12:02pm

Tue September 11, 2012
Planet Money

The iPhone 5 And The Economy: Don't Believe The Hype

Originally published on Wed September 12, 2012 12:13 pm

The iPhone 5 will give a nice boost to U.S. economic growth in the last three months of this year, according to a new note from JPMorgan.

Not surprisingly, lots of people are writing about this note. It's a prediction about the iPhone 5! And the economy!

But the prediction is based on a ridiculous assumption.

The JPMorgan note seems very mathy and precise. It starts with the full cost of the new phone, subtracts the value of the imports in each phone (imports are subtracted from economic growth numbers) and estimates the total number of phones likely to be sold in the last three months of the year.

Bottom line, according to the note: The new iPhone could add 0.33 percent to U.S. economic growth. That's actually a lot, when you consider that total economic growth is only about 2 percent.

But to arrive at that conclusion, JPMorgan assumes that every single dollar people spend on new iPhones would not otherwise have been spent on anything else during the last three months of the year.

Say I want an iPhone 5. And to pay for it, I'm going to cut back on other spending.

My wife and I won't get a babysitter one Saturday night. Instead of going out for a nice dinner and a movie, we'll have mac and cheese and watch cable. (Sorry, honey!) Instead of buying my dad a fancy Christmas present, I'll buy him a book. (Thanks for teaching me to love reading, Pop!)

My purchase of an iPhone 5 has contributed precisely zero to economic growth. I have simply decided to spend less on childcare, restaurant food, movies and Christmas presents (all that spending would have contributed to economic growth).

The JPMorgan note doesn't account for this at all. It assumes that no one is cutting back on anything in order to pay for a new iPhone.

There is a useful, if familiar, idea hidden in this report. It's what Keynes called the paradox of thrift. During an economic slump, Keynes argued, everybody starts spending less and saving more. This, perversely, keeps the economy mired in a slump. So, in the short run, the economy will grow more if people start spending more and saving less.

To the extent that people pay for their iPhones out of savings, it will in fact contribute to economic growth in the next few months. But to the extent that people pay for their iPhones by cutting back on other things — or simply buy an iPhone rather than another, comparable phone — it won't contribute to economic growth at all.

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