Money, banking & insurance

GDP is losing its meaning

Gross National Product (GNP) growth is an idea from the 1930s, devised by the Nobel-prize winning economist, Simon Kuznets. Today we use Gross Domestic Product (GDP), the total dollar value of all goods and services produced over a period. This made sense in a world where manufacturing was central to the economy and people were buying and creating tangible goods. In the digital economy it starts to lose meaning – how do you measure services that are given away free?

In the industrial age, the more we produced, the better off we were. In the digital age, it is possible to serve 230 million active Twitter users sending half a billion tweets each day - and charge them nothing. Or to have Apple, Google, Facebook and Amazon together employ only 200,000 people, yet have a market capitalisation of over $1 trillion. Yet, according to GDP, Wikipedia, Google Maps and Twitter barely exist. While the information sector has barely grown in size since the late 1980s, the volume of data and information has gone crazy. It makes no sense.

The bigger the share of digital goods in the economy, the less accurate is GDP. Websites are typically created free with open source software like WordPress, but they barely add to GDP. Sometimes new ideas can shrink GDP, such as Skype, which dampened spending on phone calls. Unpaid work, such as that done by mothers and volunteers, does not even count.

Some economists have measured the time we spend online as a proxy for value created online. In 2011, the value of free goods was hundreds of billions of dollars, rising by $US 40 billion a year, according to Brynjolfsson and Joo Hee Oh. This does not include the amount of work done by robots, which may increase GDP but put people out of work.

Gains in the digital economy seem to come from very few people offering a valuable service to lots of people. Wikipedia, for example, employs very few people but takes away business from encyclopedias. As noted above, Big Data employ only 200,000 people but dominates the internet. It seems the great economist was very wary of misinterpreting GDP growth when he said: "the welfare of a nation can scarcely be inferred from a measure of national income”. Oh dear, it appears nobody’s listening.

Ref: The New Yorker (US), 25 November 2013, Gross Domestic Freebie. J Surowiecki.
The second machine age by Andrew McAfee and Erik Brynjolfsson.
Search words: Twitter, browser, free, GDP, digital economy, industrial age, Wikipedia, Google Maps, information sector, digitization, open-source, innovation, Garmin, GPS, economist, data services, workers, ideas.
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Who are the middle class now?

People who once considered themselves middle class are starting to question their status in a world where the gap between rich and poor is widening. Pew Research Center found that 53% of Americans considered themselves to be middle class in 2008 but today, only 44% do. The percentage considering itself lower class has grown – from 25% in 2008 to 40% today. But this does not answer the question – what is middle class?

It becomes obvious looking to Asia that a growing middle class – 525 million people - is emerging. EY says the next two decades will see a spike of three billion in the number of middle class people in the world. These people live in emerging economies like China, India and Brazil. The EY definition of middle class is rather shocking: a family earning $10-$100 per day. This is because they are considered able, at this level, to buy cars and TVs! Clearly, the definition looks awry to many of us in the West.

Perhaps rather than define middle class in terms of absolute income, is it better to use relative income or direction of income? Americans who answered the Pew survey may have perceived their income as falling or likely to fall. Another definition could be state of mind, for example, feeling comfortable, stable and socially protected.

Unfortunately for the political leaders, the middle classes are becoming restless, as their lifestyles start to suffer from unemployment, rising prices for food, health and utilities and budgets that hammer welfare and protect business. Perhaps middle classes in the West will come to be defined by the volume of their protests.

Ref: Financial Times Magazine (UK), 8-9 February 2014, Which middle class, which squeeze? G Tett.
Search words: middle class, Pew Research Centre, median incomes, rich, poor, WEF, growth, definition, China, India, Brazil, EY, disposable income, perception.
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Taxing assets not income

Tax is not a popular subject with anybody, unless they are on the receiving end. Who should pay tax and how much is equally unpopular. Thomas Piketty, in his controversial book, Capital in the twenty-first century, proposes that governments should tax assets, rather than income. This is because returns to the owners of capital are rising faster than the economy is growing. As a result, the owners are getting richer while the middle and lower classes get poorer. See above, Who are the middle class now?

America first invented the idea of confiscatory income tax – putting a high tax on the very rich to avoid the inequities so obvious in Europe. This tax did not hurt growth. The US also invented mass schooling before Europe, but Europeans have more solid middle-ranking universities than America, which has 53 in the top 100 universities. Access to these places of learning is very unequal and, unfortunately, is being mirrored in the UK and Australia.

Education is not a guarantee of fair distribution of income and wealth. The managerial class, or the meritocracy, set their own pay and, consequently, have created the income inequality that America’s confiscatory income tax was designed to stop.

Piketty suggests the ideal solution of a global progressive tax on individual net worth. Progressive means paying according to your income. Global means that those with assets all over the world would be taxed on all of them. This would need global cooperation and some type of global registry. Unfortunately, lack of financial transparency and reliable statistics on wealth is a huge challenge for tax offices in all countries. Those most able to pay tax are those most able to avoid it. No wonder Piketty is unpopular in some circles.

Ref: Financial Times (UK), 29-30 March 2014, Save capitalism from the capitalists by taxing wealth. T Piketty.
Search words: distribution, income, wealth, America, patrimonial, concentration, tax, inequality, mass schooling, universities, meritocracy, capital, billionaires, progressive tax, China, Russia, oligarchs, inflation, fortunes, registry.
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The basis for inequality

Inequality is growing in most rich countries and politicians seem to have no clue how to address it. Today, the richest 1% own 25% of the wealth, the equivalent of 5 million Euros per person, and their income has shot up much faster than the rest. The reasons why are based on capital ownership, the income it creates, and income from labour.

High income earners today also tend to have a lot of capital because they invest in property or stocks that bring a return. So the rich win three times – they earn a lot of money, invest it in income-producing assets, and make profits from buying and selling increasingly scarce assets like real estate. Thomas Piketty, in his book, Capital in the 21st century, describes the propertied middle class as patrimonial and says it is the principal structural change in the way wealth was distributed in the 20th century.

Extreme income inequality arises from a hyperpatrimonial society of rentiers (owners who rent to others). They pass on their wealth through generations, which grows as it goes. In static or falling populations, inherited wealth becomes more powerful. Inequality also comes from a hypermeritocratic society, where a few superstar managers earn a disproportionately high income even though what they do is not necessarily much more brilliant than those who earn less. They pay themselves this because they can: distribution is influenced more by power than by the market.

An alternative argument comes from Erik Brynjolfsson and Andew McAfee in their book, The second machine age. They say that supermanagers today earn top money in all industries because of digital technology, which increases their ‘marginal product’. Technology naturally boosts the reach and scale of the decision maker, creating a global elite, for example, Mark Zuckerberg or Dick Costollo. They look incredibly productive, because technology has made them so.

It will be interesting to see whether competition, so beloved of capitalism, will eventually bring those salaries down. There is no sign of it yet. Unfortunately, the yawning gap of inequality is ultimately bad for the economy – poorer people cannot buy things – and is bad for social cohesion and trust. Just as the rich have used technology to become richer, perhaps it is possible for the poor, one day, to use technology to the same end. The conditions may be ripe for a revolution of some kind.

Ref: Prospect (UK), April 2014, Super-rich century. R Skidelsky.
Capital in the 21st century, by Thomas Piketty
The second machine age, by Erik Brynjolfsson and Andrew McAfee.
Search words: economics, ownership, socialism, capitalism, Karl Marx, inequality, progressive taxation, property, financial assets, wages, rentiers, hyperpatrimonial, hypermeritocratic, supermanager, ‘winners take all’, power, market, inheritance, digital technology, superstars, globalisation, global elite, consumption base.
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Cash losing its cache in China

China has traditionally been a country of caution with money, and an almost pathological fear of debt. Yet things are changing, as technology finds its way into everyday transactions. The Chinese are using credit cards, debit cards and mobile electronic wallets to pay for online shopping, taxis, cinemas and fruit and vegetables. This was a country where people used to pay for cars or houses with bundles of banknotes.

There are 4.2 billion bankcards in China, but ten times’ more of them are debit cards. Euromonitor believes credit card use will outgrow other types of card in the next five years. Companies give cards to their staff, for example, to make it easier to control spending. Overdue credit card debt has also leapt up 72%, but is still only 1.37% of total outstanding debt.

China is making the shift to cashless payments more rapidly than any other country surveyed by MasterCard. At the other end of the spectrum is Japan. Some 38% of transactions are still made in cash, compared to 11% in Britain and 20% in the US.

The reasons for this are the relative safety of streets with few muggings, small businesses that cannot afford to pay credit card issuers, and the fact cash is tax free. Meanwhile, demand for Japanese banknotes is high and, compared to their economy, banknotes in circulation have the highest value in the world. The Japanese still believe the safest place for their wealth is under the tatami (mat). Without inflation, it could well be.

Ref: Financial Times (UK), 1-2 March 2014, Chinese consumers defy tradition and decide plastic has its privileges. P Waldmeir and S Rabinovitch.
Search words: People’s Bank of China, debit cards, credit cards, electronic wallet mobile apps, Euromonitor, household debt, street crime, Mastercard, urbanisation, WeChat, online retail, Japan, e-wallets, ‘carding it’, small business, banknotes.
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