False economics: Why JP Morgan is wrong about iPhone 5
The iPhone 5 may not have a turbocharge effect on the US economy, as an analyst claims. It could, however, bring pure joy to Apple fanboys for whom the smartphone is a reward in itself.
To all the hype about the iPhone 5 launch, add one more: the hype of false economics.
JP Morgan analyst Michael Feroli claims that the new generation iPhones that Apple plans to unveil today could "potentially add" upto 0.50 percentage points to fourth-quarter annualised GDP growth in the US.
His argument, which he fleshes out in a note to clients (here) runs like this:
• Assume the iPhone 5 retails for $600 (before service plan costs and subdies bring them down).
• Deduct $200 per phone, being the likely imported cost of components.
• The remainder, $400 per iPhone 5 sold, would be the trade margin, which figures into the GDP.
• Assuming Apple sells 8 million iPhone 5's, that would boost the economy by $3.2 billion. That, he reckons, will translate into a 0.33 percentage point boost for annualised GDP growth in the fourth quarter.
• That number would be boosted further - to about 0.5 percentage points - if the government statisticians factor in the impact of hedonically adjusted constant quality price of phones (on the ground that the iPhone 5 would be superior to older models).
"This estimate seems fairly large, and for that reason should be treated sceptically," caveats Feroli. "However, we think the recent evidence is consistent with this projection."
There are, of course, a lot of assumptions there, which it would be impossible to validate at launch time - and perhaps even months later. The price, for one, and how many units will sell, for another.
But even assuming these to be right, the underlying economic logic seems flawed - for the reason that the 19th century economist Frederic Bastiat explained in his 'Broken Window fallacy' (more on that here).
That theory shows up the fallacy of the widely held assumption that even if a shop window is broken in a village, it helps boost the economy - by causing the shopkeeper to spend on fixing it. But, as Bastiat explained, this spending comes with an opportunity cost: the money might otherwise have been spent on some other economic activity.
"It is not seen," Bastiat wrote, "that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented."
In other words, the additional spending on the iPhone 5 in itself does not add to the GDP - it merely diverts money that would otherwise have been spent elsewhere.
What might have provided an economic boost, on the other hand, is if the iPhone enhanced productivity.
Nobel Prize-winning economist Paul Krugman similarly fisks JP Morgan's 'iPhone economics' theory too on the same grounds.
"The key point," he notes on his blog, "is that the optimism about the iPhone's effects has nothing (or at any rate not much) to do with the presumed quality of the phone, and the ways in which it might make us happier or more productive. Instead, the immediate gains would come from the way the new phone would get people to junk their old phones and replace them."
Krugman, the eternal Keynesian, then launches into his favourite spiel - that the money could instead have been invested in infrastructure, which would have employed labour and cash "that would otherwise sit idle".
There is one other factor to consider: Apple is already one of the most cash-rich companies on this planet, holding even more than the US government does . All that cash hoard is proving to be a headache for the company, which means that in the interest of parking it safely, it will get invested in low-yield avenues, like US Treasuries - and may not be invested in the economy.
In that sense, iPhone 5 may not have a turbocharge effect on the US economy in the way that the JP Morgan analyst claims. It could, however, bring pure joy to a few million Apple fanboys for whom conspicuous consumption is reward in itself. And you can't put a price on that.
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