by Irene Choo
For over 70 decades, Gross domestic product (GDP) has been the global elite’s go-to number, despite all the cautions statisticians offered against seeing GDP growth as an indicator of economic success and wealth. Even the key architect behind GDP, Simon Kuznets, was adamant against equating GDP growth with economic and social wellbeing.
As reported by the Organisation for Economic Co-operation and Development (OECD), “It (GDP) measures income, but not equality, it measures growth, but not destruction, and it ignores values like social cohesion and the environment.” GDP is amoral – cannot distinguish between “good” and “bad” spending. For instance, government spending on military armaments and firearms can give GDP a good boost, but the purchase has no effect in lifting our standard of living. Similarly, when personal consumption increases, GDP counts that as a positive sign, even if the expenditure is financed by credit cards or other means that pushes the household deeper into debts.
GDP is like a speedometer in a car: it tells you how fast or slow the economy is moving. It doesn’t necessarily tell you everything, for example, whether your economy is overheated or running out of steam. Above all, the speedometer doesn’t tell you if it is going in the right direction. If you suggest to the driver that you might be on the wrong road, and the response is “then we must go faster”, you might think that’s pretty stupid. Yet this is what happens whenever complaints about the state of the economy elicit a commitment to boost growth. (“Five measures of growth that are better than GDP”, World Economic Forum, Apr 2016).
The booming property market has made Singaporeans seem richer on paper, but as a society, it is ridiculous to think we can all get richer simply by buying and selling homes at ever-inflating prices. (“Homeowners: you’re not as rich as you think you are”, The Sydney Morning Herald, 14 June 2017). The reality is, any capital gains that are realised through higher property prices are achieved at the expense of successive homebuyers. Hence, no wealth is created, rather only a transfer of wealth, typically enabled through the creation of new debt. (“The Myth of Housing Prices”, Renegade Inc)
According to ValuePenguin, Singapore household debt burden has been on a worrisome rising trend, in particular, mortgage LTV (Loan-to-value) has risen to levels seen before the 1998 and 2008 recessions and bad credit card debt is nearing 10-year peak. Despite high private home vacancy amidst increasing supply, property prices continue to appreciate faster than income growth. Obviously, the rise in home prices is not a reflection of supply shortage nor sustainable strong demand.
Today, construction of residential properties are no longer purely for the provision of accommodation, but rather, a source of speculation and profiteering. Rampant property prices split the society into Haves and Have-nots: worsen the wealth gap between the rich and the poor. “As wealth inequality increases, it will create tensions and it will create problems in society,” said Sumit Agarwal (NUS vice-dean of research). Unfortunately, the adverse effects of growth seem inconsequential compared to the challenges of slow growth.
For instance, “slow growth will mean that new investments will be fewer, good jobs will be scarcer, and unemployment will be higher.” (“Speech by Prime Minister Lee Hsien Loong at Economic Society of Singapore Annual Dinner”, 8 June 2012). But, how can our economy expand indefinitely on a finite planet with finite resources?
No doubt economic growth is the most powerful tool in creating jobs, alleviating poverty and lifting the standard of living, but it can only work up to a threshold point. Beyond this point, any benefits of growth will be awash by its adverse effect and we may be worse off than before. It is becoming apparent that the pursuit of endless growth is financed by endless credit expansion and ballooning debts – the risk of default is mounting. I wish I am wrong, for once when the economic dynamism hinges so heavily on the wealth effect of rising assets value, it is unsurprising that growth-obsessed policymakers are more inclined to put up with a ticking debt-bomb than falling asset prices.
There is an increasing awareness that economic growth does not create better jobs nor higher wages, instead, people are working harder, producing more but earning less. Empirical evidence shows that the global labour share of the entire economy has been on a declining trend – less national income is allocated to labour compensation. In Singapore, wages here make up less than 43% of our GDP (2013), substantially lower than other advanced economies. An erosion of household earned income while the economy expands can exacerbate inequalities, fuel financial hardship and deteriorate standard of living.
Hence, don’t be fooled by the rosy GDP numbers. It is a deeply flawed measure of a nation’s wellness and prosperity. After all, the purpose of measuring GDP is to answer questions such as ‘how fast is the economy growing,’ ‘what is the pattern of spending on goods and services,’ ‘what percent of the increase in production is due to inflation,’ and ‘how much of the income produced is being used for consumption as opposed to investment or savings.’ (The US Bureau of Economic Analysis)