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Policy: Economy

Free online shows, services indicate boom missed by US GDP

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Education,Economy,Bloomberg News,Technology

Since completing a master’s degree in electrical engineering in 2009, Ti Zhao, a self-described “education junkie,” has continued to take classes. The total price tag for the last eight in which she enrolled: $0.00.

“It’s hard for me to imagine ever paying for a class again,” said Zhao, who has taken advantage of free studies provided by edX and Coursera Inc., including a public-health course taught by a Harvard University professor, after hearing about online education services through a friend. The 27-year- old San Francisco resident had been spending about $500 a class to enroll in a local university’s continuing-education program.

College lectures join a growing pool of web-based goods and services being given away that are transforming the lives of consumers like Zhao. Government statistics such as gross domestic product that only track things people buy underestimate the “very promising” progress made by the U.S. economy in this area, according to Erik Brynjolfsson, a professor at the Massachusetts Institute of Technology in Cambridge.

“In the coming years, we’re going to have to reinvent the way we measure economic growth,” said Brynjolfsson, director of MIT’s Sloan School of Management Center for Digital Business. “The reality is, GDP, the amount we spend, is not equal to what we get.”

Deriving the value consumers implicitly assign to the Internet by gauging how much time households spend on free websites, Brynjolfsson and MIT postdoctoral associate JooHee Oh calculated that those virtual goods added an additional $34 billion to consumers’ welfare each year from 2002 to 2011. That’s equivalent to 0.26 percent in GDP.

Money, Time

People pay for those sites with their time instead of their money -- time that, in theory, they could have spent working more or consuming something else.

“These measures of consumer surplus are improving quite nicely,” said Brynjolfsson. “You can see why ultimately we need to think harder about our metrics.”

The impact of free virtual goods is clear to young consumers like Emileigh Buck. Among her favorite online applications is Pandora Media Inc.’s Internet radio service that she uses to stream music ranging from Lady Gaga to indie electronic artist Robert Delong. Pandora introduced her to new musicians she never would have discovered on her own, helping broaden her tastes without the cost or hassle of accumulating and storing stacks of CDs, she said.

“I got an iTunes gift card two years ago that I still haven’t gotten around to using,” said the 25-year-old Seattle resident, referring to Apple Inc.’s digital music store. “It’s just so much better with Pandora.”

Other Estimates

Economists other than Brynjolfsson are also trying to quantify how much better off people are by experimenting with various methods to calculate the maximum amount consumers would be willing to pay for otherwise free services.

IAB Europe, a Brussels-based group that promotes digital marketing, and McKinsey & Co., a New York-based consulting firm, jointly surveyed Internet users in Europe and the U.S. to estimate the value placed on services ranging from search engines to social networks. Americans in 2010 would have spent 32 billion euros ($42.9 billion) above and beyond the cost of services they actually paid for and expenses associated with such things as advertising and privacy, according to the study.

A study by Boston Consulting Group estimated the surplus benefit in the U.S. at $2,528 a year per person. Some 7 percent of U.S. respondents said they would forgo showering for a year to maintain their Internet access, 21 percent said they would give up sex and 73 percent said they would sacrifice alcohol, the survey found.

Measuring Progress

The range of these estimates underscores the inherent difficulty in measuring something as nebulous as wellbeing, compared with the quick and hard proxy of money changing hands. Economists have tried for decades to come up with a broader measure of progress that includes elements like unpaid activities and environmental degradation.

The official government data keepers are among those pointing out inconsistencies.

“We’re economists, we don’t believe there’s such a thing as a free lunch,” Steven Landefeld, director of the Bureau of Economic Analysis, the Commerce Department agency in Washington that produces the GDP data, said in an interview. The advertising revenue generated by these no-cost sites and the money that comes from selling information on consumers’ browsing habits all get included in growth estimates, he said.

Consumer Surplus

In addition, almost every item in GDP has an element of consumer surplus that isn’t reflected in the accounts, said Landefeld. For example, Apple sells its iPhones at a price that optimizes sales. While consumers all pay the same $200 to $300 for the latest mobile phone, some may say the value of that device to them is $1,000.

“So it’s not really quite kosher to compare this consumer surplus from these goods with others, with the whole rest of GDP, because that should be bigger too,” Landefeld said.

Just this year, the BEA issued a comprehensive reclassification of the GDP accounts to include spending on research and development and some forms of entertainment, including films and long-running situation comedies such as “Seinfeld.” The update added $526 billion to the value of goods and services produced in 2012.

The inability of GDP to keep up with the newest developments can be seen in the mix of activities contributing to growth. Information technology industries accounted for 4.4 percent of the economy in 2012 compared with 3.4 percent in 1987, Commerce Department figures show. The widespread adoption of personal computers, the Internet and mobile devices barely made a dent in the data.

Offshoring Production

That’s because the production of these goods is often done in other countries, and even those items made in the U.S. have benefited from a surge in productivity that has brought down their costs, limiting their share in GDP, said Landefeld.

While gauges of consumer welfare have failed to gain traction in a world in which GDP remains the predominant barometer of economic health for policy makers and investors, it doesn’t mean economists won’t keep trying as Zhao in San Francisco sits down for another week of free instruction on the physics of haute cuisine.

“We’re making progress, but we’re a long way from having a number that can compete with GDP,” said Peter Klenow, an economist at Stanford University near Palo Alto, California, and an expert on economic growth and productivity. “What we do when we get richer is not more quantity -- it’s higher quality and more variety. Those are harder to measure, but they do seem to be a fundamental part of growth and progress. We’re probably missing a big chunk of that.”

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