Why both GDP and income growth are essential for wellbeing

Dr Bryce Wilkinson
Insights Newsletter
21 June, 2019

A Radio New Zealand journalist reported in the last fortnight that other top economists privately shared Eric Crampton’s publicly expressed concerns over Treasury’s economic capability. Yesterday, Treasury’s former deputy chief economist went public on the malaise in the organisation.

I share the concerns and offer two public examples.

First up is Treasury’s endorsement in recent years of Robert F. Kennedy’s absurd claim that GNP (Gross National Product) “measures everything … except that which makes life worthwhile”.

GNP and GDP are at once measures of income, production and spending. They have to be. What is produced needs to be sold and what is sold produces income. The measures are all related.

To declare that GNP does not measure things that make life worthwhile is to say measured national income does not make life worthwhile. Yet income for food, rent, clothing and much else does make life worthwhile. Even the much-increased life expectancy in the past 200 years has been found to owe more to income growth than health spending.

Well, Kennedy was a professional politician. In politics, rhetoric can trump reality. One may sigh over absurd overstatements, but not be surprised.

For Treasury to cite Kennedy’s statement approvingly even once should be professionally embarrassing.

Treasury’s many competent economists surely pointed this out internally to senior management at the time. That should have put an end to the endorsement. But it did not.

Income is REALLY important for wellbeing. That is why people relentlessly pressure governments to spend more and more of other people’s income without their consent. This process likely reduces national income.

Treasury used the Kennedy quote because its senior management wanted to promote wellbeing and living standards as a replacement focus for economic growth. Yet that idea is also professionally embarrassing.

Introductory welfare economics proposes that people make choices that maximise their wellbeing, as they perceive it, subject to their budget constraints. Ease those constraints and wellbeing should rise.

Productivity growth is central because it increases income per capita. Higher national income per capita can ease everyone’s budget constraints and thereby improve wellbeing.

For Treasury to disparage a focus on GDP or economic growth in the name of wellbeing is to lose the plot on wellbeing.

It would be good to see some evidence that Treasury’s senior management is listening to its remaining competent, professional economists.

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