Is GDP Per Capita is a "Garbage Metric"?

A lot of people have been challenging the notion that GDP is a good measure of the economy. Instead, they suggest, we should look at GDP per capita to determine whether life is getting better for individuals, rather than the country as a whole.

But is GDP per capita an economic triumph or a "garbage metric"? 

In this 23-minute discussion, Smart Prosperity Institute https://institute.smartprosperity.ca/ economist Mike Moffatt and journalist Cara Stern talk to Armine Yalnizyan, Economist and Atkinson Fellow On The Future Of Workers, explore the limitations of GDP per capita as a measure of economic health and well-being. 

The conversation highlights the issues of income distribution, the influence of tax havens and oil-producing countries on GDP per capita rankings, and the need to consider factors such as productivity and demographic changes. The discussion also touches on the challenges of measuring the digital revolution's impact on GDP and the importance of collecting real-time data.

Guest: Armine Yalnizyan https://twitter.com/ArmineYalnizyan
This podcast is funded by the Neptis Foundation https://neptis.org/

Hosted by Mike Moffatt & Cara Stern

Produced by Meredith Martin

This podcast is funded by the Neptis Foundation and brought to you by the Smart Prosperity Institute.

Transcript

Speaker 1: 0:18

Hi and welcome to the Missing Middle. I'm Kara Stern.

Speaker 2: 0:22

And I'm Mike Moffat.

Speaker 1: 0:23

And today we're going to be discussing GDP per capita with economist Armin Yalnisian, who's the Akassin Fellow on the Future of Workers. Welcome, armin, thanks so much for joining us.

Speaker 3: 0:33

So much fun. We're really looking forward to this.

Speaker 1: 0:36

You recently published a Twitter thread that took aim at the notion of GDP per capita as a good measurement of economic health. So first of all, I guess we need to start with a quick definition of GDP and then GDP per capita.

Speaker 3: 0:48

Well, so GDP is the dollars and cents value of everything that is produced in an economy, and GDP per capita is that number divided by the number of people in the economy. It's the average output created for the entire population, both working age and nonworking age. And so that's the metric that is being suggested. Is our problem metric, which I think is a garbage metric. Why is it?

Speaker 1: 1:17

a garbage metric.

Speaker 3: 1:18

First of all, it says nothing about the distribution of how that money is allocated. Just because it's a per head amount doesn't mean that's how it's distributed in an economy. It tells you nothing about how most people are doing. The second thing is that what puts a country at the top of the heap in terms of GDP per capita is well, when you take a look at those countries, they're either tax havens or they're oil producing, oil exporting juggernauts, or there's a small group of them that have enormous investments in public provisions, and that's actually a measure of GDP per capita, because people are getting a kickback from whatever wealth the country has.

Speaker 3: 2:00

How does that work? Well, because people are getting some value out of the economy that it's being taxed and then recycled into the economy in the form of affordable housing, childcare, healthcare, all the things that people need, and people are getting it rather than just being told the market's going to create most of it, which is the case in a country like Canada. And the third issue I have with GDP per capita, as any kind of a relevant measure is its little sister is productivity. So if you don't like the number, your major solution is less fixed productivity. But you know what?

Speaker 3: 2:35

We haven't been able to fix productivity in about 40 years my entire career as an economist I've been hearing how we need to fix productivity, how we're lagging in productivity compared to the US, and it's like we have tried everything. Back in the early 2000s, after Don Drummond and David Dodge had been at the helm of finance in Canada for a very long time, I heard Don Drummond stand up in front of a bunch of economists and basically say we threw the book at it. We did everything we were told we needed to do to boost productivity and business investment continued to fall. Because the little sister to productivity is, are you investing in machinery and equipment, which may not be the right measure either?

Speaker 1: 3:21

There's a lot to unpack there. I want to start with Mike. What do you think about GDP per capita?

Speaker 2: 3:26

Yeah, well, I guess it depends on what we're using it for. So, in a literal sense, again, as Armin points out, it's just how much stuff do you produce divided by the number of people. So in and of itself, that's not particularly useful. The question is is it a proxy for something that you care about? Is it a proxy for well-being in society, how well we're doing? And I think there's a couple of things to that.

Speaker 2: 3:56

I agree with Armin that cross-country comparisons can be challenging for a number of reasons, because that's one way that you could use the metric as a measure of well-being.

Speaker 2: 4:07

The other is in a time series sense of going okay, let's see how we're doing today versus 2017. And as long as you haven't discovered more oil or become more tax haven-y than you were 10 years ago, then all of those other concerns, or at least some of those other concerns, shouldn't net out. What I'm interested in is more the sort of politics of it. We always have this thing where people are kind of cherry picking which metric they want to use, and we've seen on Twitter I refuse to call it X, it's still Twitter people who are critics of the federal government, who say well, look, gdp per capita is the same now as it was in 2017. So they sort of highlight it as being a poor metric. And then you have other folks who will find other metrics to use. They go okay, yeah, gdp per capita isn't great, but we should use this other metric that shows we're doing better. So I always wonder Armin, like if we step back a little bit, like how do you think we're doing right now?

Speaker 3: 5:11

Oh, I think you and I would agree that we're not doing that great.

Speaker 3: 5:15

Economically economically, the metrics actually say that we did better than any country, including the United States, in terms of the rebound from the pandemic closure of the economy. But in terms of people's lived lives, if GDP per capita is some kind of proxy for well-being, then we know that most people are really struggling and the reason they're struggling is because more and more of their income is going into housing and that's leaving less and less money for everything else and making people feel very, very vulnerable to a hostile landlord or more interest rate increases. For a bunch of reasons, Renters and owners are feeling very vulnerable, except for the boomers that have their houses without mortgages and are basically they don't want to see prices go up for anything for any reason.

Speaker 1: 6:06

The way I've always heard GDP per capita described. I always think about the way I hope I pronounce his name right Mikhail Scooter. The way he describes it is like there's a pie for the country, and it describes how each of us are getting less and less of the pie. So, even though the pie is getting bigger, if you're getting less of it, you may end up with being worse off as a whole rather than getting the same amount. So then, when I think about that, I'm thinking well, if the pie is growing but we're all getting the same amount, that seems totally fine. So then, do you need GDP per capita to be growing, or is it a goal to be that it just stays the same? Would that be good enough?

Speaker 3: 6:44

I don't know how to answer that, because the answer is political. Okay, how come? The answer depends on whether you think that growth is good for growth's sake, because if everybody's getting a bigger, if everybody's getting the same slice of a bigger pie, but all the costs are also going up at the same time, are you better off?

Speaker 2: 7:04

Yeah. So I'm going to give a slightly different response. If we don't have any per capita growth, then basically all of our. The only way that you can get ahead is by making somebody else worse. Right that you get into a zero-sum type economy or society, that if there's a fixed amount of stuff and I get an extra dollar, that means one of you two loses a dollar. That's the only way you can get any progress. I think societies that become zero-sum when we've seen lots of them over the last 2000 years tend to be very problematic places. Now I think there are ways to have societies that are zero-sum, that don't affect GDP Right Again, and this is the problematic areas of using GDP as a proxy variable for well-being. But I think we have to be really careful that we don't go into a society that essentially becomes zero-sum.

Speaker 1: 8:06

What does that mean? Which societies have been zero-sum?

Speaker 2: 8:10

Well, I think we've seen a lot. Most of human history societies have been zero-sum that basically haven't grown in a very long time. So I would say over the last 80 to 90 years we've actually been the historical exception, not the rule Right. Most of the last couple of thousand years you've been more in kind of a Hobbesian state of nature where again the pie has been fixed and you know again, if you want to make yourself better off, you go and you steal the next guy's land or farm animals or what have you. So I think that again, I think that becomes problematic. Now you know again, can you have a society where GDP is flat but well-being is still increasing? And you can get a. You know society can be better off even if GDP isn't going up. It's theoretically possible. I don't think we've really seen that yet, but I don't necessarily think we should rule it out either. So again, it's this challenge of what are we actually measuring? But I do think you know, having growth at some level is going to be particularly important.

Speaker 3: 9:23

I just want to pick up on that, because having growth at some level, that level is going to be slower than we have seen in our lifetimes because of the aging of populations in all of the countries that had a baby boom after the Second World War, which is the richest economies, and now we're welcoming China to that fold in South Korea and Japan these countries including us when you have more exits from the labor force than entrance to the labor force, you see a gradual slowing of the economy just from demographic factors alone. When you get a larger share of people who are living on fixed incomes and spending less because they don't need to buy a house, they don't need to buy the same things that they did, and as they age they travel less, their worlds get smaller. So that natural phenomenon of aging of a population, aging of a larger and larger share of the population, is a natural drag on GDP growth and people have not wrapped their heads around the slowest moving train on the planet, which is demographics. So people are constantly pushing against that river and saying what we need is more productivity. We will get more productivity.

Speaker 3: 10:34

Here's another part of the productivity conundrum that I think it makes it a very weak measure. Mostly we are measuring labor productivity, but we don't even measure the value of data, and we are a data-driven society, so we're not including in our measures of are we doing things better, faster, stronger, more? What is the contribution of data and the digital revolution in GDP growth is not measured. It is not captured. Let me give you one very simple example.

Speaker 3: 11:06

More and more people, since the pandemic, have been relying on e-purchases, buying stuff online. Amazon has become a global bet-a-moth. It was already en route to doing that before the pandemic and certainly got there. We in Canada do not measure directly how much we spend on e-purchases Like so our measures of what is in GDP growth, how much we spend, you know, because GDP is measured both by incomes and expenditures. But we have got and I'm not saying that Canada isn't great, it's great this is happening all over the world. It's an international statistical conundrum of how we measure things that are not material, how we measure the value of services, for example, healthcare services. What does it mean to become more productive in healthcare? Does it mean that you're actually generating a profit? Why would you want that?

Speaker 2: 12:01

Yeah, so yeah. And to add to that, like, if we look at Armin's background, he's got all those lovely records but behind her, you know, you go back to the 70s, 80s, 90s. I can tell you, in the 90s I, you know, mine would have been CDs, but I could have had a wall that looked just like that. You know, I spent thousands and thousands of dollars. Nowadays I have access to basically all the world's music at zero marginal cost. Right, I can listen to anything I want and you know it doesn't really show up in GDP If I watch another video on YouTube or, you know, listen to another song on Spotify. So there is a real problem with the way that we calculate GDP. Where you have these essentially zero marginal cost products, because they exist, we might actually be underestimating our level of growth as we go from a society where you needed to have a disc or you needed to have something material to a society where, you know, all of these things are digital. So we should always keep in mind what these metrics measure and what they don't.

Speaker 3: 13:07

Yeah, in fact they're not measuring. They're not measuring Mike's loss of productivity by playing Mario Kart, for example.

Speaker 2: 13:15

Well, that's true, but that increases my well-being. So you know it all. It all evens up. So what is it that we're?

Speaker 3: 13:21

measuring again. Is it a proxy for productivity? Is it a proxy for efficiency? Is it a proxy for what you're getting done, or is it a proxy for how are we there yet in terms of feeling good about being human?

Speaker 1: 13:37

When Statscan is calculating this. How do we change that? Who has the power to actually change what we're measuring?

Speaker 3: 13:44

Yeah, we're looking at a kind of existential moment, not only for statistical measurement, which will catch up we will figure out those braniacs will figure out a way of measuring things better but it actually challenges our entire worldview. When you go from a world of allocating scarcity to dealing with a world of quasi-abundance in some things, right Like you are, this is no longer about I can't afford it, it's like next to free. So how do you, what do your economic theories look like in a world like that? I think we're at a pivot moment in many respects.

Speaker 3: 14:19

There's another respect in which we're at a pivot moment, which is that growth, gdp per capita, which is what started this conversation Growth in GDP per capita may actually go to the biggest players, and if that's your metric, you're not gonna see a problem that you need to resist. And we're seeing at the same time we're having this conversation about we need more productivity, we need to produce more, we need to boost growth, blah, blah, blah, blah. We're having this other conversation about some players have become too big, we need antitrust legislation, we need more competition, and these two conversations are having cheek by jowl and we are unable to stitch them together.

Speaker 1: 14:59

I think about the productivity part of it and what I've seemed to be seeing is that as things get more productive, the company might be making more money, but then it just doesn't seem to translate into the workers making more money for that productivity or being able to cut down on hours because of that?

Speaker 3: 15:15

I don't know how you solve that. What you just described, kara, is partly the function of a slowing economy, and investors don't want slower dividends. They want to see more returns. They want constantly high returns, which are. They just don't square with the economic moment. So the only way you can grow is by eating your competitor, and those are one-shot wonders. It's not like oh, I ate my competitor, I am perennially bigger. You have to keep eating your competitor to keep providing those returns, and so one way of dealing with that is lowering labor costs. And can I just say one example of boosting productivity? Yes, technology can help us provide better healthcare, cheaper and faster, to more people, and everybody needs healthcare at some point in their life. So you should want more productivity in the sector, but often what is happening since about hmm, I'd say 2018, 2019 across North America has been the rise of private equity Coming in and buying small owner operators, whether that's veterinarian clinics, dentists, but now it's primary care, it's diagnostic facilities, it's long-term care, it's early learning and childcare, it's the entire care economy.

Speaker 3: 16:35

Private equity sees the opportunity to come in and get steady cash flow, which is what it needs to pay off. It's over leverage debt, which is what bought it in the first place. Also, do sale buybacks, which means these same operators are paying more for rent because they spun off the real estate part. Okay, so we've got more money in the sector. Tell me how that's good for anybody Except for the investors. That's another reason why productivity per sector doesn't always make sense. It makes sense in manufacturing, where you can see how, when you invest in technology, you get more output for less input. Cool, that's what everybody wants to see. But we don't measure it in digital and we shouldn't be doing it in healthcare.

Speaker 1: 17:22

When you talk about antitrust, what does that mean? How does an average person understand what antitrust is?

Speaker 3: 17:27

Yeah, it's a terrible language. It basically means that you need to break up companies. They have become too big.

Speaker 3: 17:33

I don't know if you know this, but Canada was the first country to put forward an antitrust or pro-competition bill at the end of the 1800s. It was not a very good bill, but it was the most imaginative way to say we need more competition. Within a couple of years, the United States had a much stronger type of legislation that was really eyeing the corporate concentration that we're now in another wave of. So antitrust is basically saying for capitalism to work without shafting people, without actually moving towards a blade runner economy where a handful of producers own you, where we are consumer serfs. For that to be prevented, you need more competition. I mean, you see it every day in your bill for telecommunications, in your bill for groceries, in your bill for well, in input bills for mining, for fertilizer, for oil and gas. There's a handful of producers that govern everything. In Canada, finance is the same thing. So when you have few players, you have very little control as a consumer to be anything but a price taker, and prices always go up and we're in a world of inflation.

Speaker 1: 18:51

When you talk about the dividends. Part of it it made me think about how, when Bell last week decided to cut a whole bunch of jobs they're cutting thousands of jobs, but they're increasing their dividend and I just thought how does that make any sense at all?

Speaker 3: 19:05

Makes sense to the investors and money makes the world go around.

Speaker 1: 19:09

At what point do we kind of stop thinking of productivity as a good tool? How do you actually get that change in our society?

Speaker 3: 19:17

I think that's a cultural question. Productivity has become so basic to the way we think about how an economy should work and what we should be striving for that it will take a new generation of economists to start bringing forward some options, because you can't say don't do this without a counterpart which is do that, and there are no obvious bats in this storyline.

Speaker 1: 19:48

Mike, do you have any ideas of what we could do instead?

Speaker 2: 19:51

Well, that's a challenge, right that we don't really collect data in this country. We seem to be moving in the opposite direction for any of you who saw my YouTube shorts about housing completions in rural Canada, so that's a big challenge. It feels like, data-wise, we're moving backwards and, without those new metrics, those new forms of data, we're going to rely on these old standards. So I do think it's a problem that I don't think there's mutually exclusive to say that GDP per capita or productivity are lousy measures, but also they're the best ones we have, and I feel like that's where we are right now.

Speaker 3: 20:31

I just want to double down on what Mike just said. Stackcan has been incredibly inventive over the pandemic period in collecting more information, but it's very bad at real-time information, because real-time information often is proprietary and this raises a huge issue about who owns the data and what do they do with the big data. Right now, the public sector and public policy is flat-slotted, because the best data out there is owned by companies who have a very different agenda than improving public welfare. Their agenda is getting you to buy more, and that doesn't necessarily create public welfare, but it's great for the company. So we have this clash of power between the private sector and the public sector and how we collect data and how we use data for what ends. So I think Mike is right that we don't have the best data and we seem, in some regards, to be moving backwards. But certainly the private sector isn't moving backwards. Every day they are learning new ways to mine the data that they control and every day they control more data.

Speaker 1: 21:38

You've given us so much to think about. Thank you so much for your time. I feel like we've got a whole bunch of other topics that I hope you'll come back and unpack with us. I would love to.

Speaker 2: 21:47

Yeah, I was one of the best episodes that afterwards I was like, okay, we got this one done and now we got a half dozen more ideas. So our list just grows longer, and this is absolutely one of those. So thanks so much.

Speaker 1: 21:58

Thanks so much for watching and listening, and thanks, as always, to our incredible producer, meredith Martin.

Speaker 2: 22:04

Please like, subscribe or leave a comment. We'd love to hear from you.

Speaker 1: 22:07

And we'll see you next time.