Sectoral boasts, or a few dumb ways of sizing up the economy

This morning’s perusal of the Guardian’s brought forth a small sigh, as there just below the A level story sat the headline “UK green economy four times larger than manufacturing sector, says report”.  

Now, I have been marinating myself in sectoral data for months to write this monster, and pretty much know every sector backwards by now.  Manufacturing in 2018 was a £182bn GVA sector – a number that is actually disappointing, as it is no larger in real terms than in 1998. In terms of sales – a nonsensical way of measuring it, for reasons to be set out below – it is £545bn, and it employs 2.5m people or thereabouts.  Anything four times that large is going to be … massive, basically employing half of your family. Certainly, a lot more than the 1.2m people apparently employed in the low-carbon industry, according to the same story.  

For me, the moral of the story is that people should apply some sort of sense check when confronted with sectoral boasts.   

Sectoral boasts are a constant feature of the government adviser’s life. A typical meeting request will begin with a polite email, attached to a sector description setting out quite how ginormous is the sector you are about to meet, in terms of jobs, taxes, exports, Levelling Up Power and so on. If you collect a sheaf of these over a parliamentary term, you will usually have enough sectoral GVA to create at least a dozen United Kingdoms.

Advisers learn to cock an eyebrow at this, and most journalists do as well. The sense check I would most recommend is this: production needs income. If a sector is producing £X of value, then someone is buying that much. So are they? I was struck by the figure in the report for Wind. If the wind industry is producing £33bn, as that report implies, then customers of wind – electricity customers– are paying that much.  A glance at Drax Electric Insights can tell you that Wind is around 25% of the electricity mix.  So does the whole lot come to £130bn? I don’t think so – £5000 per household is steep* … dividing through by households is also quite a good way of thinking through a number**. The report saws Low Carbon sales are £200bn. Does it feel like you spend £8000 of your budget on this (there are ~25m households)?

But what really bugs me is anu confusion of sales with GDP. A sale is not GDP.  If you buy a piano for £200, fix it up and sell it for £300, you have generated £100 of value add, not £300.  Some industries naturally have high sales-to-value-add ratios. Financial traders! Or the auto/aero industry, which has £117bn of sales, £28bn of value add. Without making this distinction, you can spin up an economy of almost infinite size. Imagine the full production chain of the piano, all the creation of wooden and metal parts, all the purchases and labour along the way. If each of those gross purchases were counted separately as final production, as well as the piano sale at the end, then you would end up with a lot more than £300.  But that is all you have at the end – a £300 piano.  

That’s one poor way of evaluating the economy – but I didn’t intend to write about that at length, it should be the job of the ONS in an explainer.  I am a fan of the green economy and don’t think it deserves a kicking for being exuberantly over-described.

Which brings me to the other topic: this foolish way of attacking green investment on the Gaia/Guido blog.  In short, it starts with how the government is providing a £95m grant to help upgrade ports for offshore wind production and delivery, rounds that up to £160m, the full size of the fund from which this £95m is drawn (because ‘secrecy’) then divides through by the jobs created (1,340 apparently), and runs away with it from there: £119,400 per job, what a ripoff, imagine how many years of income tax is needed for that, etc etc!

There is plenty of chicanery in this, but what really bugs me here is the method. The money the government is spending is for capital. It is a capital intensive business. What you get out of it in the end is capital – infrastructure, plant, machinery, that sort of thing.  Investment is not meant to be a job creation scheme.  If all you wanted to do was target investments in industries with a low capital-to-job ratio, then you would be subsidizing restaurants, advertising and leather goods, apparently (see table).  But then you would be coming up against the other idiocy, which I covered at more length in my report – the belief that the only good policy is one that automatically chooses the industries with high GVA per job – which are generally capital intensive.

Looking across all the industries, it appears that the sector in which you find electricity-supply has £128bn invested, and 145,000 employees, or £885,000 per job (see the table below).  In those terms, producing new jobs for a cost of £119,400 each is good value – but not if the comparator sector is manufacturing.  But I don’t really care.  Job creation is a dumb way of evaluating this.  The point is to encourage capital investment, and the point of the capital is not JUST to employ people, but also to produce whatever the capital produces – in this case, wind turbines, and eventually zero carbon electricity.  

I know these blogs are written cynically, but I think they reflect a trap that the promoters of green investment have set up for themselves.  Making out that your industry is really BIG is a mistake, when you remember that someone else pays for your big-ness. Jobs are a cost as well as a source of income for someone.  Greening the economy is going to be highly capital intensive, and if you portray it as being a way of boosting the size of the economy in terms of jobs, you will be hoist by your own petard.

*OK, OK, you can just google it, that offshore wind has £6bn of turnover according to the ONS

** yes, households are not the only electricity users. They are maybe half of it. But we do know not much more than half their £1300 utility bills are electricity …

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.

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