THE impact of technology on the economy is one of the most-debated issues of the moment, whether it is the potential for automation to cause unemployment, boost long-term productivity, or widen inequality. A good deal of the annual Barclays Equity-Gilt Study, published yesterday, was devoted to the subject. But one section caught my eye; the idea that technological change was making GDP a less useful measure.
The report says that
When GDP was first introduced, manufacturing accounted for a large share of the core advanced economies, and the (system of national accounts) was designed primarily to measure physical production.
But the modern economy is dominated by services and
Services cover a wide range of activities and are often customised, making their basic unit of production, as well as differences in quality and changes over time, hard to define
Furthermore, the report points out that
Digitised goods or services are often free: and without an observable market price, the (system of national accounts), by definition, excludes them entirely from GDP. But just because the consumption of a digital product does not involve a monetary transaction does not automatically mean that it is of zero value to the consumer. Thus the current treatment of digital products within the (system of national accounts) systematically underestimates the value generated by the digital economy.
This may be true. My question is how new this is. Past technological innovations have enomously boosted human welfare. But were those benefits reflected in a narrow GDP measure?
My great-aunt Amy lived in a one-up, one-down (a house with two floors and just two rooms) in a small Yorkshire town in the 1960s. That meant she had to visit an outside toilet, whatever the weather, or time of day.¹ People today have indoor plumbing. Is that benefit fully reflected in GDP in the form of the cost of toilet installation? It seems unlikely.² Great Aunt Amy also had no fridge so had to trek down cobbled streets to get her shopping every day, whatever the weather. Go back further in time and women like Amy would have had to collect the water for the house, for cooking and washing, and the firewood for heating. A third of them would have died in childbirth and they would have lost a lot of children in infancy to disease. After the 1960s, thanks to the pill and contraception, women had more control over their reproductive rights. And so on.
We are so used to these benefits that we may not fully appreciate them.³ But we would if they were gone. And I think they would be missed more greatly than the ability to check our e-mails, listen to our favourite music, or share details of our lives on Facebook. And smartphones may conceivably be part of the productivity problem because they are so distracting: users say they spend two hours a day on social networks and five hours on their smartphones. Which of us does not spend part of the working day getting sucked into Twitter debates, watching Youtube videos and the like? This is time spent not working. Indeed, there may come a point when employers start monitoring our online activity to crack down on this problem. This loss of freedom and privacy will not be measured as a loss in GDP (it may be a gain) but it will be seen as a loss of welfare.
GDP has long had its critics. It does not measure the unpaid contribution of women in the form of housework, for example. If a mob smashes all the windows in the city centre, GDP goes up when the glaziers replace the glass. We have alternative measures of welfare: longevity (and child mortality) are basic measures, and we can add human height (as an indicator of nutrition), healthy life expectancy (how old are you before infirmity takes over?) and so on. These have been heading in the right direction, dramatically so in some parts of the developing world.
But back to the Barclays study. On the subject of automation and jobs, the report argues that, initially, parts of our jobs get automated, rather than the whole thing. Take long-distance trucking. The introduction of rear-view cameras, automatic braking, cruise control etc. has made the task easier, and thus lower skilled. In nominal terms, the average salary of a trucker has grown from $38,000 in 1980 to just $46,000 today, well below inflation. So automation has increased the pool of workers who can do a given task, and thus depressed real wage growth. Technology also creates new jobs—app developers for iPhones, content moderators on websites and so on.
As for productivity, it may be too early to see the full benefits. Thomas Edison and others pioneered the electricity industry in the 1880s but more than half of US homes did not get electricity until 1925. Factories needed to be redesigned to take advantage of electrification (the old sites relied on a single steam-driven engine and were laid out accordingly). The best decade for productivity growth in the US was the 1950s, an era with few breakthroughs; technologies developed before the war were finally spreading. So it is possible that artificial intelligence, 3-D printing and the like may yet boost the growth rate and allow us to overcome the problem of demography (an ageing population means fewer workers).
¹Of course, she could use a chamber pot. But that wasn’t a pleasant option either. the report argues that technology automates specific parts of jobs.
²A house with a toilet would be worth more, and that would be reflected in GDP via rents. But still…
³There is a lot of blood and gore in a post-apocalyptic show like The Walking Dead but they don’t show the consequences of the lack of flushing toilets
Japan still has great influence on global financial markets
IT IS the summer of 1979 and Harry “Rabbit” Angstrom, the everyman-hero of John Updike’s series of novels, is running a car showroom in Brewer, Pennsylvania. There is a pervasive mood of decline. Local textile mills have closed. Gas prices are soaring. No one wants the traded-in, Detroit-made cars clogging the lot. Yet Rabbit is serene. His is a Toyota franchise. So his cars have the best mileage and lowest servicing costs. When you buy one, he tells his customers, you are turning your dollars into yen.
“Rabbit is Rich” evokes the time when America was first unnerved by the rise of a rival economic power. Japan had taken leadership from America in a succession of industries, including textiles, consumer electronics and steel. It was threatening to topple the car industry, too. Today Japan’s economic position is much reduced. It has lost its place as the world’s second-largest economy (and primary target of American trade hawks) to China. Yet in one regard, its sway still holds.
This week the board of the Bank of Japan (BoJ) voted to leave its monetary policy broadly unchanged. But leading up to its policy meeting, rumours that it might make a substantial change caused a few jitters in global bond markets. The anxiety was justified. A sudden change of tack by the BoJ would be felt far beyond Japan’s shores.
One reason is that Japan’s influence on global asset markets has kept growing as decades of the country’s surplus savings have piled up. Japan’s net foreign assets—what its residents own abroad minus what they owe to foreigners—have risen to around $3trn, or 60% of the country’s annual GDP (see top chart).
But it is also a consequence of very loose monetary policy. The BoJ has deployed an arsenal of special measures to battle Japan’s persistently low inflation. Its benchmark interest rate is negative (-0.1%). It is committed to purchasing ¥80trn ($715bn) of government bonds each year with the aim of keeping Japan’s ten-year bond yield around zero. And it is buying baskets of Japan’s leading stocks to the tune of ¥6trn a year.
Tokyo storm warning
These measures, once unorthodox but now familiar, have pushed Japan’s banks, insurance firms and ordinary savers into buying foreign stocks and bonds that offer better returns than they can get at home. Indeed, Japanese investors have loaded up on short-term foreign debt to enable them to buy even more. Holdings of foreign assets in Japan rose from 111% of GDP in 2010 to 185% in 2017 (see bottom chart). The impact of capital outflows is evident in currency markets. The yen is cheap. On The Economist’s Big Mac index, a gauge based on burger prices, it is the most undervalued of any major currency.
Investors from Japan have also kept a lid on bond yields in the rich world. They own almost a tenth of the sovereign bonds issued by France, for instance, and more than 15% of those issued by Australia and Sweden, according to analysts at J.P. Morgan. Japanese insurance companies own lots of corporate bonds in America, although this year the rising cost of hedging dollars has caused a switch into European corporate bonds. The value of Japan’s holdings of foreign equities has tripled since 2012. They now make up almost a fifth of its overseas assets.
What happens in Japan thus matters a great deal to an array of global asset prices. A meaningful shift in monetary policy would probably have a dramatic effect. It is not natural for Japan to be the cheapest place to buy a Big Mac, a latté or an iPad, says Kit Juckes of Société Générale. The yen would surge. A retreat from special measures by the BoJ would be a signal that the era of quantitative easing was truly ending. Broader market turbulence would be likely. Yet a corollary is that as long as the BoJ maintains its current policies—and it seems minded to do so for a while—it will continue to be a prop to global asset prices.
Rabbit’s sales patter seemed to have a similar foundation. Anyone sceptical of his mileage figures would be referred to the April issue of Consumer Reports. Yet one part of his spiel proved suspect. The dollar, which he thought was decaying in 1979, was actually about to revive. This recovery owed a lot to a big increase in interest rates by the Federal Reserve. It was also, in part, made in Japan. In 1980 Japan liberalised its capital account. Its investors began selling yen to buy dollars. The shopping spree for foreign assets that started then has yet to cease.
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