With the outbreak of COVID-19, the
global economy has gone into lockdown.
You must stay at home.
and looks to be headed for the most severe recession in living memory.
But should we think about
this recession as fundamentally
different to other downturns like the
crash in 2008?
And should it change how we think about the economy in general?
In this video I want to explore different
narratives about the economy,
how we measure it, and how this relates to
concrete reality.
Technically, a recession is defined as two consecutive quarters of negative growth.
This seems straightforward enough, but if
you look into how we measure growth, it
turns out the raw numbers go through a
series of filters and adjustments before
we see them. These adjustments are based on common-sense, politics, values and most
crucially, ideas about what the economy
should be. These then feed back into our
notions of economic success and failure
including what is 'economically possible'.
For instance, the economy goes through a
lot of volatility and change that isn't
reported. Economist Jonathan Portes
recently pointed out that every summer
Italy and France experienced downturns
of up to 10% of their GDP - but nobody
worries and the statistics are
"seasonally adjusted". The post-christmas
period is another time of negative GDP
growth for the West which doesn't
register with our narratives about the
economy. Portes says that although the
pandemic is clearly much more serious
than a summer holiday, we might want to
think about it in a similar way: as a
deliberately induced temporary
interruption to economic activity which
fulfills a social need, and which we may
be able to make up for in the future. Doing what it takes to minimize harm
both health-wise and economically should
not be thought of as an alternative to
doing what's best for the economy. An
opposing narrative which has emerged is
that people effectively need to ignore
the pandemic and get back to work for
the good of the economy, even if it costs
lives.
We have mocked our economy. And now the economy has cast its vengeance upon us all.
Ultimately when we ask about the economy we are really asking about what society values.
To understand this, we're first going to have to learn a little about our favorite measure of the
economy, Gross Domestic Product - also
known as GDP. In her book GDP: a brief but
affectionate history, economist Diane
Coyle traces the origin of the concept
through to its present usage. Modern GDP
measures emerged during World War Two so
governments knew much they had to fund the war effort.
Over time, GDP has become a more
generalised measure of how things are
going, and our understanding of it has
changed.
 
GDP is supposed to measure the value of the flow of goods and services in a country over a given period of time.
It's easy to imagine that this is
measured in real time as transactions
filter through electronically to some
kind of dashboard in the Government's
offices, but actually, it's measured by
sending a comparatively clumsy series of
surveys to businesses to report their
revenues, expenses, and incomes.
Once acquired, these raw numbers need two main adjustments.
Firstly, intermediate inputs are subtracted
from final sales to get value-added.
This is on the grounds that we shouldn't
include the eggs, the flour, the sugar and
the cake which would double count the
form of three. This throws up some
difficult questions though, especially
for services: for example, is a lawyer's
lunch an 'intermediate input' into their
service? Or is commuting an intermediate
cost for workers in general? We will see
shortly how these kinds of questions can
have political implications.
Secondly, raw income must be adjusted for inflation to get 'real' income
which is supposed to measure purchasing power. In practice this means getting a basket
of commonly bought commodities and measuring how their prices change.
Naturally, the choice of what to include in this basket
and how to weight each item is up for debate. Different choices can produce different
numbers and therefore different ideas
about whether the economy is succeeding or failing.
Coyle gives an example of just how easily the numbers can be tweaked
if it seems like there's something 'wrong'
with them. Over the 1990s economic growth
was consistently below expectations. Statisticians deigned to adjust it for the
increasing quality in the IT sector,
which they felt wasn't accounted for.
This adjustment ended up retrospectively
adding over one percentage point to
every year of growth - a substantial
revision for a number that historically
hovers between two and three percent.
Jacob Assa argues that economic growth figures can be thought of as a form of rhetoric.
Through its appearance on the news, international comparisons, and direct use in policy decisions, GDP
serves a political purpose. Over time, as
the adjustments made to GDP have changed
this has favored certain parties and
worldviews while pushing out others.
Assa uses the example of the financial
sector. In the past finance was thought
of neutral, simply transferring resources from one area of the economy to another.
For that reason, it wasn't counted at all
in GDP growth, but over time financiers
lobbied to include it - and at this point
it is probably even double counted. An
alternative would be to consider finance
as a drain on the economy, subtracting it
from GDP numbers.
Well that's fantastic a really smart decision young man. We can put that cheque in a money market mutual
fund, then we'll reinvest the earnings
into foreign currency accounts with
compounding interest aaand its gone.
Ugh, what?
Assa points out that the finance-as-negative definition
actually may have dampened our perception that things were
going well before 2008, and alerted us to
the possibility of such a crisis. But he
disputes that there is a single right
answer to the question of how to measure
GDP; it is full of choices that can be
debated, and answers will change over
time. To give you another example,
research and development was recently
changed from an intermediate input to a
final output which made richer countries
look better in the international
scoreboards.
There are also proposals for new changes to GDP which have gained traction.
Ecological economists often call to
adjust GDP for environmental factors on
the grounds that so-called growth can
just be free riding on the environment.
What if we thought of natural resources
as an intermediate input and took them away from growth?
What if we adjusted growth downwards for damage to the environment?
At this point you might be thinking...
You've got some attitude mister.
Besides, you're wrong!
Another concept from ecology whose importance has become clear during the pandemic
is robustness or resilience, which is usually thought of as opposed to growth and efficiency in biology.
For example, the human body has a lot of unused capacity - in kidneys and in lungs -
which is inefficient, but this helps our body cope with adverse circumstances.
In recent decades many aspects of the economy
from health
systems to supermarket supply chains
have been made to work at capacity. This is efficient but it's not robust
and as we have seen is extremely
vulnerable to stress. This kind of
economic resilience is not something
that was often discussed, even by critics
of GDP, before the current crisis - but in
the future it looks like it could change
understanding of the economy.
 
When people talk about the economy they usually have something concrete in mind.
Employment, widely available goods and services, innovation, enough income
and once upon a time this was even rising incomes.
Sensible narratives must have some relationship to these realities, and must also be coherent on their own terms.
So...not every way of splicing the economic
story is valid; far from it. There are
plenty of bad answers to the question of
how to measure and think about the
economy. The idea that we must return to
work to fix the economy during a
pandemic is what happens when our
narratives about the economy get so
detached from reality that they no
longer make sense.
Obviously, people - healthy people - are necessary for production, and if they die it won't help
the economy by any sensible measure.
One recent paper showed that areas which took
more social distancing measures during
the 1918 Spanish flu pandemic probably
did better over the longer term by a
number of metrics.
But growth in the economy can be detached from economic reality more generally.
When the gains from growth are not widely felt
the story told by those who benefit stops resonating with those who don't .
Oren Cass, of the conservative think-tank American Compass, has highlighted how the widespread
perception that a lot of families in the USA are struggling is not reflected in economic statistics.
One reason is quality adjustments. According to the statisticians a car can double in
price but if its radio becomes digitised
and its seats get more comfortable that
won't count as a 'real' rise in price
because the car has improved.
Cass moves away from standard measures of inflation to calculate a 'cost of thriving' index
which asks how long a male breadwinner
must work to pay for his family's
essentials such as health, travel, and
education. The cost of thriving has risen
steadily over time, to the point that the
number of working weeks required to pay
for a year of essentials recently
reached 53 - that is, it takes more time to
pay for the essentials than a worker has. This measure definitely has problems: for
example, too much weighting of higher
education, and the use of the male
breadwinner model, something Cass
acknowledges. But he is correct to
identify that there is a list of
essentials which, when push comes to
shove, are what people care about most. When we think about survival over the
course of the pandemic, we naturally ask where we will get food,
how people will be treated medically, how
we will get around when necessary, who
will educate the bloody children, and
whether utility provision will continue
especially, of course, Wi-Fi.
Assa argued that financial services should not count
as contributions to the economy, but
historically some have taken this
argument much further. Classical
economists like Smith and Marx used to
distinguish between productive and
unproductive labor. For Marx productive
labour under capitalism was limited to
'things you can drop on your foot' and
this alone was the source of value and therefore profit for capitalists.
Growth statistics in the Soviet Union did not really include services for this reason.
Another way to think about the
distinction is more subjective.
I've been reading David Graeber's
bullshit jobs and although I have
concerns about the quality of some of
the evidence he uses, he identifies
something I think a lot of us recognise:
jobs which seem to have minimal or even
negative social value - as reported by the
very people employed in them. According
to polls in the UK and Netherlands, the
number of people who think their jobs
are bullshit is up to 40 percent and it
seems this pandemic will serve as a
partial test of this idea. As with the
financial sector we could fairly ask
whether we could consider certain
occupations and industries neutral or
negative for GDP. This would actually be
closer to the view of Simon Kuznets, a
pioneer of modern GDP measures, who
specified that he wanted to ignore
things like advertising, the military, and
finance.
Coyle and Benjamin Mitra-Kahn have
argued that the focus on GDP as a
measure of welfare is just a mistake
no matter how much we tweak it. As an
alternative to thinking about the flow
of income, they propose we think about
peoples' access to six different stocks of resources.
From the beginning of the pandemic, an argument made by the left has been that the
proactive measures taken by governments
show that progressive policies were
always possible. While I agree with this,
there is an easy counter argument: that
austerity "fixed the roof while the sun
was shining" and now there's space for
temporary spending in an emergency.
It's an emergency!
If it's an emergency then!
But this will likely be followed by even worse cuts in the future.
Thinking about the economy in terms of resilience,
essentials, and stocks of resources
instead of GDP flips this narrative on
its head. Far from fixing the roof while the Sun
was shining, austerity has destroyed our
capacity to handle such a crisis.
On the other hand, this way of thinking gives us some
grounds for optimism - using Coyle and
Mitra-Kahn's taxonomy human capital and
net financial capital are, to my mind, the
only two resources directly affected by
the pandemic and social isolation
measures. One way of thinking about
policy during this crisis could be in
minimising the damage to these stocks of
resources while keeping production of
essentials going. Arguably, this is in
line with the actions of governments
across the world, although I haven't seen
it said out loud. And we have to ask if
we'd prefer to keep this understanding
of the economy in the future.
Thanks for watching this video, please like and
subscribe for more videos about
economics. If you have any thoughts on
how we measure and think about the
economy and economic policy, I'd love to hear them.
