Evan Soltas
May 25, 2015

Is Growth Understated?

Martin Feldstein has a nice op-ed in The Wall Street Journal arguing that the Bureau of Economic Analysis is understating GDP growth because of difficulties in adjusting for quality improvements and new products. It goes well with recent technical reports from Goldman Sachs and the Fed's Board of Governors. And read Paul Krugman for skepticism on whether technological progress is a big deal.

Here is a closely-related claim: Free access to Internet utilities like Google and Facebook means that market-based consumption growth understates growth in total consumption and therefore GDP growth understates gains in social welfare.

The way we should be thinking about this claim is "household production." My ability to use Google and Facebook doesn't require additional spending, just additional time. Spending time on the Internet rather than buying the newspaper, therefore, is functionally similar to making a sandwich at home from cold cuts in the fridge rather than buying a ready-made one at the deli.

Consider, then, the idea that these free Internet utilities are becoming more important, more powerful, more valuable, or whatever. That's identical to an improvement in my sandwich-making skills. And we would think that, as I become a better sandwich-maker, I will substitute market goods for home production by reducing my consumption of deli sandwiches. In particular, I'll cut back until the next deli sandwich is worth as much to me as the next homemade one.

The implication is that, if the marginal value of time on the Internet is actually rising due to Google, Facebook, and similar utilities, we should be seeing substitution away from the relevant alternative uses of time.

Do we? Yes, from Business Insider:

Consumers are substituting digital media, much of it free, for media sources they pay for, like TV and print. Maybe, then, we should also take the omission of free goods seriously, too, when we consider the divergence of GDP from a fuller, hypothetical measure of social welfare.