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It would be easier for America’s Two Percent Economy to become a Three Percent Economy if it were, you know, already a Three Percent Economy. And maybe that’s the case (not even including any possible recent fiscal stimulus-driven acceleration). A new Goldman Sachs report revisits the issue of whether government statisticians are mismeasuring productivity growth and thus overall economic growth.
Perhaps the more accurate term is “under-measuring.” Here’s the issue: Productivity growth has slumped since the mid-1990s through mid-2000s productivity boom, with the weakness beginning before the Great Recession and Global Financial Crisis. As GS notes, “At 1.3% year-over-year in Q1, the current pace [of productivity growth] remains well below the 20-year average of 2.0% and only moderately above the ¾% post-crisis trend.” And again, faster productivity growth is critical given how demographics are weighing on economic growth.
The good news is that there is some reason to be optimistic about a productivity rebound. Moreover, maybe things are better that the statistics suggest, as I have written previously (such as here, here, and here, for instance). A big challenge is measuring the economic value associated with new products, especially free digital goods and services. One recent study looks at how much compensation consumers would require to give up Google and Facebook. Losing access to search, email, and maps suggests consumers value them at nearly $30,000 annually. Goldman: “We note that applying these estimates to the number of US households would suggest a combined value of $3.5 trillion of annual consumption! This would represent an eye-popping 0.7pp contribution to annual economic growth if applied over the past 25 years, and in our view, the truth is probably somewhere in between.”
In the report, GS tries to get at this under-measurement issue by analyzing the secondary market for iPhones, noting that prices fall sharply when a new model is released. The brief version: Using eBay-listed unused phones that are still functional on today’s cellular networks, the bank’s economics team compared the prices of iPhones sold in 2018 with their original prices. It found “the annualized price changes of the various models average -14% and range from -6% to -23%. This compares to telephone hardware CPI inflation of -7% since 2010.”
What’s more, the GS economists also “believe that a sizeable share of nominal smartphone consumption is misclassified in the national accounts . . . as either an intermediate input (which would be omitted in the GDP and PCE calculations) or as telecom services revenues (which would also understate consumption, because quality-adjusted prices are falling more rapidly for telecom hardware than for telecom services). . . . Taken together, we believe the combined ‘missing growth’ from smartphones is on the order of 0.1-0.2pp for annual real consumption growth (and as much as 0.15pp per year on a GDP basis).”
The bottom, bottom line here is that given the 68% consumption share of GDP, and the GS view that business investment is also understated by as much as 0.3 ppt annually, “we arrive at a combined mismeasurement of US GDP growth of between ⅔pp and ¾pp per year, up from around ¼pp two decades ago. While all of these numbers are quite uncertain, this analysis and the recent developments in the literature increase our conviction that the current pace of productivity growth is meaningfully higher than it appears.” It is also worth noting that GS not only thinks there is a significant gap, it thinks it has gotten worse over time — another contentious issue in the economics world.
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