Scott Sumner on digital deflation

He makes many good points, but this is my favorite:

From 1995 to 2004, productivity and real GDP rose at an unusually rapid rate.  The IT cheerleaders told us that this fast productivity growth was the long delayed fruits of the IT revolution.  Now we have very slow growth, and the digiterati tell us it’s also caused by the IT revolution, which is generating lots of stuff that doesn’t get picked up in the output data, because it’s free.  While I’m impressed by an explanation that’s as flexible as a circus contortionist, I’d prefer something that isn’t consistent with any possible state of the universe.  I’m no Popperian, but I like my theories to be at least a little bit falsifiable.

In other words, we know what a boom looks like, and this ain’t it.  I would, however, assent to and indeed stress two propositions:

1. Infovores are indeed much better off from the recent digital revolution.  And since most journalists and tech leaders are infovores (many academics too), they extrapolate too readily from themselves.

2. The “rate of productivity growth in consumption” is more mis-measured than is the rate of productivity growth in production.  Facebook really is fun for a lot of people, and unpriced on the consumption side; I sometimes say that I am a happiness optimist and a revenue pessimist.  But the production side of the economy matters in its own right, and indeed that is why they call it productivity.  Debts and bills must be paid, and jobs must be created at wages people will take, whether or not you’re having fun with Angry Birds or cursing at your (least) favorite blogger.  In fact we just had a recession where the jobless probably had more fun than ever before, due mostly to the internet.  It was still an event of significance.

So don’t aggregate consumption gains (e.g., learning to enjoy your Brussels sprouts more) with productivity gains, proudly parading a single number and claiming that everything is fine.  It is better, and more accurate, to say: “We’ve now learned to really love those Brussels sprouts, good for us, but we still may be in deep doo-doo.”


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