The Past Two Decades: The Coming of the Information Economy Looks to Have Doubled Our True Rate of Economic Growth

Over at Bloomberg View, smart young whippersnapper Noah Smith weighs in on the relationship between measured GDP at factor cost and societal well-being–including consumer surplus–in the information age:

Noah Smith: The Internet’s Hidden Wealth: “The stagnationists… claim to have the numbers on their side…

…People spend a relatively small fraction of their income on online services…. For products such as cable Internet and Samsung Galaxy smartphones, a small rise in price results in a big drop in demand. That’s very different from, say, the air, which you would keep breathing in just about the same amount no matter how expensive it got. If people are willing to abandon products just to save a few bucks, the hidden benefit of those products just can’t be that high. But… when we’re asking about the consumer surplus created by the Internet, we should look at the price elasticity of the entire Internet. How much would people collectively pay to avoid being utterly, totally cut off?… It’s obvious that we spend a lot of time online….

Austan Goolsbee and Peter Klenow… 2006… consumer surplus from Internet… in… time and money… 2 percent of… income. But… 2006, when fewer people… online… less time online… before the explosive growth of social media… the widespread adoption of smartphones…. streaming became big…. [Perhaps] our economy hasn’t stagnated nearly as much in the past decade as the headline numbers seem to suggest.

The conventional economic growth accounting tells us that consumption expenditures on telecommunications, information processing, and audiovisual entertainment are 2% and net investment in information processing equipment and software 3% of output. That means that a price fall of 10%/year in that category of high-tech goods contributes 0.2%+0.3%=0.5%/year to economic growth in standards of living.

But information-age services are also time- and attention-intensive. Suppose the coming of the broadband internet since 1995 has doubled the utility that humans get out of the 700 hours a year those of us in the North Atlantic typically spend interacting with our audio-visual technologies. If we are willing to guess that each hour’s activities contribute equally, doubling value for an amount of time equal to 0.35 of time spent working over twenty years boosts societal well-being at an extra rate of 1.75%/year.

This, however, requires that we be or become the type of people whose lives are truly enriched by our kindles and our tablets and our computers and our smartphones–that we value Netflix and Youtube and Google’s window into the online library of humanity and Facebook and the rest as massively superior to the ways we previously learned, gossiped, listened, and watched. But we are such people, or are rapidly becoming such people. You can argue over whether there is ultimate value in such a concentration of effort in more intensively engaging in activities that are basically snooping on and gossiping about our imaginary (and real) friends. But we, at least, like to do this. And information-age technologies enable us to do it very well.

So figure on not 1.75%/year but rather 3.5%/year as the true rate of increase of the American economy’s productivity over the past two decades…

June 16, 2015

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