IAN McAULEY. Reclaiming the ideas of economics: Jobs and Growth

Oct 3, 2019

Not all growth improves our wellbeing; not every job is a useful job. We should not confuse economic indicators, encapsulated in slogans, with meaningful economic outcomes.

It’s a neat three-word slogan. Who could disagree with “jobs and growth” as a political party’s economic objective? No one needs convincing of the misery of unemployment, and Australians who compare their material living standards with their parents and grandparents know the benefits of seventy years of strong economic growth.

But gross measures of economic growth – the GDP is the chosen metric – and statistics about what economists call “the labour market” (a term with its own twist of language) conceal a great amount of detail. By standards most Australians would hold, not all economic activity could be called good activity, and not all jobs are good jobs.

For a start, GDP captures only transactions involving market exchanges. A child-minder’s wage, and the profits of his or her employer, are captured in economic statistics, while a grandparent’s contribution doing the same work is not recorded. A 1997 ABS survey  found that unpaid housework and volunteering was worth between $250 and $340 billion a year, depending on accounting assumptions. Officially-measured GDP in the same year was $555 billion. (Such ABS surveys have fallen victim to government “efficiency dividends”, a euphemism for cutting services – yet another Orwellian appropriation of language.)

Another limitation of GDP is the way it deals with government-provided services such as health, education and infrastructure where there are no direct market transactions. The value of these services is estimated by measuring the cost of their delivery, based on government accounts. (In economists’ terms that means all “consumer surplus” is ignored.) When a service is privatised therefore there is almost inevitably a rise in measured GDP, even if there is no change in the service, because corporate profits and other expenses such as higher executive salaries are captured by the statistics. Road tolls paid to Transurban are measured in GDP; the services of a publicly-owned untolled road are not.

The outputs of publicly-owned water, gas and electricity utilities have always been captured in GDP figures because these have been subject to user charges, but with privatisation there have been generous provisions for corporate profits allowed by monopoly regulators, which means these privatisations have contributed to measured GDP, although there is not necessarily any improvement in service provision.

Yet another limitation is that national accounts do not pick up the costs of depletion of natural resources as a debit against our measured GDP. There are royalty charges and resource-rent taxes in some of our extractive industries, but these, and the major resource-rent tax proposed in the Henry Review, are in the context of revenue-raising rather than accounting for resource depletion. Similarly, when our soils blow away and our rivers die as a result of bad water and land management, there is no debit to our accounts. The greatest such omission from our national accounts is the cost of our contribution to climate change – a bill we’re demanding the rest of the world and vulnerable sectors in our own country to pick up.

In Australia’s case, as a country with high population growth and as a natural resource exporter, there are two further accounting distortions in GDP.

First, is the fact that GDP growth is influenced by population growth. To a business with a national market GDP growth is a positive indicator, but to a household GDP per capita is a more relevant indicator. Australia’s bragging about a run of so many years without a recession is based largely on population growth: if we had the demographics of Japan or Italy we would have been in deep recession in 2008 and would presently be entering another.

Also, GDP is a measure of activity that takes place in our country, even if some of the income of that activity does not accrue locally. Australia is becoming a major exporter of natural gas, but it’s a capital-intensive industry – once the wells, pipelines and terminals are constructed there is little more local activity, and if the firms are foreign-owned the dividends don’t accrue to us. The best we can hope for is the capture of some corporate tax, which, as experience shows, is very difficult when the resources of our tax office are pitted against those of multinationals.

Out of all our regular national accounts therefore, the one which has most relevance to our welfare is Gross National Income (GNI) per-capita because it filters out population growth and expatriation of income (while still being subject to other national accounting limitations).  The financial press however, either through laziness or partisan bias, almost always focuses on GDP.

Perhaps the greatest limitation of economic indicators of activity and employment is that they apply the same neutral accounting standards to those expenditures and jobs that improve our welfare as to those that do not contribute to our welfare, or even detract from it. One way to boost measured GDP would be to relax or abolish public health initiatives requiring use of seat belts or discouraging smoking. There would be a tremendous boom in jobs and income in hospitals. Raising speed limits would do wonders for crash repairers and sales of replacement cars (assuming enough people survive accidents).

Such hypothetical scenarios may seem to be absurd, but that distorted logic was applied in the gambling industry’s half-million-dollar campaign in the 2018 Tasmanian election, to swing the election against Labor because of its proposal to get rid of poker machines in pubs and clubs. The industry’s campaign was based almost entirely on preservation of jobs.  Many people were justifiably outraged by the industry’s political influence, but few people criticised the use of “jobs” as a basis for putting forward a case.

Ameliorating the damage from smoking and poker machines provides the most easily-imagined case of induced work that brings no benefit to the community. More generally, there is a great deal of work in a modern economy that can be considered unnecessary or wasteful because it is directed to correcting or ameliorating social ills by activities that count as “economic”. The textbook case is the work in cleaning up the waste of a polluting factory or mine – or, in Australia’s case, removing dead fish from the Darling. Less easily-traced but no less real is the cost imposed when a dog-eat-dog form of capitalism erodes trust in personal and business transactions. A loss of trust creates work for security guards, lawyers and auditors and adds to tendering and compliance costs across the economy. Similarly, if extreme poverty is a consequence of economic arrangements, work is created for police, social workers, jailers and others those who must deal with poverty’s consequences.

Only a utopian would claim that we could live without auditors and lawyers, but as the Nobel Prize winning economist Douglass North pointed out, there has been a huge growth in the “transactional economy” – what many would call “paperwork” or “overheads” in comparison to growth in the real economy where people grow and sell food, build housing, teach children, care for the ill, and provide services that directly affect people’s welfare.

Unfortunately many of those on the “left”, generally aware of these distortions and limitations but lacking any enthusiasm for the hard work of engaging in economic arguments, throw up their hands and abandon any attempt to make sense of economic indicators, leaving the high ground to the Coalition’s “jobs and growth” spruikers. Many people, rightly concerned with the damage our present pattern of economic activity is doing to the planet’s natural resources, deal themselves out of the economic argument by claiming that economic growth is intrinsically destructive of our natural capital and is therefore unsustainable.

If those on the “left” don’t want to abandon the economic argument to the “right”, they need to be promoting an agenda that improves human welfare without wrecking the joint. That may well be a “growth” agenda, but it would probably be growth that doesn’t register with our present limited accounting framework. There are other accounting frameworks, in various stages of development: New Zealand has its “wellbeing” budget for example, and the UK Office of National Statistics is looking at developing national wellbeing data. Our own ABS was making strides with its Measures of Australia’s Progress, which became another victim to cost-cutting. (Some of the highly-talented staff who worked on the project went to work on similar projects in other countries; perhaps if we elect an economically responsible government we can entice them back.)

A model of growth that captures our well-being and properly accounts for depletion of natural resources is not scary; in fact most Australians should find it is far more relevant to their needs and aspirations than the present set of national accounts (which would remain but as inputs to a more comprehensive model). If, based on such accounting, we learn that we can enjoy a high living standard while working a bit less, how can that be a bad thing?


This is the third of a series of articles in Pearls and Irritations  on reclaiming the ideas of economics. Others so far have been:

General introduction (September 19)

Aspiration (September 26)

Ian McAuley  is a retired lecturer in public finance at the University of Canberra and a Fellow of the Centre for Policy development.

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