Are we doing better than we think?
* It is commonplace to say that the pace of technological change is speeding up. From Twitter to online shopping our everyday lives are, apparently, being transformed.
* One of the central puzzles of modern economics is that this change is not being seen in the hard economic data. Throughout the West rates of GDP and productivity growth have slowed in the last 20 years. If the official data are right, the great digital revolution is having surprisingly little effect on prosperity.
* The great inventions of the past, such as the steam engine and electricity, changed lives and raised growth. Their modern counterparts seem to be changing lives – the media and most of us can hardly stop talking about them – but not GDP.
* One explanation is that the GDP data are right and our impressions are wrong. The US economist Robert Gordon believes that the impact of today’s innovations on human welfare are trivial compared to the great innovations, such as indoor plumbing and antibiotics, of the past.
* A more optimistic explanation is that technology is raising welfare, but in ways that are not captured by conventional measures of economic activity. On this argument GDP underestimates the full benefit to consumers of today's technology.
* GDP relies on the prices of goods and services to measure value. But many of today's technologies are, in part or in full, free, paid for by advertising, monetising consumer data, patient investors or created by fellow users. The benefits we receive from, for instance, Google Maps or TripAdvisor, are not fully captured by today’s measure of GDP.
* The unmeasured gain to welfare is known as the consumer surplus. It represents the difference between what a consumer pays and what they would have been prepared to pay for the good or service they use. Because consumers obviously only buy goods and services that deliver net benefits – where the value to the consumer exceeds the cost – the consumer surplus is always positive.
* Thus GDP has always understated the gains consumers receive from new products and services. But as more digital services become free the gap between measured GDP and the benefits consumers receive has risen.
* The consumer sector is awash with technology for which we pay little or nothing directly. Products such as Wikipedia, TripAdvisor, Google and Twitter create value for users far in excess of the advertising sales or donations that fund them. There are also existing services, such as shopping, banking or travel, where the consumer experience has been improved at little cost by the internet.
* Economists are creating new ways to measure the consumer surplus generated by modern technology.
* One approach is to measure the time saved by internet-based services. Researchers at the University of Michigan found they saved an average of 15 minutes to answer each of a series of questions using the internet rather than the university library. Assigning a monetary value to time, Google's chief economist, Hal Varian, estimated that internet searches create $65-130 billion in consumer surplus in the US each year. This is likely to be an underestimate as the experiment compared the internet with a university library – an asset to which few people have access.
* An alternative approach, used by Erik Brynjolfsson and fellow MIT researchers, uses surveys to estimate the amount of money people would need to forgo access to internet services. These surveys find that the median American Facebook user would require $576 to give up their service for a year.
* Internet search is the most highly valued service, with an estimated annual value of $17,530 for the average American. Email is in second place, with a value of $8,414. Email is followed by mapping, video and e-commerce services which respondents valued well above social media and messaging.
* The surveys also asked respondents to rank, in terms of willingness to forgo them, existing basic goods and services such as the toilet and public transport against giving up computers and digital services. People chose having a toilet at home as the most crucial service. But, perhaps surprisingly, respondents rated access to the internet and personal computers above meeting friends in person. Having a TV at home was rated above having access to a smartphone. For anyone living in a big city it is striking that respondents rated access to online maps, video streaming and Facebook as being of greater value than public transport.
* These new measures of consumer surplus offer an insight into how consumers value new technologies. But this is not the whole story. In measuring the overall welfare effects of the technology we need to consider the negative as well as the positive effects. The huge amount of time we spend online makes us sedentary, more distracted and, for some, more anxious and envious. Few innovations come without any problems. The motor car, for instance, brought mass mobility and also pollution and accidents.
* Technology is improving our lives in ways which are not fully captured in today’s measure of GDP. And, as in the past, nor are we capturing the adverse effects of innovation.
* The fact that after ten years of sluggish growth measured happiness in the UK is at record levels testifies to the limited value of GDP in gauging human welfare. To understand that, we need far wider measures of progress.
PS: Facebook’s announcement of plans to launch a new digital currency called Libra next year was one of the biggest stories last week. We have written about digital currencies in the past and how central banks’ would very carefully consider such initiatives because the effectiveness of monetary policy depends on their ability to control the supply and flow of money. This was reflected in the immediate response to Facebook’s announcement from the G7, which is setting up a high-level forum of regulators to examine the risk posed by such currencies to the financial system. The Bank of England’s governor Mark Carney said that if Facebook was successful in attracting users it would “instantly become systemic and will have to be subject to the highest standards of regulation”. This is by no means a sign that central banks are averse to financial innovation. In last week’s news, the Bank of England also announced that it will allow tech companies running payment systems to store funds in its interest-bearing accounts, a privilege so far enjoyed only by commercial banks and one that should help level the playing field for fintechs.
OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 0.8% at 7,407.
Economics and business
* The US Federal Reserve kept interest rates on hold but reinforced expectations of a cut in rates this year, citing rising “uncertainties” for the economic outlook, and indicating that “an ounce of prevention is worth more than a pound of cure”
* US President Donald Trump accused ECB chairman Mario Draghi of unfairly manipulating the euro, after the central banker’s comments on possible future monetary ease caused the single currency to move lower against the dollar
* The Bank of England kept rates at 0.75% and cut its forecasts for second quarter GDP growth to zero, citing rising risks from global trade tensions and fears of a no-deal Brexit
* Euro area wages rose at the fastest pace in a decade in the first quarter
* Italy’s official statistics authority said there is a “relatively high” probability that the country’s economy contracted in the second quarter, this would be the third contraction in the last four quarters
* UK inflation fell slightly to 2% in May due to lower car prices and air fares
* UK retail sales rose by an annual rate of 2.3% in May, the slowest pace of growth since October due in part to unseasonably cold weather
* US and China will resume trade talks ahead of President Trump and President Xi Jinping’s meeting at the G20 summit this week
* US trade representative Robert Lighthizer said Washington is “ready to engage” with China
* A senior US cyber security official warned the UK that “using untrusted vendors anywhere in a 5G network introduces an unacceptable level of risk”
* India imposed tariffs on US imports in retaliation for the Trump administration stripping India of special access to the US market
* The EU is close to finalising a new free trade deal with South American trading bloc Mercosur, which includes Argentina and Brazil
* Rating agency Moody’s cut Turkey’s credit rating due to its high reliance on foreign capital flows and risk of government default
* The oil price rose to a three-week high of $63/barrel after Iran shot down a US drone amid escalating tensions in the Gulf
* The Office for National Statistics’ introduction of a more accurate method of public accounting, which incorporates the impact of student loans, will add more than £10 billion to the UK’s public sector borrowing figures in September
* The US aviation regulator FAA banned US flights over Iranian airspace after Tehran’s downing of a US drone on Thursday prompted Donald Trump to consider retaliatory military strikes
* Global equity funds attracted their biggest weekly inflows since March last year, in the week to Wednesday, as investors expect central banks to support financial markets with looser monetary policy
Brexit and European politics
* Boris Johnson will face Jeremy Hunt in the vote among Conservative Party members to determine who will be the next leader of the party and prime minister
* Amber Rudd said talk of Boris Johnson’s campaign “lending votes” to other candidates was “rather discrediting of the system”
* Ireland is planning its fiscal budget for 2020 with the assumption that the UK will crash out of the EU without a deal, the FT reports
* Dutch prime minister Mark Rutte said Brexit will make the UK a “diminished country”
* UK chancellor Philip Hammond said a no-deal Brexit would soak up the ‘war chest’ earmarked for boosting growth and would leave the economy “permanently smaller”
* More than 25 Labour MPs have written to Jeremy Corbyn, warning him against going “full remain” as the party considers its stance on another Brexit referendum
* A quarter of visas awarded to non-EU nationals to work in the UK have been granted to people earning less than the minimum required annual income of £30,000, according to the Migration Observatory at the University of Oxford
* A survey of 30 independent forecasters by Consensus Economics shows that economists forecast two 25-basis-point cuts to the Bank of England’s base rate in response to a no-deal Brexit
And finally… Pakistani politician Shaukat Yousafzai was briefing journalists at a press conference which was being live-streamed when a cat filter was accidently turned on. Mr Yousafzai, who was sporting on-screen feline features said afterwards, "I wasn't the only one - two officials sitting along me were also hit by the cat filter" – cat-astrophe