Household spending and the truth behind GDP

By Dean dela Paz

The third quarter GDP growth was 7.6%. Our economic managers are now drumming up a prospective 8% for the end of the year. Given that GDP growth is ballyhooed as a measure of economic welfare and successful governance, while we disagree that it is a definitive and direct indicator of both, most misconceptions being a product of ignorance, divining GDP’s innards might well serve to point economic policies in the right direction.

And maybe reveal an inconvenient truth.

Philippine GDP growth had rivaled the growth of an economic powerhouse before 2016 as we then nearly paralleled China’s.

Occasionally, we have competent leaders at the helm. Two consecutive lettered economists, graduates of our best universities, knew where to lead the economy as we soon achieved investment-grade status among international rating agencies. The effects were systemic. That lowered debt costs and enabled us to finance more for development. Lower interest rates also enabled us to seek equity capital through foreign direct investments.

Fate however dictates a Yin for every Yang.

Unfortunately, partisan politics labeled our unprecedented GDP growth as benefiting only a few sectors. Inequity, often labeled as economic non-inclusivity, tends to not only polarize but can also be blindingly distracting.

Pandering to an emerging populist constituency, in a raw, rather crude, and street-smart manner, the criticism also belabored the rich versus poor cliché, a message easily transmitted to the undiscerning and uneducated.

To the misfortune of those who rely only on GDP growth as a measure, some of the other metrics substantiated the populist perception. Validated by a Gini Coefficient whose nearly static state measures the gap between the rich and the poor, the needle had hardly moved from its historic position even during our high GDP growth years. Add also the continuing unemployment and underemployment statistics that remained virtually flat and include both the poverty and the self-rated hunger statistics that undeniably rose. All these appeared essentially unaffected by historically unprecedented GDP growth.

Obviously, there is much more to GDP than simply its growth. If GDP growth is a measure of productivity and well-being, then why was its growth not felt? It is a recurring curse, and the curse seems to worsen each time. Today’s inflation crisis, two presidencies after Aquino’s, is an example.

It bears looking into the addends of the GDP equation and question its individual components and direct consequences as to how and why each should individually lead to genuine productivity or otherwise remain irrelevant.

Applying the expense method in determining national output, among the equation’s addends that sum up from household consumption to government spending, investments in productive assets expected to yield returns within a year and finally, the net difference between exports and imports, perhaps the most popularly relevant at this time is household spending.

To assist in the optics, economists use a basket of goods and services to graphically depict what expenditures are included in household spending. Because each of the items in the basket have costs which the household spends for, then each has a monetary value that reflects the current prices a household spends for. From this, we might take a small step in the direction of serious semantics where these baskets are what economists technically call the Consumer Price Index (CPI).

For policy makers and others who use the CPI, it is a measure appropriately political and populist, perhaps even truly relevant to economic governance and the success or failure of initiatives and policies targeting consumer or public welfare.

Because household consumption is one of the few albeit critical and popular addends of the GDP expense formula, we can see where focusing on the consumer’s well-being can either lead to an increase in GDP growth or where the growth index increases quite ironically without substantially affecting consumer welfare.

Note where economic policies focus instead on government expenditures for infrastructure and yet relatively back-burner household consumption. Note how the failure of the “Build, build, build” initiative to substantially alleviate the poverty, hunger, and underemployment indices.

In such instances, soaring CPI prices and runaway inflation were inflicted on the greater public even as GDP and GDP growth reflected positive albeit, for the beleaguered household, virtually holographic illusory gains. This is what is meant by non-inclusive growth where the majority are essentially alienated from glowing productivity metrics.