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We’re Richer Than We Think We Are

About every five years, the Bureau of Economic Analysis re-evaluates its metrics for measuring various aspects of the economy as data and tools change and improve. This upcoming Wednesday, the NY Times reports, Bureau officials will be undertaking one such re-evaluation. And the revisions this time around are a pretty big deal:

[The Bureau] plans to give a greater economic weighting to the creation of many types of intellectual property — from books to movies to music to biotech drugs. The economy won’t change overnight, but the numbers will. Going all the way back to 1929, the G.D.P. will look bigger.

We are still using blue model industrial age statistics to measure a post-blue economy. Increasingly, the world described by our statistical models (which are in turn used as a basis for planning by government agencies and business and used as a proxy for reality by commentators and pundits) does not match the actual world we live in. In general, the real world is significantly better than the statistical one—and offers more ground for optimism about American prospects in the 21st century. The economy is bigger and more dynamic than the conventional statistical picture, and America’s global strength is significantly understated by measures that concentrate on the old economy that America is leaving behind rather than the new one that we are busily creating. The changes being discussed here are just one step down an important road: we need to get much better at measuring and assessing the state of our increasingly information-based economy.

The central observation in the piece is certainly true: GDP significantly understates the value of the intellectual property formation that is a key to the knowledge economy now taking shape. This is not likely to be the last revision. Productivity in services is hard to measure but increasingly important, and getting this right will matter more over time.

Three smaller related points come to mind:

1. Getting better figures globally will have an impact on the way we look at different countries. Arab countries likely to fall farther behind as knowledge production becomes factored more effectively into GDP, for example.

2. These changes could help people understand better how the shift to a knowledge economy will help solve environmental problems even as economic growth expands. Including these intangible but real assets in GDP will reduce the energy intensity of the economy—the amount of energy needed to produce a given unit of economic output. Also, if the share of these assets in GDP grows over time, we will see an accelerating shift toward more energy efficiency even as GDP rises. These are all very good things.

3. As we develop better measures of GDP we will also need to think more intelligently about the value of consumption and the nature of income. That most routine interactions with Departments of Motor Vehicles in many states, for example, can be done at home over the internet rather than going down to the office and standing in line, makes people much better off—more free time, less aggravation. But it would be hard to capture that improvement with the current set of economic statistics. Because daily life has been getting better in all kinds of small ways, we’ve all been receiving an invisible social dividend.

[Chart photo courtesy of Shutterstock.]

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  • cubanbob

    Yes, we are getting better at cooking the books. If I sell you a famous bridge in Brooklyn that too will boost the GDP figures.

    • Bruce

      The unemployment statistics are fraudulent by about 50%. If CPI was measured the same way as during the Carter years, inflation would be 8%. Of course, government would be even more broke because of COLAs, so this fraud makes sense. Anyone think that the GDP numbers will be legitimate? Looks like a lot of subjectivity involved in evaluating the value of intellectual property.

      • cubanbob

        Speaking of COLAs just look at purchasing power expressed through units of gold. That’s all one needs to know about the failure of the Fed in preserving the value of the currency.

  • lukelea

    Keep in mind that GDP only measures the value of things we pay for with money. As a guide to our true standard of living it can be highly misleading (hat tip Simon Kuznets). For example, here’s an old joke in economics: when you marry your housekeeper the countries gross domenstic product goes down. The shift from the 1950’s “pre-Blue” model of a house in the suburbs and a full-time Mom who stays at home with the kids to our modern “service economy” masks the real state of our affairs. Revaluing entertainment — how do you compare the real value of high-prices blockbuster movies and video games to free sandlot baseball games or a neighborhood sock hop in the local fire hall? — is just one more example of the same economic fallacy.

    • Jim__L

      “Do you really think The World of Warcraft makes us richer than we used to be?”

      Depends on your measure of “richer”… which would be a trite observation, if it weren’t the point of this quick take.

      If you compare the players’ satisfaction ($15/month spent vs. hours per month of entertainment, say) with other entertainment sources such as cable TV or film, WoW is an example of how computers give us the tools to make our household budget expenses much, much cheaper. It could be considered the entertainment-sector equivalent of VM’s favorite Android app that brings your medical bills down.

      Things get more interesting when you consider the amount of real money in-game virtual items (and cash) will sell for on the open market. If you multiply the average market price of these items (and cash) with the amount “produced” in-game, you get some truly staggering numbers for GDP for these games — comparable to real-world countries. At one point (if I recall correctly) the Iceland-based EVE Online had a significantly higher GDP than Iceland itself. This may still be true today.

      A decade or so ago, people I know were making a living acquiring hard-to-get items and in-game cash in popular games and then selling them on eBay. (Not too long after, they started complaining about how cheap-labor Chinese sweatshops put them out of business.)

      Further, virtual nation-building can be more effective than real nation-building. Consider that for a number of years after 2003, the market price of WoW Platinum Pieces exceeded that of the Iraqi dinar.

      On the other hand, you could look at WoW as a complete waste of time that could have been otherwise productively spent — say, on an asteroid mining startup, taking your son to Scout camp, fixing a bathroom faucet, or posting to Via Meadia. 🙂

      The problem here is the one that plagues (or in their view, excites) economists who end up calculating all value in units like “utils”. This is all impossible to calibrate. It will take a lot of intelligent people a lot of time, and generally get nowhere.

      Might as well spend that time playing World of Warcraft. 😉

      • Nick Bidler

        For further evidence, skip to the part about EVE Online.

        for the lazy: a major exchange took place between two mercenary armies, and the one that got bushwhacked set a new record for ships destroyed, including (no joke) a cruiser that was worth 11,000 USD.

    • bfancher

      Does being able to search for and access the world’s information from a desktop PC or a mobile phone make us richer? To ask the question is to answer it. How do GDP statistics measure the value of say, Google (not the value of the company, the aggregate value to individuals of having access to the search engine) or Wikipedia?

  • Bart Hall

    The issue gets serious when “balance of trade” figures are involved because everything is logged according to certain codes with set “official” values. It used to be that when MS Windows was exported it was counted as “plastic” and weighed, then valued at 1.5 cents per pound.

    We’re not all that more sophisticated these days. If you go to the Schedule B Export Code search engine for “computer operating system software” it coughs up Code 85.23 (recording media) and lists total exports for 2010 as about $434 million.

    In 2010 Microsoft’s Windows 7 o/s sold over 400 million *units* (a great many exported) and they sure didn’t sell them at a buck or two each. Given the periodic political importance of the “balance of trade” issue, working from such obviously un-representative numbers is quite inexcusable and clearly represents the degree to which government and its bureaucracy remain stuck far behind what’s actually happening.

  • jthomason

    “GDP significantly understates the value of the intellectual property formation that is a key to the knowledge economy now taking shape”

    But my WAG is that that is more than offset by the fact that GDP is significantly overstated by counting government spending the same as other spending – it is not. Count government spending at 50 cents on the dollar (or less), and you’ll get a much more accurate picture.

    That would also stop Obama and his … like … from asininely claiming that the key to ‘jump starting’ the economy is yet more government spending.

  • douginsd

    The big problem with valuing IP is that multinationals export ownership or master licenses to subsidiaries in low tax jurisdictions without charging a fair arms-length transfer price for sale or royalties for the IP. Thus, it’s hard to value these assets, and our Balance of Payments and Tax revenue are affected.

    If they actually want to develop the IP in low-tax jurisdictions, fine, but that’s not what usually happens.

    • RobertArvanitis


      Uh, no. There is economic value reporting. And then there is taxable income.
      The former seeks to approximate, however poorly, the true value and hence the signal to investment and other efforts.

      The latter is a mere game of theft, played by the arbitrary rules of those who would amerce us for their own political purposes.

      Please do not conflate the two.

  • M. Report

    Most cannot admit to themselves how close
    we are to a world economic collapse and just
    how great and long lasting the damage to our consumer oriented service economy will be
    when a triggering event detonates Detroit and
    the rest of the Blue State economic time-bombs.

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