Geoff Davies' Home Page

It Really is the Economy, Stupid

We should stop being mesmerised by a few misleading economic indicators, and instead take a long hard look at what's really happening to us.

The Canberra Times, 16 June 1999

"The economy" is growing at an annual rate of 4.8% and unemployment is stuck at 7.5%. Stock markets have soared far above previous records and more than two million Australians are living in poverty. Another Australian treasurer is strutting the world stage, offering gratuitous advice and acting like the world's greatest, while our foreign debt is heading for the stratosphere.
If all of this gives you a feeling of deja vu , it should. The same apparent contradictions have been around for nearly two decades. Also familiar are the cheers of economic fundamentalists and the confused mumbling of other commentators, who seem to be mystified. However, some sense begins to emerge if you look in the right places.

To start with, it is not "the economy" that is growing at 4.8%, it is the Gross Domestic Product. In spite of its name, the GDP is a highly misleading measure of the real productive economy, not to mention our state of well-being. It is really a measure of the flow of money. It takes no account of whether that money is being used to good or useful ends.

Ralph Nader pointed out a long time ago that every time there's a car crash, the GDP goes up. From the point of view of the GDP, the ideal citizen is an aged cancer patient fighting a bitter divorce battle in the courts. Pollution and natural disasters are great. All of these things involve spending lots of money, and that money is ADDED into the GDP.

On the other hand, mothers staying at home to nurture children don't count, because no money changes hands. Workplace stress and insecurity are not counted. Crime and the state of the environment are ignored. The GDP would be better called the Grossly Deficient Parody. It is past time our politicians and media went cold-turkey on their addiction to the GDP.

The GDP has become indefensible as measure of our state of well-being. A newer measure, defensible at least in its broad approach, is the Genuine Progress Indicator, in which costs are subtracted instead of added, and in which non-monetary productive activity is included.

For eight developed nations in the OECD the GPI reveals a consistent pattern. From the 1950s until the late 1970s the GPI rose in parallel with the GDP. Since that time the GPI has levelled off or is falling, while the GDP has continued to rise. The Australian GPI has been calculated by Clive Hamilton of the Australia Institute, and since about 1980 it has wobbled around without showing any clear gain.

Of course you can't reduce quality of life to a number, but which index fits your own experience better? Are you or your children more than 30% better off than your parents or you were in 1980, as the GDP suggests? Or are you about the same, as the GPI suggests, perhaps a little better off materially but working harder and worried about where your life is going?

So what is really happening in the Australian economy? We can start to find some sense by noticing that the GDP, stock market indices and the price of the Aussie dollar are no longer primarily measures of useful economic activity, they are measures of the flow and price of money: they are about finance . The dominant financial event of recent times was the Asian currency meltdown, in the course of which lots of money was pulled out of Asia.

Where did all that money go? It went to places whose compliant governments have set up the rules in such a way as to give shareholders an expectation of a good short-term return, places like the U.S. and Australia. A lot of that money has evidently been used to bid up stock prices.

Recent symptoms in Australia include a record-high stock market and a burst of consumer spending. The trouble is the consumer spending has been on imports, while exports have not risen. Neither fickle shareholders nor the Howard Government care much about ensuring that there is adequate long-term investment in productive activities that will increase exports or replace imports.

So we have high imports, low exports and a record trade deficit. Add in the flow of money and the current account deficit (CAD) is also far into record red territory. The Hawke-Keating government copped some flak when the monthly CAD approached $2 billion, unprecedented at the time. It is now around $3 billion (actually $8.85 billion for the March quarter, they don't issue it monthly any more).

We are living off the future. We are burdening our children with a huge foreign debt. Under Hawke and Keating our net foreign debt blew out from about $20 billion to around $200 billion. It is now well over $300 billion and again heading up fast.

What about unemployment? Behind the "productivity" and "labour market flexibility" euphemisms, here is the logic that employers and the Government are pursuing. Fire a fair fraction of your employees and expect the rest to pick up the extra work, after all they could be next. Automate where at all possible. Outsource (or restructure, a la Patrick Stevedores), so you don't have to pay employee benefits. Use contract and casual labour so they carry the business risks while you reap the profits.

If the shareholders are still not happy, then managers can move their production "offshore". This allows them to use compliant, often young and/or female workers for whom the going rate in Indonesia and China is perhaps $1.50 per long day. As well, employee benefits are non-existent, workplace conditions approach the worst of nineteenth-century England, unions are weak or outlawed, and environmental regulations are a joke.

There is a relentless logic at work in Australia. You would be well advised to bear it in mind the next time you hear Peter Reith sneering at a union. You are competing in your job with computers, with machines, and with increasingly desperate unemployed. This is happening because, thanks to globalisation, we are all competing in a very real sense with people who are paid perhaps one fiftieth what we are, or less. Unless the rules are changed, that is where your wages are heading.

Meanwhile your boss is trying to please shareholders who at any moment can pull their money and put it in some distant part of the world where the return is 25% instead of ÒonlyÓ 15%. Globalisation has allowed returns to be bid up to whatever the going rate is globally, regardless of the level of exploitation that may underlie the high rate of return.

As a result, the financial sector is extracting wealth from the productive economy at a quite unsustainable rate. While shareholder returns have gone sky-high, both wages and capital investment have fallen. The results, predictably, are that Australia's real productive economy is steadily losing competitive capacity and the well-being of wage-earners is declining. Even by the conventional GDP measure, "growth" in the OECD countries has been only about half of what it was prior to 1983, when markets were more sensibly restrained (4.9% pre-1974, 2.8% 1983-93). Australian GDP growth has been less than two-thirds what it used to be (5.2% down to 3.4%).

We've had nearly two decades of this experiment with unfettered markets and globalisation, and there is abundant evidence that it's a failure. We should stop allowing ourselves to be mesmerised by a few misleading numbers, and instead take a long hard look at what's really happening to us.


	It Really is the Economy, Stupid We should stop being mesmerised by a few misleading economic indicators, and instead take a long hard look at what's really happening to us. The Canberra Times, 16 June 1999 "The economy" is growing at an annual rate of 4.8% and unemployment is stuck at 7.5%. Stock markets have soared far above previous records and more than two million Australians are living in poverty. Another Australian treasurer is strutting the world stage, offering gratuitous advice and acting like the world's greatest, while our foreign debt is heading for the stratosphere. If all of this gives you a feeling of deja vu , it should. The same apparent contradictions have been around for nearly two decades. Also familiar are the cheers of economic fundamentalists and the confused mumbling of other commentators, who seem to be mystified. However, some sense begins to emerge if you look in the right places. To start with, it is not "the economy" that is growing at 4.8%, it is the Gross Domestic Product. In spite of its name, the GDP is a highly misleading measure of the real productive economy, not to mention our state of well-being. It is really a measure of the flow of money. It takes no account of whether that money is being used to good or useful ends. Ralph Nader pointed out a long time ago that every time there's a car crash, the GDP goes up. From the point of view of the GDP, the ideal citizen is an aged cancer patient fighting a bitter divorce battle in the courts. Pollution and natural disasters are great. All of these things involve spending lots of money, and that money is ADDED into the GDP. On the other hand, mothers staying at home to nurture children don't count, because no money changes hands. Workplace stress and insecurity are not counted. Crime and the state of the environment are ignored. The GDP would be better called the Grossly Deficient Parody. It is past time our politicians and media went cold-turkey on their addiction to the GDP. The GDP has become indefensible as measure of our state of well-being. A newer measure, defensible at least in its broad approach, is the Genuine Progress Indicator, in which costs are subtracted instead of added, and in which non-monetary productive activity is included. For eight developed nations in the OECD the GPI reveals a consistent pattern. From the 1950s until the late 1970s the GPI rose in parallel with the GDP. Since that time the GPI has levelled off or is falling, while the GDP has continued to rise. The Australian GPI has been calculated by Clive Hamilton of the Australia Institute, and since about 1980 it has wobbled around without showing any clear gain. Of course you can't reduce quality of life to a number, but which index fits your own experience better? Are you or your children more than 30% better off than your parents or you were in 1980, as the GDP suggests? Or are you about the same, as the GPI suggests, perhaps a little better off materially but working harder and worried about where your life is going? So what is really happening in the Australian economy? We can start to find some sense by noticing that the GDP, stock market indices and the price of the Aussie dollar are no longer primarily measures of useful economic activity, they are measures of the flow and price of money: they are about finance . The dominant financial event of recent times was the Asian currency meltdown, in the course of which lots of money was pulled out of Asia. Where did all that money go? It went to places whose compliant governments have set up the rules in such a way as to give shareholders an expectation of a good short-term return, places like the U.S. and Australia. A lot of that money has evidently been used to bid up stock prices. Recent symptoms in Australia include a record-high stock market and a burst of consumer spending. The trouble is the consumer spending has been on imports, while exports have not risen. Neither fickle shareholders nor the Howard Government care much about ensuring that there is adequate long-term investment in productive activities that will increase exports or replace imports. So we have high imports, low exports and a record trade deficit. Add in the flow of money and the current account deficit (CAD) is also far into record red territory. The Hawke-Keating government copped some flak when the monthly CAD approached $2 billion, unprecedented at the time. It is now around $3 billion (actually $8.85 billion for the March quarter, they don't issue it monthly any more). We are living off the future. We are burdening our children with a huge foreign debt. Under Hawke and Keating our net foreign debt blew out from about $20 billion to around $200 billion. It is now well over $300 billion and again heading up fast. What about unemployment? Behind the "productivity" and "labour market flexibility" euphemisms, here is the logic that employers and the Government are pursuing. Fire a fair fraction of your employees and expect the rest to pick up the extra work, after all they could be next. Automate where at all possible. Outsource (or restructure, a la Patrick Stevedores), so you don't have to pay employee benefits. Use contract and casual labour so they carry the business risks while you reap the profits. If the shareholders are still not happy, then managers can move their production "offshore". This allows them to use compliant, often young and/or female workers for whom the going rate in Indonesia and China is perhaps $1.50 per long day. As well, employee benefits are non-existent, workplace conditions approach the worst of nineteenth-century England, unions are weak or outlawed, and environmental regulations are a joke. There is a relentless logic at work in Australia. You would be well advised to bear it in mind the next time you hear Peter Reith sneering at a union. You are competing in your job with computers, with machines, and with increasingly desperate unemployed. This is happening because, thanks to globalisation, we are all competing in a very real sense with people who are paid perhaps one fiftieth what we are, or less. Unless the rules are changed, that is where your wages are heading. Meanwhile your boss is trying to please shareholders who at any moment can pull their money and put it in some distant part of the world where the return is 25% instead of ÒonlyÓ 15%. Globalisation has allowed returns to be bid up to whatever the going rate is globally, regardless of the level of exploitation that may underlie the high rate of return. As a result, the financial sector is extracting wealth from the productive economy at a quite unsustainable rate. While shareholder returns have gone sky-high, both wages and capital investment have fallen. The results, predictably, are that Australia's real productive economy is steadily losing competitive capacity and the well-being of wage-earners is declining. Even by the conventional GDP measure, "growth" in the OECD countries has been only about half of what it was prior to 1983, when markets were more sensibly restrained (4.9% pre-1974, 2.8% 1983-93). Australian GDP growth has been less than two-thirds what it used to be (5.2% down to 3.4%). We've had nearly two decades of this experiment with unfettered markets and globalisation, and there is abundant evidence that it's a failure. We should stop allowing ourselves to be mesmerised by a few misleading numbers, and instead take a long hard look at what's really happening to us.