Why the economy is bigger than you think
In what follows I will call upon youthful memories of when we used a mixture of washing-up liquid, water, and a plastic circle to aimlessly and harmlessly blow bubbles into the air – by Savvas Savouri
I raise this childish image because a series of bubbles is uncannily like how even a mature adult economy looks. Not so much that at any moment parts of it risk bursting – rather because one can imagine bubbles representing an economy’s ‘white’, ‘grey’ and ‘black’ elements.
For even generally ultra-law-abiding nations are made up of this trinity of parts, changing shape and size in different ways and not collectively accurately measurable.GDP, or whichever other measure you prefer to capture the expanse of an economy, can never truly encompass the whole; cannot, that is, see into the shadows.
By way of another illustration, consider the biggest peacetime non-recessionary measurement hits ever experienced by US GDP. On 17 January 1920, a sharp downward shock hit the US economy. It came with the implementation of the 18th amendment imposing the prohibition of booze. This sent a sizeable part of the hitherto white economy into the unmeasurable shadows.
Then, on 5 December 1933, the 21st amendment was ratified, repelling the 18th. All of a sudden, the booze business was back under the light of the measured white economy.
During the close to 14 years the Volstead Act held sway, there was considerable but unmeasurable grey – doctors prescribing medicinal whisky for a considerable fee – and black bootlegging activity and employment going on to subvert it. In more modern times, mobs and cartels have created sizeable but unmeasured black markets dealing in all types of drugs and other illegal activities.
“During periods of elevated inflation and economic uncertainty – even more than normal – typically law-abiding folk turn to the grey economy”
Let me turn to that grey part of all economies present all the time – a part whose size is never fixed, but very much dynamic. During periods of elevated inflation and economic uncertainty – even more than normal – typically law-abiding folk turn to the grey economy.
As to the question of whether this move is statistically significant, my answer is that it will almost certainly come within the range of whatever decline we have already recorded and will come to record in UK real GDP.
Because our measurement focus is entirely on the seemingly diminishing bubble representing the recession-ridden white part of the UK economy, we miss how the one jostling next to it, in grey, has itself grown.
This is not to claim there has been an epidemic of venal behaviour or widespread loss of public spiritedness, merely to point out that the lengths and depths of all real recessions are exaggerated because, ceteris paribus, the grey economy always grows counter-cyclically to the white. The reality is that, invariably during a downturn, a part of the white economy, seemingly lost, in fact simply shifts into the grey shadows.
This brings me to an entirely new part of the grey economy: grey in the sense it has yet to be properly captured by the official data providing flash estimates of the UK’s GDP. In its efforts to produce the earliest possible gauge of quarter-by-quarter GDP, the ONS now casts.
It prints a moving three-month average, doing so not least by using retail sales. The problem with this methodology is simple: it misses out so much of our altered spending patterns.
We are, for instance, consuming online in ways which ONS coverage has yet to advance to. Specifically, while those delivering prepared food are ubiquitous on our streets, this form of consumption is notably absent from retail sales figures, which play a large part in UK GDP now casting.
And because we are ever more having restaurant quality food delivered to us, some of the retail volume of our grocery buying is missing from GDP.
“The crypto space is so poorly lit by taxation and regulation it must be considered immersed in the dark recesses of the grey/black economy”
Let us now turn to the grey/black bubbles made-up of alt-currencies: cryptos, NFTs, et al. Those who have made gains trading in the likes of bitcoin have done so unconcerned by capital gains or income tax.
Equally, those who have made transactions using alt-currencies have done so with no regard to VAT, duties or for that matter any trifling tax liabilities.
The crypto space is so poorly lit by taxation and regulation it must be considered immersed in the dark recesses of the grey/black economy. But change is coming, not because alt-currencies will be legitimatised by being integrated into the white economy – rather, the introduction of the digital pound can only be successfully achieved if it coincides with the banning of cryptos.
Alt-currencies will become verboten in the digital sterling world; their bubble will truly burst. The ONS and HMRC will use the pound’s digitalisation to properly measure all aspects of the white economy, as well as capturing the hitherto grey cash-in-hand activity bubble – which turns white upon digitalisation. Those desperate to know the real size of the UK economy – the true nature of its growth and inflation – should be welcoming of alt-currencies being banned and sterling being digitalised.
Let me now turn to the herd of large tax-evading beasts, the base eroding profit shifters. It would be somewhat ironic if this profit predatory herd of digital data harvesters were to be properly tax-trapped by the same device.
After all, digitalising the pound would make it a near impossibility to evade point-of-sales tax that would entangle these beasts. We could, in short, do away with VAT with all its failings; do away too with business rates and their glaring shortcomings.
To conclude, we must use our grey matter to accept that the growing grey parts of the UK economy are going unmeasured, but one hopes, not for that much longer. Time, then, to close with a song whose lyrics play so well into the grey/black economic activity long hidden from ONS view.
“I’m forever blowing bubbles,
Pretty bubbles in the air,
They fly so high, nearly reach the sky,
Then like my dreams they fade and die. Fortune’s always hiding,
I’ve looked everywhere.
I’m forever blowing bubbles,