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We Don't Have the Tools to Measure the New Economy

Walter Russell Mead

Over at the American Enterprise Institute, James Pethokoukis highlights new research suggesting that standard economic statistics showing modest growth rates may not be telling the whole story:

There’s an ongoing economic debate about why the US economy remains stuck in slow-growth mode. Since 2010 — the first full year of the expansion — the economy has notched annual real GDP growth of just 2.1%. Some economists have concluded the era of fast economic growth is over.

But in parallel with that debate, there’s this one: Might we somehow be statistically mismeasuring economic growth? Might growth be faster than we think? (It’s a topic I’ve written frequently about.)

And now there’s a new research paper on the subject. See, it’s widely known that measuring quality improvements in a product is tough. So perhaps traditional inflation measures like the consumer price index fail to fully capture the benefits of new or upgraded products.

The underlying case seems intuitively sound: Our measures of economic growth and wealth don’t fully account for the improvements taking place in our lives.

When the average tenth grader with a laptop has more computing power than the NATO alliance in 1965, how do you measure that? When you can watch movies on a device smaller than a pack of cards, when a month’s unlimited calling all over the United States and Canada can cost less (in constant dollars) than a ten minute call from New York to Los Angeles in 1960, when a free utility like Facebook allows you to connect with distant friends and relatives in a way never before possible, when Skype lets you have video calls for free all over the world—how exactly can we compare living standards across time?

The extraordinary collapse in the price of information and information processing even as information has become more and more the basic currency of economic activity and state power has changed the way the economy and most institutions work in ways that defy easy analysis.

Yet our bureaucracies continue to grind out statistics of dubious prescience and meaning—three and four decimal places of pseudo-certainty.

This is one element of a much larger reality—the fundamental truth of our times. That truth is so large, so daunting and so complex that it is hard to keep it in mind as we struggle to cope with the challenges of day to day living and policymaking, but if we lose touch with that larger truth we descend into a world of confusion and shadows.

Here’s the big picture we should never allow ourselves to forget: Our world and our economy are going through a phase change more profound, more sweeping and harder to assess than the Industrial Revolution, as disruptive and transformative as anything perhaps since the Neolithic Revolution when wandering bands of hunter gatherers settled down in villages to farm and began to develop written language.

Virtually all of our ways of measuring economic activity are grounded in the realities of the industrial age. So are our ways of thinking about stimulating economies, stabilizing financial systems, regulating information companies and organizing such vital functions as central banking. The gap between the ways our societies function on the one hand and the assumptions we use to think about them and the institutions we use to run them has widened dramatically in the last two decades—and the gulf continues to grow.

Modern Western societies consist of technocracies that lack the techniques they need to measure social indicators with precision, meritocracies that no longer really know what merit is, and democracies whose political institutions and ideas don’t mesh well with the lived experience of their peoples.

The one thing we can say with reasonable certainty in a situation like this is that big changes are coming, and that not all of them will be pleasant.

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