Paul Samuelson, the famous American economist and author of the bestselling textbook Economics, gave the now quaintly old-fashioned example of the pitfalls in GDP accounting by pointing out that if a man married his maid, GDP would fall. The example was dropped after the third edition.
A more relevant example today would be if a middle aged person stops working full-time to look after an elderly relative at home. The GDP economy loses part of the contribution of the middle aged person plus the demand of the elderly person for care in a private care home. Yet in most cases that elderly person is much happier staying in their own home and the state saves around £50,000 a year on their care, assuming they qualified for support. Lower GDP, but higher well-being and less demand on the state.
It would make sense to turn the current child care subsidy into a Home Care Allowance
For most people, personal happiness and well-being depends more on interactions with family and friends, than on the economy. GDP was not designed as a measure of well-being nor to capture the work of care in the home for the dependent young and old, yet it continues to have an unchallenged grip on the public’s economic thinking.
In recent years, many commissions have been established and reports written about the limitations of GDP, but nothing has changed. This is now starting to bias policy in undesirable ways. For our focus on GDP makes it harder to respond to two of the biggest, and related, challenges of our times – the ageing society and the sharp decline in fertility – in ways that align with people’s true preferences.
Much of the recent narrative around GDP has been about women. The movement of women into the full-time paid workforce at all levels over the past 60 years, from around 25 per cent in the late 1950s to over 70 per cent by the late 1990s did, of course, provide a significant, and unrepeatable, increase to GDP.
But it was also the subject of an accounting sleight of hand. It was registered as a simple plus to the workforce, to the income of our economies and families, and to women themselves. We did not account on the other side of the ledger for the loss of work that was being done by women in the family and community in the old breadwinner–homemaker economy.
It has been widely noted that much of the economic progress of recent decades has come from repackaging the value bundled up in family life. If you shift from a single income household with a homemaker to one with two breadwinners and a third person who’s a childcarer, you have three jobs instead of one and therefore more GDP – but not necessarily a corresponding increase in human welfare.
Similarly, we now have an aging population with the proportion of the dependent old rising inexorably. In the UK, most of the caring for the elderly is still done within the family. There are 5.4 million people over 75 of whom 2 million are over 85, yet only about half a million elderly people are in the public care system either in a home or receiving care in their own home from a domiciliary care worker. If the several million who receive care within the family was captured in GDP, both the level and growth rate of GDP would be much higher than at present.
We have made a fetish of aggregate growth in GDP, which was artificially boosted by women’s switch to GDP work and is now artificially depressed by the ageing society and the falling population (excluding immigration). This means we are constructing for ourselves a public scenario on whose terms we are almost bound to fail.
By the same token, Japan is regarded as having done rather poorly economically in recent decades. Yet the decline in its working population has been accompanied by a faster rise in output per worker than in almost any other country. If the work within the family caring for the elderly in the home was counted towards growth Japan would still be regarded as a leading economy.
Moreover, productivity in services is hard to measure and frequently assessed by its inputs rather than its outputs. So, a services-based economy like ours is almost bound to appear to be growing slowly whatever the underlying reality may be. To take another example, the ability to communicate face-to-face over long distances using Zoom or webinar has been, perhaps, the most important change to many of us in recent years, and yet hardly appears at all in GDP data.
Imagine a society in which the crucial, and surely productive, work of raising pre-school children and caring for the elderly at home, was captured in GDP. Not only would the total be a lot higher –£1.24 trillion or 63 per cent higher in 2016 according to the ONS Household Satellite Accounts – but it would also suggest other policy choices focused on a better balance between work inside and outside the home.
Consider this example. Both main parties are currently committed to a big expansion of formal childcare including for infants under two, despite the reservations of many child development experts, to boost maternal employment. But this £4 billion-plus extra investment in childcare is estimated to create just 60,000 extra full-time equivalent jobs, and perpetuates the questionable idea that expanding the labour supply is the main source of per capita economic growth.
Mainstream economic opinion, represented by the Treasury, academia, most media commentary, and the main political parties, is, for now, strongly pointed in the direction of more GDP and pumping up the labour supply. Keir Starmer says he wants to increase the employment rate from the current 75 per cent to 80 per cent.
Yet the UK’s employment rate of 75 per cent is already close to its peak of 76 per cent in 2019 and in the top third of the OECD rich country club of 38 nations – way ahead of the EU average. Several countries – including the US, France, Ireland, Belgium, Austria and Finland – have lower employment rates but higher productivity and per capita income.
The route to per capita growth comes through public and private investment and innovation, and being able to build the houses, factories, laboratories and energy infrastructure where they are needed. It does not come through adding to today’s tally of 33 million UK workers a few tens of thousands of recent mothers, mainly working part-time in low-productivity service jobs, many of whom feel burdened by a double shift and, according to most opinion polling, would prefer to be at home looking after pre-school children if they could afford it.
If the work of a mother or father at home looking after late adolescent children and elderly parents – the so-called sandwich generation – counted towards GDP, it would encourage politicians and the media to think of the home in a different light, not just as somewhere to fall back on or a place of alleged economic ‘inactivity’. The work would be recognised as a more cost-effective, and usually happier, way of reducing pressure on hospitals and care homes.
In this context, it would make sense to turn the current child care subsidy, approaching £9 billion a year, into a Home Care Allowance, as in Finland, allowing families to choose how to distribute the care burden between themselves and the state or market. This would reduce headline GDP as one parent would work fewer hours, or not at all, outside the home but it could reduce family stress and might help to reverse, or at least slow, the fall in fertility for which we are set to pay a very high economic price.
Similarly, at the other end of the life-cycle, incentivising families to care for their elderly relatives themselves, so long as medically practical, with decent care allowances and subsidies for ‘granny annexe’ conversions, could reduce GDP employment while increasing family well-being.
One way and another, we are destined to be spending more time at home in the years ahead thanks to the ageing society, the post-pandemic working from home trend, the likely impact of AI on the working week and the greater involvement of men in domestic care. We need to find ways of capturing the impact of this home-based work and not just classifying it as a drag on conventional GDP. One small contribution would be to publish those ONS Household Satellite Accounts more regularly and to more fanfare.
For now, we are burning through our capital. We seek to maximise workforce, GDP and tax income today, but only by making it harder to create and raise the well-balanced, productive workers of the future and to care properly for the elderly, most of whom want to remain at home as long as possible. A fertility rate of below 1.5 today in the UK means fewer workers and less tax income to support the battalions of the retired in 30 years, unless we raise immigration levels even higher or turn the right to die into a duty to die. It’s time we got serious about re-thinking GDP.
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