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Monday, July 15, 2024


Time to put the capita back in GDP per capita

With the exception of the U.S., GDP per capita — the size of the pie, and how big a slice of pie the average person gets — has stalled or fallen in all advanced economies. Of late, Australia and Canada have seen the worst declines, Armine Yalnizyan writes. Cole Burston / The Canadian Press file photo

The wonky metric is key to your quality of life, Armine Yalnizyan writes.

You may think that this story has nothing to do with you, but you are the whole reason for this story. How you and everyone thinks about a wonky metric, GDP per capita, will shape your quality of life for the next two decades.

Decision-makers in Canada and around the world are abuzz about slowing economic growth, particularly the “in-a-nutshell” measure of progress since the 1980s, GDP per capita. With the exception of the U.S., GDP per capita has stalled or fallen in all advanced economies. Of late, Australia and Canada have seen the worst declines.

The reason you should be worried isn’t that GDP per capita is falling, but what the proposed fixes are.

Let’s start with: What the heck is GDP per capita?

It is the dollar value of everything bought or sold in an economy, divided by the total number of people who live in that place. In decades-old parlance, it’s about the size of the pie, and how big a slice of pie the average person gets.

GDP per capita is an unhelpful metric for guiding policy fixes, for three reasons:

• It doesn’t tell you why GDP per capita is high or low. Most top nations in a global ranking of GDP per capita are tax havens or oil-producing juggernauts, sometimes both. However the top 20 also include all five Nordic nations and the Netherlands, historically the biggest spenders on social programs. Yes, Canadian GDP per capita is behind the U.S., but we rank 17th out of 193 nations. Is that worth kvetching about?

• GDP per capita is an average measure that doesn’t tell you anything about how the economic pie is divided. Averages imply everyone one gets the same slice of pie. In no nation is the economy equally distributed. So say we go all-in on growing the pie; there’s no guarantee you’ll get more.

• GDP per capita can fall when a growing share of the population makes less and spends less. That’s what happens with population aging. Household spending is the primary driver of every economy. It accounts for 56 per cent of GDP in Canada now, but as the share of the elderly grows, growth slows. Every nation that had a baby boom after the Second World War is facing rapid population aging and widespread labour shortages. Both put a drag on GDP per capita.

Which brings us to the evolving political narrative around the ratio that is GDP per capita: less focus on the top number (GDP growth), more on the bottom (population growth). As in, we’re letting in too many people.

Businesses have been saying that if Canada didn’t accept more temporary foreign workers, companies wouldn’t be able to produce as much, which would lead to falling GDP. Of course, to the extent we need to add people to do the work (and we do, up and down the skill spectrum, because of population aging), we also need more spending to make sure they have housing, physical infrastructure and social infrastructure. Therein lies the rub: more people means higher GDP; fewer people means a lower GDP. Both have costs. Pick your poison.

To be clear: when GDP per capita falls, or even just stays flat, things tend to get worse. Whether the economy contracts or the population grows faster than the economy does, there are fewer resources available for more people. Without growth, some people getting more comes at the cost of others losing more. Society becomes more fractious, more about taking than making. And the takers become more ruthless. There’s less patience for doing things together, like spending on health care or child care or elder care. It gets ugly.

Since the 1980s, the proposed solution to this ugliness has been productivity.

Theoretically, greater productivity is achieved when we get more for less, as in more output for less input (measured in costs), or when innovations create transformative ways of doing things (railroads, public education, clean water, health care and the internet were all huge breakthrough innovations, economically — and in human terms).

The “more for less” approach is more attainable and more easily applied in individual workplaces. Historically, it comes in two flavours — automation or outsourcing that lowers labour costs; and automation or technology that enhances the value of labour. But a new flavour has hit the market recently, as wave after wave of corporate concentration raises large firms’ market share and ability to set higher prices. The ensuing revenues (and profits) in relation to costs read as more “productivity” if enough key companies play that game. And they are.

Understanding what drives productivity helps explain why the U.S. has historically had one of the highest GDP per capita measures in the world, as well as elevated levels of both poverty and wealth. Among advanced economies, nobody does inequality like the U.S. By 2023, the top one per cent of Americans owned more wealth than the middle 60 per cent of Americans, for the first time in history. This should not be an aspirational goal for any nation anywhere.

This fact gets no mention by those who expound the virtues of how to improve productivity, and consequently GDP per capita.

Indeed, we’ve been offered the same solutions to lagging productivity for four decades. It’s a story of inadequate investments in machinery and equipment, a throwback to when economies were dominated by businesses making things, which is not the case today. Today’s economies are dominated by data and digital production, and more caregiving services as the population ages.

Guess what? We don’t completely capture the dollar value of data in GDP or in productivity metrics, though we are told AI is going to transform our economic worlds. How will we know if it does?

And how exactly should we measure the value of the care economy? More labour intensive than any other part of the economy, the productivity in the care economy has usually moved in tandem with the expenditures on public sector wages. The current wave of for-profitization of care will increase the GDP generated by the sector, while degrading working conditions and suppressing wage growth. Is that the kind of rising GDP per capita we are aiming for? Of course not.

Everyone wants more material progress. The Nordic nations suggest we’re looking for it in all the wrong places. They point to a different path to high GDP per capita: investments in the population, the capita part of GDP per capita.

These nations spend a big share of GDP on publicly funded programs that keep people healthy, educated and able to focus on life beyond the basics, such as keeping a roof over your head or having enough to eat. Like your Grandma probably told you — an ounce of prevention is worth a pound of cure. What we spend on reducing avoidable problems is repaid aplenty.

The more societies set the stage to maximize their macroeconomic potential, the more they can make the impossible possible.

There are always a few brainiacs who will come up with the kind of blindingly brilliant ideas that move us all forward. But the bigger the share of the population ready and able to innovate and interact with each other with trust, the more brainiacs we have.

GDP per capita may be a near-useless metric to help guide policies for progress, but the challenge isn’t about finding a better metric; it’s about putting the focus on the capita in GDP per capita. Because money doesn’t make an economy. People do. They — we! — are the true measure of an advanced economy.

Armine Yalnizyan is a leading voice in Canada’s economic scene and Atkinson Fellow on the Future of Workers. She is a freelance contributing columnist for the Star’s Business section. Follow her on Twitter: @ArmineYalnizyan. You can write to her at ayalnizyan@atkinsonfoundation.ca.

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