Looking at Chart 1, the gross domestic product (GDP) of the economy is shown as the combination of yellow and orange. (We note that these charts represent another aspect of pie economics; earlier pie charts showed the GDP by looking at its distribution rather than its composition.)

GDP is a measure of market production, not a measure of living standards. Nevertheless, we can picture living standards as the combination of yellow and purple; consumption and leisure. (Orange represents the production of capital goods – such as commercial buildings and machinery – which do not directly contribute to living standards, but which are necessary to maintain or increase economic productivity.)

Unemployment (coloured olive) represents labour made available at current market conditions, but not hired by employers or clients. Strictly, involuntary unemployment is measured by counting unutilised work-hours rather than unutilised people. Nevertheless, we generally measure unemployment as ‘people’, and we accept that normal ‘fully employed’ economies may have four percent of people unemployed. Such economies with ‘full employment’ also tend to have a number of unfilled jobs, but not jobs in the same places – or with the same skill specifications – as the unemployed people.

The absolute maximum capacity of the economy is represented by all four colours combined. But, in normal circumstances, living standards are maximised with a work-leisure balance; and not by replacing all leisure with work.

Some unemployment is practically unavoidable (eg four percent of the labour force), and means that unemployed people should have access to non-labour income. Further, the actual boundary between work and relaxation – essentially the yellow-purple boundary – is not necessarily the optimal boundary. For example, some people may prefer to reduce hours worked and take a proportional pay cut; the only reason that they do not do this is the rigidity of their employment contracts. (Some other people already working fulltime may wish to increase their hours for more pay, and reduce their leisure time; these people would like to give up some leisure so they can have more consumer goods.)

Looking at Chart 2, a pandemic has struck, causing emergency restrictions to be imposed, meaning that parts of the economy have to be suspended; that is, to go into ‘hibernation’. The result is reduced GDP and increased unemployment, labelled ‘hibernation’.

As the period of hibernation progresses, people reassess their choices – in particular, their work-leisure balance. The principal outcome of this personal reflection appears to have been that many people would prefer to work less for pay, and to simplify their lives; they are wanting to work less and are willing to earn less.

Looking at Chart 3, we see that about half of the new involuntary unemployment (‘hibernation’) has morphed into a preference for more relaxation time, combined with a willingness to adopt a less consumerist lifestyle.

Looking at Chart 4, the pandemic is over, and the economy is free to become normal again. However, as a result of the pandemic the optimal work-leisure balance has changed, compared to Chart 1. (The optimal balance is the one that maximises happiness.)

The remaining hibernation unemployment in Chart 3 becomes employment in Chart 4, leaving only the regular four percent unemployment. Structurally, Chart 4 is just like Chart 1. The really important change is that, post-pandemic, the purple relaxation zone is much larger than it was before the pandemic.

The pandemic has given us a mechanism – a catalyst – that enables us to find our new normal balance. However, to properly achieve that new normal, fiscal and monetary policies will need to be responsive to these changing preferences. Businesses responding to changes in household preferences may be the easy part of the adjustment; getting policymakers to respond to these changes in household preferences may be harder. (That will be the subject of my next contribution to this important discussion.)

As the public (and many economists) see it, economic growth (growth of Real GDP; marketed economic output) is the principal economic goal of a nation state. Some economists hold a (slightly) more nuanced view – for them it is productivity growth that matters – but when pressed they cannot conceive of productivity growth without economic growth.

This nuance is important. Inputs are costs – including labour inputs – and outputs are benefits. This is true, by definition. And it is the central axiom of economics. Thus labour productivity growth is beneficial, by definition, because benefits (outputs) are growing faster than costs (labour inputs).

Labour productivity growth can come about according to five scenarios. Before considering these, however, we need to note that both measures of labour inputs and economic outputs are contested. It is good to have contested measures, preferably sitting alongside each other. One measure should not displace others.

Contested output concepts:

• Real GDP, a measure of marketed outputs, reflecting purchased goods and services.
• A wider measure, that includes outputs that are not for sale, and that deducts for harm created in the production or consumption of those outputs.

Contested labour input measures:

• Hours of available labour, where labour means paid work.
• Hours of labour worked, again where labour means paid work.
• Hours of work performed, where work means any hour that contributes to the wider measure of output.

This month’s chart uses the underlined output and input measures: Real GDP and Hours of Labour Worked.

Using these measures, labour productivity growth may mean either of the following scenarios (or types):

1. Real GDP increasing, and Hours of Labour Worked increasing; GDP increasing faster.
2. Real GDP increasing, and Hours of Labour Worked static.
3. Real GDP increasing, and Hours of Labour Worked decreasing.
4. Real GDP static, and Hours of Labour Worked decreasing.
5. Real GDP decreasing, and Hours of Labour Worked decreasing; Labour decreasing faster.

All five of these productivity growth types represent successful economic outcomes, to an economist. Although, as noted, economists struggle with type 5, which is very much a leisure-preference version.

Most of the public – and most economists – and most elected politicians – strongly favour only the first of these five productivity possibilities. The reason for this is that most of us – possibly even most economists (despite their disciplinary training) – think of Hours of Labour Worked as a benefit rather than as a cost. It’s even enshrined in the Reserve Bank Act – through the most recent Policy Targets Agreement – that it is an economic goal to maximise employment. (Maximising employment is quite different from minimising unemployment, though some people assume that the two are the same.)

Looking at our chart, we see that, for the most part, outputs (dark blue) have been growing faster than labour inputs (light red),with both growing. That’s the productivity growth most economists expect to see. All the periods of negative growth of worked labour are periods of recession or near-recession, when the problem was largely unemployment; high levels of unutilised but available labour.

The public is used to thinking that economic times are good when both blue and red are growing faster than two‑percent per year. Indeed some even think that employment growth (costs) is more important than output growth (benefits). Indeed, this decade, this new unproductivity phenomenon has emerged.

For about half the time the rate of increase of paid labour has exceeded the rate of real GDP growth. In the popular view – that Hours of Labour Worked is a benefit rather than a cost – this looks peculiarly successful. To most economists (with their economist hats on), it’s appalling; since 2012 average productivity growth looks negative.

There are two important messages here to take with us into the 2020s. First – in conventional terms – we are entering unfamiliar territory. This is the non‑productivity growth variant of Productivity Type 1. The last decade of low growth, low inflation and low unemployment was the 1920s; it’s time we learned more about that decade. That’s one message.

The second message is for us to ask how we can move from Productivity Type 1 to any of the other more sustainable productivity scenarios. There are only two ways we can do it without unacceptable levels of inequality.

First, there’s the Japanese way, which is to use debt to fund consumption of the output that is growing when the labour inputs are shrinking. Inequality – and systemic bankruptcies – can be avoided if the government becomes the indebted spending sector, and the government’s creditors are domestic rather than foreign.

Second, societies may distribute capital income – social profit – to all, so that people can spend in excess of their labour wages without incurring excessive household debt. That means a Universal Basic Income (UBI), or at least a system of Public Equity Dividends. A UBI is compatible with all five productivity types.

A sustainable economic future means enabling the possibility of switching away from Productivity Scenario 1 (and its emerging non‑productivity counterpart, as seen from 2012 in the chart). This future can only exist with increasing public debt or increasing public equity or both. The most acceptable future – think Productivity Scenario 4 – requires a full acknowledgement of public equity to be incorporated into capitalist economic thought.

The solution is not to replace traditional measures; GDP will always be an important economic measure, sitting alongside measures that focus on wellbeing rather than marketed output. My conclusion that public equity is a prerequisite to sustainable wellbeing applies, whatever measures we adopt for economic output, and labour input.

This month’s chart looks at New Zealand’s 2017-18 GDP (of $288 billion). The chart uses official data, with appropriate re-accounting, as presented to this year’s New Zealand Association of Economists’ Conference (also here, and see slides here); and taking note of our need to move from “primitive capitalism” to “economic capitalism” (see article here).
In the chart, the figures for ‘NZ Superannuation’, ‘Transfer Benefits’, ‘Health’, ‘Education’, ‘Other Spending’, and ‘Surplus’ are exactly as in the May 2017 Budget Statement. (I avoided using the 2018 Budget, because the presentation of information for public consumption this year was far too opaque. In previous years, Key Facts for Taxpayers gave a succinct summary of public revenue and expenses, albeit using our time-worn outdated public accounting conventions.)
My innovations have been to redefine Gross Public Revenue – giving a more accurate and intuitive measure of the size of the public hemisphere (refer to my Liberal Mercantilism and Economic Capitalism) – and then to reclassify income tax concessions as ‘Public Equity Benefits’ (refer to my Policy Observatory Report, Public Equity and Tax-Benefit Reform) and to expose the large remaining share of public income as ‘Implicit Subsidies’.
In the pie-chart, the coloured slices together (44.7%) represent the public hemisphere of the 2017-18 New Zealand economy. By subtraction, the remaining 55.3% represents the ‘private hemisphere’. The public hemisphere is calculated as 33% of GDP (gross domestic product, the total economic ‘pie’), plus indirect taxes, plus government income from sources other than taxation. (The true public hemisphere would be closer to 50% of GDP if we added local government rates. In the interests of simplicity, local government has been left out of my picture. I have also excluded Accident Compensation levies.)
Public Equity Benefits represent the accumulation of implicit cash benefits arising from the 10.5%, 17.5% and 30% concessionary rates of personal income tax. These benefits are regressive, and unconditional, presently maxing at $9,080 per year ($175 per week) for individuals in receipt of $70,000 (or more) before tax. Persons receiving $48,000 before tax presently receive an annual Public Equity Benefit of $8,420. (These figures have been – and will be – valid for the entire 2010s’ decade.)
Wearing my accountant’s hat, I am not advocating what benefits people should get; simply I am describing what people do receive, unconditionally, from public revenue. (Most of us receive income from private and public sources.) Like democracy, however (and changing my hat), universal public benefits must be good; the problem is that higher earners get more than their share, just as before 1890 (in democracy’s early years) men of property had more general election votes than other men (and women got no votes at all).
Implicit Subsidies are largely received by organisations and land-owners; many can be classed as corporate welfare. They include the five cents in the dollar discount on company taxation (the statutory company tax rate is 28%, in contrast with the personal tax rate of 33%). They include all other corporate tax concessions. They include the proceeds of tax avoidance and evasion. They also include tax concessions to charities. And they include tax not paid on rent attributable to owner-occupied properties.
Implicit Subsidies are more regressive than are Public Equity Benefits. Though some of them are justifiable, nevertheless we require public accounting standards that make all subsidies explicit.
Good public accounting standards inform good policy. Good capitalism acknowledges both economic hemispheres, private and public.  Bad capitalist accounting disguises (even to intelligent people) how underprivileged people receive less than their democratic share of publicly-sourced income. Transparent public hemisphere accounting is the necessary sunlight that disinfects primitive capitalism.
Public Equity Benefits and Implicit Subsidies belong in the public hemisphere, not the private hemisphere.

This month’s chart shows New Zealand’s economic growth (annual percentage increase of GDP, rolling annual averages) over four separate ten-year periods, overlayed.

There are some indications of a ten-year cycle. For example, early in the years ending in 9 (meaning, in effect, during the ‘8’ year) New Zealand was in recession three times: 1978/9, 1988/9, 2008/9. 1998/9 was also well below the decadal averages.

And the ‘1’ years were very weak also. These are years of consistent difficulty internationally, whereas the 8-blight has been, as often as not, linked to New Zealand domestic circumstances.

Growth has been consistently highest in the ‘4’ and ‘5’ years.

Overall, average rates of economic growth have been around the 2‑3 percent mark in each decade. However, this does not take account of population growth. Economic growth per person has been lower on average in the most recent decade (2008 to 2018) because the adjustment for population is greater due to more rapid population growth.

While economic growth is an unnuanced measure of economic success, the chart nevertheless shows the substantial ‘flatlining’ from 1985 to 1993 as an unusual feature. This was a near-decade of practically no growth – the decade of the neoliberal experiment. We were told that, once the restructuring was in place, subsequent economic growth rates would be higher. They have not been higher, despite a favourable global trading and investment environment from the early 1990s, compared to global environment during the Muldoon years (1978-84 in this chart).