Dorset Economy blog 43: Big changes are coming – ready or not?
BU's emeritus Professor Nigel Jump writes the latest in his series of blogs about the regional economy.
Stale Economy
Each year, we (the UK in aggregate) produce value from our economic activity. This is measured as gross domestic product (GDP): the total amount of value we create and have available for use inside our borders. It is equivalent to all the output (goods and services) the country makes, which equals all the income it receives or all the money it spends. In 2022, this was about £2.2 trillion – a really big number. This amounts to c£32,000 each – a bit easier to understand. People tend to concentrate on the increase or fall in GDP over time. Importantly, in terms of this “growth” rate, they are nearly always talking about real GDP: the above nominal figures adjusted for inflation. Last year, UK real GDP grew by 4% but that left it still below its pre-pandemic level.
These are difficult things to measure accurately but the ONS does a pretty good job in producing such figures, monthly, quarterly and annually, although it often revises the numbers for years afterwards as it gets more accurate information. The next point is what is this total GDP made up of? What are the ingredients of the GDP ‘cake’? Basically, it tries to capture all the goods and services we deal with. There are always lots of calls to change how and what we measure. As we buy, sell and make different tangible and intangible “stuff”, the measure of real GDP changes. For example, I can remember a time when there were no smart phones measured in GDP. Now, of course, they are.
In the last few years, we have seen this total economic “cake” shrink because of the pandemic. Then, it has not rebounded fully, with trade and war problems making things worse. In other words, we are poorer than we were: we have less “cake” to go round, especially as there are more of us (population growth) wanting to have a slice of the “cake”. Some people do better than others in getting a “fair” share, ideally reflecting their real contribution or, at least, the value we implicitly ascribe to that contribution. Hence, the battle between’ haves and have nots’ and the powerful and the unpowered. For example, a football manager earning £30,000 per week is valued more than some medical or educational staff earning £30,000 a year.
Whatever distribution of income it throws up, the economy, the UK is poorer than it was. Asa nation, we cannot hark back to a time when things were “better” and hope to restore all the lost value, at least not quickly. When the “cake” is not growing, if one group gets a big increase in income, somebody else must lose, particularly if the “cake” is less wholesome than it was: has gone a bit stale. For example, if our activities cause more environmental damage than before (and that means future activity will be negatively affected), will that damage be captured by today’s measurement (and forecast) of real GDP.
In essence, after the shocks of recent years, we have to accept where we are and start from a new base, founded on current and expected reality - not on some mythical time a generation ago when the “cake” was different. This is uncomfortable news for many, but politicians and others should own up to the truth. (I notice Bank of England luminaries have been spreading such views recently). So, the bottom line is we need to think carefully about what ‘value’ really means looking forward to the 2050s and whether a ‘new economy’ is warranted to improve net worth/net wealth for everyone through better (more accurate and sustainable) measures of real GDP per head.
‘New’ Economy
One feature of the ’New Economy’ emerging for the mid-21st century will be the transition to a ‘greener’ basis for production and consumption. This requires novel financing for new green activities and for the greening of old ones. The public sector has a key role in both funding and regulating this process through suitable incentives and investments, but it will not have enough resources on its own to take on the full burden of adjustment – not least because the recent pandemic-related scale of public debt accumulation will stifle government spending capacities for many years to come. Offering efficiency and effectiveness, the private sector will need to step up, even lead, on many important ‘low carbon’ initiatives.
Historically, economists have focused on the environment as an “externality”: something not catered for by the market system, needing top-down constraints to correct market imperfections. Our assessment must be that this approach has not delivered well for nature, across most of the economy. Now, we need to find ways to properly “internalise” environmental value in terms of preserving and sustaining natural capital and the benefits we get from the flow of environmental services. Private actors need to incorporate these ‘costs and benefits’ into their accounting and profits systems. In particular, the banking and finance industries must help us all to decide 1) what ‘new’ areas to invest in, 2) where the returns (making and saving) money will occur, and 3) how to monetise it all through project finance and green securities: (creating new assets and formulating new loan deals).
Economists are supposedly experts in the efficient and effective analysis of scarcity and resource allocation through markets. This can be their contribution to any transition to a ‘new economy’. I have seen estimates that the UK may need to spend £50bn (2% of current GDP) and the world over £700bn to make the shift to a ‘new’ economy with sustainable growth. As yet, such figures can only be taken as rough guides, but they indicate a need for a large scale of economic adjustment. This adjustment needs strong foundations in analysis, data and technological and meta-development.
Some of the necessary private and public co-operation is underway, as indicated by the recent, rapid development of the renewable energy industry. Where ‘public goods’ exist, we need to design and regulate market development to capture the cost of natural capital (as well as factoring in the cost of inaction) in order to assess the true quantum of risk and reward. We need to regulate for outcomes, not just inputs and outputs, and to compete in setting standards that build towards optimal resource allocation and value capture over time.
To this end, our appraisal systems need to be set on a wider recognition of long-term impacts rather than simple, multiplier-driven, historical baselines. This may require a need to minimise discounting of future costs and benefits. Against this background, certainty and especially clarity are key for investors, particularly about related property rights and wealth distribution.
In a blog like this, we can only deal with some of the generalities of the ‘new economy’. So, this piece is really just an appeal for local business and workers to 1) interrogate and embrace the changes that are underway, needed and possible; 2) to recognise and investigate the opportunities that have or will arrive; and 3) to adjust the investment in the productivity drivers towards these assets, (capital and services). Beyond our short-term macroeconomic problems, there is a need for our corporates and their advisers to understand and grasp a viable, competitive share of the ‘new’ microeconomy that is coming. Will we be ready or not?
