QED

Does anybody care?

Measuring our economic success

There are at least three ways in determining the success of an economy. We deal with something abstract called economic growth, we look at the most common measure we have for production which is Gross Domestic Product, or we tally up the number of jobs across the economy. 

When Adam Smith wrote his Wealth of Nations, what he wrote about was how to make a community and its members prosperous. When Keynes came to write his book, his title was The General Theory of Employment, Interest and Money

In moving from one to the other, we move from thinking about what will make the members of a community wealthier to thinking about what will cause the level of employment to increase. 

In the first of these ways of looking at things (Adam Smith’s way), a job is a necessity in creating wealth for which one receives a wage. In the second, a job is a necessity if someone is to receive a wage irrespective of whether there is any wealth actually created along the way. 

We now, in dealing with matters such as the stimulus, think only about job creation and have almost totally divorced workplace effort from productive output. It simply does not appear to matter. We spend literally billions on producing goods and services providing no net economic value, and thereby deprive ourselves of all of the useful forms of output we might have produced instead. But if it creates jobs, good enough; that is the only political coin of the realm. 

GDP is the measure of wealth creation but is an entirely artificial construct. Not one in a hundred who quote the fact that GDP has risen have much of a clue at all about what it is that has actually gone up. 

Flaws abound in the construction of the national accounts, but let me dwell here on just one. For the private sector, what is included is the money value of goods and services sold on the market adjusted for movements in the price level. 

But for most of the public sector, no such money value exists since what was produced was never actually put up for sale. What is therefore done instead is that the actual amount outlaid by governments for whatever they purchase is simply included “at cost”. The amounts spent by governments are just added in without making any attempt to work out whether the economy is in any way better off. 

In the private sector, expenditure is only recorded after a business goes to all the effort of production and has then found someone to purchase what has been produced. In the public sector, whatever the government spends, on whatever it happens to buy, is put straight into the accounts without making any adjustment to determine whether there has actually been an increase in the community’s wealth. 

A stimulus package will therefore create jobs, at least in the short term, and lead to a rise in the measured level of GDP. But whether the community is economically better off is simply an unknown. 

There is no doubt that the various elements found in our stimulus packages are using up our resources at an extraordinary rate. Whether they leave behind a more prosperous economy is unfortunately an outcome that is very much in doubt. But at least the statistics will look better so why worry? 

But Does Anybody Care?  

Indeed, building a stronger economy does not even appear to be the foremost issue for the Government. The front page story in The Australian on Friday does no more than highlight what everyone knows who has bothered to look. 

The nation’s key economic advisory body [the Productivity Commission] says the government has not ‘universally applied’ its own promise to subject all major infrastructure spending to detailed and transparent cost-benefit analysis. 

It cites the controversial $43 billion national broadband network announcement, which was not subject to a cost-benefit analysis, and several projects in the $22bn ‘nation-building’ infrastructure plan that formed the centrepiece of the May budget, which had either not been evaluated by Infrastructure Australia or had not been deemed ‘ready to proceed’ but had been funded anyway.

The Government is counting on your ignorance to get away with literally destroying billions of dollars of our wealth. These projects will almost certainly not make us better off, they will just make us poorer. 

But they will use labour. And they will lead to a rise in the recorded level of GDP. That we will actually end up with a lower standard of living because of this tremendous level of public waste is just how it is. 

I now meet people all the time who tell me we had to do something about the Global Financial Crisis. Fine I say, very noble I think. Pay the higher interest rates, pay the higher taxes, sacrifice your living standards on some Keynesian altar. I don’t think it will do any good but it’s majority rule so this is what we do. 

But these latest expenditures, the ones being highlighted by the Productivity Commission, are not being undertaken in the heat of a crisis but are a matter of deliberate policy. That we let governments direct so much of our resource base to ends of their own choosing is unfortunate but if we as a community do not know any better, that is just how it is going to be.

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