The decline of GDP

Shane Greenstein writes,

Television has gotten much better over the last few decades, but—for many reasons—total advertising has not grown.

Without more advertising revenue, the contribution of better TV to GDP is zero. A few remarks:

For me personally, the value of television is close to zero. I never turn on the TV. Still, if I did have to watch, I would find prefer new shows to the type of shows that were available when I was a kid.

But Greenstein’s larger point is that free services, like Google Maps, do not get valued properly in GDP.

I would like to make the point larger still. The economy is much less legible today than it was in 1950. The most legible components of the economy are agriculture and manufacturing. In 1950, the majority of people worked in those sectors. Today, if you add up farm labor and manufacturing production workers (not including white collar workers in manufacturing), you get maybe 7 percent of the labor force. Pretty much everyone else works in sectors like finance, government, health care, and education, where we do not know how to measure or value output.

The Department of Commerce hums along, producing a number for GDP. And many economists read a lot into the behavior of this number. In the process, they treat an increasingly illegible economy as if it were still legible.

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18 Responses to The decline of GDP

  1. Slocum says:

    The television we do watch is virtually all on pay services (mostly Amazon and Netflix), which are ad-free But we do pay monthly fees. How do those fees compare to the annual per-viewer value of watching ads on network TV? Still, the point that valuable modern electronic services add little to GDP is important. The consumer surplus for Google Maps alone is incredible.

  2. Andrew' says:

    I always point out, and everyone thinks I’m crazy, and it is admittedly topic orthogonal, but I don’t think TV is improved when I can’t watch GOT or even Gotham or Super Girl with my kids or in-laws and my revealed preference is that I only turn it on for football and watch the inappropriate commercials like a hawk when I can’t avoid them entirely.

    • Andrew' says:

      The BEST super bowl commercial this year was something about some guy having to take a shit.

  3. Thomas says:

    I think of Google Maps as an intermediate service, not a final product. Where the use of Google Maps adds value, it will show up in such things as the delivery rate of finished products, and thus total output. Where the use of Google Maps is only for entertainment purposes (e.g., “Where is Podunk, anyway?”) it simply displaces other forms of free entertainment. TV commercials are about the same, I think. If they add value, it shows up in the output of the things advertised. If they’re viewed as entertainment, they simply displace things like the use of Google Maps for entertainment. If they’re negative entertainment (i.e., always muted, as at our house during the few things we watch on TV), they rightly have no local effect on GDP.

    • Slocum says:

      “Where the use of Google Maps adds value, it will show up in such things as the delivery rate of finished products, and thus total output. ”

      Google Maps delivers a great deal of value to non-commercial users on the roads, too. People take more efficient routes, avoid traffic jams, and no longer get lost. None of us have to spend time anymore time giving and trying to follow verbal directions (“turn left at the second stoplight after you cross the bridge”) or drawing and sending maps to visitors. Especially for people with a poor sense of direction, GPS mapping programs have been a godsend.

      • Handle says:

        Cowen took a few swipes at Google Maps GPS navigation while driving in Average is Over, but the lag between writing and sale is such that I think those criticisms were mostly obsolete by the time the book was on the shelves.

        But Google still leads me astray from time to time while driving in the DC metro during rush hours. The biggest glitch seems to be that it assumes that certain left turns will be quick and easy when they are anything but. “Oh, here’s a great shortcut for you. All you have to do is go to this stop sign at the end of this residential street and turn left against four lanes of constant traffic without a stoplight to ever ensure you’ll get that break you need to make your move. Surely your fellow, friendly DC drivers will pause to let you in though, instead of jamming together and blocking the box.”

        • Netizen says:

          I’ve heard it called the ‘suicide left’ here in SF. Looked into Waze as an alternative, but it turns out to be even worse there (and called the ‘waze left’).

          • Handle says:

            Yes, it’s the suicide left. Waze put in a “reduce difficult intersections” option about a year or two ago specifically to address this particular problem. Quite the euphemism. Google toyed with the idea but decided against it for some reason.

            I don’t mind dealing with difficult intersections; that’s life in the big city. What I mind is that the algorithm is completely off in estimating the amount of time it will take for the ten timid drivers ahead of me to gather the courage to bolt into a rare open space. The whole point is to find me the quickest route, and in an effort to save me a minute or two in traffic theory, the algorithm actually costs me 15 extra minutes at these spots in traffic reality.

            I have faith that eventually they’ll figure this stuff out. These will be the hardship stories we tell our grandchildren, when human driving will probably be outlawed as intolerably less safe than robots.

    • JK Brown says:

      On the other hand, up to the 2000s, those needing a map bought a physical product that was accounted for in the GDP. The utility of those physical maps is now a part of Google maps (and other digital map services) so the value remains but the accounting for that value is no longer clear.

  4. RobertB says:

    You can even tie the concept of reduced legibility back to James Scott’s point about the linkage between legibility and taxability. Many multinational businesses are able to avoid a lot of taxes because the nature of the value they create is illegible to the state. The government may suspect that most of Apple’s profits are due to (taxable) activities conducted by its engineers and marketers and designers in the U.S., but they can’t *prove* that it’s not (non-taxable) IP in some Irish subsidiary that’s really driving business It’s illegible to the IRS in that sense and therefore not practically taxable.

  5. collin says:

    It is fine to point out GDP but you still have measure items.

    1) Just because TV advertising is flat does not mean it is not effecting GDP. Long term, our economy car buying is relatively flat for the last 35 years at an average of 15 – 16 M new cars. We have seen Newspaper/magazine advertising drop while internet advertising go up. So we have impact here. Also there a lot of cable or provider fees or paid as well effecting GDP. (Netflix usage effects GDP)
    2) Google Maps is indirectly billed on cell phone plans effecting GDP. Cell phone plans have all kinds of variation on usage so data usage is covered by GDP.
    3) What increased internet usage? Internet providers could bill by usage but for most part they have a few different tiers.

  6. baconbacon says:

    It looks like Greenstein makes a few basic mistakes. First most economists follow RGDP, not NGDP, and RGDP is effected by changes in prices. If Google maps drives the price of maps down toward zero then this increases RGDP by decreasing the costs. You can argue that the inflation adjustments are poorly done, or incomplete but just because something is ‘free’ doesn’t mean it won’t contribute to rising RGDP.

    This is part of a broader, and frequently made, mistake. In a market economy (really in all economies) all things are paid for. If you get HBO for ‘free’ as part of a package or you pay for it separately either way the production costs and purchasing costs get factored into GDP. In terms of advertising being flat you would still have to look to other areas (such as the subscription costs that were mentioned by others) to understand the impact (plus you have to compare to ‘what would have been’, and not to the past).

    • Slocum says:

      “If Google maps drives the price of maps down toward zero then this increases RGDP by decreasing the costs. ”

      But Google Maps is far more than a replacement for paper maps. There were no pre-existing products that could show you the fastest route from A to B (along with a few alternatives) given historical and current traffic conditions and that would warn you of a traffic backup that has just developed due to a crash. Or show you the upcoming gas stations, with their prices, and the time it would take to make the stop. And it’s not likely that paper map prices have declined, but rather that sales volumes have collapsed (in fact, prices may even rise as paper maps become a specialty item). Will a shrinking paper map market register as an increase in RGDP?

      • baconbacon says:

        “But Google Maps is far more than a replacement for paper maps….”

        1. Technically you can make what is known as a hedonic adjustment to allow for improvements without cost increases. I doubt this is happening but it doesn’t matter because

        2. If google maps is really providing a major consumer surplus then it should trickle (or flood) into the real economy. If it is allowing people to find restaurants/gas stations/hobby specific knick knack shops then you will expect an increase in purchases at those places (the ease of finding them means a reduced real cost in the experience and thus for most goods an increase in consumption). If these programs allow more leisure time then you expect an increase in consumption goods linked to leisure. The only way it doesn’t end up a part of GDP is if that increased leisure is spent in non consumption based ways (hammock swinging when you already owned the hammock) or if the prices for the things no longer being consumed are extremely inelastic.

        Because of the way opportunity cost has a tendency to work these improvements do show up in GDP calculations. If I can knock off 20 mins of driving time to my parents house I will take the kids to see their grandparents more often. If I can get to work more efficiently I will be more efficient at work (less stress for the commute, more time and energy to devote to my home life etc).

        • Fiddlinmike says:

          Good comments, but isn’t all this discussion making the author’s point… that the economy is less “legible” than when GDP was more heavily weighted toward easily defined activities, like growing crops or making widgets. Determining its contribution is virtually impossible.

          GDP, RGDP or NGDP – whatever – is supposed to be a rough proxy for economic welfare, which is a rough proxy for quality of life. The critical point being made is that those who place great policy importance on GDP are increasingly operating in the dark. Makes sense to me.

    • tk says:

      …..Then there are those ‘services’ that add cost to the final sales price, thus to GDP, without having added value to the item or services being sold.

  7. The Snob says:

    What Google et al are doing is a lot like the Bell Labs of old. Just as AT&T’s monopoly profits paid for a lot of research of uncertain short term direct value to Ma Bell, the Internet bigs have poured a lot of money into side projects that may not actually be profitable, but the core business prints so much money that investors aren’t inclined to ask too many questions.

  8. Television has gotten much better over the last few decades, but—for many reasons—total advertising has not grown.

    And there are still only 24 hours in a day. Stagnation is here

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