Measuring national income in the time of COVID

National accounts are useful.  Yes, they have their limitations, and, particularly in the case of Ireland, can be subject to distortions but they are useful.

One of those uses is measuring changes in living standards.  If the growth of the inflation-adjusted measure of national income exceeds the growth rate of the population then it is likely that living standards are rising, at least on average.  This is usually taken as the real growth rate of per capita GDP (or another variant).

For Ireland, this averaged around one per cent per annum for the first three decades post independence, it rose by an average of three per cent per annum over the next thirty years and has averaged around five per cent per annum in the period since the late 1980s which is where it was before the current crisis hit.  These are useful summaries of our economic performance, though as is well known, such long-term averages do belie some significant volatility that Irish growth rates have exhibited.

2020 seems set to add to that volatility but let’s consider two things that are likely to muddy the link between the change in real per capita national income (as measured by, say,  GNI*), and the impact of the crisis on living standards:

  • Food consumption and the exclusion of domestic household production from national income;
  • Education and the cost-based approach to including public production in national income.

Food Consumption

Restaurants have been closed for dining in since March.  The CSO’s Monthly Services Index shows that the turnover value of services in Restaurants, Event Catering and Other Food Service Activities was over 50 per cent lower in April than in the same month last year.  The contribution to value added and national income from restaurants will be significantly lower this year.

However, this does not mean we are eating less or even consuming fewer food-related services.  The composition has changed.  The CSO’s Retail Sales Index shows that our retail purchases from Food Businesses were 17 per cent higher in April than in the same month last year.  The food we are not consuming in restaurants and other outlets has been replaced by food we are buying in shops.

In the national accounts, both the food and labour inputs are counted when measuring the value added of restaurants.  For food we buy in the shops the domestic labour input used to turn that food into a meal is omitted from national income, but it still contributes to our living standards.

There’s no doubt there’s more to restaurants than the food we eat and the cooking and cleaning services provided to us.  That is why we are willing to pay more for dining in.  But we are still eating the meal we would have had in the restaurant or cafeteria so someone is still doing the cooking and someone is still doing the cleaning.  It still adds to our living standards, it’s just that it has switched from market production to household production.

The drop in living standards implied by the fall in value added from restaurants in the national accounts won’t be as large as the figures suggest.  We have been forced to move to something that does not have its value added included in the national accounts (nor generate as much Value Added Tax for the government which is also counted as value added when measured at market prices.)

And, separately, the employees who would have been paid from that lost value added have had a large part of their income replaced with government transfers.

Public Education 

For market-provided services the value added is essentially the value of the output produced less than cost of intermediate consumption. 

The value of market output is estimated using the prices people for it.  After intermediate consumption has been subtracted from total revenue, value added is divided between labour through compensation of employees, government through taxes on products, and capital through gross operating surplus.  Net operating surplus remains after a deduction for the consumption of fixed capital (depreciation).  The additional value added that goes to users above the price paid (consumer surplus) is not measured. 

Still, value added is a useful concept and represents a large share of the living standards and welfare benefits of the goods and services we produce and consume in market settings.

This does not hold for publicly-produced services such as education.  These are paid for from general taxation.  We do not have prices and revenues to provide an estimate of the value people place on these services (nor how much they would be willing to buy).  Market prices might be absent but they do contribute to living standards.

The value added for public services in national accounts is essentially the sum of compensation of employees and depreciation, that is, it is the cost not the benefit that is included. 

The value added of education is simply put at the pay bill for teachers and the cost of maintained school buildings.  No benefit above that is included in national income aggregates.

Schools have been closed since the middle of March.  Just like restaurants there has been a switch to domestic production.  Yes, some online supports have been provided but the value of this is unquestionably lower (just as we are only willing to pay lower prices for takeaway meals).  The shift to home-schooling has had a huge impact on living standards.

However, the value added of publicly-provided education services will be largely unaffected.  The fact that the school children aren’t in school doesn’t matter for national accounts; all that matters is that teachers get paid.

Conclusion

The provisional Quarterly National Accounts for Q1 2020 show that constant price gross value added in Distribution, Transport, Hotels and Restaurants was down 10 per cent compared to the first quarter of 2020.  This reflects the forced closure of most of these services towards the end of the quarter.

On the other hand the gross value added in Public Admin, Education and Health was up four per cent compared to the same period a year ago.  This is despite the fact that schools were closed from the 12th of March.

This isn’t necessarily an argument to change the way national accounts are compiled.  Should household production be included in national income? Maybe.  Should the added value of public services be more than pay and depreciation costs? Maybe. For the time being we’ll be satisfied with an understanding of what the figures as currently compiled actually mean.

The drop in value added from restaurants doesn’t mean that we are not eating.  The stability in value added from education doesn’t mean that our kids are being taught.  National accounts are useful and the changes in the aggregates can be a useful proxy for changes in living standards. But not always.

Professor David O’Mahony, RIP

Professor David O’Mahony, former UCC Professor of Economics, passed away on March 10th.  He was Professor of Economics in UCC from 1964 to 1988.

A highly-respected scholar, his works include The Irish economy: an introductory description (1964), Ireland and the EEC: political, legal and economic aspects (1972) and The general theory of profit equilibrium: Keynes and the entrepreneur economy (1998) (with Connell Fanning). In addition, he authored several Economic Research Institute (now ESRI) papers, in particular on collective bargaining and industrial relations.     

Professor O’Mahony was widely held in great respect and affection by colleagues and students alike and will be sadly missed.

Funeral arrangements: https://rip.ie/death-notice/professor-david-o-mahony-sunday-s-well-cork/382183

Irish Economic Association Annual Conference 2019

Irish Economic Association Annual Conference 2019

https://iea2019.exordo.com

http://www.iea.ie/

The 33rd Annual Irish Economic Association Conference will be held in The River Lee Hotel, Western Road, Cork City on Thursday May 9th and Friday May 10th, 2019. Seamus Coffey (Department of Economics, University College Cork) is the local organiser.

The keynote speakers will be Dr Asli Demiguc-Kunt, Director of Research at the World Bank, and Prof. Valentina Bosetti, Professor of Economics at Bocconi and a member of the IPCC.

The Association invites submissions of papers to be considered for the conference programme.  Preference will be given to submissions that include a full paper.  Papers may be on any area in Economics, Finance and Econometrics.

The deadline for submissions is Tuesday 5th of February 2019 and submissions can be made through this site.

Latest Assessment Report from IFAC

The Irish Fiscal Advisory Council has published its latest Fiscal Assessment Report.  The report and some additional resources are available here.

Accompanying the report is a working paper that looks at how a counter-cyclical “rainy day fund” could be incorporated in the framework of the Stability and Growth Pack.  Last week, IFAC published its assessment of compliance with the Domestic Budgetary Rule in 2017 as well as an update of its Standstill Scenario which estimates of the cost of maintaining today’s level of public services and benefits in real terms over the medium term.

A bullet-point summary of the latest FAR:

  • A rapid cyclical recovery has taken place since at least 2014 and this is continuing at a strong pace.
  • Ireland’s debt burden is still among the highest in the OECD.
  • Negative shocks will inevitably occur in future years and there are clear downside risks over the medium term, namely those associated with Brexit, US trade policy and the international tax environment.
  • Improvements on the budgetary front have stalled since 2015 despite the strong cyclical recovery taking place – one that is reinforced by a number of favourable tailwinds.
  • Any unexpected increases in tax revenues or lower interest costs should not be used to fund budgetary measures.
  • The Council welcomes the Department’s publication of alternative estimates of the output gap.
  • The Medium Term Objective (MTO) of a structural deficit of no less than 0.5 per cent of GDP was reached in 2017.
  • The Council sees the fiscal rules as a minimum standard for sustainability and continues to recommend that the Government commit to adhering to the Expenditure Benchmark even after the MTO is achieved.

And on Budget 2019 in particular:

  • The Government should at least stick to existing budget plans for 2019 as there is no case for additional fiscal stimulus beyond existing plans as set out in the 2018 Stability Programme Update.
  • Estimates of the medium-term potential growth rate of the economy and expectations of economy-wide inflation for next year imply an upper limit for increasing the adjusted measure of government expenditure of 4.5%.
  • In nominal terms this translates into spending increases or tax cuts of up to €3½ billion (“gross fiscal space”) as the starting point for Budget 2019.
  • Previously announced measures – including sharp increases in public investment – mean that the Government’s scope for new initiatives in Budget 2019 will be limited.
  • If additional priorities are to be addressed, these should be funded by additional tax increases or through re-allocations of existing spending.
  • Improving the budget balance by more than planned would be desirable, especially given current favourable times, possible overheating in the near-term and visible downside risks over the medium term.

New publication from the CSO on productivity in Ireland

The CSO have a new publication, which it is intended to update annually, on productivity in Ireland.  It is available here.

The analysis assesses the contribution of labour and capital to growth in Ireland and splits the economy into an MNE-dominated sector and a domestic and other sector.  A breakdown using the standard NACE classifications is also provided.  The first publication covers the period from 2000 to 2016 but the analysis is undertaken for a number of sub-periods, most notably 2000 to 2014, which exclude the dramatic shifts we have seen since 2015.

Here is the summary but the entire publication is well worth a look:

This publication has presented new CSO results for productivity in the Irish economy since 2000. Some key aspects of this publication are set out below.

Irish labour productivity growth averaged 4.5 percent in the period to 2016, significantly for the period ending 2014 the equivalent growth rate is 3.4 percent. This compares with an EU average of 1.8 percent for the entire period to 2016. The contribution of the Foreign sector to labour productivity growth averaged 10.9 percent over the period to 2016 and averaged 6.2 percent to 2014. For the Domestic and Other sectors, the result to 2016 was 2.5 percent to 2016 and 2.4 percent to 2014. This clearly illustrates that the impact from the globalisation events of 2015 are concentrated in the Foreign sector as there is little change in the results for the Domestic and Other sector for the two periods.

Multi-factor productivity (MFP) has played a small part in explaining Ireland’s economic growth over the entire period 2000-2016. However, when the period 2000 -2014 is examined, i.e. excluding the effects of 2015, the picture for multi-factor productivity in the Irish economy improves and this is clearly illustrated in Figure 5.6 and 5.7. Growth in MFP was higher for the Foreign sector than the Domestic and Other sector up to 2014. However, the negative result for MFP in the Foreign sector in 2015 and in the overall economy over the full period is due to the impact of the globalisation events of 2015 on capital services where no corresponding change in labour input occurred. A major aspect of Ireland’s growth, and therefore its productivity story over the period, is the growth in capital.

Ireland’s capital stock per worker has increased from €150,000 to €378,000 per worker between 2000 and 2016, an increase of 152 percent. Capital stock per worker for the Foreign sector increased by an average annual growth rate of 6.9 percent to 2014. When the period is extended to 2016, the growth rate increases substantially to almost 32 percent. For the Domestic and Other sector, the growth in capital stock per worker is around 3.5 percent for both the periods to 2014 and for the entire period to 2016. The EU average annual growth in capital stocks per worker from 2000 to 2016 was 0.6 percent. The rate of increase in capital stocks in Ireland for both the Foreign sector and the Domestic and Other sector was higher than for any country in the EU for which data are available.

As this is the first productivity publication by CSO the results are considered experimental. There is considerable scope for extending the analysis presented in this publication to more detailed presentation by economic sector or to more detailed analysis of labour quality, i.e. gender, education, employment etc and their impacts on productivity. We look forward to a full engagement with our stakeholders to assist in setting priorities for future work in this area.