War boosts GDP. But should it?

ABC Listen, podcasts, radio, news, music and more. It's one of Australia's most baffling, unsolved missing persons' cases. In 2007, four people, including a five-year-old girl, vanished in Western Australia, amid rumors of bizarre behaviour, cults and long-hidden secrets. Yep, yep. We're trying to track them down. I'm Dominique Bans and I've been investigating for the new season of Expans, the Nanop 4. Search Expans on ABC Listen or wherever you get your podcasts. The US and Iran are at war. It feels as if our living standards have stalled, and yet we've just been told that in the past year, Australia's economy grew by an outsized 2.6%. Part of the explanation for the disconnect between how many of us feel, and what the figures say, is that the figures released this week are dated. They tell us what happened to recorded gross domestic product, GDP, in the year to December when there were other wars, but not this one. But here's what's really odd. If Australia was involved in a war, if it gets involved in this one, Australia's GDP would probably surge further. War, which destroys lives and evicerates populations, war boosts GDP, and yet we're still being told it's a measure of how well we're doing. There's something unnerving about the way we measure GDP, and as you're about to hear, it's deliberate. GDP was built the way it was in order to build the case for war. Welcome to the Economy Stupid, on ABC Radio National, with me Peter Martin, and my guest this week, someone who has literally written the book on GDP. It's called GDP, a brief but affectionate history. It's one of my favourite titles, Diane Coel. Diane is Bennett Professor of Public Policy at the University of Cambridge, and has just written a new book about what could replace GDP. It's called The Measure of Progress. And Nikki Hattley, who's been ranking through these figures for decades as a senior economist and chief economist at all manner of institutions, and is among other things a Councillor with the Climate Council. Welcome, Diane, and welcome back Nikki. Hello Peter. Hello. Nikki, what do the GDP figures release this week tell us? What's happened to the size of the Australian economy, the amount bought, sold and made each quarter? So it's increased by what we call a real 2.6%. That's just a for inflation. That means it's just a for inflation, exactly. And that growth was relatively broad-based, so a little bit of the private sector, a little bit of the public sector, and in the private sector, a little bit of consumer demand, plus some business investment, particularly in those data centres that we seem down here to be investing in much like the rest of the world. And this is a, you know, you said an outsize 2.6%. But I think by Australian historical standards, that's pretty modest. It's just that size by the last decade. Well, but, you know, and also particularly compared to the last year. But of course, the central bank is now worried that 2% represents the sort of speed limit for our economy above which inflation starts to pick up. So there's lots of ways of interpreting this one. Good to see that GDP per capita has increased a little bit, that labour costs have gone down a bit. It's actually quite a nice set of numbers. I would think our Treasurer was quite happy to read those out. But of course, that speed limit perhaps puts a little bit of a dampener on the overall view of our economy. Well, some of the increase in GDP quite a bit actually was due to government spending on defence. It happened to surge in the quarter defence infrastructure recruitment, this new war that suddenly upon us, to the extent that we're involved in it, to the extent that an oil crisis boosts demand for our resources. And natural gas and so on. To the extent that panic drives up demand for gold, could that boost Australia's GDP further? Well, it could add to GDP, particularly the demand for gold as long as its volume is not just prices of course. But you need to also think about what does this do to confidence, both consumer confidence, which is already taking a bit of a hit because of interest rates now rising and expectations of another increase. How does business look at this world as trade going to be disrupted for months, particularly around the states of Hummus? There's so much uncertainty there. We're not entirely sure how this is going to play out. And that may start to eat into consumer and business behaviour, and then we're relying on the public sector to keep the engine going again. Diane, this link between war, public expenditure on defence and GDP almost didn't happen. Can you take us back to the original ideas of the people who developed the concept of GDP in the United States and in Britain in the 1930s? The concept was down to Keynes, the famous economist, who was working with the UK Treasury during the Second World War. And was frustrated because there weren't any figures that told him how the economy as a whole was doing what its speed limit was, and what kind of consumption sacrifices would be tolerable during wartime to free up resources for the war effort. And so he inspired what became the number we know as gross national product than gross domestic product. And there was a considerable debate at the time among economists about whether or not to include government spending, including on defence in the number. And they ended up doing so because they did not want the war effort to look like it was reducing the economy, although in some sense it obviously was, there was less available for consumers. And the point this made for me was that GDP is an idea. It's not a thing. It's a construct for the way we think about the economy. And that in turn has become incredibly influential and it shapes decisions by governments and businesses now for both good and bad. And it's not obvious what should have been included in the concept. I think one of the ideas was that advertising should be out of it because that's mere persuasion. Even there was an idea, you say that domestic workers shouldn't be included because they're just doing work on behalf of someone. Decisions had to be made about what was in and what was out. You're absolutely right and those decisions have been really consequential. So we have never included unpaid work in the home, although it's economically valuable. Some of that is now shifting. Digital means that we're doing a lot of things in the home that we would have paid for in the market previously, like online travel and online banking. We've always excluded since the Second World War, the full cost of the natural resources that our economies are using up. For economy like Australia, that's obviously quite a big deal. Nikki, I think this might matter a lot and not only the resources that we're using up, but also, I suppose, the clean atmosphere that we're using up. Bobby Kennedy, the US Attorney General in the early 1960s, was onto it then, which is very early, saying that assuming the destruction of the environment is costless is wrong. He said in a speech in 1968 that GDP or GNP, as it was called in his speech, counts as goods, things that are bad and doesn't count at all, many of the things that are actually good. That gross national product counts air pollution and cigarette advertising. It counts the destruction of the redwood. It counts napalm and it counts nuclear warheads and armored cars for the police to fight the riots in our cities. That the gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debates for the integrity of our public officials. It measures neither our width nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country. It measures everything in short, except that which makes life worthwhile. And it can tell us everything about America, except why we are proud that we are Americans. Nikki, did this emission counting the benefit of using resources but not counting the cost of using them up, has this mattered for what we've considered as progress in Australia and elsewhere? I think we're seeing only to clearly the cost of this decision peter today, particularly in the world of climate change and the cost that that is bringing to bear on individual society, communities, governments in terms of recovery costs in terms of the natural disasters, extreme heat, loss productivity, etc. We economists like to use the very sexy word 'extenalities' so that is things like emissions that have a cost but don't get included in any sort of formal accounting system of the economy. And this is a huge mistake. And if they had been measured, things might have been different. If they had been publicised, we might perhaps have been Canada put towns where they should have been and Canada to reduce emissions. One can only hope that we will have made those correct decisions, although I think even in today's society where we know that some of those risks, we still keep making full-hard decisions. And yes, I'm not sure that always having the information necessarily makes politicians or policymakers act more sensibly, but at least they are called more to account to do so if we have that data in front of us. Dan, you provided telling example of how what we count matters when you describe the way in which we count the so-called production of the finance sector. It was changed and that happened to be in the lead up to the financial crisis. What happened? There's always been debate about how best to measure the financial sector. And Adam Smith, father of economics, thought that finance didn't add anything to the economy at all. He would have just omitted. We should say happy birthday, by the way. It's 250 years since the publication of his famous book this year. Happy birthday, Adam Smith. But over time in the post-war era, changes are made to the definition of how finance was measured, that surprise, surprise, tended to increase the size of the sector relative to the rest of the economy. What happened in the mid-2000s was the introduction of what's called financial intermediation services indirectly measured. That was argued it was needed because in finance, for a lot of services, there's no actual price. You're looking at a spread between borrowing rates and lending rates. The decision was made to start to introduce that spread into the definition of the financial sector. Of course, what that does is measure risk-taking, more than it measures actual productive economic activity. The biggest contribution to the economy from the financial sector came in the quarter of the financial crisis, which is just absurd. The more risk that was taken on the better the GDP looked, and probably the more countries, not mentioning any particular names such as Ireland, thought it was worthwhile getting a big financial sector because it would boost GDP. The way you get that is getting a sector that takes some more risk. That's what the result was. That's what the consequence was. There are lots of other things that are difficult to measure in GDP. They seem to be increasing. There's AI, there are apps that are free. It may be making GDP less of a measure of anything that it was, whether it's now much good at all. It's one of the questions we're examining here on the economy's stupid on ABC Radio National with me Peter Martin. I guess this week GDP expert, it's GDP week, Diane Coel, and independent economist Nikki Hartley. Diane, in your latest book, you make the point that the boundary between goods and services is blurring, who knows what music is these days, that so many incredibly valuable things are now free, meaning their value isn't properly counted in GDP, that the contribution of AI is essentially invisible in GDP even though it's extraordinarily useful and extraordinarily important. Is GDP less for measure of living standards than it has ever been in its short life? I think it is. The structure of the economy because of digital technology over the past 20, 30 years has changed so much that a measure that was constructed for an economy that was dominated by manufacturing and by also agriculture and mining, it is just not a good fit for the economy today. We need to think about better ways of measuring all of the intangible activity that you just mentioned, the new kinds of business models, be it global supply chains or digital platforms, the way that many manufacturing companies actually make a lot of their money from services and intangibles. We don't have good underlying data on these and we don't really have good concepts for thinking about how is that actually making people better off and what is a good indicator for governments to decide what that economic policy is all to be. Or even who's a producer and who's a consumer? Volunteers, you've said that the internet is held together by a handful of volunteers and masses of content on it is produced by consumers really. Might all this be wildly underestimating GDP? Well in one sense, yes. So there's huge value in the open source software that the internet runs on and all kinds of digital activities that we are not measuring. We're also not measuring very well the kinds of human benefits that come from medical innovations that don't actually use much resource so that they don't have a material footprint particularly but obviously make a huge impact on human lives and well-being. On the other hand a lot of people have not been served well by the way the economy has evolved over time, the affordability crisis, the inequality and not to mention the environmental impacts of our economic activity that we were just talking about. So we're not including a lot of good things and we're also not including a lot of bad things and so this GDP construct is fraying at both edges if you like. A new technology might be both good and bad in the sense that it's monopolising so much of our time. Yes, I now have a free radio, free music player, free calculator, free street directories to pay for all of those things but it's not definitionally good if in fact for a lot of people in Australia's introduced a law about this for children it's making us less happy. That's obviously true and there are lots of adverse effects of these technologies. I'm sticking to the economics I think if you want to get into the whole calculus of people's well-being that's a much harder question so I'm sticking to the relatively easy question of you know what should the government measure to know what's going on in the economy and what they ought to do about it? Are these problems solvable Nikki? Are they moves in that direction? Well, this certainly is in Australia and I think you know GDP is Diane's just said it's a useful economic measure despite its imperfections just because we don't include all these other things in our traditional GDP measure doesn't mean we can't think about them and talk about them and measure them alongside GDP so that we have good conversations about what does economic health look like but it is a useful barometer for things like measuring you know our debt to GDP ratio it's much more clear to understand what something as a percent of the economy is even if that benchmark GDP figure is is imperfect at least it is a consistent benchmark between countries that allows us to compare apples with apples or to drive policy in one direction or another so I think we're trying but we're trying to do things in this country like the well-being index looking at broader things we have introduced a shadow price on carbon for policy decision making so we are getting better at broader measures that affect policy decisions. I know you're a GDP specialist Diane but should we pay much less attention to it that is to say when it comes out each quarter in Australia it's really the measure people look at and other measures aren't released on the same day or even if they were we wouldn't look at them much. I would be a big fan of not paying so much attention to the numbers and it's kind of absurd that the media you know sorry we're on media but pay too much attention to a quarterly change is it point four is it point six when the margins vary and the revision swamp those kinds of debates you know we even have monthly GDP in the UK which is completely bizarre and nobody should pay any attention to that at all unless their financial market speculators of course when they can make money off of it so yeah let's pay less attention let's pay more attention as Nicky is saying to other figures that we have that give a better guide to policy and business decisions. How we can make GDP better or what we can replace it with or augment it with is what we're about to consider here on the economy stupid on ABC radio national with me Peter Martin and I guess this week GDP expert Diane Coil from the University of Cambridge and Australian independent economist Nikki Hatley. Diane all sorts of ideas have been floated for improving or replacing GDP. One floated by President Trump's former adviser Elon Musk is to exclude government spending to get a better handle on what the non-government sector is doing another that you've put forward is GNP how would that differ from GDP? So you can think about including and excluding things from GDP and the idea of taking out government spending the US quickly backtracked on that thought when they realised that would reduce the measure of the US economy you can think about taking better account of things like international flows of capital and the trade and value added as it's called whereby any product now that people buy in the Western economy. companies has got components from all over the world. You get a better picture of trade if you net those out. And the US China deficit, for example, would do it smaller if you did that. But the thing that I'm keenest on actually goes back to the bit of our conversation about environmental impacts and costs. And that's having a balance sheet for the economy. You know, no company would think it could measure its long term health without looking at its balance sheet as well as its profit and loss. It's the same for the economy. We need to know how much we are depleting assets to get a handle on how much can GDP continue to grow in future. And GNP, gross net product, would do some of that because if we had less iron ore left and we're getting less iron ore left each year, I suppose that would be netted off the iron ore that we say we produce. That's right. So the proposal is to have a net figure that takes out some of the depletion of natural assets. But what I have in mind is a broader balance sheet. You could turn that into a net figure each quarter if you wanted to. But I'm also including things like what's the physical infrastructure, the digital infrastructure, the human capital and the institutional basis of the economy because from economic research we know all of these things matter a lot for long-term growth and yet in our quarterly figures we're not paying attention to them. Would you be in favor of that sort of thing, Nikki? I certainly think a broad of measure is absolutely a brilliant idea and I can't believe that we haven't thought of this till now. Some sort of dashboard that at least looks at not only what we're adding but what we're subtracting as well I think is critically important. We know that the planet is now running up against limits. We've going up against planetary tipping points and if we're not measuring those that are depleting our well-being then we're doing ourselves a disservice. What gets included in there is quite tricky because if you think of something like you mentioned Peter, iron ore resources we know in Australia that there's ongoing, well around the world, ongoing search for new deposits. I think at one time we've had 80 years with left and we've probably got more now so I can see your point. Well and depending on what the price is and the technology to extract things so whether you can get them out. So it's complicated. It doesn't mean that we shouldn't have a go at saying well within these limits we know this much and unless we find more of this this is what's going to happen. I mean obviously with the critical minerals which include such a broad range of what we used to call base metals even in the old days and the race for renewables and obviously the use and technology of these things. We really kind of need to get a much better handle on what's left and what does that mean for our future. And you'd also include people you were saying Diane in what you called human capital. If we lost a lot of people in a war that would hurt human capital or if we abandoned education that would hurt our human capital too or if we spent more on education and got results it would increase it. That's right it would show that education is an investment in the future of the economy but also health and the measures that we do have of human capital to use the not very romantic economist term for people. Don't don't include health and so the impact of COVID and long COVID does decrease the potential productivity and growth of the economy and we haven't counted for that. Another really simple idea put forward by Australian born US economist Justin Wolffers and Betsy Stephenson is not to measure GDP but to instead simply measure happiness well being by surveying the population. They say that happiness moves pretty tightly in line with GDP. It's much easier to measure and it's probably what we're aiming for, life satisfaction. Would that work Diane? It'll be cheaper. So it would be easier to construct a measure for sure so that would make it cheaper. I'm not such a big fan of measuring happiness or well being. It's obviously what we care about. That's what we want for people but although it's really tightly linked with GDP across countries or regions at any moment in time. So if you're richer today you're happier than somebody who's poorer today. Over time it's not such a great indicator for policymakers because it's measured on a scale of 0 to 10. That's never going to cope off 10 and in fact people calibrate their replies to these surveys so they always go oh I'm about a seven and in a country like Australia it would be 6 or 7 you know kind of maximum eight at all times. So that's not useful for policy. For policymakers you need something that's changing over time, that's giving you an indicator of our things now going better or worse than what should I do about it. You've put forward your own intriguing idea for a new framework using time, time being the ultimate non-renewable resource. Your idea is that if we look at how time is allocated we can probably get a better handle on things than we do now. How would that work? Well as you say we've all got to our 24 hours, we've got to spend them and so it's a great accounting framework. We've long understood that having more leisure because we're paid enough in hours of work that's a good thing for the economy. So let's take that further and think about how people allocate their time and how much they enjoy what they're doing. Do they have to work two jobs because they don't have enough money or do they have plenty of leisure but they don't know how to use it well because their doom scrolling on their phone. And from the productivity side, a measure of productivity is often that things get speeded up, things that we need to happen to produce goods and services happen faster or you get more high quality personal time. So my example is healthcare where if you've got routine tests you want that to happen as quickly as possible and get the results back super fast. But if you're in the intensive care unit you want many, many hours of highly skilled dedicated staff time to care for you. So for both consumers and the production side of the economy it seems an interesting indicator to look at when the technology is changing how we use time so quickly. And it could also look at how consumers are being forced to become producers, are on their force to do the work of checkouts at my supermarkets. That's my time and I'm forced to wait online forever while I say that my call is important. That's my time that in earlier times was done by a business for me. So we would absolutely look at that as a time tax or a time for us that we have to pay. What do you think of that idea, Nikki? It's an interesting one to me but I wonder how practically you could account for whether people actually are accounting for their time in the right sort of in a way that is robust and consistent. But I think it's an interesting construct but I'm not sure how it's going to be used. Interesting indeed. I like the idea but then I like ideas which are in practical and contested. Before we go Diane and Nikki as is traditional in this program anything to look out for in the weeks and months ahead Diane do you have anything? A couple of weeks ago I was visiting Silicon Valley and talking to AI engineers and made me start to take seriously the idea of the agentic economy. So I'm now thinking about how do we think about agents as entities in the economy and understand what they're doing. Nikki. Well you know that I'm always thinking about the net zero transition and climate change but at the moment it's pretty hard to tell yourself away from the headlines of what's happening in the Middle East and what that might mean for economies right around the world as well as the broader geopolitical agenda and so I think we will all be very very much glued to our various types of screens to see how that plays out especially those of us who might have travelled in the horizon that may or may not come to fruition. I'm glad you've just got back Nikki independent economist and GDP aficionado Nikki Houtley, Dame Professor Diane Coil author of GDP, A Brief But Affection at History and the new book The Measure of Progress Counting What Really Matters. Thank you both so much. Thanks Peter. Thank you. And thank you for listening. You can find out episodes on the ABC Listen app or live on ABC Radio National Thursdays. If you have any thoughts or questions or comments about happiness GDP or time no economic question is stupid you can email us at [email protected]. Thanks to producer Sam Comedy, I'm Peter Martin. We'll see you next week. You've been listening to an ABC podcast. Discover more great ABC podcasts, live radio and exclusives on the ABC Listen app.