The mismeasure of the economy
Policymakers are searching for solutions to problems that might well not exist, says Matthew Lynn.
Policymakers are searching for solutions to problems that might well not exist.
How much are prices going up by in the shops? Is productivity rising, or has it stagnated? Is GDP expanding by 1% a year, 2%, or nothing at all? We rely on a standard set of measures to give us a snapshot of how the economy is doing. But what if it turns out that the figures are meaningless? It increasingly looks as if much of the data may be wildly inaccurate. And we might be doing far better than we realise.
The Amazon effect
The Office for National Statistics (ONS) said this week that it was changing the way it collects price data to take more account of the "Amazon effect". Right now, the official price indexes are calculated using a typical basket of goods that most households consume every week, with regular updates such as dropping pork pies and mashed potatoes and adding in gym clothing as happened earlier this year. But now it is being changed again to take account of the fact that a fifth of our shopping is done online. And, as anyone who has booked a budget flight will know, prices change all the time.
In the shops, prices change occasionally, but on the internet they can change hour by hour, and often quicker even than that, as suppliers adjust to demand. So the ONS is developing "web scraping" software to search thousands of prices around the web and then feed the data into the price index.
Will that change anything? Almost certainly it will. It must be a fair bet that the price index will drop significantly, and we may well be back in outright deflation once online prices are more accurately measured. That matters. Right now, wages are only just about keeping pace with prices, with both rising by about 2% annually. But it might turn out that inflation is actually zero, or indeed that prices are falling by 1% a year. If so, then real wages are growing in the 2%-3% range per year rather than stagnating.
That is not the only impact. A growing number of economists are starting to suspect that the productivity and GDP statistics are meaningless as well. One recent study looked at how much American consumers would have to be compensated to give up access to Google and Facebook and all the services they provide. That suggested that people value all that stuff at around $30,000 per year. That's a heck of a lot, but because it is all given away for nothing it isn't measured.
Goldman Sachs recently crunched through some numbers on the missing data from the smartphone economy, and argued that growth in the US was being consistently under-reported by around 0.75% annually. Instead of growing at around 2% a year, it might be close to 3%. If so, there is no "great stagnation" at all the economy is doing about as well as it has been for most of the post-war period.
The productivity non-problem
Or take the productivity statistics. We keep being told that growth in output per person has ground to a halt, and that explains why the economy is not doing very well. If so, it is certainly a big problem. But what if it is not so? Take WhatsApp. The social-media app provides sophisticated telecoms services free of charge. So none of its output appears in the economic statistics in the same way that landline calls you paid for once did.
The company famously only has 55 staff, despite having a valuation of almost $20bn. So all that shows up in the conventional economic statistics is the salaries of those 55 people with no associated output. In effect, WhatsApp is reducing the overall productivity of the economy, as far as the data goes. But in reality, it is vastly increasing output, because it is providing us with something that used to be quite expensive for nothing.
Policymakers and central bankers are spending a lot of time fighting low growth and stagnant real wages. We hear endless proposals for trying to get the economy moving again. But if we are just looking in the wrong places, perhaps we should simply stop worrying about it and accept that we are doing better than we realise.