Why we are much better off than the official statistics say

The oldest surviving map of Britain was created in Canterbury a thousand years ago. Our ancestors had a good idea of how to get around. The country is depicted in its familiar shape. Understanding of the world outside Western Europe remained sketchy for centuries.  The phrase ‘here be dragons’ was allegedly used to conceal ignorance about substantial parts of the world.

Sir Charles Bean’s Independent Review of UK Economic Statistics was published last week.   It is an impressive and well argued document.  But it leaves the distinct impression that the state of our knowledge about how to measure the size of the economy is not much better than that of the Canterbury map makers.  The Office for National Statistics knows how to guide us around the old, familiar parts of the economy.

The second paragraph of the Bean report hones in on the dragons: “The Review was prompted by the growing difficulty of measuring output and productivity accurately in a modern, dynamic and increasingly diverse and digital economy.” An anecdote illustrates the point. Last week, our old washing machine finally packed up.  My wife went onto the internet in the afternoon, did some searches, read some price and quality comparisons sites and blogs, and placed the order.  Thanks to just in time stock control and vastly improved logistics, the new one was safely installed and working the next morning.

Even thirty years ago, the whole process would have required much more time and nervous energy. Perhaps writing to get catalogues, visiting retailers to inspect the machines, trudging around to compare prices, finally placing the order, and hoping that there wasn’t a six week wait for your chosen model, then finding someone to install it.

None of these savings of effort or improved quality of service appear in the national accounts. The national accounts just see a retail purchase, a delivery and an installation: exactly what they would have seen thirty years ago. Yet economic statistics are, again as Bean puts it, “central to monitoring, understanding and managing the economy, at both national and regional levels”.

A major issue for policy makers is the so-called productivity puzzle. Since the trough of the recession in 2009, output has grown by 12.6 per cent and employment by 7.0 per cent.  So productivity, output per worker, has only expanded by just over 5 per cent, or less than 1 per cent a year.  By historical standards, this is pitifully low, especially during a period of economic recovery.  Companies need to be sure that demand is growing before they take people on, so employment growth lags behind output growth and productivity rises sharply.  Or, at least, it did in every other recovery since the Second World War.

The Nobel Laureate Bob Solow, still going strong in his 90s, presciently remarked as long ago as 1987 “You can see the computer age everywhere but in the productivity statistics”. We can rely on employment data, based as it is on PAYE returns to HMRC.  But the Bean report implies we have been grossly underestimating output in the digital economy.

As published in CITY AM on Wednesday 16th March 2016

Image: Old Map by rosarlo flore as licensed under CC BY 2.0

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