economics

Consumer Confidence in the Economy has Diminished

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The Reserve Bank of India recently released the consumer confidence survey, which had some interesting insights. The survey was conducted in May with a sample drawn from the 6 major cities of New Delhi, Mumbai, Bengaluru, Chennai, Kolkata and Hyderabad. So, we must be aware of the extreme urban bias of the survey. Nonetheless, consumer perception about their current state and their expectations about the future can sometimes capture what the statistical data cannot.

In short, 48% of the population believe that the overall economic condition has worsened from a year ago, while 32% believe that their situation has improved. The rest believe that there is no significant change.

These tables from an article in Mint captures the summary of the consumer confidence survey.

Similarly, nearly 44% believe that their job situation has worsened and a majority of people believe that their incomes have remained constant in the last one year. This should ring alarm bells for the ruling government. In a fast growing economy, it should be worrying if a majority of people believe that there is a worsening or even a status quo of their income, job prospects and overall economic conditions.

The perception of those surveyed are contrary to the data. While GDP growth in the latest quarter has been the highest in the past two years, people believe that the economy is siding. Inflation perception does not correlate with the data as well. People largely believe that the inflation situation has improved in the past year, though CPI has been rising continuously.

The question, then, is whether we can take the results of this survey seriously. The answer is yes. People make decisions based on their perception and expectations of the future. They do not necessarily follow data released by the Central Statistical Office. Those decisions can result in a self-fulfilling prophecy. If enough people believe that the economic situation will worsen, they will postpone investment and big consumption decisions, and will choose to save instead. This will result in reduced demand and slack in the economy.

On that note, it is slightly reassuring to note that people are quite optimistic about the future. A majority of the people believe that all 4 of the parameters spoken above will improve in the coming year. However, the article also points out that the numbers were higher in 2014.

The Ten Commandment for Economists and Non-Economists

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This is a fascinating set of rules I came across in Dani Rodrik’s book Economic Rules:

The Commandments

I really liked the 6th commandment for non-economists, which states “When an economist uses the term “economic welfare,” ask what he/she means by it”. While you are at it, make sure you ask them what they mean when they use the term “structural reforms” as well. It seems to be the single greatest solution to all of mankind’s problems. The specifics are often missing though, and perhaps, therein lies the reason why they have not been carried out.

 

Should GDP be Value-Neutral?

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The Economist has a lovely series on the shortcomings of the economics profession. This week, they are focusing on measurement issues in economics. These issues are all well known and accepted within the profession, but will make a good read if someone is new to the field.

They start with the complaint that economists often equate price and value and put a dollar figure on the value of certain products, commodities or even intangible aspects such as emotions and happiness. I don’t quite agree with this. One of the first lessons in the Microeconomics course that I teach at Takshashila is the difference between cost, price, and value. The perceived potential value of a certain commodity is necessarily higher or equal  to the price that they pay. If not, they wouldn’t be undertaking the transaction. The price of a bottle of water in summer can be just Rs. 10, but the value that we derive from it will be much higher, if we are hungover and dehydrated, for example.

Then, it lists the familiar complaints with GDP as a measuring tool. Some of these are valid and provides a scope for improvement in the methodology, but some others are just plain bunkum. They start with the fact that GDP measurement is value neutral.

In a speech in 1968 Robert Kennedy complained that measures of output include spending on cigarette advertisements, napalm and the like, while omitting the quality of children’s health and education. Despite efforts to improve such statistics, these problems remain. A dollar spent on financial services or a pricey medical test counts towards GDP whether or not it contributes to human welfare.

Now, I would have categorised this in the pros column of GDP rather than the cons column, as The Economist has done. The mandate of GDP is to measure economic activity, not to make value judgement. We would want such measurements to be value neutral and not take moral positions. Imagine the consequences of ascribing moral weights while measuring economic activity. Who would have the moral authority to issue weights? Will spending money on alcohol have a lower weight than spending on religious rituals?

Another oft repeated complaint is that GDP does not measure unpaid activity or the social costs of environmental damage or resource abuse. These are valid concerns and the answer lies in continuously improving the methodology and capturing as much information as possible, and not discarding GDP, as some critics have suggested. GDP is still the most comprehensive tool available to measure economic activity.

Do listen to a podcast I recorded by Pavan Srinath on GDP. We go through the history of GDP calculation and try to address some of the problems with GDP as a measurement tool.