GDP, Austerity and Wellbeing

GDP is a hugely misleading measure of economic wellbeing. It includes items which are actually destructive of the real economy on which most people’s wellbeing depends. Not only that, but most of it is actually immeasurable.

They used to measure progress by GNP which tried to measure nationally owned economic activity, no matter where it took place. But as successive governments presided over the disposal of UK owned assets to foreign corporates and governments, GNP reported the post-industrial economies as shrinking. Self-interested politicians found GDP a more convenient measure, since it ignored that massive fire sale and provided short term breathing space. So, despite the long term damage done to the real economy, those disposals, nominated as foreign direct investment, were actually celebrated in the UK as demonstrating it as ‘open for business’.

That fits nicely with the Milton Friedman version of the free market open access ideology that took command of Anglo-American politics since the days of Thatcher and Reagan. Initially, that perspective included an acknowledgement of the theoretical importance of the quantity of money circulating in the economy. That quantity would determine the rate of inflation as well as the growth of the economy. Politicians tried it and it failed, to such an extent that even Friedman himself confessed disappointment.

Another fundamental of the ideology is the notion that the market knows best. Therefore public expenditure, which might respond to such considerations as fairness and justice, rather than simply market forces, is inefficient and should be minimised. On the other hand, private expenditure, which always responds to the market, is efficient.

Friedman addressed the Institute of Economic Affairs in 1977 arguing that ‘There is a sort of empirical generalisation that it costs the state twice as much to do anything as it costs private enterprise’. He didn’t actually produce any data to support that contention, but added that ‘My son once called my attention to this generalisation, and it is amazing how accurate it is.’ His son couldn’t be more wrong in relation to UK’s more recent experience of privatisation and outsourcing.

While the quantity of money idea is no longer so fashionable, it continues to drive Anglo-American government policies, most obviously maintaining the stress on austerity, rather than stimulus of the economy.

The quantity of money approach completely ignores the other critical variable: the velocity of money’s circulation. If money is given directly to those in need, it will be spent immediately and will circulate fast, being spent a dozen or more times in the year. With each transaction it will have a multiplying effect, increasing economic activity and employment. So the economy is stimulated by channelling the money to those in need.

If, on the other hand, money is given to those who have no need, it will find its way, via some part of the banking or finance sector, to the pursuit of highest returns. Those are not achieved by investing in the real economy such as manufacturing. Far higher returns are achieved by speculative dealing on the various capital markets across the globe. Those returns increase massively when governments are clearly prepared to bale out those that take too much risk and threaten to crash. Tax payers in Anglo-America have paid hundreds of billions saving some institutions and providing ‘quantitative easing’ to support the too-big-to-fail investment bankers. None of that finds its way into the real economy creating real jobs.

Moreover, the winners from that financial opportunism are the least likely of all to pay their intended taxes, as illustrated by Donald Trump’s proud assertion that he hadn’t paid taxes for eighteen years because he’s ‘smart’.

So the need is to funnel funds to the needy to stimulate the economy. The question is where does the money come from? The answer has to be that it must come from those who can best afford to contribute it. In other words, from taxation which is at least a bit progressive and redistributive, and unavoidable even by the really smart.

Friedman argued a single low flat rate income tax was the best solution. In 1976 he advocated 23.5% as the best rate for the UK. He provided no supporting evidence for that figure, no doubt leaving the apparent precision to suggest such detailed analysis had been completed. However, even IMF staff have found that ‘redistribution appears generally benign in terms of its impact on growth … the combined direct and indirect effects of redistribution – including the growth effects of the resulting lower inequality – are on average pro-growth.’

The policies most likely to benefit Anglo-America would focus on stimulating GDP growth by increasing the velocity of circulation. That would be achieved by ensuring intended taxes are paid and making the top earners pay higher rates of tax, and passing that money to the needy.

That would be more efficient, fair and just, as well as increasing economic wellbeing.

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