Last week, we learned that Britain’s GDP grew by an impressive 1 per cent in the third quarter of the year. This was a cause for restrained celebration by the country’s leaders. Prime Minister David Cameron acknowledged that “we still have a long way to go and there are still difficulties ahead”. But, he added, “these figures do show that we are on the right track, we have got the right approach”. Chancellor George Osborne also thought that there was “still a long way to go, but these figures show we are on the right track”. The impressive unanimity helped get the message through. In the days following the announcement, more than 1,500 news stories carried the phrase “the right track” and “GDP”.
But GDP growth doesn’t always show that the economy on the right track. The British economy grew impressively in the decade before the economic crisis began in 2007. But it is now clear that the boom was dependent on an unsustainable expansion of debt. The Bank of England’s former governor, Eddie George, told the House of Commons Treasury Select Committee in March 2007 that:
We knew that we were having to stimulate consumer spending. We knew we had pushed it up to levels which couldn’t possibly be sustained into the medium and long term. But for the time being, if we had not done that, the UK economy would have gone into recession just as the United States did.
The central bank held interest rates low to keep GDP “moving forward” or, to borrow a Cameron-Osborne phrase, “on the right track”. The increase in household debt was thought to be a price worth paying to avoid recession. The already wealthy and a relatively small number of workers in the financial sector benefitted disproportionately.
The Bank of England official responsible for financial stability, Andy Haldane, now acknowledges that that the “rising tide of asset prices added to aggregate wealth. But it did not lift all boats”. Instead, the “pre-crisis asset price bubble acted like a regressive tax”. This is a polite way of saying that the rich made out like bandits while everyone else fell behind.
“The Bank of England’s narrow focus on GDP growth resulted in steeper inequality and weak
And even on its own terms the Bank of England’s approach failed. A few months after George’s comments, the banking sector began to collapse and a sharp contraction of GDP followed. The Bank’s narrow focus on GDP growth resulted in steeper inequality and weak overall growth. And as Kate Pickett and Richard Wilkinson point out in The Spirit Level, increases in GDP in affluent countries tell us little about the wellbeing of a society. Increases in inequality, on the other hand, correlate eerily with all kinds of problems, from violent crime to mental illness.
On the other hand, highly desirable developments can have a negative effect on GDP. If people stopped buying junk food and grew fruits and vegetables for themselves they might become healthier. But the figures for national output would look decidedly sickly. A programme to insulate homes would mean we burnt less fossil fuel. But we would also spend less money. Using new technology to produce clean and hyper-abundant energy is necessary if we are to save the planet, but again it would have some negative effects on the growth statistics in the short term. In the longer term, it would fend off the danger of an apocalypse in which industrial civilisation vanishes without trace, GDP statistics and all. But as Maynard Keynes almost said, in the long term, it’s the people who aren’t responsible for runaway global warming who will all die.
If civilisational collapse is a little too much, let’s try something more manageable, disease, say. In 2011, spending on drugs accounted for 0.9 per cent of the UK’s GDP. Imagine if conditions that currently require expensive chronic treatment could be cured cheaply and quickly. This miraculous improvement in human welfare would wipe out almost all of last quarter’s 1 per cent GDP growth. In the United States, spending on drugs was 2.1 per cent of GDP. The sudden eradication of diseases like depression would show in the GDP figures as, well, a depression.
Disease is interesting to companies when treating promises significant financial returns. This is consistent with the macro objective of maximising GDP growth. But it might be inconsistent with, say, curing cancer. A short course of cheap treatment – a combination of generic drugs, or a procedure that boosts the immune response, for example – would wipe billions from the balance sheets of pharmaceutical companies. Giving huge subsidies to profit-maximising companies might not be such a good idea after all.
It is time to distinguish between GDP growth and the common interest. They aren’t always the same thing. This is not to say that GDP growth is necessarily bad. But we need to make sure that economic growth takes a form that is consistent with objectives that are debated and agreed by a democratically organised public. So, enough with GDP. It isn’t the right track, if it ever was. Let’s see what a boom in equality looks like.
Dan Hind is the author of two books, The Threat to Reason and The Return of the Public. His pamphlet, Common Sense: Occupation, Assembly, and the Future of Liberty, was published as an e-book in March. He is a member of the Tax Justice Network.