Defining productivity in a pandemic may teach us a lesson

How should we measure the contribution of a teacher or a health worker during this crisis asks  DIANE COYLE in The FT 

One “P” word has been dominating economic policy discussions for some time now: not “pandemic”, but “productivity”. Now that coronavirus has dealt an unprecedented blow to economies everywhere, policymakers are asking how it will affect productivity at a national level. 

The long-term effects of Covid-19 are unknown — they depend on the length of time for which economic activity will have to be suspended. The longer lockdowns last, the greater the hit to output growth and increasing unemployment. 

Productivity — the output the economy gains for the resources and effort it expends — matters because it is what drives improvements in living standards: better health; longer lives; greater comfort. Investment, innovation and skills are the key ingredients, though the recipe is still a mystery.  

In the UK, the pandemic will certainly cause a short-term fall in private-sector productivity. This is not only because many people are unwell or struggling to work at home around children and pets, but also because of a sharp decline in output. Employment is falling too, but many businesses are keeping workers on their books so labour input will not decline by as much. In general, productivity falls when output falls. 

In the public sector, measuring productivity is hard. For services such as health and education, the Office for National Statistics looks at both activity and quality — such as the number of pupils and their exam grades, or the number of operations and health outcomes. But, at the best of times, these measures depend on other factors. 

How should we think of the productivity of a teacher preparing lessons for online delivery, with all the challenges that involves, and what will be the effect on pupils’ attainment? It is easy to think of new measures, such as the number of online lessons delivered, but hard to imagine pupil outcomes not suffering. 

As for medical staff, who would argue their productivity has not rocketed in recent weeks? But for many patients the outcomes that are measured will sadly be tragic. The biggest “productivity” boost may come from a new vaccine. 

Public investment in infrastructure or green technologies will ultimately help productivity, but financial pain may force businesses to retrench. Business investment in the UK has been sluggish anyway, falling in 2018 and rising just 0.6 per cent in 2019. It is hard to foresee anything other than a big fall from the £50m-or-so-a-quarter last year. 

Will supply chains unravel? The division of labour and specialisation that comes with outsourcing has driven gains in manufacturing productivity since the 1980s, but it depends on frictionless logistics and freight. Keeping that system going through lockdowns will take significant international co-ordination, which seems unlikely. 

Some recent work suggests that even quite small shocks can cause networks to fall apart. This one will reverberate as waves of contagion hit countries at varying times. One res­ponse would be for importing companies to diversify supply chains. A less benign one — in productivity terms — would be a shift to reshoring production at home. 

The pandemic and its aftermath will raise profound questions. Productivity involves a more-for-less (or, at least, more-for-the-same) mindset — hence the just-in-time systems and tight logistics operations. Companies may rethink the need for buffers as economic insurance. Inventories could rise, increasing business costs. Suppliers closer to home could be found, again at higher cost. 

Perhaps the definition of economic wellbeing will also change. Conventional economic output matters, as people now losing their incomes know all too well. But so do social support networks and fair access to services. Without them, everyone is more vulnerable. Prosperity is more than productivity.

What is productivity and why is the UK's so poor?

Larry Elliot in The Guardian

The shortfall in productivity compared with other developed economies has long been Britain’s economic achilles heel. It is a problem that Conservative and Labour chancellors have been grappling with for decades.

Productivity is a guide to how good a country is at delivering the goods and services that are bought and sold. Technically, it is the rate of output per unit of input, measured per worker or by the number of hours worked. In layman’s terms, it is a measure of what goes in and what comes out.

In some sectors, productivity is easy to measure. A factory that makes 1,000 cars a day with 50 workers is twice as productive as a factory that requires 100 workers to do the same job. In other parts of the economy, assessing whether productivity has improved is harder and less objective.

At face value a fast-food joint that employed the same number of chefs to cook the same number of hamburgers as they did a year earlier would not be showing any increase in productivity. But if the quality of the hamburgers improved, that would be a productivity gain and statisticians would try to capture the improvement in the official figures.

There are a number of ways in which a firm can make itself more productive. It can invest in new machinery that makes the production process more efficient. It can employ more highly skilled staff. It can train workers so that they can fully exploit the equipment they are using.

It is through productivity improvements that living standards rise. For many years, the annual increase in productivity in the UK averaged around 2%, although there were periods when it was lower and periods when it was higher.

Each year since the early 1990s, the Office for National Statistics has published an international comparison of productivity. This showed that UK productivity was 9% lower than the average of the other six members of the G7 (the US, Japan, Germany, France, Italy and Canada) but this gap narrowed to 4% by the time of the 2007 financial crisis.

Since then, however, productivity in the UK has barely grown and the gap with the rest of the G7 has widened to 18%. The gap with Germany is 35% and with the US 30%.

There have been a number of explanations for the dramatic deterioration in productivity: the availability of unskilled cheap labour has deterred firms from investment; the poor quality of UK roads, railways and broadband network; the shrinkage of the financial sector, which had been a source of high-productivity jobs in the boom before the 2007 crisis; and the misallocation of capital to “zombie” firms kept alive by ultra-low interest rates rather than to dynamic new enterprises.

The government’s autumn statement document states that improving productivity is the “central long-term economic challenge” for the UK. Philip Hammond, the chancellor, has identified better infrastructure, technology and skills as the foundations for doing so, which is why he unveiled a new £23bn national productivity investment fund and backed Sir Charlie Mayfield’s productivity council in his autumn statement. But this is a goal that requires long-term investment and commitment.

The dishonesty in counting the poor

UTSA PATNAIK

  

The Planning Commission’s spurious method shows a decline in poverty because it has continuously lowered the measuring standard

The Planning Commission has once again embarrassed us with its claims of decline in poverty by 2011-12 to grossly unrealistic levels of 13.7 per cent of population in urban areas and 25.7 per cent in rural areas, using monthly poverty lines of Rs. 1000 and Rs. 816 respectively, or Rs. 33.3 and Rs. 27.2 per day. These princely amounts will pay for one urban male haircut while they are supposed to meet all daily food and non-food living costs. The poverty decline claimed is huge, a full 8 per cent points fall in rural areas over the two years since 2009-10, and a 7 per cent points fall in urban areas, never mind that these two years saw the aftermath of drought, poor employment growth and exceptionally rapid food price rise. The logically incorrect estimation method that the Commission continues to use makes it an absolute certainty that in another four years, when the 2014-15 survey results become available, it will claim that urban poverty is near zero and rural poverty only around 12 per cent. This will be the case regardless of any rise in actual deprivation and intensification of actual poverty.

Substantial rise

All official claims of low poverty level and poverty decline are quite spurious, solely the result of mistaken method. In reality, poverty is high and rising. By 2009-10, after meeting all essential non-food expenses (manufactured necessities, utilities, rent, transport, health, education), 75.5 per cent of rural persons could not consume enough food to give 2200 calories per day, while 73 per cent of all urban persons could not access 2100 calories per day. The comparable percentages for 2004-5 were 69.5 rural and 64.5 urban, so there has been a substantial poverty rise. Once the NSS releases its nutritional intake data for 2011-12 we can see the change up to that year, but given the high rate of inflation and sluggish job growth, the situation is likely to be as bad, if not worse. Our figures are obtained by applying the Planning Commission’s own original definition of poverty line. Given the rapidly rising cost of privatised health care, education and utilities (electricity, petrol, gas), combined with high food price inflation and exclusion of the majority of the actually poor from affordable PDS grain, it is hardly surprising that the bulk of the population is getting more impoverished, and its nutritional level is declining faster than before.

What is the basic problem with the Planning Commission’s method which produces its low and necessarily declining estimates, regardless of ground reality? The Commission in practice gave up its own definition of the poverty line which was applied only once — to get the 1973-74 estimate. After that, it has never looked over the next 40 years even once for deriving poverty lines at the actual current spending level, which will allow the population to maintain the same standard of living in terms of nutrition after meeting all non-food costs — even though these data have been available in every five-yearly NSS survey.

The Commission instead simply applied price indices to bring forward the base year monthly poverty lines of Rs 49 rural and Rs.56 urban in 1973-74. The Tendulkar committee did not change this aspect; it merely altered the specific index.

Price indexation does not capture the actual rise in the cost of living over long periods. Those doing the poverty estimates would be the first to protest if their own salaries were indexed only through dearness allowance. A fairly high level government employee getting Rs.1,000 a month in 1973-74 would get Rs.18,000 a month today if the salary was only indexed. The fact that indexing does not capture the actual rise in the cost of living is recognised by the government itself by appointing decadal Pay Commissions which push up the entire structure of salaries — an employee in the same position today gets not Rs.18,000 but a four times higher salary of over Rs.70,000. Yet those doing poverty estimates continue to maintain the fiction that the same standard of living can be accessed by the poor by merely indexing the original poverty line, and they never mention the severely lowered nutritional access at their poverty lines which, by now, are destitution lines.

Worsening deprivation

The fact is that official poverty lines give command over time to a lower and lower standard of living. With a steadily lowered standard, the poverty figures will always show apparent improvement even when actual deprivation is worsening. A school child knows that if last year’s percentage of students passing the annual examination is to be compared to this year’s percentage, the pass mark should be the same. The school principal cannot quietly lower the pass mark without informing the public, say from 50 out of hundred last year to 40 this year, and then claim that the school’s performance has improved because 80 per cent of students are recorded as ‘passed’ this year at the clandestinely lowered pass mark, compared to 75 per cent of students last year. If, at the same pass mark of 50, we find that 70 per cent of students have passed this year, we are justified in saying that the performance, far from improving, has worsened. If the school is allowed to continue with its wrong method, and lower the pass mark further next year, and again the next year, so ad infinitum, it is eventually bound to record 100 per cent pass and zero failure.

The case is exactly the same with the official poverty lines as with the pass mark: the poverty lines have been lowered continuously below the standard over a very long period of 40 years. ‘Poverty’ so measured is bound to disappear from India even though in reality it may be very high and worsening over time. The Commission’s monthly poverty line for urban Delhi state in 2009-10 is Rs.1040 — but a consumer spending this much could afford food that gave only 1400 calories a day after meeting all other fast rising expenses. The correct poverty line is Rs.5,000 for accessing 2100 calories, and a staggering 90 per cent of people have been pushed below this, compared to 57 per cent below the correct poverty line of Rs.1150 in 2004-05. Given the very high rate of food price inflation plus the rising cost of privatised medical care and utilities, it is not surprising that people are being forced to cut back on food, and the average calorie intake in urban Delhi has fallen to an all-time low of 1756. While a high-visibility minority of households with stable incomes is able to hire-purchase multiple cars per household and enjoy other durable goods, the vast working underclass which is invisible to the rich is struggling to survive. Fifty five per cent of the urban population cannot access even 1800 calories today, compared to less than a quarter in that position a mere five years earlier.

Why, it may be asked, do the highly trained economists in the Commission ignore reality and continue with their incorrect method? Surely they can see as we do, that their Rs.1040 poverty line gives access to a bare-survival 1400 calories. Part of the answer is that the ramifications of using the wrong method extend globally, for the World Bank economists have, for decades, based their poverty estimates on the local currency official poverty lines of developing countries, including India.

The World Bank claim of poverty decline in Asia is equally spurious. In reality, under the regime of poor employment growth and high food price inflation, poverty has been rising. To admit this would mean that the entire imposing-looking global poverty estimation structure, employing hundreds of economists busy churning out wrong figures, would come crashing down like a rotten termite-eaten house. The rest of the answer is that since the method automatically produces numbers showing spurious poverty decline, it is convenient for arguing that globalisation and neo-liberal policies are beneficial for people. Truth will always out, however.

What is GDP?

Q&A: What is GDP?

From the BBC website

GDP, or Gross Domestic Product, is arguably the most important of all economic statistics as it attempts to capture the state of the economy in one number.

Quite simply, if the GDP measure is up on the previous three months, the economy is growing. If it is negative it is contracting.

And two consecutive three-month periods of contraction mean an economy is in recession.

What is GDP?
GDP can be measured in three ways:

• Output measure: This is the value of the goods and services produced by all sectors of the economy; agriculture, manufacturing, energy, construction, the service sector and government

• Expenditure measure: This is the value of the goods and services purchased by households and by government, investment in machinery and buildings. It also includes the value of exports minus imports

• Income measure: The value of the income generated mostly in terms of profits and wages.

In theory all three approaches should produce the same number.

In the UK the Office for National Statistics (ONS) publishes one single measure of GDP which, apart from the first estimate, is calculated using all three ways of measuring.

Usually the main interest in the UK figures is in the quarterly change in GDP in real terms, that is after taking into account changes in prices (inflation).

How is GDP calculated?

Calculating a GDP estimate for all three measures is a huge undertaking every three months.
The output measure alone - which is considered the most accurate in the short term - involves surveying tens of thousands of UK firms.

The main sources used for this are ONS surveys of manufacturing and service industries.
Information on sales is collected from 6,000 companies in manufacturing, 25,000 service sector firms, 5,000 retailers and 10,000 companies in the construction sector.

Data is also collected from government departments covering activities such as agriculture, energy, health and education.

New GDP figures are released every three months, but they get revised in the interim. Why?

The UK produces the earliest estimate of GDP of the major economies, around 25 days after the quarter in question.

This provides policymakers with an early, or "flash", estimate of the real growth in economic activity. It is quick, but only based on the output measure.

At that stage only about 40% of the data is available, so this figure is revised as more information comes in.

They are two subsequent revisions at monthly intervals. But this isn't the end.

Revisions can be made as much as 18 months to two years after the first "flash" estimate. The ONS publishes more information on how this is done on its website.

What is GDP used for?

GDP is the principal means of determining the health of the UK economy and is used by the Bank of England and its Monetary Policy Committee (MPC) as one of the key indicators in setting interest rates.

So, for example, if prices are rising too fast, the Bank would be expected to increase interest rates to try to control them. But it may hold off if GDP growth is sluggish, as higher rates could damage the recovery. That is the situation at the moment.

The Treasury also uses GDP when planning economic policy. When an economy is contracting, tax receipts tend to fall, and the government adjusts its tax and spending plans accordingly.

UK GDP is used internationally by the various financial bodies such as OECD, IMF, and the World Bank to compare the performance of different economies.

The European Union also uses GDP estimates as a basis for determining different countries' contributions to the EU budget.

Also read:
About Economic Growth and Well Being
http://giffenman-miscellania.blogspot.com/2010/01/economic-growth-and-well-being.html

About Economic Growth
http://giffenman-miscellania.blogspot.com/2008/03/economic-growth.html