Contributor Post Created with Sketch. US Economy Might Be Growing Faster Than We Think

 

The economics team at Goldman Sachs has made another run at trying to determine whether official statistics are undermeasuring America’s rapidly evolving digital economy. The bank now believes even more strongly that “technological change is not fully reflected in the real output statistics.”

From a bottom-up perspective, there’s all that missing growth from free digital goods. From a top-down perspective, Goldman economists note that the “growth of domestically generated profits and incomes (GDI) is outpacing that of GDP, a departure from earlier decades” and that “US profits generated in tax havens totaled over $300bn in 2018, some of which represents unmeasured domestic production.”

And a bit more detail here (bold by me):

For free digital goods, we average across the three approaches explored above to form our baseline. Importantly though, in the case of Brynjolffson et al. we exclude all consumer surplus generated by search engines and email (to avoid misattribution); we also assume that on average only a third of US consumers derive the associated consumer welfare estimates from these activities, to avoid overstating the impact for the population as a whole. With respect to business capex in information technology, it is worth noting that the broad importance of ICT output in the economy continues to grow, despite the decline in business investment in hardware. Our estimated contribution from business ICT reflects the value-added share of the various high-tech industries, which show a fairly stable share for the computer and electronic products industry but a sharp increase for other technology industries.

In our central estimate, we estimate that the pace of annual real GDP growth is understated by around 1.0pp of GDP, up from 0.5pp in 2005 and 0.3pp in 1995. While the results contrast with Moulton’s finding that mismeasurement has actually declined—to 0.47pp today in PCE terms vs. 0.95pp in 1996)—the results are not directly comparable. Central issues such as healthcare quality, software quality, smartphone services and free digital goods measurement, and profit-shifting are not explicitly addressed in Moulton’s analysis.

Our results also suggest that nearly half of the slowdown in measured productivity growth since the financial crisis can be explained by measurement issues. We caution that the uncertainty around our estimates is large, particularly that pertaining to free digital goods and healthcare consumer inflation.

There are 7 comments.

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  1. Steve C. Member

    James Pethokoukis: We caution that the uncertainty around our estimates is large, particularly that pertaining to free digital goods and healthcare consumer inflation.

    In other words, it’s a William Goldman world. Nobody knows anything.

     

    • #1
    • July 15, 2019, at 4:12 PM PDT
    • 1 like
  2. David Foster Member
    David Foster Joined in the first year of Ricochet Ricochet Charter Member

    “the “growth of domestically generated profits and incomes (GDI) is outpacing that of GDP, a departure from earlier decades” and that “US profits generated in tax havens totaled over $300bn in 2018, some of which represents unmeasured domestic production.”

     

    How does this work, exactly?…production done in the US but with profits attributed to the tax have via skewed cost allocation?

    Anyone have any insights on this?

    • #2
    • July 15, 2019, at 4:24 PM PDT
    • Like
  3. Steve C. Member

    David Foster (View Comment):

    “the “growth of domestically generated profits and incomes (GDI) is outpacing that of GDP, a departure from earlier decades” and that “US profits generated in tax havens totaled over $300bn in 2018, some of which represents unmeasured domestic production.”

     

    How does this work, exactly?…production done in the US but with profits attributed to the tax have via skewed cost allocation?

    Anyone have any insights on this?

    Apple, among other companies, have used international subsidiaries in places like Ireland, as offshore tax havens. I’m not sure of the details because not only do I not play a lawyer on the internet, I don’t pretend to understand cost accounting.

    • #3
    • July 15, 2019, at 4:29 PM PDT
    • Like
  4. Valiuth Inactive
    Valiuth Joined in the first year of Ricochet Ricochet Charter Member

    David Foster (View Comment):

    “the “growth of domestically generated profits and incomes (GDI) is outpacing that of GDP, a departure from earlier decades” and that “US profits generated in tax havens totaled over $300bn in 2018, some of which represents unmeasured domestic production.”

     

    How does this work, exactly?…production done in the US but with profits attributed to the tax have via skewed cost allocation?

    Anyone have any insights on this?

    Isn’t that how the creative accounting of Apple, Google, and other companies works. The work is done in the US, but profits are technically earned over seas in tax shelters. This domestically the company reports a loss to the IRS for their business in the US and they can lower their tax rates. Meanwhile all their money is technically earned by their Ireland branch. Where they pay a smaller tax rate. Or something like this.

    • #4
    • July 15, 2019, at 4:31 PM PDT
    • Like
  5. Joseph Eagar Member
    Joseph Eagar Joined in the first year of Ricochet Ricochet Charter Member

    Oh come on. GDP data is generated by looking at an enormous amount of data, from production to wages to consumption. Moreover, if economic growth is higher than believed, why is the U.S. current account deficit only 2.8% of GDP? Even if you only look at the trade deficit, it’s still only 4%, which isn’t what you’d expect from a consumption-driven, overheating economy. It’s about what you’d expect for a normal business cycle peak.

    • #5
    • July 15, 2019, at 5:35 PM PDT
    • Like
  6. DonG (2+2=5. Say it!) Coolidge

    Great post. Measurement error in economics is usually ignored.

    • #6
    • July 15, 2019, at 10:30 PM PDT
    • 1 like
  7. JoelB Member

    I don’t really understand much of this besides the headline, but does this mean that the President could honestly tweet that we are doing even better than we thought and could have done better yet were it not for democrats’ high corporate taxes that have been causing companies to move their headquarters overseas?

    • #7
    • July 16, 2019, at 8:10 AM PDT
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