Are we undermeasuring productivity gains from the internet?, part II

From my new paper with Ben Southwood on whether the rate of progress in science is diminishing:

Similarly, the tech sector of the American economy still isn’t as big as many people think. The productivity gap has meant that measured GDP is about fifteen percent lower than it would have been under earlier rates of productivity growth. But if you look say about the tech sector in 2004, it is only about 7.7 percent of GDP (since the productivity slowdown is ongoing, picking a more recent and larger number is not actually appropriate here). A mismeasurement of that tech sector just doesn’t seem nearly large enough to fill in for the productivity gap. You might argue in response that “today the whole economy is incorporating tech,” but that doesn’t seem to work either. For one thing, recent tech incorporations typically involve goods and services that are counted in GDP. Furthermore, there is a problem of timing, namely that the U.S. productivity slowdown dates back to 1973, and that is perhaps the single biggest problem for trying to attribute this gap mainly to under-measured innovations in the tech sector.

Other research looks at “worst case” scenarios from the mismeasurement of welfare adjustments in consumer price deflators and finds a similar result: a significant effect that nonetheless does not reverse the judgement that innovation has been slowing. 

The most general point of relevance here is simply that price deflator bias has been with productivity statistics since the beginning, and if anything the ability of those numbers to adjust for quality improvements may have increased with time. For instance, the research papers do not find that the mismeasurement has risen in the relevant period. You might think the introduction of the internet is still undervalued in measured GDP, but arguably the introduction of penicillin earlier in the 20th century was undervalued further yet. The market prices for those doses of penicillin probably did not reflect the value of the very large number of lives saved. So when we are comparing whether rates of progress have slowed down over time, and if we wish to salvage the performance of more recent times, we still need an argument that quality mismeasurement has increased over time. So far that case has not been made, and if you believe that the general science of statistics has made some advances, the opposite is more likely to be true, namely that mismeasurement biases are narrowing to some extent. 

You will find citations and footnotes in the original.  Here is my first post on whether the productivity gains from the internet are understated.

Comments

'Similarly, the tech sector of the American economy still isn’t as big as many people think.'

This is true. It is likely, that just as with subway cost disease, most Americans are unaware how insignificant the U.S. is in industrial robotics, semiconductor fabrication, high speed rail, advanced electrical grid technologies, though the U.S. as represented by Boeing is at least playing catch up with the sort of automation that is is routine on Airbus passenger liners.

Basically, the U.S. is nowhere the tech powerhouse it was back in the 1980s.

"Basically, the U.S. is nowhere the tech powerhouse it was back in the 1980s."

The biggest component of modern tech is software and the US is the leading software powerhouse. Furthermore, the US is not insignificant in industrial robotics or semiconductor fabrication. We probably are a bit player in high speed rail. Advanced electrical grids are a pretty niche area, but it's likely GE is still a major supplier, though I'm not sure how much of that production is based in the US. Suffice to say the US is a tech powerhouse.

Venn diagram Overlap: USA & HSR

A: The Null Set

Conceited much??

Last, you invoke a specialised area of technology about which you know nothing, in order that you can conclude that the USA is a 'tech powerhouse'.

If wishes were horses, beggars would ride.

It's not a bad thing for the US if other countries develop comparative advantages in certain sectors. In the long run, both parties benefit.

AI will likely the African continent's advantage because in the long run those who know animals prosper better.

What do you mean? Can you elaborate?

He is referring to on (going) campaign in the infirmary.

and that's exactly the case here. I know we can only compare what is now to what has happened and the future is just predictions... but it seems as though this "slowdown" or lack of development is a byproduct of how our economy currently is. Unemployment is down, overall people do have jobs and are spending money. This is obvious information so my point is that we are happy and bored. The push for tech advances, when looking at catalysts that pushed it in the past, are not there. So we get more fancy iterations of iPhones and version 2, 3, 4 of tech that consumers already have. Not many pioneers out there at the moment trying to do something for the "greater good" of the economy.

Please respond with something of substance. Tear me apart or agree and build me up. Either way, a response helps!

There's also 0 incentive to innovate anything new. People are enjoying the status quo and are more concerned with the fastest news and connection to information. Innovation means change, and today's economic and social climates do not bode well for change as it disrupts people's current situations/routines. Thus, companies reinvent the same wheel over and over again because people buy it and there's little to no risk in innovating something new.

"So we get more fancy iterations of iPhones and version 2, 3, 4 of tech that consumers already have. "

The iPhone is 11 years old. The advancements over that time are phenomenal. We went from clunky calling devices to a personal digital assistant with the worlds knowledge at our fingertips in a generation.

"Not many pioneers out there at the moment trying to do something for the "greater good" of the economy."

It's always bizarre to see these comments. People live in a bubble and don't engage the facts.

Worldwide extreme poverty has decreased from half (45%) of the population in 1980 to under 10% today. Over a period when the world population went up by 70%.

https://www.worldvision.org/sponsorship-news-stories/global-poverty-facts

"This is obvious information so my point is that we are happy and bored."

Exactly. You are reacting from an emotional point of view and not a logical point of view.

The last 10 minutes reading this blog has really messed with my productivity, so I'll say yeah.

Women both working for high pay in tech and then taking care of the kids, house cleaning, laundry, etc, increasing the productivity of her husband who is paid more for doing less is under measured in GDP.

The rise of the dual high income professional couple dates from about 1973....

"The rise of the dual high income professional couple dates from about 1973...."

More like from 1983.

Cowen's preceding blog post and this one are the same. The tech sector is to the US economy what new track housing is to a local real estate market: both absorb all of the oxygen. In many ways, the tech sector, or those who control it, are like the wealthy industrialists of another era: lacking investment options that promise a high rate of return, they resort to investment in vanity projects. For the industrialists, it was mansions and public facilities (concert halls, libraries, etc.) that bear their name; for the tech billionaires, it is mansions and moon shots, the latter both figuratively (autonomous cars) and literally (spaceships to Mars, eternal life).

Every city believes it is the next Silicon Valley, and they will do just about anything to lure the boy wonders and the capital that follows them to their fair city. Yet, this blog post informs us that the promise is much greater than the actual return. Or as Cowen's friend Peter Thiel puts it: “We wanted flying cars, instead we got 140 characters.” Indeed, software's ability to change reality being limited, tech has focused more and more on virtual reality.

How do tech millionaires turn into tech billionares? They liquify their assets. It's been going on at companies in Palo Alto since 1999.

There are many xenophobic tendencies in capitalism; the idea is when currency becomes manipulated the liquidation becomes unreasonable, therefore, it must be ligated by popular opinion.

I said something fairly similar above. I like the direction of your point on virtual reality as this is probably the way of our future as consumers. Imagine instead of shopping in a physical walmart you put on a VR headset and go shopping in virtual amazon. You can see and experience everything about the item you plan on purchasing except for the actual physical experience. Wild.
I just wonder how our economy will hold up in the future when physical retail stores are entirely obsolete and our towns are only full of restaurants, gas stations (or charge stations) and schools (and that's a hard maybe depending on VR as well).

"and that's exactly the case here. I know we can only compare what is now to what has happened and the future is just predictions... but it seems as though this "slowdown" or lack of development is a byproduct of how our economy currently is. Unemployment is down, overall people do have jobs and are spending money. This is obvious information so my point is that we are happy and bored. The push for tech advances, when looking at catalysts that pushed it in the past, are not there. So we get more fancy iterations of iPhones and version 2, 3, 4 of tech that consumers already have. Not many pioneers out there at the moment trying to do something for the "greater good" of the economy.

Please respond with something of substance. Tear me apart or agree and build me up. Either way, a response helps!"

In the end, internet has the economic impact of the xerox machine.

In the end, the sum of all human activity is a wasteful dance until the next Ice Age.

What in god's holy name are you blathering about?!?

https://youtu.be/2-WPlvZguZ4

I'm only blathering about the ubiquity of measurement problems now that Holy Science insists upon leading us haltingly and hesitantly into a world both poorly measured by classical physics and not yet accurately described by quantum physics.

Holy Science is at fault and Holy Science is to blame for NOT having learned over the past century how to reconcile classical physics with quantum physics: measurement problems will only persist and will likely continue to proliferate as long as macro- and micro-level physics resist conciliation.

I have decided to accept famous cartoonist Garry Trudeau in my life. The man is a prophet. https://www.washingtonpost.com/doonesbury/strip/archive/1999/12/06

I have decided not like that

I can agree with much of this, while at the same time feel that it is trying (repeatedly) to put a square peg into a round hole. If "economic growth" does not include all the benefits of penicillin, nor all the positive spillovers of YouTube, then "economic growth" is not a measure of human progress.

No surprise though, we should already know that.

The best defense of "economic growth as progress" is that it is associated with more good things than bad. Not that it measures or captures all benefits or harms.

So how do you know when growth is really working as progress? I'm afraid you can't solve it in economics alone. It needs more sociology, and a broader understanding of what makes for happy societies.

This^^

While GDP may measure service, I think what hurts this economic measure the most is that it can't measure the quality of service. The internet provides people an opportunity to have a service at their door within five minutes. With services such as Uber, Lyft, GrubHub, and many others it's amazing how much production the internet has led too. The impact of these services is immeasurable because the services can come be of good quality one day and bad quality the next. People will take a ride from an Uber driver with a five-star rating rather than one with a two-star rating. The internet has provided us with a rating system for the quality of these online services and GDP fails to measure that.

We can do many different things on the internet now and all of that is without anyone's help. When we don't necessarily pay a middle-man for certain things, GDP goes down. While overall productivity may be going up, GDP doesn't follow suit in that case. There's many more examples of this but those are two that came to mind. When it comes to the internet, a lot of the time, productivity goes up while GDP goes down.

GDP accounts for the things that you said. It counts transactions like Uber services.

While it may account for GDP, it doesn’t necessarily account for the gain in productivity that a person may gain from these services. For instance, the convenience of an uber ride. Not only that but the internet essentially eliminates a middle-man, so the GDP would go down because one less person is making money.

Would you agree with me statements?

I would agree with your statement, sort of. GDP may not know this person is becoming more popular with their 5 star ratings. But the evidence will still exist as they will be getting a higher return from Uber as they are getting more customers. I also would encourage you to watch Black Mirrors episode called "Nosedive" on Netflix, if you have not already, that essentially covers your exact instance of how GDP cuts the middle man out. The setting is an entire culture where everyone can rate each other on everything they do and say (from a job well done in the service industry to being polite in a store in passing.)
Now your point on GDP going down because the middle man is cut out... Think of it this way. If I would spend 15 dollars to get a ride - 10 going to the driver who shows up and 5 to the middle man that made sure they arrived. It still doesn't necessarily lower GDP because the likelihood of me not spending that 5 dollars for the middle man somewhere else is very low. So, even though I'm not implementing cash into that industry I may be using that cash towards a different one. Therefor GDP does not lower.

The above comments is more correct. Further, the idea that because one person is making less money due to no "middle-man" and this affecting GDP is not necessarily correct. Theoretically, you would spend more as a consumer when you do not have to pay more for a services or a middle man service to get to the final good/product/service. Money will be spent regardless if it's through a service or not, internet or not. Cutting a middle man in or out doesn't really make a difference on anything other than time, which is not quantified in a GDP calculation.

I was wrong with the middle-man comment and you are correct about that. The money is still being circulated whether or not there is a middle-man.

I think the dual income process has shifted modern living into the realm where the idea of a women's income matching a man's is actually looked forward to in today's economy. Women are placed in less labor-like jobs in more comfortable companies where their innovation for change is higher and the impact to the country is higher as well. This helps the GDP as well as a future outlooks on the same topic. Feel free to disagree.

As a response to these two productivity posts how do you measure lost productivity from the internet usage.

i work at a multinational firm with around over 10k employees and several thousand additional contractors and roughly 50% of our corporate bandwidth is Facebook and YouTube. That has held very close to constant in terms of percentage across every firm I've worked at over the last decade.

I would say whatever the internet giveth in one sector it probably is balanced out by the distraction factor and corresponding lost productivity in other places.

I always wonder since productivity would be some form of GDP produced per hours worked, but I sincerely believe we are grossly over estimating hours worked for exactly the reasons you say. We all put in 8 hour days but maybe only work for 4-6 of those.

When I was a kid and worked as a retail cashier, all my downtime was spent cleaning up and organizing. Now I see kids on phones (whether or not this is allowed, it IS happening) passing the time...

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