Macroeconomics on the Ground

When people get philosophical about economics, they grumble about GDP. “How can it even measure societal wellbeing?” GDP goes up in wartime and after natural disasters. War requires arms production, and properties need repair following a disaster. But no one’s saying that either of the two leaves society better off.

The trouble with encapsulating a complex world into a single number is that it’s just not possible. GDP does not measure a society’s wellbeing. We have to stop imagining that GDP is anything more than it actually is – a measure of a country’s production. If we trace it back to its roots, GDP started off as ‘national income.’ The name indicates clearly what it tries to measure. In fact, its inventor warned against using GDP as a measure of welfare.

But the desire to measure happiness and wellbeing is understandable. In this regard, metrics like Genuine Progress Indicator, Gross National Happiness, and the Human Development Index have been put forward. Ultimately, however, no single measure is perfect. A simple number can’t do justice to a complex world.

What if you received $1000 every month, no questions asked? Would you spend it on booze, quit your job, enroll in night classes? This is one of the central debates around universal basic income (UBI).

If governments provide citizens a fixed amount regularly, will people put it to good use? Will society benefit, or will we have more lazy slouches relying on government welfare? Research has shown that the stereotypical welfare bum is a myth – at least in relation to UBI. In 1970, Canadians receiving UBI lessened their work hours, but to focus on childcare or pursue education, which, in turn, would benefit the economy in the long term.

Research also suggests UBI holds up better compared to unemployment welfare. The latter’s stringent criteria and convoluted rules tend to confine recipients in a poverty trap. UBI skirts around these issues.

A massive program like UBI will create ripples throughout the economy – perhaps, inflation? Well, UBI simply shifts money to those who need it; it doesn't create new money. But the funds need to come from somewhere, and here we find UBI’s most contentious point. Who pays for it?

Cutting back workers’ hours is not a novel concept. The industrial revolution reduced the workweek from 6 days to 5. But a 4-day workweek – without a corresponding salary cut – brings significant changes.

Among the biggest selling points of a 4-day workweek is its impact on workers. An extra day off to attend to personal priorities or to just rest can improve quality of life. From an employer’s standpoint, improved worker wellbeing produces fewer sick days, lower incidences of burnout, and better employee retention.

Studies show that productivity either improves or remains unharmed with a 4-day workweek. This demonstrates a common phenomenon in economics – diminishing returns. Working more hours produces lower-quality output. Just ask any healthcare professional who’s worked back-to-back shifts.

That's not to say the 4-day workweek is a brilliant idea that should’ve been implemented yesterday. Some industries will love it; others will find the adjustment process trickier. It requires more staff – and, thus, employee training – to cover for the extra day off. Systems need to be established to maintain continuity of service, especially in healthcare facilities, hospitality businesses, and the like. Until more research bears out its benefits, the debates will carry on.

Cryptocurrencies have become a polarizing topic. On the one hand, you have ‘crypto bros’ preaching its gospel, and, on the other, the haters who dismiss it as a waste of resources. So, what is it, really?

Cryptocurrencies are digital currencies that are traded semi-anonymously using a secure technology called blockchain. With blockchain, information, once recorded, is accessible to everyone within the network and is completely unmodifiable. Crypto’s most striking feature is that it is not regulated by any central bank or authority. Instead, it uses a decentralized system or ledger – the blockchain – to keep tabs on all transactions.

Does it have any inherent value? No, but neither does the paper currency we use today. The value of cryptocurrency is determined by market forces. The available supply of a cryptocurrency increases through a process called ‘mining,’ but it's a costly and highly competitive process. In this sense, supply is fairly limited.

But, due to crypto’s newness and novelty, demand fluctuates, and so its value is extremely volatile. Some cryptocurrencies have addressed this issue by creating a ‘stablecoin,’ which burns and creates supply as necessary to peg themselves to a non-digital currency, usually the US dollar.

One of the biggest questions for cryptocurrency is why. Why invest in it? Once your initial stake in crypto has grown, can you use it as a medium of exchange? Unfortunately, crypto is easy to buy into, but cashing out – using whatever coin you have to pay for something – isn’t so easy.

The first issue is volatility. Crypto’s value fluctuates. On any given day, how much your crypto wallet can buy you varies. Some days it’s a brand-new car, some days a week’s groceries, and on bad days, maybe nothing. You have to constantly time purchases to cash out at the most opportune moment.

Which brings us to our next challenge. Who accepts cryptocurrencies as payment? Some companies have experimented with accepting some cryptocurrencies, mostly bitcoin, in fits and starts – Tesla, Microsoft, and Starbucks. But several have since discontinued support, and, as such, crypto hasn’t truly reached mainstream usage yet worldwide. That said, El Salvador and the Central African Republic have begun to recognize bitcoin as legal tender.

Most times though, cashing out on crypto means literally that – converting your coins back into conventional currency. When stacked against conventional currencies, cryptocurrencies largely currently fail on 2 counts – as a medium of exchange and as a store of value.

Those who rode the crypto wave will eventually find it crashing down. It’s no different to when the housing bubble burst in 2007, or when Wall Street crashed in 1929. Markets will find a way to correct themselves. When the public get overly excited about a seemingly good investment, they want to cash in. Optimism begets more optimism. But now that the crypto market has crashed, pundits warn of a crypto winter. Should we brace for the worst?

There’s good news and there’s bad news. On the one hand, experts don’t expect the crash to make any big waves beyond the crypto market. With the US housing bubble, big banks and investment firms bought into the housing craze. This time, they stayed a safe distance away from cryptocurrencies.

The bad news is that a large number of casual traders will be personally affected. Individuals hurt from the huge losses may find themselves less optimistic, and this may affect how they spend and invest outside of cryptocurrency.

What lessons from macroeconomics can we take into our daily lives? First, ignore the hype. Some of the worst recessions the world has experienced came about because people invested in overvalued assets. Don’t follow the wisdom of the crowd, especially if they're not thinking clearly. And most especially, don’t gamble away what you can’t afford to lose.

Second, recessions are a question of when, not if. The business cycle moves at its own pace, but it will reach its next phase eventually. To this end, always be prepared. Build up an emergency fund. If you're lucky enough, a retirement fund too, now that you’ve encountered the life cycle theory of savings.

Thirdly, think about inflation. You can’t see it, but it's there. Safeguard your savings from inflation by investing them in assets that generate a decent rate of return.

And lastly, stay calm. Inflation and bank runs are both self-fulfilling prophecies. If you're part of the panicking horde, you're part of the problem.