By Martin Weale
GDP is widely used as an indicator of economic performance but it is well-known to have substantial limitations as an indicator of welfare. For example, it is measured gross rather than net of capital assets used up in the productive process and it takes no account of the interest bill faced by countries like Greece or earned on their overseas investments by countries like Germany. Finally, of course, it takes no account of population size. Britain has a lower GDP than China, but most people would think of Britain as a richer country than China.
These issues are easily offset. One can look at net rather than gross product and adjust for international payments and receipts. One can also look at the total per head instead of in aggregate. But growth in the resulting measure, net income per head, would still be subject to the critique raised by a heckler in Newcastle during last year’s referendum campaign, “That’s your bloody GDP. Not ours!”. Measures of growth in average income per head of population or per household are, in essence, plutocratic measures of economic growth. Growth in the income of a high-earning household has more impact on the growth in the total, or the growth in the total per household than does growth in the income of a low-earning household. The contribution of each household’s experience to the movement in the total, and in the average, is given by its own income. Thus, for many years the United States delivered a good performance in terms of GDP growth while the incomes of low earners were stagnating.
There are limits to what economic statisticians can do to produce simple aggregates which describe everyone’s experience and which are straightforward to explain to users of economic data. But it is probable that more could be done than at present. What about a democratic measure to complement our plutocratic indicators of growth? Instead of letting each household’s contribution to the overall growth rate be given by its income level, why not give each household an equal weight. The Newcastle heckler might still feel that the growth numbers did not describe her own experience, but they would be the average of everyone’s growth experience and could be explained as such.
There are a number of obstacles to be cleared before this can be done in a manner which is fully satisfactory. An important one is that there are material omissions from the conventional measures of household income. For example investment income is materially under-reported, at least relative to the numbers produced by official statisticians for the household sector as a whole. Pension entitlements do not normally feature in the surveys used to assess inequality and thus the income accruing as a result of people’s pension rights is left out of the calculations. Some account also needs to be taken of the services that the government provides on our behalf; they feature in some studies but not others. The undistributed income of the business sector needs to be allocated to households, probably in proportion to the dividends that they receive. The benefit that accrues to people as a result of owning their own home also needs to be taken into account.
Finally, if we are to look at changes over time, after adjusting for price changes, it is necessary to use a measure of inflation which gives equal weight to everyone’s experience. The current measure of inflation, like the measure of economic growth, is plutocratic. In its calculation it gives more weight to the spending patterns of big spenders than it does to the spending patterns of people on low incomes. For many purposes that is the right thing to do, but it is not appropriate if you want to produce a measure of the average growth in the real income of each household. If people on low incomes spend relatively more of their money on things whose prices are rising rapidly, then their real income growth is lower than that of households who get the same growth in money incomes but who happen to spend more of their money on things which are not rising in price so rapidly.
If there is a substantial amount of work still to be done to put the production of democratic estimates of economic growth on a production footing, it is nevertheless possible to give some indication of why this matters. Household income statistics suggest that average income per household in real terms grew by 5.4 per cent between 2002 and 2013. This is an average growth rate of just under 0.5 per cent per annum- disappointing but better than nothing. However, over the same period the democratic measure of growth shows an increase of only 2.2 per cent, or only 0.2 per cent a year. A weak performance becomes even more disappointing. The difference does not arise because high income households did better than low income households in money terms. Rather it is because the items which feature disproportionately in the shopping baskets of people with low incomes rose relatively rapidly in price between 2002 and 2013. Most discussion of changes in inequality ignores this effect.
None of this is to say that there is anything materially wrong with the framework currently used to represent developments in the overall economy. But users can reasonably ask to see developments from a perspective which gives equal weight to everyone’s experience. That means developing a democratic system of economic statistics which will, it is hoped, lead to more careful policymaking.
ESCoE blogs are published to further debate. Any views expressed are solely those of the author(s) and so cannot be taken to represent those of the ESCoE, its partner institutions or the Office for National Statistics.