The odd world of XXIth century finance took another leap into weirdness today as Sweden’s central bank slashed its benchmark rate to minus 0.5 percent. As Matt Phillips wrote yesterday in this Quartz post, “paying someone to borrow your money seems like a bad idea. But it isn’t, necessarily. Why? Deflation”. Moving deeper into negative territory is an extreme measure taken to escape the deadly embrace of very low inflation, a concern shared by other central banks — Japan, Denmark and Switzerland — that have resorted to negative rates.
The step was taken as the Swedish economy is forecast to expand at a sizzling 3.2 percent rate and with a property market increasingly morphing into a bubble, to the extent that the domestic National Institute of Economic Research expects a positive output gap. Forecasts for headline inflation were just cut from 1.6 percent to 1.3 percent: conventional wisdom has it that when GDP and housing prices soar you’d expect the opposite, agitating inflationistas’ worst nightmares.
Central banks which have made use of negative rates, in most cases have resorted to this utterly unconventional tool as a way of boosting demand. Of late, it is a commodity in such, well, demand that all those central banks tinkering with ultra-low rates have forced to do so even the most (age-wise) venerable of them all, as Stockholm is enveloped by concerns related to the possible and likely fallout of sudden currency shifts.
Sweden’s central bank in the past has been publicly lambasted for been bad at coping with telltale signs, especially those spreading on the cusp of deflation. These days the Swedes are hardly alone in coping with the quirks of swooning markets: in fact, since the outset of the Great Recession there wasn’t a dearth of scenarios at odds with expectations. Handy and once reliable gauges of the economists’ toolbox, such as the Phillips curve, have been put into question.
Doubts arose over measurement of the economy performance itself. Which bring us back to the Spring of 2015, when measurements of productivity, and hence inflation, were openly challenged. As Gavyn Davies wrote in his FT blog: “an increasing number of economists from across the spectrum believe that the possible under-estimation of productivity growth could lead to a major policy mistake.”
The debate at the time developed around the difficulty to gauge the productivity gains that stem from the technology advancements. John Fernald may embody the camp that sees technology-based gains slumping — you can find his argument here. However, I lean on the thesis put forward by Jan Hatzius and Kris Dawsey of Goldman Sachs, which Noah Smith summarized in this post: “economists measure inflation by measuring changes in prices for the same goods (or services) so they will miss this kind of change, and end up overstimating inflation — which understates productivity.”
Since lower inflation, for any level of nominal GDP growth, automatically implies faster GDP growth, in the case of Sweden this would imply utterly deflationary figures, as well as red-hot GDP growth. The figures involved may be staggering in major economies: according to the Goldman Sachs economists, the U.S. average growth rate over the past five years would have been close to 3 percent, from the official 2.2 percent. This explanation would, sort of, relieve the headaches of the scores of analysts and economists who wonder why the oil windfall is not spent by consumers. If the genuine inflation measure happened to be lower than the official, the blunt response would be that the consumers behave like they are supposed to do as deflation takes hold.
It is somehow disquieting to think that central banks the world over may have engaged either the wrong or belated fight due to mis-measurement of technology gains, even taking into account how difficult is capturing the new value innovation can generate. Quality-change and the arrival of new products and services have always been a challenge to measure, but lately this may have been compounded by the burgeoning sharing economy, which is underpinned by both.
Productivity, we all agree, has to do with more output squeezed from the same input. Nobel laureate Michael Spence remarked in this Project Syndacate column how the world is replete with under-utilized assets and resources: innovation and the collaborative economy have spurred the process of exploiting all that and “the long term benefits consist not just in efficiency and productivity gains (large enough to show up in macro data), but also in much-needed new jobs requiring a broad range of skills”.
Professor Spence in the long term may prove right on both counts, yet in the short term I would underscore how difficult the task of measuring the sharing economy can be. Last September, the World Economic Forum released a survey report called “Deep Shift – Technology Tipping Points and Societal Impact.” Amid innumerable positive outcome that may be underpinned by this new ingredient of the overall economy, it listed as one of the negative impacts of the sharing economy the decreased ability to measure this potentially grey economy. Part of the grey, it has to be noted, has to do with the economic gains widely spread among those involved are divided in much finer increments.
Probably, the current framework for gathering data is very accurate for giving us figures portraying the disruption that the collaborative economy is enforcing on the incumbents. It’s unlikely that the empty hotel rooms and taxis sitting idle in their lanes fail to show up in figures. Statistics agencies have usually made a good job of avoiding the peril of maintaining in their spreadsheets outdated items or services. That’s why these days you will find in Italy-based ISTAT lists the price of leggings for young girls but not mens’ Borsalinos.
Unfortunately, the sharing economy has the feature of triggering cascading effects that entail, especially in its early stage, difficult measurements. Gauging productivity gains that squeeze more from the same may have different rates of difficulty: easier if you focus on the efficiency gain of a Boeing 737 operated by Ryanair compared to one owned by legacy carriers, which may mostly translate in more routes per day. It is harder if you try to make the measurement of the productivity gains from, let’s say, the internet connection: businesses may still be stuck to using it for e-mails while the most efficient have their trade and logistics underpinned by broadband.
In addition, the sharing economy seems to store an uncanny power to magnify technology innovation, multiplying the tipping points that open up productivity gains. Car sharing has been around since we were making calls on clamshell phones, but it did not soared until smartphones and apps made it convenient even for the less tech-savvy users. Besides, the collaborative economy has the feature to be able to build on improvements (from clamshell phones to smartphones) as well as on downturns. Millenials’ fleeting disposable incomes are a case of the latter, one that AirBnb and the like seized to launch a new offer of travel suited for those who would have been shut out from traditional accommodations. It is, possibly, another form of productivity that may have been understated.
In Italy, the difficulty that measuring the sharing economy poses, may easily be misunderstood for raw under-reporting, which is a phenomenon we have been familiar with for historically entrenched (bad) habits. As it is, sectors like car sharing seem to have been fully on record since their Italian infancy — morevoer, the major players have just joined Confidustria, our main employers’ association — while others that enjoyed a free ride across their nonage are increasingly cleaning up their act. Of late, my hometown Florence looked very keen to help those homeowner willing to stay in the open, burying the hatchet as AirBnb agreed to collect its hosts occupancy fees — a €2.50 levy corresponding to an occupancy tax for a two-star hotel.
Even though the web and the collaborative economy may give a reprieve to cottage industries that in Italy have always thrived, I am not inclined to beleive that it is under-reporting that makes difficult to measure the productivity gains of the sharing economy: it’s its disruptive features. As the head of McKinsey’s Milan branch Alberto Marchi underlined in an article on the policies suitable for the sharing economy stalwarts how even a player as unwieldy as the EU Commission has yet to decide whether ride sharing is a digital service or a transport — the latter regulated by member states, the former under the 2006 EU Services directive.
Of course, the gist of this post is not that the sharing economy on its own will be the major deflationary force to be reckoned with. If you look at the pie chart above taken from a New York City study, which recaps the local transportation market, one has to acknowledge that it is still a relatively small force, in spite of Uber having a sizeable market share there, as yet unrivalled elsewhere.
Yet it is growing fast as traditional industries slump, and its revenue makes impossible to make light work of it. Even for government, from supra-national to local. The deal the Florence city council signed with AirBnb — which offers over 7,500 houses in the Tuscan city center alone — is worth €10-million income for the city coffers. Therefore, governments — local or not — needing revenue, seem to welcome the sharing economy charge. Besides looking at it for revenue, they’ll have to look at its growth for their planning: if we heed the September World Economic Forum by 2025 globally there will be more trips via car sharing than in private cars.
Nevertheless, policy-makers seem to understate its disruptive core as much as they might have done in understating productivity gains and inflation. As technology advances, it may enmesh with a force even more disruptive and deflationary than the sharing economy as we know it. FT Alphaville’s Izabella Kaminska wrote back in 2013: “As free goods become increasingly plentiful throughout the economy,and people learn to recycle, swap and exchange goods without monetary transaction, it becomes very difficult to engineer an inflation problem.” Over time, the genuine (i.e. monetary-free) collaborative economy that hinges on free goods and services, may be the undoing of any measurement based on the concept of supply potential, hence confirming the widespread gut feeling that change is unusually rapid at present.