色花堂

色花堂'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.聽 This is measured as gross domestic product (GDP): the total amount of value we create and have available for use inside our borders. 聽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.聽 In 2022, this was about 拢2.2 trillion 鈥� a really big number.聽 This amounts to c拢32,000 each 鈥� a bit easier to understand.聽 People tend to concentrate on the increase or fall in GDP over time. 聽Importantly, in terms of this 鈥済rowth鈥� rate, they are nearly always talking about real GDP: the above nominal figures adjusted for inflation.聽 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.聽 The next point is what is this total GDP made up of? What are the ingredients of the GDP 鈥榗ake鈥�?聽 Basically, it tries to capture all the goods and services we deal with.聽 There are always lots of calls to change how and what we measure.聽 As we buy, sell and make different tangible and intangible 鈥渟tuff鈥�, the measure of real GDP changes.聽 For example, I can remember a time when there were no smart phones measured in GDP.聽 Now, of course, they are.

In the last few years, we have seen this total economic 鈥渃ake鈥� shrink because of the pandemic.聽 Then, it has not rebounded fully, with trade and war problems making things worse.聽 In other words, we are poorer than we were: we have less 鈥渃ake鈥� to go round, especially as there are more of us (population growth) wanting to have a slice of the 鈥渃ake鈥�.聽 Some people do better than others in getting a 鈥渇air鈥� share, ideally reflecting their real contribution or, at least, the value we implicitly ascribe to that contribution.聽 Hence, the battle between鈥� haves and have nots鈥� and the powerful and the unpowered.聽 For example, a football manager earning 拢30,000 per week is valued more than some medical or educational staff earning 拢30,000 a year.

Whatever distribution of income it throws up, the economy, the UK is poorer than it was.聽 Asa nation, we cannot hark back to a time when things were 鈥渂etter鈥� and hope to restore all the lost value, at least not quickly.聽 When the 鈥渃ake鈥� is not growing, if one group gets a big increase in income, somebody else must lose, particularly if the 鈥渃ake鈥� is less wholesome than it was: has gone a bit stale.聽 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鈥檚 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 鈥渃ake鈥� was different.聽 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).聽 So, the bottom line is we need to think carefully about what 鈥榲alue鈥� really means looking forward to the 2050s and whether a 鈥榥ew economy鈥� is warranted to improve net worth/net wealth for everyone through better (more accurate and sustainable) measures of real GDP per head.

鈥楴ew鈥� Economy

One feature of the 鈥橬ew Economy鈥� emerging for the mid-21st century will be the transition to a 鈥榞reener鈥� basis for production and consumption.聽 This requires novel financing for new green activities and for the greening of old ones.聽 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 鈥� not least because the recent pandemic-related scale of public debt accumulation will stifle government spending capacities for many years to come.聽 Offering efficiency and effectiveness, the private sector will need to step up, even lead, on many important 鈥榣ow carbon鈥� initiatives.

Historically, economists have focused on the environment as an 鈥渆xternality鈥�: something not catered for by the market system, needing top-down constraints to correct market imperfections.聽 Our assessment must be that this approach has not delivered well for nature, across most of the economy.聽 Now, we need to find ways to properly 鈥渋nternalise鈥� environmental value in terms of preserving and sustaining natural capital and the benefits we get from the flow of environmental services.聽 Private actors need to incorporate these 鈥榗osts and benefits鈥� into their accounting and profits systems.聽 In particular, the banking and finance industries must help us all to decide 1) what 鈥榥ew鈥� 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.聽 This can be their contribution to any transition to a 鈥榥ew economy鈥�.聽 I have seen estimates that the UK may need to spend 拢50bn (2% of current GDP) and the world over 拢700bn to make the shift to a 鈥榥ew鈥� economy with sustainable growth.聽 As yet, such figures can only be taken as rough guides, but they indicate a need for a large scale of economic adjustment.聽 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.聽 Where 鈥榩ublic goods鈥� 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.聽 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.聽

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.聽 This may require a need to minimise discounting of future costs and benefits.聽 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 鈥榥ew economy鈥�.聽 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).聽 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 鈥榥ew鈥� microeconomy that is coming.聽 Will we be ready or not?