Not much of a milestone

Last week everyone got a bit excited. The UK’s GDP, we were told, had finally hit its pre-crisis peak. We are now – hooray – as big as we used to be.

David Cameron and George Osborne called it a “milestone” and most papers reported it with happy exclamation marks. No one mentioned that the US hit the same milestone in 2011.

But if this announcement gave you great joy, perhaps it’s worth looking at just what GDP is. It is not a snap shot of an economy’s balance sheet. It doesn’t tell us our wealth. It measures the flow through an economy – the things created in any one year.

So, if you knocked a city down and built it again to exactly the same specifications, you would see no rise in real wealth. But you would see a sharp rise in GDP. What else?

GDP doesn’t factor in the size of the black market – the UK’s statisticians recently added a bit on to our GDP for drugs, prostitution and the like, but I think we can all agree they didn’t add quite enough (if they had captured the whole black economy, GDP would have risen by 20% not 5%).

It doesn’t distinguish between good growth (such as the output of entrepreneurial manufacturing companies) and bad growth (such as the bomb-making bonanzas that come with war).

It doesn’t tell us how much debt a country has and the extent to which that debt has brought forward growth or the extent to which growth has been driven by super low interest rates.

It doesn’t tell us how much of today’s growth will be tomorrow’s contraction. Look at China, where GDP has been boosted by indiscriminate construction, but there is a “looming haircut” to the number from “a write-off of bad debt, under utilised plants, and unsellable inventories, especially of housing”, says J- Capital’s Anne Stevenson–Yang.

GDP also doesn’t count the negatives of growth, such as pollution. And it can’t measure the improvements in our lives that come from lower working hours or technology. It is, as David Pilling puts it in the FT, a slightly outdated and entirely “amoral” number.

That isn’t to say that rising GDP is a bad thing. Assuming it isn’t rising for too many wrong reasons, it is surely better than falling GDP. But there is another problem in the way we look at numbers. Does the GDP of a country as a whole matter, or does its GDP per person matter?

Given that the end goal (I think) of having governments and of bothering to measure all this stuff is to gradually improve life for everyone, the answer should be GDP per capita. And guess what? It turns out that when you divide our shiny new GDP number by our fast-growing population, the result is still a good 4% off its peak.

Our GDP may have clawed itself back to exactly the same place it first hit six years ago. But the rise in our population means that output per head absolutely has not. Still think that the return of GDP to “pre-crisis highs” means everything is OK? Me neither.