For all of those who think that the Gross Domestic Product (GDP) is outdated and that wellbeing is the way forward, the Covid recession has been tough as New Zealand lost one position in the 2021 world happiness ranking and brought GDP back to the front pages.
For those who believe in the so-called degrowth theory, it has been even worse.
If you are not familiar with degrowth theory, here is an incomplete summary: Given a finite planet, finite resources, and bounded growth in productivity, a new economic system is called for. Degrowth is the equitable reduction in production which, at the same time, improves wellbeing and ecological conditions.
Key points include, for example, a reduction in global trade and an increase in recycling and home-production (e.g. grow your own food and make your own clothes). In summation, living in relative scarcity with lower income.
The Covid pandemic offers a unique opportunity to study whether people subscribe to this idea and whether they care about income, employment and consumption, or rather focus on wellbeing.
In 2020, air travel nearly entirely stopped, cruise ships remained docked in harbours, and according to the IMF, world GDP fell by about 3.5 per cent and world trade volume fell by 9.5 per cent. Pollution was sizably reduced as Nasa reports that the global nitrogen dioxide concentration fell by about 20 per cent. People worked from home and many discovered baking and cooking.
This is exactly what degrowth theory wants and, hence, we should not worry that this is the worst recession since the Great Depression.
The problem is that less GDP does not mean less inequality and it is certainly not "equitable". According to predictions from the UN's World Food Programme, an additional 130 million people will be pushed into starvation in 2020 alone. If anything, inequality has increased during Covid. No one can claim that Covid has reduced inequality in outcomes such as income, wealth, education, or health.
Further, the fact that the economy has not taken more damage is due to large scale debt-financed government spending programmes. However, governments only have limited abilities to continue with these policies and they are not sustainable.
Increases in unemployment benefits and subsidies for firms cause distortions within the economy. Zombification, i.e. artificially keeping unproductive businesses alive, leads to an inefficient allocation of resources such as labour and capital.
The Schumpeterian idea of creative destruction is disrupted, and productivity could be
reduced for a long time. A lost decade, as in Japan, is on the horizon.
A reduction in GDP also means less tax revenue for the government. How are we supposed to finance, for example, education, health, and the necessary innovations into green technologies?
I also wonder whether people would prefer the lockdown lifestyle combined with lower income. The reaction of Aucklanders whenever the city moves from Alert Level 3 to 2 shows me that we do like our "old" lifestyle. Online shopping, by the way, was one of the biggest winners in 2020.
As things stand, not much is left of degrowth theory. Even here in New Zealand, the country that publicly moved towards wellbeing, GDP is back. Suddenly, the Treasury speaks less about wellbeing, focusing instead on GDP and unemployment.
However, I am afraid that this will not last long. What we would should do right now is to put our economy on track for the future by stimulating productivity. Economic policies should target sustainable production and creating jobs in the sectors of the future.
Unfortunately, this Government does not have an economic growth policy and soon will go back to focus on wellbeing at the cost of focusing on what matters, production and jobs. That is, GDP.
• Dr Dennis Wesselbaum is a Senior Lecturer in the Department of Economics at the University of Otago.