What does it mean to speculate that growth is faster than we think?
By Scott Sumner
Tyler Cowen has a new post that discusses the implications of under-measuring economic growth:
Many people suggest that we are under-measuring the benefits of innovation, and thus real rates of economic growth are much higher than we think. That in turn means the gdp deflator is off and real rates of interest are considerably higher than we think. Someday we will all realize the truth and asset prices will adjust.
Let’s say that view is correct (not my view, by the way), how should that change your investment decisions?
As with Tyler, that’s “not my view”. I don’t believe that growth is faster than we think. It will be easier to explain why when we consider the implications:
More generally, if real rates of return are high, but not perceived as high by most investors (who are still victims of fallacious “great stagnation” arguments and the like), at some point those investors will learn. With more rapid growth enriching the future, and with the realization of such, there will be a sudden demand to shift funds into the present, so as to equalize marginal utilities. So bond prices will fall and that means you should short bonds and buy puts on bonds.
Growth is getting increasingly hard to measure as we move from an economy of stuff (commodities) to an economy of intangibles. If we can no longer measure growth in terms of quantity of “widgets” being produced, we need some measure of the value provided by economic output. You could use money, but the value of money itself changes over time. So that won’t work.
Economists typical speak in terms of “utility”. But as far as I know there is not a shred of evidence that we have more utility than we had 60 years ago. When I look around, it doesn’t seem like people are happier than when I was a child. Maybe they are happier (I’m agnostic on the question), it just doesn’t seem that way to me. Of course utility and happiness are not necessarily the same thing, but I’d make the same argument for each. It’s not clear we are getting happier, and it’s equally unclear that we are accumulating more utility.
Now you might argue that this is because real wages have stagnated for 60 years. I don’t agree, but that argument cannot account for China, where polls show no aggregate increase in happiness since the 1990s. No one disputes that real wages in China (as conventionally measured) have soared much higher. Unlike Americans, the Chinese really do have lots more stuff; it’s not just quality change. So economic growth is a slippery concept, which is hard to measure.
Here’s one simple example. A part of the measured growth in real income comes from the fact that the BLS considers our current TVs to be many times better than the TVs of 60 years ago. As a result, the BLS says that TV prices have fallen by roughly 98% since 1959. I certainly enjoy my new 77-inch OLED set. But it seems unlikely that the utility derived from these sets is 50 times higher than TV sets from 1959, at least if “utility” is defined the way I visualize the term. So “growth” is probably being overstated, if utility is what we are interested in.
If people really did perceive rapid growth in living standards, then they would want to shift consumption from the future to the present, as Tyler says. Yet polls show that people are increasingly pessimistic about their children’s economic prospects. I suspect they might be too pessimistic, nonetheless there doesn’t seem to be much of a perception that technology is producing rapid economic growth.
It’s almost like people treat technological progress as analogous to climate change—something in the backdrop of our lives. To most people, actual economic growth is something tangible and positional, like a better house and car. New products like iPhones and HDTVs are just “how we live today”. If boomer’s kids have to downsize from their parent’s 5 bedroom 3000 sq. foot home to a small three bedroom ranch, that’s perceived as going backwards, even if the smaller home is full of gadgets that they could only dream of back in the 1960s. And I’d say the same is true of lots of other changes. I consider restaurant food today to be vastly better than when I was younger, but replacing a steak and potato dinner with a $12 meal at a good Sichuan restaurant doesn’t seem at all like “economic growth”, as the 1959 “supper club” was viewed as in some sense more luxurious than is the modern Chinese place. This sort of evolution seems more like cultural change. The food tastes much better, but because of the hedonic treadmill it doesn’t make us happier.
I suppose it’s worth trying to measure economic growth, but don’t take the findings too seriously.
PS. If you did a survey of the public and asked them to estimate the current rate of inflation, I’d consider the poll results to be just as “scientific” an estimate of “actual inflation” as those produced by the BLS, or by academic economists who try to improve on the BLS data.
PPS. And I’d consider the poll results for the less educated half of the population to be more reliable than those for the more educated half, whose responses might be “contaminated” by having heard the most recent BLS inflation data reported on NPR.