OPINION
Welcome to Inside Economics. Every week, I take a deeper dive into some of the more left-field economic news you may have missed. To sign up for my weekly newsletter, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.
Q: Hi Liam
I heard a surprising statistic, that the per capita GDP of the UK is lower than that of each of the 50 states in the US. I didn’t believe it but when I looked it up it’s true. Sure you would expect the likes of California, New York, and Texas to have large economies but how do smaller states such as South Dakota, West Virginia, and Mississippi also have such high productivity? Are there lessons to learn for NZ’s economy from these smaller states?
Cheers
Mitra Prasad
A: Thanks Mitra, you raise a very interesting issue. You are right. The latest figures I can find show the poorest state in the United States is Mississippi with a per capita GDP of US$53,000 and, yes, that is above both the United Kingdom and New Zealand at US$52,000 and US$47,000 respectively.
On the face of it, that seems pretty wild. It certainly jars with the version of Mississippi and other southern states that we get through Hollywood and streaming TV shows. What gives?
Firstly, it’s important to recognise that the US is still the world’s largest economy and one of the richest nations on earth. We all know that, but it’s easy to forget how rich it is.
The per capita GDP figure for the US as a whole is US$86,600 ($147,157) which puts it seventh in the IMF’s ranking - behind Luxembourg, Switzerland, Ireland, Norway, and Singapore (in that order). It’s by far the richest big country.
In some ways, the more striking comparison on that list is Ireland which has a per capita GDP of US$103,500 - almost double that of the UK. I doubt anyone would have picked that in the 1980s when the country was one of the poorest in Western Europe.
That does highlight another issue to consider when we look at these lists. Ireland has done really well economically in the past 30 years (although it got hammered in the GFC with a deep recession and unemployment spiking to about 14%).
But it isn’t twice as rich as the UK.
There are limits to how useful GDP and per capita GDP are as measures of individual wealth in a population.
GDP is an aggregate figure for total economic output. When we break it down per capita we get an average for everyone in the population. But that doesn’t account for the distribution of that wealth.
There’s a measure called the Gini Coefficient which economists use to rate the levels of inequality in a population. As the OECD describes it, the Gini Coefficient “is a comparison of cumulative proportions of the population against cumulative proportions of income they receive”.
In other words, how does per capita GDP stack up against median or average wage?
The average salary in Ireland is around US$45,000 ($76,512), which isn’t bad but is a long way from its per capita GDP and only marginally above the UK’s average salary.
Ireland’s GDP growth in the past few decades has been underpinned by low corporate tax rates. That’s led to high levels of investment by international companies. While that has worked to create jobs and boost overall economic activity, a lot of the corporate profits are repatriated to shareholders elsewhere in the world.
Is per capita GDP the best measure?
But back to those allegedly poor US states.
When you look at those per capita GDP figures it’s easy to wonder why Americans are so dissatisfied with the state of their economy.
In fact, the US economy has performed really well since Covid. It has kept growing through a period when most other comparable economies have been in recession.
So GDP per capita has gone backwards in both the UK and New Zealand in the past two years while it has risen quite sharply in the US, even in states like Mississippi.
That’s one of the reasons states like Mississippi have leapfrogged the UK (and New Zealand) on a per capita GDP basis.
But we should be careful about attributing that to improved productivity.
The poorest states in the US tend to receive the highest proportion of federal government funding. Mississippi and Alabama both received more than 25% of their total state budget from the federal Government.
There’s been plenty of that federal support under President Joe Biden. His Inflation Reduction Act authorised US$891 billion in total spending – including US$783b on energy and climate change.
When we look at long-term productivity (2007-2023) by state (as measured by the US Department of Labour) we see that Mississippi has achieved just a 0.5% productivity growth rate - one of the lowest in the US.
Okay, New Zealand’s productivity isn’t really any better across that period.
Let’s just say that there is plenty that New Zealand can learn from the US with regard to productivity, but states like Mississippi aren’t the best examples.
When we look at wage comparisons between Mississippi and New Zealand things are close but we come out ahead, just.
According to the US Bureau of Labour Statistics Mississippi had an annual median wage of US$37,500 ($63,712) in 2023. In New Zealand, the median wage (based on annualising Stats NZ weekly figures) comes in just above $70,000.
We haven’t looked at the relative tax rates, the cost of living or the benefits (or lack of) from state-funded healthcare and tertiary education that we get in New Zealand.
So measuring relative wealth is not a simple thing. It is best done as a multifactorial analysis - we need to weigh up a number of different metrics.
I’ve written many times about the shortcomings of GDP as a measure of economic success. GDP per capita is slightly better and it accounts for big changes in population - as we’ve seen with high net migration in New Zealand in the past few years.
But we should be wary of putting too much weight on it.
I don’t want to make excuses for New Zealand’s low per capita GDP, we really should doing a lot better. But I know where I’d rather be living.
New Zealand’s low productivity really is a serious problem. And that has been back in focus again in the past few weeks as both the Treasury and the Reserve Bank have lowered our long-term GDP growth outlook and warned that our low productivity growth across the past decade is putting a limit on how fast we can actually grow.
The Herald’s Wellington business editor Jenée Tibshraeny wrote an analysis piece looking at the issue.
She uses Westpac chief economist Kelly Eckhold’s analogy to explain that the RBNZ now sees “the speed limit for the economy is lower than previously thought”.
Once the economy breaks that speed limit any extra GDP growth just adds to inflation.
JB Drax Honore chief strategist for Asia-Pacific, Sean Keane, believes the situation makes for a “very challenging macro-economic outlook”.
He explains how that means interest rates can no longer be cut as low as they might otherwise have been.
I also took a look at the issue in my Sunday column, coming to the grim conclusion that unless we can do something to boost productivity, the days of economic booms (ie annual GDP growth of more than 3%) are behind us.
I’ve suggested that it poses a real challenge for the Government in the next few years as we head into what increasingly looks like a classic Kiwi economic recovery built on good dairy export prices and a housing market revival.
That kind of economic growth cycle is delivering ever-diminishing returns and we need to find a new circuit breaker.
You could be forgiven for wondering what to make of the economic outlook right now.
On the one hand, we are looking out across the next few years and worrying about the economic growth potential. That’s made for some gloomy headlines.
But on the other hand, we’re celebrating a return to low inflation, falling interest rates and record prices for dairy exporters. While we’re still waiting for third-quarter GDP data to tell us we’ve been in recession, there’s a sense that the worst is behind us and the economic recovery is under way.
That’s the hand the Government is keen to focus on.
Perhaps as we near the end of the year we should pause, take a breath, and focus on the good stuff. Beating inflation is something to cheer about, surely.
There are challenges but at the very least they’ll be easier to address in an economy with low inflation, low unemployment, and a bit of economic growth (even if that;’s low too).
On that note, as this is the last edition of Inside Economics for 2024 let’s end with a couple, of the more upbeat economic stories from the past week.
Herald senior markets writer Jamie Gray has noted that an important predictor of economic health - the interest rate yield curve - is pointing to better times ahead.
He explains how that works;
“The yield curve – seen as an indicator of the health, or otherwise, of the economy - turned positive around the middle of the year when the Reserve Bank embarked on its current easing cycle after two years of post-Covid recession. An upwardly sloping yield curve reflects low short-term interest rates, which normally stimulates growth.
“Growth is usually accompanied by inflation, to the point where investors demand more reward for locking their money up over the longer term, which drives longer rates higher. A positive curve indicates better times ahead, while the opposite is true of a negative sloping curve.”
Gray quotes Kiwibank chief economist Jarrod Kerr, who offers some typically cautious optimism.
“I think things will be better next year and that won’t be hard coming off the weak year that we have just had,” Kerr said.
“It’s going to be patchy, and it’s not going to be perfect, but we are going to see a lot more growth next year, and a lot more growth in 2026 as the economy rebalances.
“The big shift is that businesses are telling me that their costs are coming down, their interest rates are going down, and that their profitability is looking better going into next year.”
That optimism also came through in the ANZ Business Outlook for November.
In a release headlined “Brightening”, ANZ chief economist Sharon Zollner notes the “economy is clearly still very weak, but things are starting to turn higher”.
Firms’ expectations for their own activity were up and their expectations for rising costs were down.
So there we go, there’ll never be any shortage of economic issues to worry about but for now let’s just look forward to leaving a recession behind us as we head into 2025.
Thanks to regular readers and especially those who subscribe to the newsletter.
We’ll be back in late January to document the economic recovery and hopefully answer a few more tricky reader questions.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003. To sign up to my weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.
Startup founder Emily Blythe takes us on a training flight