IT gives me no pleasure to say so, but Nicola Sturgeon has been serving up more “wacky theories” in her latest speech on Gross Domestic Product and related matters. The tag is not mine, but owed to the Fraser of Allander Institute.
It was her second stab at a critique of GDP, after last August in Edinburgh where she had addressed the TED conference (Technology, Entertainment, Design) on the same subject. She has now made similar points to another of the capital’s innumerable conferences, this time the Wellbeing Economy Alliance.
It is all in preparation for COP26, the climate change summit coming to Glasgow at the end of the year.
What the First Minister misses is that there is not a professional economist in the world who places absolute, unquestioning faith in GDP figures. They are, to begin with, constantly revised. It was comparatively recently we learned how the balance of payments deficit (a component of GDP) during the premiership of Harold Wilson half a century ago had never existed.
On the contrary, there was a small surplus. So the immense efforts his government put into eliminating what was anyway a fairly minor flaw in its strategy were wasted. If he had known the truth, UK history might have been different.
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What all the same makes GDP the economists’s preferred measure of national performance is, first, that it goes back a long way – to the Second World War.
Then it became vital for victory that governments had some measure of how efficiently their nations were making armaments and generally organising for the struggle. It remains good for showing up long-term trends, pointing out where corrective action is needed; for instance, if investment steadily declines.
And secondly, the recording of GDP has internal checks that allow us to test its accuracy. It is, in fact, not one measure but three. One, the most often used, is of expenditure. We can see how much consumers spend, we know what government lays out, we ask industry how much it invests and we adjust the total by setting imports against exports.
The second measure is of income. We can observe what the nation’s wage bill is, and can add in the rents that are paid, the interest on investments and the profits companies make.
The third measure is of production – harder to estimate in cash terms, because different inputs, all variable in price, go into output of goods and services. Usually an index number is used.
But the miracle is that, in the eight decades since the UK began estimating GDP by these three means, their results have by and large confirmed one another and not been out of line with what we see every day with our own eyes in the economy round us.
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When we have a boom it promptly appears in the GDP figures too, with the reverse when we have a recession. In my view, this means the figures give us a real picture of a real economy, not complete though the broadest available. We pooh-pooh them at our peril.
Still, as I said above, economists are always wary of placing total trust in them. Their huge advantage from the professional point of view is that they allow comparisons to be made. Because they have proved consistent with one another, we can trace through the economy the effects of a tax change, or a rise in the oil price, or a sharp increase in the US tariff on our whisky. This is all information we are the better for having than for not having.
What is more, to quote the Office for National Statistics, its “statistical classifications provide a set of related categories in a meaningful, systematic and standard format”. The First Minister cannot compete with this.
She wants us to take account of “wellness” too, but what is this wellness? It’s not a word I ever learned at school, and I don’t think many university courses teach it. In what units is it counted? If we cannot measure it, how will we verify whether, from one year to the next, we feel more well or less well?
How, in other words, can we judge if the Scottish Government’s policies to promote wellness are working or not? I fear Nicola would prefer her spin-doctors just to brainwash us. And that is not as good as getting unbiased economists trained in objective methods to find out on our behalf.
It is fair to say the First Minister is not alone in her concerns. The fashionable questioning of GDP was started by economics Nobel Prize winner, Joseph Stiglitz. I’ve found this memorable quote by him from a year or so ago: “What we measure affects what we do. If we focus only on material wellbeing – on, say, the production of goods, rather than on health, education, and the environment – we become distorted in the same way that these measures are distorted; we become more materialistic.”
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This formula has proved attractive to heads of government apart from Nicola. She has linked herself with two other likeable lady leaders, Katrin Jakobsdottir of Iceland and Jacinda Ardern of New Zealand, to pursue a common agenda. The tough bit of toiling to keep up in this terrific trio is that both Iceland and New Zealand have pretty well solved the sort of economic problems that still burden Scotland. The growth rate in Iceland is 4% a year, and in New Zealand 2% a year, respectively eight times and four times Scotland’s.
It would be better to wait till we have matched them before saying we want no more increases in our growth rate.
Nobel Prize winners, each with £700,000 in the bank courtesy of the Swedish Academy of Sciences, may well sneer at materialism. Mere mortals have no choice but to be materialistic. There are families to feed and clothe, homes to buy and maintain, commuting or holidays to pay for. Most of us will never be clear of debt till our retirement, which itself gets later and later, less and less prosperous. And short of redistribution of income on a revolutionary scale, unlikely ever to be voted for in a democracy, we will have to rely on the materialism of economic growth to provide the necessary resources.
It is not, after all, as if GDP is some abstraction existing only in the brains of economic nerds. When we build a hospital or a school, that is part of GDP (the expenditure measure). When workers’s pay goes up, that is part of GDP as well (the income measure). If a new oilfield in the North Sea comes onstream that, too, is part of GDP (the output measure). It is the blather about wellness that is airy-fairy, not GDP.
If I were not such a kindly fellow, I would suspect the Scottish Government of another motive for trying to focus our attention away from information that shows this country in a less than favourable light. What I mean is things like rising death rates or falling educational standards. They seem to demonstrate not only that a progressive approach can fail, but also that it may be misconceived to start with. This is the risk with “wacky policies”. In a crucial year for national independence, they are more likely to delay our freedom than to bring it forward.
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