The value of the internet and double counting

by on July 14, 2011 at 7:01 am in Economics | Permalink

Continuing the exchange over the value of the internet, David Henderson writes (and do read the whole thing):

So I can imagine doubling Goolsbee’s and Klenow’s 2% to 4% to reflect the broader version of CS [consumer surplus] that users get directly and then adding another 4% to reflect the lower cost of getting goods and services delivered to us even if we never use the Internet directly. That get’s it to 8%. To me that’s “huge.”

This is useful for helping sort out where David and I disagree.  As I see it, the latter factor — the lower prices for goods and services — is already reflected in measured real wage gains, or smaller real wage losses than would otherwise hold, as the case may be.  We’re back down to four percent.

In the post, David mentions both the “lower price” gains (which he stresses in the TGS review) from the “lower time cost of shopping” gains.  The two are not quite the same.  What about the latter?  The lower time cost of shopping is already counted in WTP measures of the value of the internet — you’ll pay more for the internet if it saves you more time — and to some extent in gdp statistics and other real income measures.  How does the gdp effect work?  Let’s say it used to take half an hour to buy a book, now it takes ten seconds.  People will buy more books and that gain is already measured.  The rest of the saved half hour goes into other methods of production and shopping, which also show up in national income.  Some of the saved half hour shows up as “pure leisure” (i.e., sitting on one’s bum, doing nothing) and that one part of the saved time doesn’t show up in gdp statistics though it still does show up in WTP estimates (which again clock in below four percent).

Time use studies also count these “time saved shopping” gains, but in a different way.  Goolsbee and Klenow measure the income elasticity of leisure uses of the internet and find it is negative.  That means high value of time users find the internet a time sink, on net, rather than a time saver.  In any case the magnitude of this value already lies behind their estimate.

Goolsbee and Klenow estimate two percent for consumer surplus, not “2% to 4%,” and they worry they are overestimating the gains because of assumptions they make about substitutability.  The other studies I cited are below four percent, unless it’s for computer use more generally.  I’m the one who kicks it up to four percent, largely because of Facebook, which de facto postdates some of the papers (though not the FCC study which still gives modest sums), and also because of unmeasured workplace consumption usage.  But that’s probably as high as we should go, once we adjust for what is already counted elsewhere.

Addendum: The Billion Price Index matches the CPI pretty closely, so there is not much gain from invoking the “CPI doesn’t measure internet bargains” argument, though there may still be a small effect there.  And Matt Yglesias offers interesting comment.

Alex F July 14, 2011 at 9:27 am

Goolsbee and Klenow estimate two percent for consumer surplus, not “2% to 4%,”

I think you are misreading this — I believe David Henderson is saying that we double 2% to get up to 4%, then we add another 4% to get to 8%.

Ryan July 14, 2011 at 9:49 am

Help me out here MR folks — in the context of consumer surplus (CS), is it always calculated based on end-user-households? The average-*person*? Can a consumer not be a large-global company (assuming such a company relies on TCP/IP quite a bit)? And, if so, does the question — “How much would a company pay above market value to ensure there operations aren’t interrupted, even for single business day?” — ever impart into the equation?

I would do my own reading but, I simply don’t have time — but, of course, luckily I have the internet, this blog, and your comments. ah-hem… example of consumer surplus?

Morgan Warstler July 14, 2011 at 9:53 am

The absence of gate keepers has delivered far more than 8%. Tyler, repent!! From networked radio antennas to Pirate Bay to bitcoin… the partial function of the Internet is to destroy and temper the power of the entrenched.

I’ll say it again, the Internet accrues credit for ALL things that come after it, delivered sooner and faster. The most important inventions shift human history to the left on the timeline. The automobile sped up human history, the Internet sped it up 100x more.

Where it took a year to deliver a wrench and then a day (365:1) it now takes 1 second (86,400:1).

granite26 July 14, 2011 at 9:53 am

What about A: the increased existance of products due to internet collaboration, and B: the increased availabiliy of uniquely suited products due to the long tail? A 10 dollar download from a band I never would have heard of vs a 20 cd at the mall by megaband X.

Turkey Vulture July 14, 2011 at 10:07 am

Is there any research on whether the internet, and specifically sites like Amazon, Craigslist, and Ebay, have led to greater re-circulation and re-use of previously used goods? If it has, it seems like this would increase consumer welfare while actually leading to lower GDP.

Tom July 14, 2011 at 11:26 am

Excellent point. I have made much use of both.

Steve S July 14, 2011 at 10:29 am

“Goolsbee and Klenow measure the income elasticity of leisure uses of the internet and find it is negative.”

1) Does this take into account that high income individuals may have less time for leisurely internet use since they tend to work more hours? If I have 3 hours at home every night before I go to bed I’ll spend less time on the internet than if I have 6 hours.

2) Whereas regular-income people may use the internet to plan leisure (i.e. setup flights, get a tee-time, read the news), I could see a lot of high-income individuals calling a conceirge or getting “the help” to plan those kinds of things, which in my eyes doesn’t count as not using the internet just because you’re not physically doing it yourself. Maybe that is my Hollywood-stylized view of high income individuals, but it has to hold some truth, at least at the very high end of the scale.

mark July 14, 2011 at 11:04 am

This is starting to sound like a definitional dispute. It seems to me that the Henderson perspective is using “consumer surplus” to mean “benefits” and Tyler is using “consumer surplus” to mean “otherwise unquantified and unmonetized hedonic benefits”. Each in a way is correct but they are different. Tyler correctly points out that much of Henderson’s “consumer surplus” is already captured in economic data because it is embedded in the price of transactions in that data. Henderson is correct that the aggregate value of the transactions is large. So a lot of the debate comes down to which answer are looking for – how much consumer surplus, not otherwise accounted for, should be added to GDP, or how much is the internet doing for consumers relative to what they are paying for it. I think the debate has generally focused on the former because it is usually in the context of “things are better than the data” or “inequality is less than the data suggest because we have to add consumer surplus to the data”. But neither is wrong in their line of thinking.

mark July 14, 2011 at 11:14 am

Carrying on,
the two problems with Tyler’s perspective are 1) it’s impossible to prove what number should be assigned to what are inherently unquantified benefits. WTP is not at all convincing even if commonly used. Self -reporting is not reliable in data collection and hypothetical self-reporting is even less so.
2) even at 2%- 4%, that means GDP is higher by that amount and that is meaningful in a $16T economy – 320 – 640 billion? That’s a very large sector of the economy.

Mal July 14, 2011 at 11:25 am

When I was a kid…

- My dad bought the NYT everyday. Now I read it online – savings: $2/day

- We owned the Encyclopedia Britannica. Now I can look up Wikipedia – savings: $700 for the set, plus no storage, and I don’t have to pack it up every time I move!

- To watch the Civil War by Ken Burns, I would either have to wait for PBS to run a pledge drive, thus paying by sitting through all those pleas for money, or shell out to buy the whole set so I could watch it whenever I wanted to, now there is Bit Torrent – savings: $35/dvds

- To gain daily perspective of an economist, one would have to read Krugman’s columns in the Times, now I have marginalrevolution – savings: PRICELESS!

N.B.: Porn – reduces crime, saves lives.

Slocum July 14, 2011 at 12:19 pm

With respect to WTP — is the argument that people would generally be willing to give up all Internet access in exchange for only a 2% pay raise? Seriously?

FYI July 14, 2011 at 1:02 pm

The main problem I see here is:

Let’s say GDP was 100 ‘before the internet’ (how do you define when the internet started to have impact I don’t know). Now let’s say that 10 years after, GDP is 150. How exactly do we know the impact of the internet in that growth? Using past growth rates or even specific rates for certain industries seem bogus. The question really is, how much growth would we have had without the internet? I don’t know if answering that is even possible.

Rahul July 14, 2011 at 2:02 pm

Maybe we need a short moratorium on internet-utility discussions? Seems to me that we’ve beaten this to death.

mark July 14, 2011 at 5:06 pm

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