Is all GDP created equal?

Scott Corfe of the Social Market Foundation* has with his team produced an eye-catching report about gambling regulation**. The major headline: while gambling supports thousands of jobs in the economy, clamping down on it is nothing to worry about, because the spending currently diverted to gambling would go elsewhere. In fact, it would probably go to places that have a better overall economic effect.  This is because other industries on the whole have a larger ‘footprint’ and higher economic multipliers, so when the spending is diverted back to, say, retail, the knock on to the rest of the economy is greater.

This brought back to mind a 2018 argument I had in the Policy Unit with a colleague who was railing against a cut in the maximum stake on Fixed Odds Betting Terminals (FOBTs); I remember gently arguing that you cannot take the full jobs number from the industry at face value. Yes, a lot of people work servicing these terminals, but the money spent on them would be spent elsewhere, generating different jobs.  I even prepared a thought experiment: suppose every town had roadblocks, which you had to pay £5 to pass, and which needed manning. The Town Roadblock Industry would protest against the removal of the roadblocks and use the job losses of road-block-workers as part of their argument. But it is basically mafia economics: keep our protection racket, because the racket hires people.  It is pure economic rent.

Glad I didn’t send that email.

The report also brought to mind a passage I saw in Thomas Phillipon’s recent book The Great Reversal about competition and productivity, which also talks about ‘footprint’. It is making a different point to Scott, however.  When asking which companies really matter to productivity of the whole US, Phillipon writes

“The notion that the biggest tech firms are somehow the pillars of the US economy is false on its face.  The defining feature of the new stars is not how much money they make or how high their stock market values are.  If we exclude amazing, the defining feature of the new stars is how few people they employ and how little they buy from other firms …. Because their footprint is small, whatever happens to the GAFAMs does not matter a lot for the overall productivity of the US economy.  If GM’s productivity had doubled in 1960, people would have noticed the difference.   Cars would have become cheaper, safer and more fuel efficient, and the entire supply chain of GM consequently would have become more productive”. 

He goes on to say, naming a modern tech company, that if its productivity had doubled you would not really notice much, since it isn’t spending that much in the US economy. If you are interested in his whole argument, he and a co-author set it out more in this NBER working paper. The major point I see Phillipon making, however, is this: don’t equate “building a company or industry with a high equity value”  with “boosting the overall productivity of the economy”– a point I have laboured in posts like this for the IFG and the article “Companies can thrive without creating tech billionaires”.

What about Scott’s argument? On the face of it, it conflicts with basic economic sense (see the tweet of Renkitt). The view that we should choose policies that divert spending into industries with a bigger ‘footprint’ sounds awfully like urging the economy to move down the productivity curve. Borrowing off a message from a critical friend, it would be like arguing that it is better to eat heavily processed food (because of the employment) than just pluck an apple off the tree. Or, taking the Simpsons as one should, it would be like looking at their imagined bowling-pin system and applauding it.  

There is force to this argument. We should not (as a car lobbyist once tried on me) resist the growth of the electric car industry, because its internal combustion predecessor employs more people.  Absent a serious demand problem, shifting demand to industries that use fewer factors of production (i.e. are more productive) is a good thing, because any labour freed up is assumed to have a good use elsewhere.

But. Is it possible to stretch this thinking too far? I am particularly interested in thinking about it when the industry in question has a really high, owner-kept mark-up (a bit like the industries Phillipon is so preoccupied with in his book).  Allow me another thought experiment.

Imagine an economy where the main leisure activity is watching people dance.  There are a lot of dancers – say, 10% of the population – and the rest of the economy gladly hands over, say, 11% of their income to watch dances.

Then a new technology comes along – a single superb dancer, videos, very cheap distribution.  As a result, the population no longer paid 11% of their incomes, but only 5%, and this time to the single provider of all the dances. That single provider is now a billionaire and takes the money to spend himself: on having lots of houses, building a giant island complex in the sea, owning the politicians, all sorts. The people who were hitherto dancing for a decent salary are now stuck in service-level jobs that pay less well, because that is what the structure of the economy allows.

In such a scenario, would a regulation aimed at reversing some of this be a ‘good thing’? In economic terms, perhaps not; it would shift spending from the very high productivity activity (watching the genius dancer) to the lower, more artisanal past. In terms of actual prosperity, it may well work though. It messes with the distribution of economic rent in the economy, in a way that is broadly positive (given diminishing marginal utility curves and the way the billionaire wasted money on vanities).

Back to reality. Is the dancer-economy fairy tale remotely applicable? Some industries could claim that the parable captures what they have gone through in the last 30 years – lower employment, lower revenues, vastly more consumer surplus, a radically different distribution of economic rent.  Ask any grizzled journalist from the era of long lunches and six week Sunday Magazine assignments, or recording stars from a few decades ago.

In the case of the gambling analysis, a pure examination of the cost structure of gambling compared to retail in providing the service is probably not enough alone. I would want to know where the economic rent goes too, and think more about dynamic effects like what each industry invests in.  Gambling produces more revenue per worker than retail, and at less cost.  Once I would have assumed that this makes a shift from retail to gambling a straightforwardly good thing.  Now I wonder if we need to look at more than just that.  Read the report.

*disclosure: I sit on their Advisory Board, although I had no input in the production of this report

**second disclosure: I sort-of worked in this business from 1996-2006, though in truth our sector was more about financial derivatives than gambling as currently understood.  Insert your own snarky comment on what’s the difference.

Published by freethinkingeconomist

I'm a mid 40s, former special adviser (Downing Street 2017-19, BIS from 2010-14), former FT leader writer and Lex Columnist, former financial dealer (?) at IG, student of economic history, PPE like the rest of them, etc. This blog has large gaps for obvious reasons. The name is dumb - the CentreForum think tank blog was called Freethink, I adapted that, we are stuck now.

3 thoughts on “Is all GDP created equal?

  1. Hello Giles

    I enjoyed this, thank you. There was a Dutch economist in the old BIS whose name escapes me, but who used to say that broken windows create lots of work for glaziers, but that’s not a reason to encourage everyone to riot. He was actually arguing there against arguments claiming that supporting renewable electricity was good because of all the people who get jobs installing solar panels. Which is almost the opposite to the ‘FOBTs are bad but the jobs are good’ argument (NB I am astonished anyone in government still bought this argument in 2018).

    As for big tech, well whoever decided Jason Furman should come in and review how regulation works has a lot to answer for.

    Hope you’re very well.

    Sam

     Sam Sharps Government Affairs ssharps@apple.com +44 (0)7508 188 620

    >

    1. Quoting Frederic Bastiat on broken windows was a real thing in BIS, but the collapse in wind prices has silenced that I reckon

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