Economic pessimism misplaced
22 January, 2016
Economically speaking, 2016 has started on the wrong foot. The world seems to be suffering from a bad bout of economic pessimism.
Remember the expression "when America sneezes, the world catches a cold?" These days you can intersperse any country's name and the notion still holds.
Virtually every economic headline today reinforces the theme that, with very low interest rates, non-existent inflation and no productivity growth, we should prepare for a decline rather than an improvement in our prosperity and living standards.
Being a glass half-full sort of person, I recently explored the views of contrarian economists who suggest we are all too pessimistic by half. Their theories are summarised by Google Inc.'s chief economist Hal Varian who says: "We do not have a productivity problem; we have a measurement problem".
Mr Varian says productivity simply measures how much people produce and how long it takes. However, traditional measures of economic growth and productivity were developed in the manufacturing era of the 1930s and 1940s when economists focused on tangible things such as steel production and the man hours required to make stuff.
Official US productivity figures today suggest economic output per hour worked has barely moved over the past 10 years. In fact, it has fallen in the past six months, raising alarm bells for the government and the Federal Reserve. Similarly worrying productivity trends have been observed in China — hence the economic pessimism of recent weeks.
Varian, however, says there is a productivity explosion under way with technology enabling people and companies to do things better and faster; yet this improvement is not being measured.
He and fellow economists believe while traditional productivity measures indicate we have a problem, an updated, more relevant measurement would highlight that growth is being underestimated.
Goods and services are only included in official productivity measures once consumers and businesses pay for them. Anything free, no matter how much it improves the quality of life or the ability to get things done, is excluded.
Therefore even though we consume a whole lot more goods and services (think faster telecommunications, mobile applications and all manner of music and entertainment at our fingertips) because much of it is "free", it doesn't get included in productivity measures.
A simple example is a courier driver using a GPS tracking system telling him where to deliver goods and enabling the customer (and his boss) to monitor whereabouts and likely delivery time. Surely that driver will be more productive than the driver of 20 years ago who relied on maps and delivery chits? The improved quality of his service, however, is not measured in the official stats.
I can vouch for my own increased productivity during the Christmas period. I bought my gifts online — so much quicker than trawling shops for weeks — and even Christmas lunch was delivered to my door, requiring minimal preparation on the day. I had so much more time to use productively on important tasks. Yet my productivity increase was not measured by anyone.
These are just small examples but if each of us is doing and consuming more because we have the time and the tools to do so, then surely the global productivity needle should be moving a lot more than the statistics suggest.
It is impossible to measure all the lifestyle improvements we have enjoyed in recent decades truly. Certainly, the official statistics don't do them justice.
So next time you read a depressing economics headline, consider it a blind spot. We know our prosperity is on the rise.