Spotify is causing a major problem for economists

[Note: This item comes from friend Judi Clark. DLH]

Spotify is causing a major problem for economists
By Jim Edwards
Sep 25 2016
http://www.businessinsider.com/spotify-problem-for-economists-2016-9

The global economy is baffling economists, particularly those employed at central banks. Government mints have printed a vast amount of (electronic) money, and according to the textbooks the planet right now should look like the Weimar Republic in 1929 — awash in cash and growing like crazy.

But it’s not. Growth and productivity are stagnating worldwide.

What if it’s all Spotify’s fault?

Or rather, not Spotify specifically, but tech companies and the services they provide. Our economy is less and less dependent on factories churning out physical objects, and more and more dependent on non-tangible, virtual goods and services.

In the old days, economists could count cars coming out of an automobile factory. They could count freight containers on ships in ports, and get an idea of whether trade was growing, and where exports and imports were headed.

But if Spotify, based in Sweden, sells a subscription to someone in the UK, that “export” is unlikely to be picked up in the trade measurement data. Even if it is detected in Sweden’s tax data, it won’t be reported and factored into Swedish GDP or months or years.

And it will be hardly recorded at all in the UK, even though the consumer who previously spent £30 a month on CDs is now spending £12.99 a month and receiving countless more albums. That consumer is now £17.01 richer every month than she was before — but her extra wealth isn’t reflected in the macro data that the Bank of England uses to set interest rates, or the import data that the government uses to set spending policy.

HSBC global economist James Pomeroy recently published a fascinating paper that looks at this question. “The rise of the digital natives” argues that the increase in digital services like Spotify — and Apple and Google and Facebook and Amazon and on and on — put downward pressure on prices and inflation.

Right now, Pomeroy argues, central banks interpret a lack of inflation (or deflation) as a sign of impending recession, something that needs to be tackled with extra cash liquidity. But what if deflation is not a sign of recession but rather a product of the relentless efficiency of tech services like Uber, Airbnb and Spotify? That might explain why, in the UK, there is high employment and low unemployment, but low inflation and apparently marginal economic growth.

Maybe, Pomeroy suggests, central banks have a “Spotify problem”: Under-calculating GDP because they are failing to count sales of virtual goods like Spotify subscriptions.

“Are we basically mismeasuring the actual amount of output? Are we mismeasuring productivity because of this quality element? Are we actually mismeasuring what is actually growth? I think Spotify is a good example,” he says.

Pomeroy also suggests — controversially — that in a world of falling prices, companies like Uber could make workers richer. Not in the nominal face value of the money they earn but proportionally, in how far that money can increasingly stretch, year on year. (He also suggests the opposite might happen: In a world of falling prices employers might be keen to cut wages when they can.)

[snip]

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