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Where’s All The Economic Growth? Goldman Sachs Blames Apple’s iPhone

Perhaps not blames Apple’s iPhone but Goldman Sachs is using the company’s products to explain where that missing economic growth is. One of our basic economic problems at present is that we know we’re in the middle of a technological revolution. There simply isn’t a technology that has come anywhere close to arriving in the hands of actual users as fast as the smartphone and mobile internet. The next closest competitor is the mobile phone itself. All others running distant third and behind.

Our problem is that we know technological revolutions produce growth. Yet economic growth is limp at best, meagre perhaps a better description. So, there’s something wrong here. Either our basic understandings about how growth occurs are wrong and we loathe to agree to that. Not because too much is bound up in that understanding but because too much of it makes sense. The other explanation is that we’re counting wrong.

I’ve discussed, often enough, one of our counting problems, that we’re simply not ascribing a value to much of this new digital output.

Which is what we do have and more, isn’t it? Search engines are at near one thousandth of their true value, email at something similar, even Facebook is counted at less than that 10% of its real value ($322 a year, instead of the around $20 that arrives in GDP). Again, bear in mind that GDP is merely a proxy to what we’re really interested in, value consumption – and one that’s becoming ever less useful in our modern world.

This failure to take proper account of digital products has profound implications for all GDP-derived numbers. Productivity is GDP divided by the number of hours of labour taken to create it. If value’s higher then so is productivity – telling us that whines about slow productivity growth stemming from the official figures might not be all that usefully correct.

Goldman Sachs is looking at the other problem with our counting. We know that we’ve not quite got new products and their falling prices in our estimates of inflation quite correctly. They tend to enter the inflation indices after their first major price falls, meaning that inflation is always overstated. Given that the number we really look at is real growth – nominal growth minus inflation – this means we are consistently underestimating real growth. GS uses the iPhone in an interesting manner to show this:

In the report, GS tries to get at this under-measurement issue by analyzing the secondary market for iPhones, noting that prices fall sharply when a new model is released. The brief version: Using eBay-listed unused phones that are still functional on today’s cellular networks, the bank’s economics team compared compared the prices of iPhones sold in 2018 with their original prices. It found “the annualized price changes of the various models average -14% and range from -6% to -23%. This compares to telephone hardware CPI inflation of -7% since 2010.”

Note that this is not, *not*, the problem above, of missing the first chunk of price falls. This is something extra to that. The effect is quite large by the standards of these things:

What’s more, the GS economist also “believe that a sizeable share of nominal smartphone consumption is misclassified in the national accounts … as either an intermediate input (which would be omitted in the GDP and PCE calculations) or as telecom services revenues (which would also understate consumption, because quality-adjusted prices are falling more rapidly for telecom hardware than for telecom services). … Taken together, we believe the combined ‘missing growth’ from smartphones is on the order of 0.1-0.2pp for annual real consumption growth (and as much as 0.15pp per year on a GDP basis).

0.1 percentage points just from telecoms handset pricing? That’s pretty big you know.

The more we dig into this the more convinced I am that our only real economic problem at present is counting. Everything makes sense if we are counting output and inflation incorrectly, under-estimating the first, over- the second. If we are doing that – and we know that we are, only not quite to what extent – then all other economic numbers make sense. We’re in the midst of a large technological change, we’ve full employment by any reasonable measure, wages and productivity should be rising strongly. If we’re mismeasuring as above then those two are rising strongly, we’re just not capturing it. Oh, and if that’s also true then inequality is lower than currently estimated too.

The thing is, the more we study the details of these questions the more it becomes clear that we are mismeasuring, and mismeasuring enough that all of the claimed problems, the low growth, low productivity rises, low wage growth, simply aren’t there in the first place. And if they ain’t then nothing needs to be done about them, does it? Except, perhaps, count properly.

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5 years ago

Would this not be a wonderful reason for following in Cowperthwaite’s footsteps? He refused to have data compiled in case some damn fool tried to do something with it. We can produce the same effect by acknowledging that we cannot collect the data.

5 years ago

The smartphone has made some individuals hugely productive. If this is not measurable I’d be highly surprised.

The same smartphone has made vast numbers of individuals hugely unproductive. To suggest that walking along a street with your head down in your phone looking at cat pictures, somehow adds value, is to subscribe to the bread and circuses school of economics. We all know how that turned out for Nero.

5 years ago
Reply to  Southerner

I think the complaint here is not that “vast numbers [are] hugely unproductive” but that “vast numbers don’t share my values.” Some of these would rather view cat pictures than improve their production of widgets per hour. For the reason people turn inward rather than do things that matter to other people, I look to the minimum wage, mandated health insurance and the related requirement to move all your medical data to Washington “for safe keeping,” and recent new guarantees of tenure, which have led to outrageous vetting before being hired in the first place. But the smartphone is just… Read more »

5 years ago
Reply to  Spike

Thanks, that’s why it’s called bread and circuses or alternatively rearranging deckchairs on the Titanic.

5 years ago

How did we account, one of the last times this happened? the time when television made it possible to present world-class theater to millions who would never have gone to a show or least of all journeyed to Broadway? The marginal cost of performing for an additional million patrons was $0, and the amount charged was also $0, but merely their willingness to sit through commercial breaks. None of this new, additional consumption of entertainment was accompanied by its own flow of banknotes. It’s conceivable that, except for bodily necessities, we could drastically curtail our lives if the smart web… Read more »

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