrous interventions in the energy market and a highly restrictive land-use system are the worst of these policy areas, but there are many more. The range of industrial projects which are now suitable for investment have steadily shrunk, while alternative rival markets have matured. Britain is still a safe and attractive place for investors to put their money, but not generally in the kind of ways that will increase the productivity of the country’s workforce. Buying into the extant housing stock is the safest and easiest way to guarantee returns.
So, why do we let successive governments get away with this? Maybe it’s that statistical literacy is so limited in public life here that subjecting raw data to even the most basic analytical tools is seen as a form of voodoo. Andrew Neil’s outing with per capita GDP was not the only recent case of a mainstream commentator being spooked by the concept of “dividing a numerator by a denominator”. In a recent discussion of rates of sexual offences among different ethnic groups, Channel 4’s Krishnan Guru-Murthy seemed to regard Andrea Jenkyns’ attempt to consider proportionality to those groups as a percentage of the general population as borderline disinformation. This won him warm adulation from other broadcasters and media. In a similar vein, Fraser Nelson’s recent tour of headline crime data glided serenely over any examination of underlying trends in terms of population age, or the disappearance of high-value electronic goods from people’s unattended houses.
In some ways, the contemporary obsession with headline GDP mirrors the focus on the balance of payments numbers during the Bretton Woods era. In both cases, it reduced the role of the government of the day to oversight of a few KPIs — and thus of the role of political commentary to whether the numbers were up or down this quarter. With the big questions of political and economic philosophy answered, this was little more than palace eunuchs trying to discern whether the emperor still enjoyed the mandate of heaven. It had more to do with timing and luck than managerial skill.
Under the post-war consensus, governments manipulated the figures with crude interventions such as currency controls, prices & incomes policies and money printing. In the post-Thatcherite consensus, politicians have done so through capital requirement manipulation, “quantitative easing”, and by maximising immigration to make GDP look like it’s growing (or what Tom Jones calls human quantitative easing). As was the case by the late 1970s, a correction is now in order.
