Why quality matters more than quantity
Andrew Miligan – Jackson Hole Economics
Over millennia wise men and women have remarked on the importance of quality to the good life. “It is the quality of our work which will please God and not the quantity” (Mahatma Ghandi), “It is the quality rather than the quantity that matters” (Seneca) or “The happiness of your life depends upon the quality of your thoughts” from Marcus Aurelius.
A long-standing problem facing economists is dealing with externalities, the benefits or costs from an economic activity, which affects other parties without being reflected in market prices. As an example, it reportedly takes 2,700 litres of water to make one T-shirt, enough for one person to drink for 900 days. Was the water priced correctly? Was the wastewater disposed properly?
We know that the Covid-19 pandemic is having a major impact on every aspect of the world economy. The OECD has estimated that the long-term economic cost could amount to $7 trillion, or around $900 for every person on the planet. Some factors of production are less efficient than before, and some have been permanently damaged. There is more talk about the threat from zombie companies, or of hysteresis—permanently elevated unemployment—plus the long-term damage to education and job skills that may affect labour markets for years to come.
The pressure on politicians to do something is readily apparent, for example in President Macron’s announcement of another €100 billion package to support the French economy, in the UK’s debate about how far to press the EU on state aid rules, and in the acrimonious run up to the US elections. The spending programme put forward by Joe Biden, for instance, has been estimated at $5.4 trillion by the Penn Wharton Budget Model. The goal for many governments will be to create as many jobs as possible by re-opening restaurants, easing travel restrictions and boosting overall private sector spending.
The danger, however, is that policy is guided too much by a focus on lifting Gross Domestic Product (GDP) with less attention paid to the factors of production, which underpin growth. An alternative approach is to solidify the foundations of the economy: financial, social, human, physical, and natural capital.
In terms of financial capital, global debt is at record levels relative to GDP, requiring historically unprecedented central bank easing to ensure the world does not tip into another financial crisis. Social capital is also under stress, evidenced by the lack of trust in government, private and civic institutions. If a vaccine appears, how many people will use it? Human capital warrants a separate essay, highlighting inequality of opportunity and the need for education and training reform. To take but one measure, the OECD has estimated that the disruption to schooling caused by the pandemic will cause a skill loss that could lead to a 1.5% drop in global economic output for the rest of this century. There were already threats to public health, for example the alarming rise in mental illness accompanying rapid economic change, gig economies and automation, even before the arrival of the pandemic. Meanwhile, the stock market is trying to place a correct value on physical capital. Global equity markets are busy lifting the value of narrower forms of invested capital, brands and market barriers to entry, exemplified by the triumph of ‘growth’ versus ‘value’ stocks.
And then there is the final form of capital, our planet. While it may be easy to get drawn into short-term, apocalyptic conclusions as parts of the US West Coast and the Brazilian Amazon basin, quite literally, go up in smoke, the despair is only heightened by climate denials issued by the Trump or Bolsanaro administrations, reflecting deep-seated fears that combatting climate change may come at the cost of living standards.
Environmental data are flashing red flags. According to the Rainforest Action Network, the world’s forests are vanishing at a rate of 1 acre every two seconds. Climate Action 100 has written to the 161 largest polluting companies calling on them to move rapidly towards net zero emissions. The World Wildlife Fund’s Living Planet Report warned that animal populations have declined by more than two-thirds in the last 50 years, heralding a potential sixth mass extinction event. Habitat loss and climate change are both to blame, with roughly half of all habitable land devoted to agriculture, increasingly industrial monocultures. According to the Ecological Threat Register, more than 1 billion people could be forced to migrate over the next three decades by a combination of water scarcity, increased exposure to natural disasters, and rapid population growth.
Economists can and must approach these issues. Over time, sensible capital management, in all its forms, will enhance human welfare more than a narrow focus on near-term GDP or employment outcomes. Socially responsible investment (SRI) can be a powerful engine to change incentives. If companies were required to publish SRI achievement goals, transparent ratings would promote capital allocation to the best among them, while investors could include such analysis into their strategic asset allocation processes.
Incentives are a fundamental aspect of the modern economy. Subsidies need to be restructured. At present, governments around the world spend $500 billion a year on supporting environmentally harmful agriculture, mining, and fossil fuels. The IMF has suggested a tax of $75 per ton of carbon dioxide emissions that could raise much-needed government revenues and reduce harmful pollutants, killing two birds with one stone. Economics and big data can also inform scenario analysis, helping to better formulate policies in response to low-probability, high-impact risks such as pandemics. Resilience must become the new watch word!
In summary, shifting human behaviours to more sustainable outcomes can be informed by the targets we set for ourselves. A focus on boosting incomes and jobs, while understandable, promotes outcomes that may not take account of their true costs. A balance sheet approach, accompanied by better pricing of all the factors of production, offers a truer path toward a healthier planet and shared prosperity. Quality, not quantity, is the promise for today’s and future generations.
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