A real-time revolution will revolutionize the practice of macroeconomics
DOES EVERYONE really understand what’s going on in the global economy? The pandemic has left many observers distraught. Few predicted $ 80 worth of oil, let alone container ship fleets waiting outside California and Chinese ports. As covid-19 collapses in 2020, forecasters have overestimated how high unemployment would be by the end of the year. Today, prices are rising faster than expected and no one knows if inflation and wages will skyrocket. Despite all their equations and theories, economists often grope in the dark, with too little information to choose the policies that would maximize jobs and growth.
Yet, as we report this week, the era of perplexity is beginning to give way to greater enlightenment. The world is on the verge of a real-time revolution in the economy, as the quality and timeliness of information is transformed. Big companies from Amazon to Netflix are already using snapshot data to monitor grocery deliveries and how many people are stuck in “Squid Game.” The pandemic has led governments and central banks to experiment, from monitoring restaurant reservations to tracking card payments. The results are still rudimentary, but as digital devices, sensors and fast payments become ubiquitous, the ability to observe the economy accurately and quickly will improve. This leaves open the promise of better decision-making in the public sector, as well as the temptation for governments to get involved.
The desire for better economic data is not new. America GNP the estimates date back to 1934 and initially came with a lag of 13 months. In the 1950s, a young Alan Greenspan monitored freight car traffic to arrive at the first estimates of steel production. Ever since Walmart pioneered supply chain management in the 1980s, private sector bosses have viewed timely data as a source of competitive advantage. But the public sector has been slow to reform how it works. The official numbers that economists follow – think about GDP or employment – come with week or month lags and are often overhauled dramatically. Productivity takes years to accurately calculate. It is only a slight exaggeration to say that central banks are stealing blind.
Erroneous and late data can lead to policy errors that cost millions of jobs and billions of dollars in lost production. The financial crisis would have been much less damaging if the Federal Reserve had cut interest rates to near zero in December 2007, when America entered a recession, rather than December 2008, when economists finally got it. seen in the numbers. Uneven data on a large informal economy and rotten banks have made it harder for Indian policymakers to end their country’s lost decade of low growth. The European Central Bank wrongly hiked interest rates in 2011 amid temporary inflation, pushing the eurozone back into recession. The Bank of England may be on the verge of making a similar mistake today.
The pandemic has, however, become a catalyst for change. With no time to wait for official investigations to reveal the effects of the virus or blockages, governments and central banks have been experimenting, tracking cell phones, contactless payments, and real-time use of aircraft engines. Instead of locking themselves into their studies for years writing the next “General Theory,” today’s star economists, like Raj Chetty at Harvard University, run well-endowed labs that analyze the numbers. Companies such as JPMorgan Chase have opened treasure chests of data on bank balances and credit card bills, helping to reveal whether people are spending or accumulating money.
These trends will intensify as technology permeates the economy. More spending travels online and transactions are processed faster. Real-time payments rose 41% in 2020, according to McKinsey, a consulting firm (India recorded 25.6 billion such transactions). More and more machines and objects are fitted with sensors, including individual shipping containers that could make sense of blockages in the supply chain. Govcoins, or central bank digital currencies (CBDCs), which China is already piloting and more than 50 other countries are considering, could soon provide a gold mine of real-time detail on how the economy works.
Timely data would reduce the risk of policy runaway – it would be easier to judge, for example, whether a downturn in activity turned into a meltdown. And the levers that governments can pull will improve as well. Central bankers estimate that it takes 18 months or more for a change in interest rates to take full effect. But Hong Kong is trying cash distributions in digital wallets that expire if not spent quickly. CBDCs could allow interest rates to turn deeply negative. Good data during crises could allow precise targeting of aid; imagine loans only for companies with strong balance sheets but a temporary liquidity problem. Instead of wasted universal social benefits paid through Social Security bureaucracies, the poor could get an instant income supplement if they lost their jobs, poured into digital wallets without any paperwork.
The real-time revolution promises to make economic decisions more precise, transparent and rules-based. But it also carries dangers. New metrics can be misinterpreted: Is a global recession starting or is Uber simply losing market share? They are not as representative or free of bias as the careful surveys of statistical agencies. Large companies could accumulate data, giving them an unfair advantage. Private companies like Facebook, which launched a digital wallet this week, may one day have better insight into consumer spending than the Fed.
The greatest danger is pride. With a panopticon of the economy, it will be tempting for politicians and officials to imagine that they can see far into the future, or shape society according to their preferences and favor particular groups. This is the dream of the Chinese Communist Party, which seeks to engage in some form of digital central planning.
In fact, no amount of data can reliably predict the future. Incredibly complex and dynamic economies do not rely on Big Brother but on the spontaneous behavior of millions of independent businesses and consumers. Instant economy is not about clairvoyance or omniscience. Instead, its promise is prosaic but transformative: better, more timely, and more rational decision-making. ■
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This article appeared in the Leaders section of the print edition under the title “Instant economics”