Saturday, January 20, 2018

Whose GDP Is It Anyway?

During the UK Brexit referendum there was an exchange which highlighted the differences between experts and the public.

During one debate Europe expert, professor Anand Menon, made the point that leaving the UK would reduce the UK’s GDP which would be bad for everyone. One woman in the audience retorted “That’s your bloody GDP. Not ours.”

The woman was ridiculed by many for not understanding economics and the importance of GDP. However, her analysis was far more accurate than many of the experts. It is simply not the case that a rising GDP tide lifts up everyone. Consider the chart below.

From 2000 to 2013 GDP rose strongly in America but over the same period median incomes fell. Over fifty per cent of the population saw their incomes fall. You can argue all you like about the benefits of increasing GDP but if the additional wealth created goes almost entirely to a small economic elite, it will have little impact on working class voters.

The expert's predictions were also wrong.

After the Brexit vote in August 2016, the Bank of England's economists produced new forecasts. They forecast exports in 2017 would be down 0.5 per cent, despite the devaluation of sterling, that business investment in 2017 would be down 2 per cent and Housing investment would be down 4.75 per cent.

In fact when the Financial Times looked at the year-on-year figures for the third quarter of 2017, exports were up 8.3 per cent, business investment was up 1.7 per cent and housing investment was up 5 per cent year-on-year.

In terms of GDP the UK's growth was also above most forecasts. However, median wages continue to languish which is squeezing living standards. GDP growth may be a good thing but a more equitable distribution of the benefits would be even better.