There are various estimations of the fall in GDP as a result of these lockdowns. There are some even saying that it’s all a jolly good idea as emissions fall and nature returns.
There is though a slight problem here as all too many don’t quite understand what GDP is.
Now, GDP isn’t everything, of course, but it is everything economic. More importantly, it’s precisely and exactly equal to all production, or all income, or all consumption — each of the three equaling either of the other two by definition.
If GDP falls by 25%, that means that there’s a quarter less production. It means that all incomes, all added together, must have fallen by 25%. It means that we can only consume, in aggregate, three-quarters of what we used to. It really does mean that there are only three beef patties to put into two Big Macs instead of four.
Forget money and modern monetary theory and trying to take more cash off the rich and all that. This isn’t a money nor monetary problem. There is simply 25% less being produced. Therefore everyone – in aggregate of course – has to consume 25% less.
There is no way around this. OK, well, there is, which is that we cease the lockdown, power up the economy again in that good old way and get back to where we were. Other than that there is no way out of this. There’s 25% less stuff being made therefore there’s 25% less stuff that we can consume.
Again, money doesn’t change this. It also doesn’t matter what we do with tax, benefits or redistribution. There’s a quarter less to go around, all together and as a group we can simply do, have, eat, ride on or go to watch three quarters of what we used to.
This includes 25% less NHS, a quarter less government and everyone’s real income, in aggregate again, is now only three quarters of what it was.
Which brings us to that lovely question. If public sector wages do not fall then all of that pain is dumped on the shoulders of those in the private sector. Which would be most unfair, obviously we all agree.
So, we’re a quarter poorer. When do those paid for by the exactions from our fiscal hides get that 25% pay cut then? And if not why not?
OK, sure, it’s not going to happen but anyone want to come up with a convincing explanation to enlighten us over the last two words of the preceding question?
Not only that, but if there’s a lot of other options that have gone from the public sector (working on a music festival, becoming an air hostess), that means less competition for their skills.
If “we” are 25% poorer but the Parasite Sector is untouched, then “we” in the Productive Sector are more than 25% poorer.
And it is untouched. A buddy at the state D.O.T. has been declared “essential” and, at last report, was picking up roadside trash – useful, but deferrable if your strategy is to impose misery to try to halt the spread of the virus. Soil “remediation” for where that oil tanker rolled over continues at full speed. And schoolmarms are on full pay (plus their Trump Free Loot) while stuck at home “preparing course plans” or however it is they describe their Bad Hair Days.
Tim, you are conflating two views of GDP – what is produced and what public sector workers are paid [yes, I do know that is how they calculate GDP]. The populace is 25% worse off because less is being produced and consumed *but* the public sector workers are also consuming less candyfloss and popcorn when they can’t visit the cinema (or, in the case of senior civil servants, less champagne and canapes when they cannot attend the Opera). Cash is presumably piling up in their bank accounts and some of them are learning how to cook. [The income of the… Read more »
Can confirm that cash is indeed piling up in the bank accounts of public sector workers.
Maybe when Willie Walsh turns down his bonus for the year
They’ll probably demand a raise because of the additional work required to try to increase taxes so as to extract a larger portion of a smaller pie so that they maintain the size of their current slice.
But since the public service portion of GDP is valued at cost, and most of that cost is staff, a pay cut for public sector workers will show up in the figures as a further fall in GDP.
I’ll leave others to come up with a printable answer as to why a 33% pay rise to public service workers, which would restore GDP to its former level, isn’t an answer.
As with any use of GDP, it’s important to realise that it’s a fairly bogus concept. For example, suppose I run a coffee stall (just me) and my neighbour runs an adjacent sandwich stall (just him). Every day I buy a sandwich from him for lunch and he buys a coffee from me. That’s one coffee and one sandwich in the GDP. Now with lockdown we’re not trading, so I make my own sandwich at home and he makes his own coffee. GDP is reduced by the coffee and sandwich, but actual production and consumption is unchanged. Of course I’m… Read more »