The value of the internet and double counting

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.


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