I have published a new podcast this morning. Entitled 'Bogus Numbers', I suggest in it that it is increasingly hard to determine what the truth in accounts and economic data might be. Finance directors do not recognise their own, supposedly true and fair, financial reports as representing the companies that they manage. The Office for National Statistics is putting out figures for the national debt that are 12.7% overstated and figures for GDP that are 10% overstated. It really is time that we stopped trying to manage the economy on the basis of bogus data.
This edition of The Account is also the first to feature new intro and outro music written especially for the podcast by Mark Northfield, whose work appears occasionally on this blog. I am very grateful to him for recording these for me. I happen to think this the best of these podcasts so far.
As this edition of The Account is based on a column I have written for The National newspaper in Scotland I suggest reading what I have to say there, and will not share a transcript here.
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Enjoyed? Loved it! Now you have rendered 85% of the economics profession not only redundant, but probably illiterate. No great loss. Incidentally, I could only listen on Podbean. The embedded link didn’t work.
On Bogus Numbers in economics, I had different, confessedly wild thought which has long nagged at me, that I feel here I might appropriately throw in the pot.
The IMF provides this simple equation for GDP:
GDP = C + I + G + NX.
Where GDP is the value of all final goods and services produced in the economy. C + I + G + NX are the sources of aggregate spending or demand that make up GDP —private consumption (C), private investment (I), purchases of goods and services by the government (G), and exports minus imports (net exports, NX).
It does not seem to me that this can be complete. How do we know whether or not C + I + G + NX captures all the material elements of two variables not separately identifiable, that I will term theta (θ) and lambda (λ); where theta represents the black economy, and lambda represents other unrecognised, unmeasured but real economic activity (for example by unpaid carers). In the case of the black economy, we know the sums are not immaterial; indeed in Britain it has been sufficiently noticeable in very large, sensitive areas of economic activity, with London described by Catherine Belton, “Putin’s People” (2020) as “the world’s laundromat, washing hundreds of billions of pounds of dirty cash every year, according to estimates by the UK’s National Crome Agency” (p.416-7). A notable vehicle for this laundering was the British LLP. Laundering is the mechanism used to wash dirty money into the legitimate (taxable) economy. Can we assume all this is laundered cash is captured by the IMF equation; and even if it is, where is the unlaundered money; where does it come from, where does it go? In other words, what about the size of the unlaundered black economy? Is it immaterial? How do we know? How do we know how well we are measuring accurately that what is captured is (materially), all there is to be captured?
In the case of the second category of lambda, the unmeasured non-black economic activity; we know that the care sector is a monetised, measurable economic activity, we know it is captured, for example by the private care sector, or for care as a public service; but we know this is by no means the total of care provided in our communities (by a long chalk). Vital care is provided for large numbers of elderly or disabled people in our communities, but it is not monetised or measured as economic activity. The only difference between the two forms of care is – one is not monetised, or measured. It is as well to remember that in Victorian Britain, at the high point of Britain’s industrial success, there were probably more people working in (often low paid) domestic service than in industry.
I propose as a fresh hypothesis that the simplest equation of GDP the IMF should offer is:
GDP = C + I + G + NX + (θ + λ).
Where (θ + λ) represents hitherto all un-monetised or measured economic activity that is not captured solely because it is not monetised or measured.
John
We know C is seriously understated because of the black economy
We know also T (Tax) is understated and S (Savings) overstated, not least by offshore.
Let me think about the
Apologies for the delay: a busy day.
“Labour says £28bn green prosperity plan in doubt due to Tory crashing of the economy – UK politics live – Shadow chancellor says she cannot give a ‘final set of numbers’ on spending until after the government’s next fiscal statement”
https://www.theguardian.com/politics/live/2023/jun/09/conservatives-labour-rishi-sunak-keir-starmer-boris-johnson-honours-uk-politics-news#comments
Staggering
We cannot afford to survive
“We cannot afford to survive…” yet we CAN afford to give everything to the bankers………
I like the music but I think you should then have a “grab the listener” intro before you go into your credentials, rather than repeat them on every “edition”.
In this case, for example, you should have gone right into:
“I was told I was a bit of a geek by a journalist for an English newspaper this week. I
accepted the accusation. It was, of course, why she was talking to me. Being a geek
is no bad thing.
“I am Richard Murphy etc”
Let me think about that
Not hard to do
Very good and clear National piece Richard. Presumably ONS would have to revise GDP back for decades, With Reeves latest utterence – she now seems to be losing understanding of teh difference between current and capital spending – but Labour show absolutely no interest in even discussing economics.
Reeves is for tomorrow morning, if I have the energy