The Economic Consequences of the Pandemic

by John Quiggin on September 4, 2020

That’s the title of the book I’m working on for Yale University Press, and also the theme of two articles I published yesterday.

One, in The Conversation, looked at the potential benefits of remote work and the likely struggle over who will get those benefits. Key paras

For the most part, disputes over sharing the benefits of remote office work will be hashed out between employers, workers and unions, in the ordinary workings of the labour market.

But what about the other half of the workforce, who don’t have the option of working from home? In particular, what about the mostly low-paid service workers who depend on people coming into offices?

If the productivity gains made possible through remote work are to be shared by the entire community, substantial government action will be needed to make sure it happens.

The other article, in Inside Story, looks at the end of the goods economy and its replacement by an information and services economy, a transformation that’s been highlighted by the pandemic. An important implication is that investment demand by private firms is likely to stay low, even as greater public investment is desperately needed.

Tech firms like Microsoft, which now determine stock market values, don’t need much capital. The book value of Microsoft’s capital stock is less then 10 per cent of its market value. The rest is made up of intangibles, a polite word for monopoly-power network effects, intellectual property, and good old-fashioned predatory conduct.

Without any need for private sector investment, interest rates will remain low unless public investment picks up the slack. With the physical goods economy fading into the past, though, we don’t need more of the transport infrastructure projects governments automatically turn to at times like these. Rather, we need to invest in human services like health (mental and physical), education and childcare, and in information platforms that break the monopoly power of the tech giants.

These are the investments that will allow Australia to flourish in an economy dominated by information and services rather than industrial production.

{ 16 comments }

1

Hidari 09.04.20 at 7:35 am

I am deeply unclear as to what people mean by ‘the end of the goods economy ‘.

Assuming the human race has a future (a moot point at the moment) by the year 2050 or so essentially all our power is going to have to come from renewables: not just the obvious suspects (solar panels, wind turbines) but other sources of power as well: hydroelectric, geothermal, wave power, and so on.

Moreover all of our current road and air travel ‘methods’ are going to have to replaced by green (or at least greener) alternatives. So every petrol drive car on planet Earth will have to be ‘decommissioned’ and replaced with an electric car: battery powered or solar powered planes will have to be developed and then made mandatory, all trains will have to be electrified, and so on.

Now, this seems to me (assuming this is possible and will happen) to presage, not the end of manufacturing, but, on the contrary, a manufacturing ‘golden age’. I.e., capitalism functioning as it always has: people digging things out of the earth, then driving (in green vehicles, presumably) the dug up ‘stuff’ to factories, where it is made into commodities, which are then driven to other factories, where the commodities are assembled into other commodities, which are then sold to people in shops (or ‘shops’).

This would seem to be particularly the case in Australia. I haven’t looked into it, but I would imagine that the Australian outback would seem to be the perfect place for huge arrays of solar panels, you could have offshore windfarms and so on.

So….what am I missing here? How does the Green New Deal (which must happen, assuming the human race has a future) mean ‘the end of the goods economy’? Do you mean just consumer goods?

2

Matt 09.04.20 at 8:32 am

potential benefits of remote work and the likely struggle over who will get those benefits.

How sure are you that there will be enough “benefit” to share? Of course, some people will benefit, but this isn’t the same thing as there being a surplus that’s large enough to compensate others. No doubt it’s too early to tell, but I’m sympathetic to the sorts of worries noted by Kevin Drum here:

https://www.motherjones.com/kevin-drum/2020/07/remote-work-isnt-the-future-after-all/

If that’s right, then there is unlikely to be a surplus generated that would allow the “winners” to compensate the “losers”, and some chance that we end up at a lower over-all level. That would be bad, but wouldn’t surprise me.

3

Starry Gordon 09.04.20 at 2:31 pm

If we follow David Graeber’s bullshit-jobs theory, then one reason the transition to working at home went smoothly is that the people who did it weren’t really producing much of anything. For instance, I could have worked at home for decades, because what I was doing was concocting computer programs which were then gathered into large projects which were thrown away — not because they didn’t work, but because their various raisons d’être were spurious in the first place. Many other people were paid to support, describe, plan, test, and manage my efforts; since the project was going to be junked, they could have ‘worked from home’ too. Being usually an inhabitant of New York City, most of my work was for the financial industry, which is parasitical rather than productive; the better my work, the more value would have been destroyed.

It turns out, though, that in spite of all the symbolic and virtual foofarrah we still want things: food to eat, clothes to wear, houses to live and work in, energy to keep things going, vehicles to move us around our poorly laid-out conurbations, toys, tools, drugs, and so on — stuff. I gather most of the stuff is currently made by people for low wages and under authoritarian oppression, which explains why it is evaluated contemptuously and said to be disappearing. That arrangement will last as long as the West (that is, the U.S. ruling class) can believably threaten the rest of the world with its military and economic power. Given the evident incompetence of that ruling class, the arrangement may not last too much longer, in which case making actual things — manufacturing — will come back big-time.

4

Tim Worstall 09.04.20 at 3:08 pm

I think you’re falling into a definitional error. That is, one caused by the usual definitions.

“The book value of Microsoft’s capital stock is less then 10 per cent of its market value. The rest is made up of intangibles, a polite word for monopoly-power network effects, intellectual property, and good old-fashioned predatory conduct.”

“Rather, we need to invest in human services like health (mental and physical), education and childcare, and in information platforms that break the monopoly power of the tech giants.”

Investment, in the national accounts, is stuff that gets written off over more than a one year accounting period. This definition, unless one is careful, can lead one into error.

For example, take Microsoft Office and the subscription version of the same thing. Traditionally a firm would buy licences on a two or more year basis. That’s investment, it’s written off over more than 12 months. A subscription to exactly the same software is a monthly fee, it’s not investment. Same software, possibly the same cost, but one is investment in those national accounts, the other isn’t. To be not wholly accurate, Microsoft Office in an investment, Office 365 is not.

So, a couple of years back Goldman Sachs (and others have made the same point, Bob Solow?) says looking at business investment in software there is no tech revolution. But the definition of investment being looked at doesn’t cover any part of subscriptions. That’s the entire SaaS industry revenues classifed as current spending – which by the definition it is – and not investment. Which doesn’t really work if we’re then trying to use the number to see what companies are spending upon software in this moment of the white hot heat of the technological revolution.

Yes, SaaS is large enough to impact upon that line in the national accounts. As far as I’m aware all Salesforce revenue is subscription. $20 billion a year? Is that investment? Not by national accounts standards it isn’t, it’s current spending. Sure, that one company is only 0.1% of GDP but add more of the sector and pretty soon we’re talking real money when the business investment in software number is 1.6% or whatever of GDP.

Equally, on the writing of software at a company like Microsoft. If software development expenses are capitalised then all those engineers coding away to build Windows XVII – the one that will finally work – are counted as investment because they are then amortised over more than one year. If all those salaries are counted as current expenses then they’re not investment. Same activity, same end result, different levels of investment being recorded in the national accounts.

As far as I’m aware at least capitalisation of the costs of writing software is rather frowned upon. At significant corporations at least. Which means that a measure of the capital stock at Microsoft is not going to be telling us quite the same thing – assuming non-capitalisation of sotware developemnt costs – as we might think using the more traditional methods of measurement.

If the expenditure on the software is now a current expense, the writing of it is also a current expense, then we are measuring investment differently from the way we did before. What we would probably call investment, the writing and using of new software, isn’t being recorded as such. And conclusions drawn from a change in the way of measurement are perhaps not quite enough to launch a change of policy from.

This definitional problem then trips over into your second point. Spending on childcare, psychiatrists, university lecturers, is not investment by that same measure. It’s current spending – they are not things amortised over more than 12 months.

So, if there is some special factor that accrues to investment by that traditional measure – amortisation – then these forms of spending don’t gain it. And if we are to say that no, that doesn’t matter, it’s spending on increasing capacity etc that matters, then writing new software, installing it, without amortisation also achieves that special factor.

Software here is used as an example of the point, I am not trying to say that more software is all the investment an economy needs, nothing like it.

The moment we say there is something special about “investment” then we’ve got to be very careful about what our definition of it is.

Something absolutely true is that the change in the way software is accounted for is undercounting “investment” in new technology. How much it is is another matter probably better left to someone more numerate than I am. Back of the envelope says it’s a big enough point to matter.

(Something from the past here: https://ftalphaville.ft.com/2015/05/27/2130417/goldman-goes-astray-on-grand-theft-auto-and-productivity/. The chart showing investment in software as percentage of GDP. Flatlining or worse since 1999 (Y2K, obvs.). And yet it’s using that stuff amortised over more than 12 months definition. It has entirely and wholly missed SaaS. A bad number to be trying to draw conclusions and policy goals from)

5

Ebenezer Scrooge 09.04.20 at 6:11 pm

Public investment in human services and info tech is a Good Thing. But an exclusive emphasis on this at the expense of physical infrastructure is a classic case of the economists’ fallacy: ignoring second-best political economy in pursuit of first-best efficient outcomes. No society can last long without meaningful employment for men: particularly young men. It’s not fair; it’s not right. But it is true. If the choice is between excessive physical infrastructure (and concomitant depressed women’s wages) and fascism, I’ll pick the non-fascist alternative any time.
Or let me rephrase it. Subsidized employment for men is a constraint on public policy. (It has to be infrastructure rather than the military because women make better soldiers.)

6

CHETAN R MURTHY 09.04.20 at 6:18 pm

Recently Bret Deveraux (over at acoup.blog) has had a nice series of articles about farming, and esp. cereal crops and bread production in medieval times. In this series, at one point he talked about the disproportionate influence wielded over small farmers, by the large landowner. And about how there was a back-and-forth relationship, wherein small farmers put up with being lorded-over, and with giving up their labor and crops to the lord, in exchange for, among other things, the tacit guarantee that the lord would share his surplus and savings to succor them, when and if hard times came. The poor accepted a set of quite unequal relations in power, property, and manifold other social and physical realms, because of this tradeoff.

The modern version of this is that the rich must be expropriated to pay for the rebuilding of our world. Period.

7

John Quiggin 09.04.20 at 8:49 pm

Tim W. In a previous post, I looked at R&D spending by the big 5 tech firms and it didn’t make a lot of difference. And in economic terms, if you count software that’s updated every couple of years as investment, it’s depreciated so fast that net investment doesn’t change much.

8

John Quiggin 09.04.20 at 8:51 pm

Hidari, there is certainly room for a lot of investment in renewables, and I’ll be writing about that. But it isn’t big enough to make up for the decline elsewhere. And, obviously, I’m not suggesting an end to manufactured goods, any more than the end of the pre-industrial economy based on agriculture meant the end of food.

9

notGoodenough 09.04.20 at 9:00 pm

CHETAN R MURTHY @ 6

The modern version of this is that the rich must be expropriated to pay for the rebuilding of our world.

Your idea is intriguing to me, and I wish to subscribe to your newletter.

10

notGoodenough 09.04.20 at 9:43 pm

John Quiggin @ 8

there is certainly room for a lot of investment in renewables, and I’ll be writing about that

Another thoughtful discussion regarding the intersection between energy, environment, and economics? Really John, you are spoiling me…

..please continue to do so :-)

11

nastywoman 09.05.20 at 8:54 am

Y’all need to know – from the NYT –

”The Service Economy Meltdown
As companies reconsider their long-term need to have employees on site, low-wage workers depending on office-based businesses stand to lose the most”.

And as we – a few years ago – suggested to Dean Baker – that it is a very, VERY bad idea to go Full Service Economy – there was… silence?

So why was there… SILENCE?

12

Tim Worstall 09.05.20 at 10:24 am

“Tim W. In a previous post, I looked at R&D spending by the big 5 tech firms and it didn’t make a lot of difference. And in economic terms, if you count software that’s updated every couple of years as investment, it’s depreciated so fast that net investment doesn’t change much.”

JQ, can you point me to this? Yes, I know. Mr. Google is my friend but it’s also very large.

13

Rapier 09.07.20 at 2:13 am

14

Tm 09.07.20 at 7:52 am

JQ: “the end of the goods economy”
“With the physical goods economy fading into the past, though, we don’t need more of the transport infrastructure projects governments automatically turn to at times like these.”

“And, obviously, I’m not suggesting an end to manufactured goods”

I am unable to reconcile your statements. Why exactly do you think transport infrastructure will be less in demand in the future? Perhaps if home office work remains widespread, people will travel less. I hope so. But as far as freight transport is concerned, I don’t see where you see a decline. So far, the main difference the pandemic has made is that online shopping has gotten a huge boost. But the stuff people buy online still needs transport infrastructure, no?

15

Bob 09.07.20 at 1:20 pm

I have a question on the first article. Is the time spent commuting to work included in measures of productivity? I thought it was only the hours actually worked. I understand completely how the lack of a commute represents a gain in productivity from a social perspective–it certainly costs workers both time and money commuting. But I didn’t think that those costs were factored into the standard measures of productivity.

16

John Quiggin 09.07.20 at 7:16 pm

Bob @15 You’re right that these cost savings represent a real gain and that they won’t appear in standard measures.

TM @14 I’ll need to respond at greater length to this

Tim @12 The R&D number is linked in my post on intangibles and monopoly I think. The point about net investment is my application of standard theory.

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