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.