Is the US economy doing better than we think? That is the upbeat thesis Goldman Sachs put forward in May, arguing that official statistics are mismeasuring productivity growth in the digital economy. Goldman economists Jan Hatzius and Kris Dawsey on the “productivity paradox,” as they put it:

Measured productivity growth has slowed sharply in recent years … But is the weakness for real? We have our doubts. Profit margins have risen to record levels, inflation has mostly surprised on the downside, overall equity prices have surged, and technology stocks have performed even better than the broader market. None of this feels like a major IT-led productivity slowdown. One potential explanation that reconciles these observations is that structural changes in the US economy may have resulted in a statistical understatement of real GDP growth. There are several possible areas of concern, but the rapid growth of software and digital content—where quality-adjusted prices and real output are much harder to measure than in most other sectors—seems particularly important.

JPMorgan takes a different view, arguing that America is “stuck in the slow lane” with growth potential of less than 2%. (Fed staff economists seem to agree.) In June, economists Michael Feroli and Jesse Edgerton offered a direct counter to the Goldman analysis in “Do androids dream of electric growth?”:

Slowing economic growth has prompted speculation that the data aren’t capturing the digital economy. For this explanation to work one needs to demonstrate that measurement issues are getting worse over time. There is evidence that there are measurement issues, but little evidence thus far that they are getting worse. The conjecture that the recent growth slowdown is due to mismeasurement has little empirical support.

Back to you Goldman. And Goldman has responded last week in “Doing the Sums on Productivity Paradox v2.0″:

— We have argued that increased difficulty in measuring quality-adjusted prices in the information technology sector may partly account for the productivity slowdown seen over the past decade. This week, we provide some—highly approximate and uncertain—estimates of how large the error might be.

— There are some fairly well-documented measurement problems in the IT hardware industry. Recent research indicates that the sharp slowdown in the measured deflation of semiconductors and computers may be a spurious consequence of shifts in industry dynamics rather than a genuine slowdown in technological progress. The lack of any significant quality-adjusted price decline in more specialized IT hardware industries also looks implausible. Our best guess is that these two issues together are worth about 0.2pp per year on real GDP growth.

— The problems in the software and digital content industry are thornier but potentially more sizable. One is that the official statistics seem to make little attempt to adjust for quality improvements in these products over time. Another is that the proliferation of free digital content has arguably introduced a more extreme form of “new product bias” into the inflation statistics. These two issues might be worth another 0.5pp per year.

— Skeptics might contend that our analysis ignores unmeasured quality deterioration in other parts of the economy. But even outside of IT proper, unmeasured quality deterioration is likely to be less common than unmeasured improvement—for example, in areas such as healthcare services and R&D spending by non-IT firms. (Neither is included in our analysis.)

— Skeptics might also contend that the issue of measurement error is nothing new, and might thus question whether our results explain the decline in measured productivity growth. It is probably true that a small part of the potential error already existed during the late 1990s productivity boom, but our best guess is that most of it has only appeared in the last decade. If so, increased measurement error might indeed account for most of the ¾pp decline seen in consensus estimates of trend productivity growth over the past decade.

Put it all together — do the sums — and you have an economy growing faster than GDP stats say: “If our ballpark estimate of a 0.7pp understatement of annual GDP growth is close to the mark, the measured growth pace over the past five years of 2.2% might correspond to a true growth pace of almost 3%. This would be closer to the pace one would expect given the pace of improvement in most labor market indicators over the past five years.”

So about a Three Percent Economy rather than a Two Percent Economy. (And correspondingly the bank’s analysis “implies that true inflation may be even lower than the (already low) official numbers.”) The debate goes on …