A great friend of ours, Graham Turner, runs an independent economic consultancy (GFC Economics) in London. Graham founded GFC in 1999 after many years working as an economist with various international investment banks in the City. Graham has written a number of highly regarded books, the most recent of which (The US Economic Recovery) I can highly recommend. He has recently written, with a colleague, a fascinating paper on the measuring of GDP. Graham’s paper is focused specifically on the US but the themes and ideas that he discusses are certainly relevant to the measurement of GDP in Australia.
I was at Uni with Graham in the early 1980s and worked with him in London for some years in the 1990s. Graham has very kindly allowed me to make his paper available to Conus Blog readers. You can download the paper here…..Measuring the US economy
As Graham points out “the ‘economy’ is a continuously evolving concept. Rapid technological change and the shift towards a services-based economy pose fundamental challenges for measuring Gross Domestic Product (GDP)“. And what we measure has real implications for the economy. “What the authorities decide to measure will affect GDP. This could highlight new sources of growth, which will in turn influence what the statisticians decide to measure. This is neatly summarised by Mr. Bernanke, who acknowledged that “what we decide to measure, or are able to measure, has important effects on the choices we make, since it is natural to focus on those objectives for which we can best estimate and document the effects of our decisions.”
Graham has some really interesting thoughts regarding the inclusion of intangible investments into the national accounts framework. This includes things such as computerised information, innovative property and economic competencies. The paper argues that “Investment is the commitment of current resources to increase future consumption (at the expense of current consumption). Any outlay satisfying this definition should, in theory, be treated as capital investment. From this perspective, investment in intangible capital ought to be capitalised in the national accounts.” Turner argues further that “knowledge creation, R&D, marketing, management, and organisational efficiency are strategic investments that contribute to the long-run growth and success of an enterprise. It is imperative that these components are accurately measured to ensure that the optimal incentive structures are in place to encourage investment in such areas.”
The issue of how deflators can be created for these kind of intangibles is covered in some depth; and this is a vital issue. Graham looks at specific issues relating to items such as health care, software and R&D.
Of particular interest to us in Australia are Turner’s comments about the growing importance of small businesses in the US economy, and questions about whether this activity is being adequately picked up in the date. As Graham notes, “These firms tend to have higher growth rates and are an important pillar in driving technological innovation and productivity gains. Nevertheless, their size can make them more difficult to measure. Many non-employers and self-employed workers are excluded from official statistics. A significant number of small businesses may also be underrepresented in surveys. A proliferation of smaller enterprises may signal a shift in the traditional workplace landscape that could have significant implications for productivity.”
In summary Graham suggests that the US recovery may actually be understated at present since many of the important positive impacts on economic growth from things such as technological improvements are not being adequately captured in national accounts data. It’s an interesting idea and a conversation that both he and I would be interested to see developed in Australia. We would be delighted to hear your thoughts on the paper, so please feel free to leave comments on this blog or contact me directly.