Non-anachronistic inflation

An interesting-looking book has arrived – I’ve not yet had chance to read it but have paged through. It’s The Truth About Inflation by Paul Donovan. It looks like a very nice overview – historical trends, why it happens, why it matters, the issues with index numbers and when to use different price indices, inflation and debt, and inflation for different social groups. The author is an eminent City economist (UBS) and the book is aimed at investors, but would therefore work as well for students – it’s non-technical but intelligent.

The conclusion touches on the deflation question but says: “This does not mean inflation can now be pushed to one side by an investor as some kind of quaint anachronism of times past.” For one thing, in a low inflation world, small differences in inflation rates make for big differences in outcomes and returns. For another, not all groups of people in society are experiencing any deflation – it depends on your consumption pattern.

Like me, Donovan was marked by the British high inflation experience of the 1970s. He says, “I have long wanted to write a book on inflation.” Economists are indeed strange, he adds. Maybe I’m strange too, but I’m looking forward to reading this.

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The joy of GDP – and beyond

Late last week I attended a special IARIW-OECD conference on the future of the national accounts, and don’t tune out – it was fascinating. I’ll write up my own talk soon: one of my two main themes was that whatever approach one takes to measuring economic and social progress, there needs to be a more explicit social welfare framework informing the measurements. It’s often said that GDP is not a measure of welfare but of activity, and yet we freight it with value judgements and use it as an indicator of living standards.

All the alternatives have the explicit aim of measuring welfare but end up usually as ad hoc lists because the analytic framework is only implicit. A recent example is the Social Progress Index published recently (and Michael Porter explains its rationale here), which has 54 indicators in 12 categories and makes a point of excluding economic measures such as employment and income, which seems odd to me given that surely we want to understand the trade-offs. Anyway, the indicators included are all Good Things, but then so are the categories in the OECD’s Better Life Index and the Human Development Index. How should we choose?

Anyway, clarity about the relationship between the economy and nature on the one hand, and the economy and non-efficiency, social indicators on the other, was on the mind of many participants at the conference. The conference papers are well worth a browse.

GDP is certainly a surprisingly popular subject at the moment. Apart from my own GDP: A Brief but Affectionate History, there was Zachary Karabell’s The Leading Indicators (which I reviewed for the New York Times) and Lorenzo Fioramonti’s Gross Domestic Problem. These were all published around the same time. In June there will be Dirk Philipsen’s Little Big Number: How GDP Came to Rule the World and What to Do About It, which I’m half way through and is in the Fioramonti vein. At the conference Quentin Dufour pointed me to a French book (published in English in 2002) by Alain Desrosières, The politics of large numbers: a history of statistical reasoning.

       

The wave of publication is surely a sign that something is shifting? The last big wave of books about measuring the economy dates to the early years of national income accounting, including Richard Stone’s The Role of Measurement in Economics and J.R. Hicks’ The Social Framework.

A challenge to techno-euphoria

After plucking it off the shelf for yesterday’s post on the ebb and flow of economic power in the long sweep of history (or – what I did on my holidays), Angus Maddison’s The World Economy: A Millennial Perspective (read it online here) absorbed me. He identifies three forces driving long term growth: conquest and settlement; trade (specialisation and the division of labour); and technological innovation. On the last of these, he writes:

“It is clear that technological progress has slowed down. It was a good deal faster from 1913 to 1973 than it has been since. The slowdown in the last quarter century [ie. to 1999] is one of the reasons for the deceleration of world economic growth. ‘New economy’ pundits find the notion of decelerating technological progress unacceptable and cite anecdotal or microeconomic evidence to argue otherwise. However, the impact of their technological revolution has not been apparent in the macroeconomic statistics until very recently, and I do not share their euphoric expectations.”

I would really challenge the implication here that macroeconomic statistics are facts and microeconomic evidence just anecdote. SInce Maddison wrote this, we have had the early 2000s boom and then the financial crisis and its aftermath. It will be a while before the macro data can make sense of it all.

It’s quite clear though that there are some innovations that have not improved productivity or welfare – see Thomas Philippon’s marvellous paper Has the US Finance Industry Become Less Efficient? (Answ: Yes) The Maddison challenge is a good one to those of us who do think there is important technological innovation occurring – just as when Solow made his famous comment about computers, there is a question about why it doesn’t show in macro data. One answer might be that GDP data don’t capture the welfare gain due to new technologies (see my GDP for more). Another might be that the technologies are doing more for growth outside the OECD countries – think mobiles in Africa, South Asia or Latin America. But if Maddison is right, the interesting question then is why this wave of technology uniquely has not translated into faster growth and social welfare?

Venetian capitalism, 1515 and 2015

I’ve had a short break to celebrate my 25th wedding anniversary, and we went to Venice. One of my books was Peter Ackroyd’s Venice: Pure City, which has lots of interesting facts but is frankly a bit long and dull. I did enjoy, though, the sections about the Venetian economy. It was the engine of the world economy in the 16th century, a bustling, dynamic trading economy, built on a marsh with no natural resources apart from lots of fish.

Angus Maddison’s The World Economy: A Millennial Economy is excellent on this, and on the tides of economic history more generally; one of the fascinating things is how different places have had their moment. Italy’s was the during Renaissance, and look at it now. Maddison writes of the Venetian Republic: “It created political and legal institutions which guaranteed property rights and the enforceability of contracts. It was a pioneer in developing foreign exchange and credit markets, banking and accountancy. It created what was effectively a government bod market. … Its fiscal system was efficient and favorable to merchant profits and the accumulation of capital.” On the accountancy, Jane Gleeson-White’s Double Entry: How the Merchants of Venice Created Modern Finance is a great read.

   

Venice was also the first centre of commercial publishing thanks to Aldus Manutius (there’s an exhibition on him now at the John Rylands library in Manchester). Ackroyd writes: “Printing was the first form of mass production technology, creating identical objects at identical cost.” Venice pioneered commercial printing and publishing, although the activity led to complaints that the technologically-driven abundance of books was making people less studious, a vulgarising influence. Sounds familiar!

One thing that intrigued me in Venice (the city, not the book) was the fact that the identity of the sellers of cheap handbags and selfie sticks in the streets has shifted. Last time I was there, five years ago, these men were mainly Senegalese. This time they were mainly South Asian. I wonder how these shifts happen? Of course, the city’s main trade these days is tourism, and all the services and goods that requires – like so many other beautiful places whose earlier economic function has vanished into the mists of time.

Beautiful - and redundant?

Beautiful – and redundant?

Globalized Inequality

Francois Bourguignon’s The Globalization of Inequality is an interesting companion to Tony Atkinson’s Inequality, which I reviewed here recently. It’s a different kind of book, a relatively short argument about why and how to make the globalization process fairer, as contrasted with Atkinson’s longer and detailed description and analysis of inequality in the UK with a substantial list of policy recommendations. It’s useful to have the global picture alongside the national one, however, because the story globally is of much increased incomes in the middle of the distribution in a few countries – largely China – as well as gains among the richest groups.

In the first chapter and its data annexe Bourguignon sets out the figures in careful detail, distinguishing between increases in inequality within countries and changes between countries. “Inequality in the standard of living between countries has started to decline … On the other hand, inequality within many countries has increased.” The book’s central question is then whether these two phenomena are related, linked by the process of globalization, of trade and investment flows between high and low (average) income countries. This is addressed in the second and third chapters of the book. He answers broadly yes, through the far greater intensity of competitive forces operating on industries in the rich economies that couldn’t cope – although he also attributes a significant part of the explanation to the politics of deregulation and tax cuts, and the expanding role of finance.

The final part of the book turns to whether anything ought to be done about inequality in this global context, and if so what can be done. Bourguignon argues that it is worth trying to get the best of both worlds and combine the trend towards less inequality between countries while tackling greater inequality within countries. He rejects the idea of a sharp trade-off between equity and economic efficiency on the grounds that inequality of the degree seen now in the US and UK is politically and institutionally destabilising. Indeed, he says, many aspects of inequality inhibit the efficient operation of markets.

The final chapter turns to policies, and it is the least satisfactory. This is in large part because in a short book like this, there is little room for the persuasive detail. However, I don’t think the policies he favours – more development aid for the poorer economies, taxes and transfers within the rich economies – would be particularly effective. I’m far more in sympathy with Atkinson’s emphasis on market incomes, and the need to address the structures of markets that are the root causes of the increase in inequality.

Having grumbled about that, it is certainly important to keep the biggest of big pictures in mind when thinking about inequality, even at the national level. The fact that the economy is globalized is an important factor in any assessment of the causes of inequality and therefore what it might be practical to do about it.