Monthly Archives: April 2015

The joy of GDP – and beyond

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Late last week I attended a special IARIW-OECD conference on the future of the national accounts, and don’t tune out – it was fascinating. I’ll write up my own talk soon: one of my two main themes was that whatever approach one takes to measuring economic and social progress, there needs to be a more explicit social welfare framework informing the measurements. It’s often said that GDP is not a measure of welfare but of activity, and yet we freight it with value judgements and use it as an indicator of living standards.

All the alternatives have the explicit aim of measuring welfare but end up usually as ad hoc lists because the analytic framework is only implicit. A recent example is the Social Progress Index published recently (and Michael Porter explains its rationale here), which has 54 indicators in 12 categories and makes a point of excluding economic measures such as employment and income, which seems odd to me given that surely we want to understand the trade-offs. Anyway, the indicators included are all Good Things, but then so are the categories in the OECD’s Better Life Index and the Human Development Index. How should we choose?

Anyway, clarity about the relationship between the economy and nature on the one hand, and the economy and non-efficiency, social indicators on the other, was on the mind of many participants at the conference. The conference papers are well worth a browse.

GDP is certainly a surprisingly popular subject at the moment. Apart from my own [amazon_link id=”0691169853″ target=”_blank” ]GDP: A Brief but Affectionate History[/amazon_link], there was Zachary Karabell’s [amazon_link id=”1451651228″ target=”_blank” ]The Leading Indicators[/amazon_link] (which I reviewed for the New York Times) and Lorenzo Fioramonti’s [amazon_link id=”B00EKYOQ8O” target=”_blank” ]Gross Domestic Problem[/amazon_link]. These were all published around the same time. In June there will be Dirk Philipsen’s [amazon_link id=”0691166528″ target=”_blank” ]Little Big Number: How GDP Came to Rule the World and What to Do About It[/amazon_link], which I’m half way through and is in the Fioramonti vein. At the conference Quentin Dufour pointed me to a French book (published in English in 2002) by Alain Desrosières, [amazon_link id=”067400969X” target=”_blank” ]The politics of large numbers: a history of statistical reasoning[/amazon_link].

[amazon_image id=”B00WAM16BS” link=”true” target=”_blank” size=”medium” ]GDP: A Brief but Affectionate History[/amazon_image]  [amazon_image id=”1451651228″ link=”true” target=”_blank” size=”medium” ]The Leading Indicators: A Short History of the Numbers That Rule Our World[/amazon_image]  [amazon_image id=”B00EKYOQ8O” link=”true” target=”_blank” size=”medium” ]Gross Domestic Problem: The Politics Behind the World’s Most Powerful Number (Economic Controversies) by Lorenzo Fioramonti published by Zed Books (2013)[/amazon_image]  [amazon_image id=”B00V943S3W” link=”true” target=”_blank” size=”medium” ]The Little Big Number: How GDP Came to Rule the World and What to Do about It[/amazon_image]  [amazon_image id=”067400969X” link=”true” target=”_blank” size=”medium” ]The Politics of Large Numbers: A History of Statistical Reasoning[/amazon_image]

The wave of publication is surely a sign that something is shifting? The last big wave of books about measuring the economy dates to the early years of national income accounting, including Richard Stone’s [amazon_link id=”0751201863″ target=”_blank” ]The Role of Measurement in Economics[/amazon_link] and J.R. Hicks’ [amazon_link id=”B0006DLA5A” target=”_blank” ]The Social Framework[/amazon_link].

A challenge to techno-euphoria

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After plucking it off the shelf for yesterday’s post on the ebb and flow of economic power in the long sweep of history (or – what I did on my holidays), Angus Maddison’s [amazon_link id=”9264022619″ target=”_blank” ]The World Economy: A Millennial Perspective [/amazon_link] (read it online here) absorbed me. He identifies three forces driving long term growth: conquest and settlement; trade (specialisation and the division of labour); and technological innovation. On the last of these, he writes:

“It is clear that technological progress has slowed down. It was a good deal faster from 1913 to 1973 than it has been since. The slowdown in the last quarter century [ie. to 1999] is one of the reasons for the deceleration of world economic growth. ‘New economy’ pundits find the notion of decelerating technological progress unacceptable and cite anecdotal or microeconomic evidence to argue otherwise. However, the impact of their technological revolution has not been apparent in the macroeconomic statistics until very recently, and I do not share their euphoric expectations.”

I would really challenge the implication here that macroeconomic statistics are facts and microeconomic evidence just anecdote. SInce Maddison wrote this, we have had the early 2000s boom and then the financial crisis and its aftermath. It will be a while before the macro data can make sense of it all.

It’s quite clear though that there are some innovations that have not improved productivity or welfare – see Thomas Philippon’s marvellous paper Has the US Finance Industry Become Less Efficient? (Answ: Yes) The Maddison challenge is a good one to those of us who do think there is important technological innovation occurring – just as when Solow made his famous comment about computers, there is a question about why it doesn’t show in macro data. One answer might be that GDP data don’t capture the welfare gain due to new technologies (see my [amazon_link id=”B00M0H5PGU” target=”_blank” ]GDP[/amazon_link] for more). Another might be that the technologies are doing more for growth outside the OECD countries – think mobiles in Africa, South Asia or Latin America. But if Maddison is right, the interesting question then is why this wave of technology uniquely has not translated into faster growth and social welfare?

Venetian capitalism, 1515 and 2015

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I’ve had a short break to celebrate my 25th wedding anniversary, and we went to Venice. One of my books was Peter Ackroyd’s [amazon_link id=”0099422565″ target=”_blank” ]Venice: Pure City[/amazon_link], which has lots of interesting facts but is frankly a bit long and dull. I did enjoy, though, the sections about the Venetian economy. It was the engine of the world economy in the 16th century, a bustling, dynamic trading economy, built on a marsh with no natural resources apart from lots of fish.

Angus Maddison’s [amazon_link id=”B00BTM3SCU” target=”_blank” ]The World Economy: A Millennial Economy[/amazon_link] is excellent on this, and on the tides of economic history more generally; one of the fascinating things is how different places have had their moment. Italy’s was the during Renaissance, and look at it now. Maddison writes of the Venetian Republic: “It created political and legal institutions which guaranteed property rights and the enforceability of contracts. It was a pioneer in developing foreign exchange and credit markets, banking and accountancy. It created what was effectively a government bod market. … Its fiscal system was efficient and favorable to merchant profits and the accumulation of capital.” On the accountancy, Jane Gleeson-White’s [amazon_link id=”1743311494″ target=”_blank” ]Double Entry: How the Merchants of Venice Created Modern Finance[/amazon_link] is a great read.

[amazon_image id=”0099422565″ link=”true” target=”_blank” size=”medium” ]Venice[/amazon_image]  [amazon_image id=”B00BTM3SCU” link=”true” target=”_blank” size=”medium” ]Development Centre Studies The World Economy: A Millennial Perspective unknown Edition by Angus Maddison (2001)[/amazon_image]  [amazon_image id=”1743311435″ link=”true” target=”_blank” size=”medium” ]Double Entry[/amazon_image]

Venice was also the first centre of commercial publishing thanks to Aldus Manutius (there’s an exhibition on him now at the John Rylands library in Manchester). Ackroyd writes: “Printing was the first form of mass production technology, creating identical objects at identical cost.” Venice pioneered commercial printing and publishing, although the activity led to complaints that the technologically-driven abundance of books was making people less studious, a vulgarising influence. Sounds familiar!

One thing that intrigued me in Venice (the city, not the book) was the fact that the identity of the sellers of cheap handbags and selfie sticks in the streets has shifted. Last time I was there, five years ago, these men were mainly Senegalese. This time they were mainly South Asian. I wonder how these shifts happen? Of course, the city’s main trade these days is tourism, and all the services and goods that requires – like so many other beautiful places whose earlier economic function has vanished into the mists of time.

Beautiful - and redundant?

Beautiful – and redundant?

Globalized Inequality

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Francois Bourguignon’s [amazon_link id=”069116052X” target=”_blank” ]The Globalization of Inequality[/amazon_link] is an interesting companion to Tony Atkinson’s [amazon_link id=”0674504763″ target=”_blank” ]Inequality[/amazon_link], which I reviewed here recently. It’s a different kind of book, a relatively short argument about why and how to make the globalization process fairer, as contrasted with Atkinson’s longer and detailed description and analysis of inequality in the UK with a substantial list of policy recommendations. It’s useful to have the global picture alongside the national one, however, because the story globally is of much increased incomes in the middle of the distribution in a few countries – largely China – as well as gains among the richest groups.

In the first chapter and its data annexe Bourguignon sets out the figures in careful detail, distinguishing between increases in inequality within countries and changes between countries. “Inequality in the standard of living between countries has started to decline … On the other hand, inequality within many countries has increased.” The book’s central question is then whether these two phenomena are related, linked by the process of globalization, of trade and investment flows between high and low (average) income countries. This is addressed in the second and third chapters of the book. He answers broadly yes, through the far greater intensity of competitive forces operating on industries in the rich economies that couldn’t cope – although he also attributes a significant part of the explanation to the politics of deregulation and tax cuts, and the expanding role of finance.

The final part of the book turns to whether anything ought to be done about inequality in this global context, and if so what can be done. Bourguignon argues that it is worth trying to get the best of both worlds and combine the trend towards less inequality between countries while tackling greater inequality within countries. He rejects the idea of a sharp trade-off between equity and economic efficiency on the grounds that inequality of the degree seen now in the US and UK is politically and institutionally destabilising. Indeed, he says, many aspects of inequality inhibit the efficient operation of markets.

The final chapter turns to policies, and it is the least satisfactory. This is in large part because in a short book like this, there is little room for the persuasive detail. However, I don’t think the policies he favours – more development aid for the poorer economies, taxes and transfers within the rich economies – would be particularly effective. I’m far more in sympathy with Atkinson’s emphasis on market incomes, and the need to address the structures of markets that are the root causes of the increase in inequality.

Having grumbled about that, it is certainly important to keep the biggest of big pictures in mind when thinking about inequality, even at the national level. The fact that the economy is globalized is an important factor in any assessment of the causes of inequality and therefore what it might be practical to do about it.

[amazon_image id=”B00RKMZZME” link=”true” target=”_blank” size=”medium” ]The Globalization of Inequality[/amazon_image]

Inequality – What is to be done?

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I finished [amazon_link id=”0674504763″ target=”_blank” ]Inequality: What Can Be Done?[/amazon_link] by Tony Atkinson, and think it’s great. If you’re only going to read one book on the subject, this is more useful than [amazon_link id=”067443000X” target=”_blank” ]Piketty[/amazon_link] – although I have Francois Bourguignon’s forthcoming (May) [amazon_link id=”069116052X” target=”_blank” ]The Globalization of Inequality[/amazon_link] in my in-pile and have high hopes for that one too, as a companion work.

[amazon_image id=”0674504763″ link=”true” target=”_blank” size=”medium” ]Inequality[/amazon_image]  [amazon_image id=”069116052X” link=”true” target=”_blank” size=”medium” ]The Globalization of Inequality[/amazon_image]

As noted in my previous posts, Atkinson’s [amazon_link id=”0674504763″ target=”_blank” ]Inequality[/amazon_link] starts out very carefully and clearly with the data, highlighting the fundamental point that although there are some common underlying trends tending to drive greater inequality in market incomes, different countries have had different outcomes in terms of post-tax, post-transfer incomes (and in access to public goods and services too, but this is too hard to measure). Even when it comes to the skill bias of technological change, on which many economists (me included) have placed a lot of emphasis as an explanatory factor, Atkinson argues that this is not a given of the universe. The direction of investment spending and substitution is shaped by the menu of opportunities firms face, and that is not exogenous.

His main focus is how firms make these choices and exercise their market power. What constraints do they face? This depends on the state, and on corporate governance, and on finance. All of these offer paths to influencing income distribution.

The second part of the book offers s series (15) of policy interventions to reverse the increased income inequality – there is a UK focus in the recommendations. I don’t agree with all of them, or at least not without further thought. For instance, he recommends implementing competition policy with explicit distributional considerations. However, I love the fact that there are 15 suggestions – enough of books that pretend there are simple solutions! When it comes to inequality, there’s a generation’s worth of institutional and political change behind the current situation so narrowing the income distribution will take work.

One of Atkinson’s key proposals is a vehicle for assessing and co-ordinating what will be needed is a new Social and Economic Council, with members drawn from the old tripartite of unions, business and government but adding also non-governmental organisations and consumer groups. He includes also property taxation – a proportional tax on regularly uprated property values. Every economist I know in the UK (many) recommends reforming property taxation – I was much struck by John Muellbauer’s FT column today calling for an updated and progressive council tax, with an equity transfer instead of cash payment option. Kate Barker’s excellent [amazon_link id=”1907994114″ target=”_blank” ]Housing: Where’s the plan?[/amazon_link] included a look at capital gains tax on the main dwelling.

[amazon_image id=”1907994114″ link=”true” target=”_blank” size=”medium” ]Housing: Where’s the Plan? (Perspectives)[/amazon_image]

There are many other suggestions in the book – capital endowments for all young people; a job guarantee for those out of work for more then 12 months; and more. The length of the list could be depressing (you mean we can’t just tax plutocrats?) but I found it ended up cheering me because there are so many good policy ideas here that perhaps a government could make a start with just a few and take it from there.

Anyway, UK folks, read this book and then for comparison read your favourite party manifesto. Now, onto [amazon_link id=”069116052X” target=”_blank” ]the global picture[/amazon_link].