Thursday 04 June 2020

How much more in your pocket? Down with purchasing power predictions!

There they are again: the spending power predictions. Don’t you believe them, says economist Mathijs Bouman.

Crack open the beer, we’re having a party. Next year spending power is up by 1.5%. For a while it looked as if the meter would get stuck at 1.3% but in an ultimate pre-budget day effort the government cranked it up by means of a number of measures.

What these measures are we do not know – I’m guessing it will be something to do with a slight increase of the tax break for the elderly and some extra allowances for people on minimum incomes – but we do know they mean an extra 0.2 % to spend.

This is important for people on benefits and pensioners in particular, because the gap between these groups and those in work is in danger of getting larger. The economic upturn means a healthy rise for the latter, and the government undoubtedly had to tug the national duvet quite rigorously to smooth the creases of injustice.

But it worked: according to the calculations of the CPB everyone will be tucked in warm and snug. Almost everyone will be better off and both pensioners and people on benefits will share in the bounty generated by a reviving economy.

Moaning economists

So is everybody happy? No. A handful of economists are pointing and waving frantically but cannot prevent an oblivious government from walking into the trap that is the spending power projection.

Instead of a proper fiscal and economic policy to consolidate prosperity it is once again about niggly little percentage points for some group or other. The cake is divided fairly but no one is worried about the size of the cake.

The result of the Dutch fixation on these projections is sub-optimal policy which is turning the population into a permanently surly mob. What we should do is agree is to do without a single purchasing power projection for an entire cabinet period. My prediction is that policy will improve and people will be less dissatisfied.

Artificial story

Spending power projections do not tell the real story. They tell of an artificial The Netherlands with 10,000 virtual Dutch people who all live in the CPB’s central computer. The predictions about the economy and the policies hammered out by the politicians are applied to these imaginary people. So if the CPB says ‘purchasing power will go down’ it is talking about the purchasing power of these non-existent digital households.

It gets worse: it is actually only talking about one of these households. The CPB is reporting the ‘median’ purchasing power, i.e. the percentage of the middle households if you put all 10,000 virtual household in a line from low to high.

MPs will spend a whole day debating the merits of the budget based on this single, virtual household. I could think of more useful ways of spending that time. Of course, the CPB is open about the limitations of its calculations but in politics such nuances are ignored completely.

Real spending power

There will be no mention during the debates of the difference between the statistical purchasing power calculated by the CPB and the dynamic purchasing power which is what people are experiencing in real life.

The CPB takes it as given that workers will stay in work and that the unemployed stay unemployed. Only changes in wages, prices, benefits, and government policy are thrown into the calculation mix.

It is estimated that next year some 125,000 people will find a job. But the accompanying rise in income is nowhere to be found in the static purchasing power projections of the CPB. Neither are promotions (and the rise in wage that implies) which increase as the economy improves.

The national statistics office CBS includes these data in their historical purchasing power figures. Their chart shows that the real (‘dynamic’) purchasing power almost always pans out better than the static predictions of the CPB. Looking back at the static CPB figures we are led to believe that we are always getting less. Way to keep the population happy.

Making purchasing power projections is silly. They don’t tell the truth, are unreliable and are keeping people ignorant and angry. Let’s pack it in.

This article appeared earlier in the Financieele Dagblad

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