AS a child of about six, I remember being devastated when I learned that grownups did not know everything. Sadly, I have been continually disappointed that people in important positions of power and influence are not necessarily competent either.
Too many people assume that politicians and bureaucrats who run our country know what they are doing.
This week, Treasurer Joe Hockey delivered his first budget amid bold statements about sustainability and the need to leave our children a nation of opportunity. Unfortunately, very little of the budget will deliver the future the Treasurer so optimistically espouses.
Gross Domestic Product or GDP is the most common index used by our politicians to discuss or explain economic performance. More or less, GDP is the gross value of all the goods and services of the country typically measured per year. This effectively means that every transaction that takes place in the Australian economy is added up to give a total figure that is the GDP. In layman’s terms GDP is a measure of how busy the economy is.
It sounds very plausible that GDP must continue to rise for the economy to be in good shape. However, GDP does not measure the change in wealth of the nation because growth in GDP does not necessarily equate to an increase in wealth.
GDP does not effectively differentiate between economic activity that retains capital in Australia or alternatively benefits foreign interests. For example the wealth that is mined on foreign owned mining leases or generated in a foreign owned farming enterprise ultimately is exported along behind the commodity, seriously eroding the so called economic benefit to Australians in the exploitation of our natural resources.
Unfortunately the fixation with boosting GDP has lead to a decision making culture that misses the important underlying problems that must be addressed to sustain a stronger economy.
When your dog gets hurt, a useful diagnostic tool to check how seriously, is to check its gums. If they are pink and full of colour that is a good sign. If its gums are white or very pale the animal is likely in shock and the injury more serious.
Our politician’s fixation with increasing GDP to fix the economy is not dissimilar to trying to manage the dog’s health by staining his gums pink with red cordial or food dye if they are pale.
Instead of diagnosing the real problem and treating it effectively, they would rather mask the problem by manipulating the indicator that shows there is a problem. Ultimately, artificially stimulating our economy to achieve short-term economic growth as defined by GDP only increases the inevitability of a more invasive “treatment” later on.
Here is an example of the GDP economic trick. If you normally washed your own car and then one day decided to go to a carwash, this would create an extra transaction in the economy and GDP would rise.
The political stimulus package that the Rudd government implemented spent the nation’s cash reserves and borrowed further money to execute this exact trick. The reality is that getting your car washed delivers no net increase in the wealth or earning capacity of the nation, it just shuffles money around. It is focussed on the consumptive end of the economy and typically delivers short-term benefits to tertiary industry or the “services” sector only.
You cannot consume your way to wealth. “Fixing” the economy by just increasing GDP is like trying to build a house from the roof down.
Australians need to consider the real underlying issues affecting our economy and their gaze should now, more than ever, be in growing wealth. The only way to grow Australian wealth stably is to bring more money into the country than we send out. As a trading nation we export and import products and the extension of this theme is to create wealth by reducing the gross value of imports and increasing the gross value of exports. Simply spend less than you earn, as a nation.
GDP is not the arbiter of economic success. It is a diagnostic tool that helps measure economic activity and is easily distorted in a “services” based economy to overestimate true economic growth.
Gross National Income (GNI) is another and perhaps more relevant economic index, particularly in a “services” based economy. Simply GNI calculates our retained earnings after debt servicing costs, dividends, rents and the like due to overseas investors are deducted from what Australian enterprises and individuals investing overseas earn. Apparently, Australia runs an income deficit of around $40 billion annually.
So you can see, a growing economy as measured by GDP masks a serious erosion of our economic strength. Conversely, it is quite possible to undergo a “recession” as defined by negative GDP growth while in fact improving the underlying economic/fiscal position of the nation.
Our balance of payment figures are the real key to a sustainable economic recovery. These figures are best manipulated by improving the conditions for primary and secondary industries and gently constraining discretionary spending on imports. This may bring down consumption, while improving our industrial competitiveness. (A simple way to achieve this is bring down the value of the dollar.)
The Coalition appears committed to developing our natural resources through foreign investment that effectively gives away our only opportunity to create wealth in the long run. This is reflected in the obtuse assertion that privatising public utilities and sale of mining leases and farmland is good for the nation.
It is impossible to generate long-term sustainable economic growth if you keep selling the assets that generate the nation’s income to foreign interests. It is essential that we retain the Australian ownership of the real earning assets of the nation, most importantly the farm.
Our economic focus needs to shift away from consumption and back to production.