Rangi Krishnan

GDP vs Demography

(Is GDP on its way out as a measure of economic wellbeing?)

31 July 2021
GDP vs Demography

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We’ve all heard about gross domestic product (“GDP”) – it’s on the news and politicians and economic and financial talking heads are constantly referring to it when espousing their opinion about the state of the economy. It has always been a poor measure of economic progress in my view. It tells you a little something about where we have been but nothing about where we may be going and, in my view, it is at best a myopic view of our economies.

Demography, on the other hand, is more about people and people are always going somewhere. They’re often telling you ahead of time what their travel plans are so it’s worth paying attention. This article takes a stab at divining some future expectations of people based on the makeup of our populations and, along the way, considers the relevance of economic measures such as GDP.

However, let’s backtrack a little and talk about GDP (without any math whew) – in particular, what is it and why do the suits love using this metric? GDP takes into account consumption, government spending, net exports and investments; it is a measure of overall production and consumption of an economy. When compared from one period to the next, we can see if there is growth or decay in production/consumption of goods and services in an economy. When compared with other countries, we can see how we are doing compared to other nations – keeping up with the Joneses so to speak. Also when calculated the right way, we also get to see patterns concerning inflation.

Its underlying premise is that production and consumption are key to the economic development of a nation and, as a consequence, a nation’s standard of living. Although this premise has merit in the early to middle stages of economic progress, in the latter stages there are many who easily demonstrate that this measure is meaningless as they experience declining standards of living. It is however a simple indicator of progress, albeit of one form only, and that is why it appeals to economists, politicians and the like. For those wanting a bit more depth, here is a useful link to get started: Investopedia article

In an earlier article I discussed what I saw as flaws in economic and financial theories; the principal flaw being to look at an economy through the lens of production and consumption rather than seeing the bigger picture from the perspective of the behaviour of human beings. You can read my article titled “Capitalism Misunderstood” here:. It is in this context that demographics do become important.

For many traditionally trained economists, maintaining and increasing our populations is important as this provides the backbone for a production/consumption based economy. When a nation can’t achieve this naturally, they may resort to immigration and, in extreme cases, through annexation of some other state. However, we may all be reaching the limits of this particular game.

Darrell Bricker and John Ibbitson, demographers of note, wrote a book titled “Empty Planet: Preparing for the Global Population Decline”. They didn’t just sit behind desks and sort the numbers. Instead, they travelled extensively and interviewed many people, especially women as future generations rests squarely in their hands. What they found is that the standard of living all across the globe has been improving – something not limited to western nations. More importantly, the lot of women, particularly across Asia and Africa, has been improving. This also means that women get to make more informed choices about whether to have children and how many if any at all. It turns out that they are making similar life choices across the world.

The authors also point out that the trends relating to immigration is also likely to slow. Many western nations experienced immigration because people were looking for a better life with improved opportunities. However, as opportunities grow and the standard of living in their home nations improves, that reason to emigrate tends to dissolve.

Also, immigrants won’t suddenly end up taking over the nation which is often the cry of far right activists and political groups. This is because they embrace the education and standard of living of their adopted nation. As a consequence, they, particularly women, make lifestyle choices (including how many children to have) similarly to others in that nation. This makes perfect sense given my earlier comments about the reasons why people emigrate.

Finally, it is well accepted that for a population to maintain itself, it requires 2.1 children; two to replace the parents and 0.1 to cover those not having kids or children who don’t survive. New Zealand currently tracks around 1.61 as of 2020 1 – well below the replacement rate. Depopulation is a fact and this is irrespective of such things as war and plagues. Source:(1)

Then there are articles with headlines like:

The New New Zealand: Facing demographic disruption In 2030 there may be 6 million of us. One and half million of us will live overseas. We will be clustered in Auckland, dependent on migration, and worried about a shortage of workers. We haven’t planned for this. We need to.
Royal Society article

First, drawing a straight line on a graph is the poorest of projection tools and seldom right as life does not track according to an extrapolation of the past. Second, and more importantly, this all assumes that we need to continue to live like we always have. Such articles lack the imagination necessary to consider a lifestyle that is different from the status quo. The need to pursue a consumption based economic model requires the maintenance of populations, particularly through immigration. If we were to continue to pursue our current model, there would be competition for immigrants as New Zealand is not alone in experiencing shrinkage. However, the reality is that we are all headed in the same direction and this means that, one way or another, we will be forced to recognise that current economic models will not serve us well as we look ahead.

This leads nicely to the crux of the matter – we are all getting older while the younger generations are thinning out. The boomer generation is starting to retire and we are living longer. I wrote about millennials in my article “Certainty, Security and Community – The Road Ahead”. In that article, I also forecast the general direction we are likely to head particularly as the millennials and future generations of youngsters take charge.

The older generation and the younger generation today have a lot in common even though many would argue otherwise. I know that there is a lot said about boomers hoarding all the wealth at the expense of the younger generations, but I would point out that the majority of people today, old and young alike have considerable debt and so are not well placed to handle shocks. Also, superannuation and various pension schemes are in the hands of fund managers who do well when the markets do well and still get paid when the markets don’t. As such, financial shocks will go down like a cup of cold sick no doubt. There is considerable vulnerability in the present system and pressures have been building for some time now.

Getting Older
Image by Gerd Altmann - Pixabay

So what does all this mean for our economies looking ahead? Nations cannot afford to pursue economies purely based on production and consumption particularly as there is considerable waste in this system. Further, foreign production reduces local opportunities. As Henry Ford pointed out, if you pay your workers well, they will come buy your goods. But the current economic model has squeezed wages so local production becomes too expensive to support and people go off looking for cheaper options. This also has a flow on effect to employers so it all becomes a vicious cycle.

Our demographics suggest that the current economic model is unsustainable so change is inevitable in my view. Also, our needs will drive us in this direction and I think that old and young alike will align to meet these needs and the challenges that go with these. The following briefly illustrates this alignment.

As we get older, I expect that traffic congestion will eventually abate, especially in Auckland and other major cities. Some of us will find it too difficult to drive while others simply will not be allowed to drive. I often hear that we will have driverless cars before very long. What people forget is that the infrastructure needed to handle cars is expensive to build and maintain. Driverless vehicles also require their own specialised infrastructure. While such vehicles may become a reality, our ability to afford them may be our limitation. As such, we will have to be smarter and not simply rely on tools that are smarter. As I pointed out in my earlier article about millennials, many young people do not appear to be interested in driving either. In my view, their needs to get around will align nicely with their elders needs to do the same, so we are likely to realise some form of mass rail and road service in the future.

Meaningful Opportunities
Image by Klimkin - Pixabay

As we get older, we also become far less consumer focused. What will be important are services; getting a ride to do the shopping, getting a haircut or simply going out. Access to health services and local support becomes important. For the younger generation, they are looking for opportunities. Many are jaded by roles that simply involve production and distribution based on our current system, especially when their compensation doesn’t cover their cost of living. If employment is not meaningful to them, they will not have any concerns about opting out or finding the means to do so. Here again, I think the needs of both generations will align.

These couple of examples are the tip of the iceberg but you get the point and you can do this exercise for yourself. What is required is a paradigm shift that reflects the reality of our needs as we create our future. A decline in population does not have to be a problem that needs to be addressed as indicated in the Royal Society article referred to earlier. It is only a problem if all you see is a continuation of the status quo. However, if you can shift your perspective, it can be seen as an opportunity to create a different kind of future.

As the reality of population decline begins to bite and the realisation that the status quo is unsustainable, it also means that measures such as GDP are likely to become far less important in determining the state of an economy. The idea of consuming less may be unpalatable to the current breed of economists and other such advisors to governments, but it is far easier to replace them than to try to force a consumption model upon a people who are generally well and truly passed it.

As the older generation retire or become less involved in paid work, their income levels will also drop. This will also constrain their consumerism and shift priorities. Further, the younger generation are unlikely to want to bear the burden of pursuing a consumption driven model of economy especially when it would likely place a huge tax burden upon them. The status quo system sees a smaller younger population trying to support a growing older population and the only way to do this would be to sacrifice the wealth of the youngsters for the benefit of the elders. This, I can absolutely assure you will not be accepted – by both old and young alike. A paradigm shift is therefore essential and inevitable.

Image by Gerd Altmann - Pixabay

Demographics suggest that a great change is upon us and, from my perspective, the needs of the old and young will align to meet the challenges ahead. Although technology may be part of the solution, we may nonetheless all want to lower our expectations, consume less and focus on being happier rather than simply being wealthier. Also, if the generational cycle referred to in my earlier millennials article plays out, I expect that the next 80-90 years may involve a considerably lower level of economic activity than experienced today.

Accordingly, while measures such as GDP may still be referred to, such measures are likely to play minor roles in the future in my view. I also expect that there will be a new range of measures for wellbeing and for meaningful employment as we trudge forward.

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