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Created: 2000-05-16
Last Modified: 2000-05-16
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Economic Growth

J. Bradford DeLong
delong@econ.berkeley.edu
http://www.j-bradford-delong.net/

May 2000

Another early draft of a possible column for Fortune


We know that economic growth is fast these days. But how fast?

The Commerce Department's Bureau of Economic Analysis [BEA] estimates that adjusted for inflation U.S. real GDP grew at a rate of 5.7% per year between the second and third quarters of 1999, at a rate of 7.3% per year between the third and fourth quarters of 1999, and at a rate of 5.4% per year between the fourth quarter of 1999 and the first quarter of 2000. Some $2,424.3 billion of goods and services were produced in the United States in the first quarter of 2000--at that pace annual GDP in 2000 would be $9.7 trillion, but we are confident that it will be higher because growth will continue. Measured real GDP per worker in 2000 will be close to 25% higher than it was back in 1989.

But there are lots of reasons to think that actual economic growth is faster--perhaps much faster--than what the BEA reports.

Twelve years ago my wife and I acquired a copy of the Encyclopedia Britannica. Back then the Britannica sold for about $1500, an amount of money that then seemed alarmingly and absurdly large, but we have been very happy with it: for us, it would have been worth getting at three or four times its then-market price. Today--if you have a computer and are already paying $19.99 a month to your Internet Service Provider--the whole Encyclopedia Britannica is free. Simply web-surf your way to http://www.britannica.com/. And the online version of the Britannica is far superior to the paper version. Pieces of information that I knew were in there somewhere but could never find in the paper version appear in seconds in the web version. Searches are rapid and complete, and no longer finding enough flat space to open five different volumes.

The creation of the free Britannica online has made everyone today who wants to equip their house with the best encyclopedia around some $1500 richer than my wife and I were a little more than a decade ago. They get the same capabilities--better capabilities--than we did for free, and have $1500 to spend on other things. The gain in wealth is not as great for the average household. But even if easy in-home access to an encyclopedia were worth only $100 to an average household, it is still the case that there are sixty million households in America: the creation of free web-based encyclopedias would boost America's total real wealth by $6 billion.

And here is the kicker: The BEA's GDP estimates do not count any of this increase in our national wealth. They take no notice of the quantum leap in productivity that has made online encyclopedias possible.

Why not? Because a year's GDP is the sum of the values of all U.S.-made final goods and services *sold* in the course of that year. Nominal GDP is just the total of all the raw values: prices charged times quantities sold. Real GDP is nominal GDP corrected for changes over time in the prices charged for the same goods. But no one charges for the knowledge of www.britannica.com: it is given away. Back when leather-bound printed-on-paper encyclopedias were sold, the BEA would track the money flow associated with the purchase and include it in GDP. But now there is no money flow to track.

If online encyclopedias were unique, then the problems caused for the BEA by this shift in form from expensive leather-bound to free electron-delivered would be a mere curiosity. But online encyclopedias are not unique. They are being joined by the library of the past works of humanity, by the newspaper and magazine industries, and by a large chunk of that component of retail services which informed consumers about products. They will be joined by much if not nearly all of the recorded entertainment industry (as even the rock band Metallica comes to realize that free distribution via Napster of the songs from one's past CD is the best way to build an audience willing to buy one's next CD). They will be joined by a large chunk of the education industry: the three-month online discussion on eh.net of David Landes's _Wealth and Poverty of Nations_ was better than any seminar on the book could have been, or than any class on the book I could have taught.

What does the BEA do when changing technology creates a new type of good or service that provides the important features of an old type, but provides them for free or for nearly free? One possibility would be to link the goods together, and to calculate real GDP as if every household that accessed britannica.com more than, say, four times a month should be counted as having bought the enclyclopedia and thus as having received $1500 1989-basis dollars' worth of consumer value. But the BEA does not do this. It cannot do this. So it ignores a large chunk of the true economic value created by the invention of new goods and new kinds of goods.

How big a chunk is missed? I do not know. Michael Boskin's CPI Commission guessed that perhaps one percentage point per year of true economic growth was missed. Yale economist William Nordhaus adds together estimates of the value of greater life expectancy and of technical change in sectors that undergo true productivity earthquakes and gets larger numbers. Others point out that what you conclude depends on where you sit: if you spend such a large chunk of your income on necessary food, clothing, and shelter that you cannot afford an internet connection, then you only benefit from high tech to the extent that it lowers the prices of the necessaries you buy.

One response is to say that this undercounting of economic growth is nothing new. When cable TV came in, allowing each TV to receive 50 rather than 5 channels, the BEA took no notice of the fact that a TV-plus-cable-subscription purchase now gave the consumer ten times as much in the way of video-channel-access services as a TV purchase had before. I downloaded a copy of the _Odyssey_ from the internet. A decade ago I would have purchased a copy of the _Odyssey_ for $12--about 30 minutes' worth of the average American's economic productivity. Ten centuries ago I would have had to pay for two months of a skilled, literate monk's time, and 27 centuries ago I would have had to keep an epic poet on my household staff had I wanted a copy of the _Odyssey_ at hand. It is always the case, the response goes, that improvements in information access technology are greatly cheapening our access to "information goods." And it is always the case that standard measures of economic growth miss a large chunk of the true value added.

I think that this response has a good deal of force--but its point is that our standard estimates of economic growth in the past understate the truth, not that our current measurements of economic growth are accurate. And it misses the fact that a larger part of our leisure and work time and of our leisure and business expenditure today than in the past is concentrated in information-intensive activities where the quality and power of our tools for organization, data processing, and data communications--our tools for thought--make a big difference.

And there are other responses: If we are so rich, why are we cutting down the tropical rainforest? And if we are so rich, why aren't we happier? The answer to the first seems to be that just because we are highly productive does not guarantee that we will use our productive potential wisely. And the answer to the second? It is the case that today's upper middle class is rich enough that, from the standpoint of previous centuries, all reasonable and many unreasonable demands for goods and services can be satisfied. But is is also the case that, in the words of Scottish novelist Iain M. Banks, "people still make their own unhappiness, as they always do." Material wealth is not the same thing as utopia.


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I was just reading you're article in the latest edition of FORTUNE. It reminded me a little bit of another article from a few months ago (or maybe more). Similar concepts, but the author talked a little more about measuring the quality of life with 20 or so basic ideas (sorry for such a generic word, but I don't remember what the auther called these "things"). They were things like transportation, communication and so on. Anyway, the idea was that by using these 20 basic concepts you could make a decent comparison throughout time -- rather than measuring the cost of outputs. I recall one of the things that was compared was light. I can't remember what one unit of light was, but the author showed how much cheaper light had become over the years -- from burning whale oil so many centuries ago to the anoying overabundance of "free" street lights we have available to us today. Anyway, something about your Oddysey comment reminded me of the article -- maybe you wrote it...

Sorry for the babble. I don't mean to be filling you're email inbox up with junk from all the readers who decide to respond to your article -- I'm sure even if it's a small percent of readers, a small percent of a lot of people is still probably a relatively large number. The funny thing is that my writing this right now is really quite an interesting demonstration of the value technology has added to our lives. I read you're article on line. At the bottom I notice an email address. Immediately I decide it would be so easy to respond and I do so. In the past that wouldn't have happened. Now take a look at the result. Technology makes it so easy for all these readers to respond that you end up inundated with inane emails of little value. On top of that, I'm doing this all from work, taking away time that could have otherwise been productive (I don't quite believe that one though -- technology may provide more options for workers who want to slack off, but if this option weren't there, I would have found another one...). I'm just saying I think that the value technology adds is sometimes a paradox -- the potential is there, but what do we do with it. I'm also overstating the idea that my response is worthless since it has the potential to spark an idea as you read it (or even as I write it). It could also end up creating another connection in the social network -- something which I think is often undermeasured as a valuable resource.

Anyway, I didn't want to dispute the point of your article. I agree whole heartedly. I did want to make a comment on your example of the encyclopedia though. I'm 24 right now. When I was young, my parents never doled out $1,500 for the latest edition of the encyclopedia britanica -- although I think I had them pretty close to doing it. Inspite of that I always had my own free access to the encyclopedia -- just a mile away at the local library. And that didn't cost $240 a year (obviously the internet access gives people more value than just the ability to look at britanica's website though).

I guess I should also recognize that the encyclopedias at the library weren't exactly free since part of my parents tax dollars went to pay for them, but they were always available. It's also hard to compare the value of the physical version to the internet version. True, the internet version has connections to information outside of the encyclopedia which is very nice, but unless you have a high speed connection and a computer which is always on, it takes longer to get the information off the web than it would to walk over to the bookshelf and look it up (although with the improvements in technology, that may not be true for much longer). Although my parents didn't buy a new set of encyclopedias when I was young, we did have an old set in the house (from the 60's maybe). I was always annoyed that it was a couple decades behind in terms of technology, but I loved reading it. The whole set was in my bedroom and my room was usually set up with it right next to my bed. Every night when I went to sleep, the answers to (not quite) all of my questions were right there next to me. If I had any trouble getting to sleep, I could solve all the problems that were disturbing me by turning the light on and looking them up. I can't imagine getting the same value out of a computer and the internet -- most of that has to do with my love of paper though.

Sorry, I've gone back to blabbering. I just wanted to point out something that you'd probably already known. People seem to forget about libraries. It makes me wonder what will happen to the over the next 10 or 20 years...

Have fun economizing, jeff

Contributed by Jeff Hansen (JKHANSEN@hewitt.com) on June 19, 2000.


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