Where does the grumpiness threatening the nation’s stability come from?
Why is everybody so grumpy? Politically grumpy, I mean. Not just in New Zealand; Australia, the US, Britain, much of the rest of Europe all have a restlessness which is indicated by dissenting populist parties. The political fragmentation is on the left and the right. It can even be difficult to place some of these parties on the political spectrum.
The economy seems to be part of the problem. Perhaps not all of it. Issues of national identity usually crop up, as do attacks on emerging minorities. There is a lot of anxiety about social and technological change – there always is. But the economy seems to be somewhere in the mix.
Actually, the economy is not doing too badly in historical terms. There is some growth of market economic activity (GDP); unemployment is not outrageously high. Yet the grumpiness is there.
It seems though that GDP is growing more slowly in per capita terms. That is the issue explored in this column.
First, GDP does not correlate well with life satisfaction at levels of national income in affluent economies like ours and those mentioned above. Perhaps GDP increases are not measuring real income growth or over-measuring it. (They are even less likely to be measuring increases in life satisfaction.)
I am not here referring to the measure’s cavalier treatment of resource (environmental) depletion, which we ignore until the resources run out. That depletion has been going on for a long time. The exception is that global warming, from using the atmosphere as a dump, is now obviously generating climate change evident in the heatwaves and fires in the Northern Hemisphere. (I don’t see such thinking in the populist parties, some practice climate change denial.)
However, the conventional GDP measure fails to incorporate other downsides. It has always been a bit weak on dealing with activity which switches between the market (measured in GDP) and the nonmarket (which is usually not). Very often an increase in market activity is accompanied by costs elsewhere. For instance, businesses are increasingly outsourcing their interfacing with their clients via what are often clumsy websites. You may have noticed how easy it is to sign up for, say, insurance and how difficult it can be to put in a claim – funny that the arrangement benefits the business.
Or the banks abolished cheques and now they are demanding you get a mobile phone which is far more complicated and expensive than you need, in order to bank with them.
Or to take another class of measurement issues. Consider the cost of making a building – perhaps your home – more earthquake resilient. The rebuilding goes into GDP, but you may not get much benefit – not until the next significant earthquake anyway.
It is possible that the multitude of minor downsides reduces any real benefit of the apparent rise in incomes to close to zero, contributing to a nationwide grumpiness.
Then there is the implications of slower GDP growth (leaving aside the downsides). Per capita economic growth rate in affluent economies seems to be a down a bit in the last decade even if it is still positive. What I am nowgoing to do is vary one of the standard assumptions in talk about the economy, an assumption so standard that we usually overlook it.
Its technical term in economics is ‘the representative individual’ (or household). That is, we analyse GDP incomes as if everyone gets the same increase. In fact, there is a lot of anecdotal evidence and scattered statistics which suggest the assumption is not true. Even when GDP is increasing, there are some people who are economically worse off.
Unfortunately I cannot find any comprehensive data base which measures how many. So I am going to have to illustrate the phenomenon by making some data up (a method which goes back at least two centuries to David Ricardo, so it is a respectable enough one).
I begin by assuming that real incomes of individuals are up by 1.5 percent over a year (not too different from the post-war average). Now I am going to assume that 10 percent have no increase in their incomes for that year – some will even have reductions (negative increases). This is not to say the same 10 percent are down every year – we just don’t know – some are. The assumption means another 10 percent are benefiting from a 3.0 percent increase or more in their real incomes.
Now suppose the income increase is only 0.75 percent in the year – it halves. Then those who have zero increases or negative income reductions jump to almost 30 percent. That is, halving the growth rate trebles their number. Any slowing of the growth rate magnifies the number of losers.
Presumably, it happens often enough the losers get very grumpy and express themselves in a populist revolt, the sort of thing we are seeing today in the affluent world. Explaining their depressed economic outcome, the grumpy are likely to extend their anger to immigrants (claiming they take away jobs – there is surprisingly little evidence they do), to international trade (ignoring that exporting boosts the economy) and to the government (which probably has less influence over the economy than we like to think). So, they join a party which promises fewer immigrants, fewer imports and to change the government. They are incensed by those who say the economy is doing well – typically those who are doing better than average – assuming they are doing better at the disgruntled’s expense.
That is, as best as this economist can explain it, the economics underlying the grumpiness. Of course, they have other gripes. But their economic situation reinforces them.
You may not believe there are significant downsides to economic growth – perhaps you do not suffer from them, or that a lot of people are missing out – perhaps none of your friends are, or that there is no need to be apprehensive about the future – not if you were in charge anyway. But there is one thing you should take from the column.
Looking solely at aggregates is misleading. Economic outcomes are far more complex than what a handful of numbers tells us; people’s experiences are far more varied than that of a single representative person.
Unless we pay attention to these complexities and variations, the resulting grumpiness threatens the stability of the nation.
PS. I have not talked here of the rising importance of the wealthy. That is another column; they are adding to the political instability.