I've just posted a short piece about UK GDP, GDP per capita and what constitutes an economic recovery. A lot of people think that if GDP is going up but average real wages are falling and the overall financial position of many people is worse today than it was a year ago, then there is no economic recovery. It's hard to argue with that position.
But that's only part of the issue. 'GDP' is a measure of the total output of a country in monetary terms, but increasing total quantifiable output definitely isn't the only thing we should be trying to do.
Harry Eyres wrote a column for today's FT called Why work so hard? He quotes John Maynard Keynes' prediction that by 2030 we would all be much better off and would work far fewer hours. Keynes was right on the first, wrong on the second and Mr Eyres wants to understand why.
When I read the article I wondered whether Mr Eyres considers that writing articles for the FT is 'work' and would rather spend less time doing that and more time doing 'leisure' which is by definition more fun. Because if that's the case, he's doing a good job of kidding us, as his writing style suggests that travelling, reading, thinking and writing about the world as he sees it, is how he would spend his leisure time even if he did less 'work'. Journalists, especially ones who write columns like the 'The Slow Lane' aren't typical, but the line between 'work' and 'leisure' is being blurred and many of those who say they would rather spend less time 'working' often really mean 'less time at work, in this job'.
There are, I think, three issues. The first is money, the second is how we choose to spend our time and the third is our jobs.
When Keynes said he thought we would work fewer hours, 'work' meant leaving home to earn money in a farm, factory, mine, docks or army (for the vast majority of people, at any rate). The difference between work and leisure was very clear and that is why we have measures such as GDP which count the output from 'work' and ignore everything else (most obviously housework). This also gave rise to a fixation with productivity, a measure of how much we can produce per hour. Give me a better machine and better training and I can produce more, faster. More, faster, means more money and that's good. And so Keynes believed that we would reach a point where we could earn enough money to have fun while working fewer hours.
We still go to 'work' for money, but quite a lot of people would do the same thing in their leisure time as they do at work. One of the tragedies of our society is that so many old people suffer from loneliness and that's one reason why people work. You go to work to get paid, but it becomes a centre of your social life. I've seen too many men retire and then age 5 years in a few months and slowly vegetate because they have no idea what to do with their time, to believe that a life of enforced 'leisure' is so appealing that it should be the dominant goal of my working life.
I choose economics as a way to spend time, for work or in leisure. It would have been nice to have played golf this morning but frost having intervened, I've spent a couple of enjoyable hours reading. Was that work or leisure? The answer is that today, it's leisure because I'm not being paid. And that's a good thing because otherwise, I'd have to count all the hours I spend thinking about financial markets as 'work' and that would immediately make me less productive.
But here the difference between 'work' and 'job' becomes more important. How many teachers, doctors, nurses, or policemen for that matter went into the profession for love, but became disillusioned because of how they spend their time. If I could work from home whenever it was convenient; and surf the web, chat with friends and socialise when I was at 'work' that would not make less productive, it would just make me happier. Firms create insane levels of bureaucracy, of measurement and of time-wasting, partly in order to justify 'work'.
I'll give an example from financial market research. Almost every fund manager or other investor I have ever asked, has told me that what he or she wants from investment bank research teams are short, timely, thought-provoking ideas. They haven't got time to read long pieces, unless every single word is necessary to help them make money (and even then they want a one-page precis). They don't much like multi-authored 'house view' pieces because these tend to group-think consensus. They prefer high-conviction, spur of the moment pieces, or research that was the product of incredibly detailed analysis but summed up in a few words or even better, a single chart. And I know more and more who think 140 characters is about right for a research note.
So how do the world's investment banks react to this plea for brevity and strong opinion? By doing the exact opposite, of course. 'Less is more' is a great philosophy but persuading an employer that it would be a better idea to write less and go and spend four hours thinking on the golf course on a Monday morning, isn't easy.
So, Mr Eyres, I don't want to work fewer hours, but I don't want to waste time doing the wrong kind of work in the wrong place, either. I just need to persuade my employer to pay for my work, irrespective of where I do it.
Which takes me to another FT story, written by Izabella Kaminska on the Alphaville Blog. It considers The rise of the non-monetised economy but is worth a read on many levels. Ms Kaminska is paid to write pieces about foraging for mushrooms and wondering what to give her godchildren as presents, but as I pointed out earlier, maybe journalists aren't typical when we consider what is work and what is leisure.
Saturday, 16 November 2013
When rising GDP isn't a 'recovery'. Part 1
There's a debate on LBC radio this morning about the prospects for and the nature of, the economic recovery currently underway in the UK. Here are a few facts, as I see them. Firstly, the UK's current recovery is the most pathetically weak of any in the last hundred years, including the period after the Great Depression. Secondly, real GDP is now growing and most forward-looking indicators suggest that it will continue to do so. And thirdly, so far real GDP per capita has not recovered noticeably, with the GDP recovery itself mostly due to an increase in the population.
I wrote about the economic implications of population growth a couple of weeks ago. An influx of people looking for work in the UK is keeping wages down, boosting demand and will in due course help boost output. But it is also placing huge demands on antiquated infrastructure (transport, utilities, education and the health system) which is a factor behind the UK's inflation rate being higher than it is in a lot of other countries. This is not the only reason the UK has higher inflation but it plays a large part. And so, wage growth is depressed,as new workers compete for jobs and real wages fall. Overall demand is boosted as new arrivals find somewhere to live and spend money; Housing costs go up in the South East as supply fails to keep up with demand. And that leads to a debate about whether there really is a recovery at all. I think there's a completely separate debate to be had about GDP as a measure of economic success. I'll get more coffee as I swap a frosted golf course for sun shining through the living room window, and then get into that but first I'll finish up on the UK 'recovery'.
Stronger growth and above-target inflation are beginning to put pressure on the Bank of England Governor and his MPC colleagues to increase interest rates. They are resisting this pressure, preferring to delay any policy tightening until the unemployment rate has fallen a good bit further. The pressure won't go away and with ex-MPC members debating the economic outlook and policy implications, I suspect that the MPC will struggle to maintain a united front through 2014. Low rates will go on supporting house prices in the capital and South East (which is increasingly not seen as a good thing by the majority of people). Meanwhile, the pound is recovering some of the fall which followed the 2008 crisis. This is a good thing. The weak pound pushed up import prices and hurt consumer demand, more than it boosted exports (largely because the UK's main export markets in Europe were and remain very weak). A de facto policy of using sterling weakness to help re-balance the economy towards manufacturing was in my opinion both a mistake and a failure.
I suspect the difference between a recovery in 'GDP' and a recovery in real per capital disposable incomes will be a major source of political debate in the next couple of years. As, inevitably, will the social consequences of immigration. I am optimistic that the economy will benefit over time from being the go-to place for anyone in Europe who wants a job, but I do wish that this would trigger a response in terms of investment in the education, transport and regional development that would allow recovery to be shared across the UK and across economic sectors. Apart from anything else, if the UK doesn't do that, we'll have a truly terrifying trade deficit in about 5 years' time.
I wrote about the economic implications of population growth a couple of weeks ago. An influx of people looking for work in the UK is keeping wages down, boosting demand and will in due course help boost output. But it is also placing huge demands on antiquated infrastructure (transport, utilities, education and the health system) which is a factor behind the UK's inflation rate being higher than it is in a lot of other countries. This is not the only reason the UK has higher inflation but it plays a large part. And so, wage growth is depressed,as new workers compete for jobs and real wages fall. Overall demand is boosted as new arrivals find somewhere to live and spend money; Housing costs go up in the South East as supply fails to keep up with demand. And that leads to a debate about whether there really is a recovery at all. I think there's a completely separate debate to be had about GDP as a measure of economic success. I'll get more coffee as I swap a frosted golf course for sun shining through the living room window, and then get into that but first I'll finish up on the UK 'recovery'.
Stronger growth and above-target inflation are beginning to put pressure on the Bank of England Governor and his MPC colleagues to increase interest rates. They are resisting this pressure, preferring to delay any policy tightening until the unemployment rate has fallen a good bit further. The pressure won't go away and with ex-MPC members debating the economic outlook and policy implications, I suspect that the MPC will struggle to maintain a united front through 2014. Low rates will go on supporting house prices in the capital and South East (which is increasingly not seen as a good thing by the majority of people). Meanwhile, the pound is recovering some of the fall which followed the 2008 crisis. This is a good thing. The weak pound pushed up import prices and hurt consumer demand, more than it boosted exports (largely because the UK's main export markets in Europe were and remain very weak). A de facto policy of using sterling weakness to help re-balance the economy towards manufacturing was in my opinion both a mistake and a failure.
I suspect the difference between a recovery in 'GDP' and a recovery in real per capital disposable incomes will be a major source of political debate in the next couple of years. As, inevitably, will the social consequences of immigration. I am optimistic that the economy will benefit over time from being the go-to place for anyone in Europe who wants a job, but I do wish that this would trigger a response in terms of investment in the education, transport and regional development that would allow recovery to be shared across the UK and across economic sectors. Apart from anything else, if the UK doesn't do that, we'll have a truly terrifying trade deficit in about 5 years' time.
Sunday, 10 November 2013
Twitter and Starbucks
One of the most tweeted articles this week was This one, which purports to tell any tweeter how much money Twitter 'owes' him or her. That's a tongue in cheek way of saying that we can value Twitter on the basis of the number of tweets that have been sent. And anyone who sends them, adds to the value of the company.
This misses the 'point' of Twitter (and social media in general) in the same way as thinking that Starbucks is a coffee shop misses the point. I'll start with the latter. A few weeks ago, when the weather was still warm, I was wandering merrily from one fund manager to another in Boston, updating on views about the world and the relationship between our employers. When I wasn't sure how to get to the next appointment, I darted into the nearest coffee shop. The salesman who was with me (and doesn't know his way around Boston nearly well enough) pointed out that Starbucks charges a lot for coffee. I sent him to buy me a tall latte and told him I wasn't here for the coffee. I use Starbucks because I know I can get quick access to wifi and make sure I know the way to my next meeting, while enjoying some air conditioning in a relatively clean and comfortable environment. The coffee's OK, but incidental. The price of the coffee is high, if that's all you go there for, but it's cheap if you want to arrive, cooler and on time, at your next meeting.
Others have different uses for Starbucks but the common factor is that few if any are there for the coffee alone. And so it is with Twitter. I tweet because I want dialogue. I want dialogue because I want to know what other people think. If you don't know what people think, how can you expect to know how they will react to economic data, policy decisions or any other news that comes over the wires? Anticipating how markets will react to news is more important than knowing what the news will be, most of the time. I also read tweets because they are an incredibly efficient way of filtering the daily news. I follow people who will tell me, while I'm still in bed in the morning, what the important stories of the day are in the Wall Street Journal, FT, Economist, New York Times, Reuters, Bloomberg, Le Monde, Die Welt, Spiegel, Guardian, Telegraph, Nouvel Observateur, and more. I've got people who I've never met scouring the web for me to find blog posts, central bank research papers and snippets of information I might find useful.
I don't suppose for a second that the majority of Twitter fans like it for the same reasons as me, any more than other people think air conditioning and wifi are Starbucks' key selling point in Boston. My only question for twitter of course, is how it plans to make enough money to justify the fancy market capitalisation. Starbucks, at least, sells those over-priced cappuccinos
This misses the 'point' of Twitter (and social media in general) in the same way as thinking that Starbucks is a coffee shop misses the point. I'll start with the latter. A few weeks ago, when the weather was still warm, I was wandering merrily from one fund manager to another in Boston, updating on views about the world and the relationship between our employers. When I wasn't sure how to get to the next appointment, I darted into the nearest coffee shop. The salesman who was with me (and doesn't know his way around Boston nearly well enough) pointed out that Starbucks charges a lot for coffee. I sent him to buy me a tall latte and told him I wasn't here for the coffee. I use Starbucks because I know I can get quick access to wifi and make sure I know the way to my next meeting, while enjoying some air conditioning in a relatively clean and comfortable environment. The coffee's OK, but incidental. The price of the coffee is high, if that's all you go there for, but it's cheap if you want to arrive, cooler and on time, at your next meeting.
Others have different uses for Starbucks but the common factor is that few if any are there for the coffee alone. And so it is with Twitter. I tweet because I want dialogue. I want dialogue because I want to know what other people think. If you don't know what people think, how can you expect to know how they will react to economic data, policy decisions or any other news that comes over the wires? Anticipating how markets will react to news is more important than knowing what the news will be, most of the time. I also read tweets because they are an incredibly efficient way of filtering the daily news. I follow people who will tell me, while I'm still in bed in the morning, what the important stories of the day are in the Wall Street Journal, FT, Economist, New York Times, Reuters, Bloomberg, Le Monde, Die Welt, Spiegel, Guardian, Telegraph, Nouvel Observateur, and more. I've got people who I've never met scouring the web for me to find blog posts, central bank research papers and snippets of information I might find useful.
I don't suppose for a second that the majority of Twitter fans like it for the same reasons as me, any more than other people think air conditioning and wifi are Starbucks' key selling point in Boston. My only question for twitter of course, is how it plans to make enough money to justify the fancy market capitalisation. Starbucks, at least, sells those over-priced cappuccinos
Why 'QE' needed in Europe and unnecessary in the US
Two Fed papers last week argue, effectively, that US monetary policy needs to be even looser for even longer. The ECB cut interest rates. The press tell us that the Bank of England is more optimistic on growth, and on falling unemployment but the MPC will re-emphasise its commitment to keep rates low. I think the Federal Reserve in the US should be cutting back its bond purchases, while the ECB should be buying in size. That doesn't mean either is very likely. Far from it, sadly.
The US has high (but falling) unemployment and even higher under-employment. It is also an economy with rising real wages and substantial deficits on both the trade and current account balances. It has low consumer price inflation, however we choose to measure it, and a fair degree of asset price inflation by most measures. The economy is growing, but not fast enough to satisfy the desires of those who want to see unemployment fall faster. Two additional observations: the post-crisis environment has seen historically weak growth in output per worker/hour; and this anaemic recovery is associated with growing inequality that is likely to be the single biggest factor is US politics in the coming years.
US consumption growth remains strong relative to output (those pesky deficits) but investment remains weak (hence the weak employment and low productivity). Inflation isn't a problem, in either direction (this is not deflation, and real wages are rising). Under-investment should be the focus for policy-makers. John Maynard Keynes might point out that it is not written in law for total aggregate demand to be at a level which ensures the economy is on a path to full employment, and the public sector should step in. There are obvious problems associated with that, of course - starting with the level of the national debt and moving on the toxicity of the politics around both the debt level and how to ease fiscal policy.
One thing the doctor might well order, is a policy of currency softness. Grabbing jobs back from overseas, helping domestic products compete better with imports, these are desirable in an economy with a manufacturing base and a need of investment.But QE? Not really. QE has boosted asset prices, but that hasn't done anything to hep investment. . QE has done much to make owners of Picassos and Greenwich mansions happier, but while it has helped direct some investment flows towards corporate bonds (good) it has pushed more towards equities and EM assets and it still isn't clear how that helps US companies raise money for productive investment. TARP did more to help banks lend than QE has done. And a small rise in short-term rates might even help money flow round the SME sector of the US economy more productively.
QE seems the wrong policy when what is needed is to encourage private sector entrepreneurs and companies to invest in plant, equipment and people in order to boost output, and therefore employment and wages. And that in turn, is what is needed to reverse the widening inequality that unchecked, will become an ever bigger social blight.
Contrast all this with the Eurozone. In many European countries wages and prices are now falling in tandem. The current account surplus is huge, and growing fast. Bank lending continues to contract. Consumption is weak and unemployment terrifyingly high. Youth unemployment should be the single biggest issue in the political debate as an entire generation of voters will at some point realise they have been abandoned by their leaders. The Euro Area problem is that investment is weak but consumption even weaker - overall aggregate demand needs a huge boost.
And then there is the debt... public sector debt levels are too high everywhere and private sector debt levels are too high in several countries. With weak nominal GDP growth, these debt levels will go on growing relative to GDP unless one of three things happen - default reduces the debt, austerity creates a downward spiral of increased savings and falling demand that might at some point find an equilibrium debt/GDP level, albeit at a level of unemployment, real incomes and overall GDP that is too awful to contemplate, or policy-makers breathe some inflation back into the system.
In the Euro Area, QE (buying bonds in substantial quantities through a series of auctions, as the Fed does), would encourage the banking sector to lend more and hold fewer government bonds. That would be a good thing. It might weaken the Euro, which would be a very good thing indeed. It might send asset prices and increase inequality but the Euro Area, unlike the US, has a political system and social structure that can counter this. And if it boosted consumption through wealth effects, then that would be a god thing. A weaker currency, a reduced current account surplus, and a boost to bank lending? Bring it on. With banks encouraged to 'cut assets' (i.e, shrink their balance sheets) it makes sense for the central bank to boost its own balance sheet (at least temporarily) to plug the gap they leave behind. I don't think that's the same thing, at all, as 1920s money printing in Germany.
The US has high (but falling) unemployment and even higher under-employment. It is also an economy with rising real wages and substantial deficits on both the trade and current account balances. It has low consumer price inflation, however we choose to measure it, and a fair degree of asset price inflation by most measures. The economy is growing, but not fast enough to satisfy the desires of those who want to see unemployment fall faster. Two additional observations: the post-crisis environment has seen historically weak growth in output per worker/hour; and this anaemic recovery is associated with growing inequality that is likely to be the single biggest factor is US politics in the coming years.
US consumption growth remains strong relative to output (those pesky deficits) but investment remains weak (hence the weak employment and low productivity). Inflation isn't a problem, in either direction (this is not deflation, and real wages are rising). Under-investment should be the focus for policy-makers. John Maynard Keynes might point out that it is not written in law for total aggregate demand to be at a level which ensures the economy is on a path to full employment, and the public sector should step in. There are obvious problems associated with that, of course - starting with the level of the national debt and moving on the toxicity of the politics around both the debt level and how to ease fiscal policy.
One thing the doctor might well order, is a policy of currency softness. Grabbing jobs back from overseas, helping domestic products compete better with imports, these are desirable in an economy with a manufacturing base and a need of investment.But QE? Not really. QE has boosted asset prices, but that hasn't done anything to hep investment. . QE has done much to make owners of Picassos and Greenwich mansions happier, but while it has helped direct some investment flows towards corporate bonds (good) it has pushed more towards equities and EM assets and it still isn't clear how that helps US companies raise money for productive investment. TARP did more to help banks lend than QE has done. And a small rise in short-term rates might even help money flow round the SME sector of the US economy more productively.
QE seems the wrong policy when what is needed is to encourage private sector entrepreneurs and companies to invest in plant, equipment and people in order to boost output, and therefore employment and wages. And that in turn, is what is needed to reverse the widening inequality that unchecked, will become an ever bigger social blight.
Contrast all this with the Eurozone. In many European countries wages and prices are now falling in tandem. The current account surplus is huge, and growing fast. Bank lending continues to contract. Consumption is weak and unemployment terrifyingly high. Youth unemployment should be the single biggest issue in the political debate as an entire generation of voters will at some point realise they have been abandoned by their leaders. The Euro Area problem is that investment is weak but consumption even weaker - overall aggregate demand needs a huge boost.
And then there is the debt... public sector debt levels are too high everywhere and private sector debt levels are too high in several countries. With weak nominal GDP growth, these debt levels will go on growing relative to GDP unless one of three things happen - default reduces the debt, austerity creates a downward spiral of increased savings and falling demand that might at some point find an equilibrium debt/GDP level, albeit at a level of unemployment, real incomes and overall GDP that is too awful to contemplate, or policy-makers breathe some inflation back into the system.
In the Euro Area, QE (buying bonds in substantial quantities through a series of auctions, as the Fed does), would encourage the banking sector to lend more and hold fewer government bonds. That would be a good thing. It might weaken the Euro, which would be a very good thing indeed. It might send asset prices and increase inequality but the Euro Area, unlike the US, has a political system and social structure that can counter this. And if it boosted consumption through wealth effects, then that would be a god thing. A weaker currency, a reduced current account surplus, and a boost to bank lending? Bring it on. With banks encouraged to 'cut assets' (i.e, shrink their balance sheets) it makes sense for the central bank to boost its own balance sheet (at least temporarily) to plug the gap they leave behind. I don't think that's the same thing, at all, as 1920s money printing in Germany.
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