Reliability of Economic Data Undermined by Digital Revolution
The economic data that drives so much political debate is becoming increasingly less reliable in the digital era. That’s because new technology makes it hard to compare the 21st-century economy to anything that came before it.
How, for example, do you compare the living standards of a middle-income American in the 1970s with a middle-income American today? The 1970s version had no cellphone, no Internet, no digital camera and was limited to watching one of three television networks. That sounds primitive by today’s standards.
However, official Census Bureau data suggest that the median income in the United States today is barely higher than it was in the late 1970s. Income stagnation may make a great talking point in a campaign commercial, but it is out of sync with reality. I remember the ’70s. The notion that we’re no better off today is silly.
When data and reality collide like this, it’s safe to assume the data are wrong.
The problem is not with the government statisticians, who do a fine job generating lots and lots of precisely accurate data. The problem is that the data they are asked to generate are more appropriate for the 1970s than today.
“During periods of major technological change,” Yale Professor William Nordhaus noted, capturing “the impact of new technologies on living standards is beyond the practical capability of official statistical agencies.” What’s more, the failures of official statistics are not random; they always tend to underestimate the real improvement in living standards.
In the 1990s, Nordhaus presented fascinating research built around measuring the cost of lighting a single room. This was a measure that didn’t depend on technology. Obviously, lighting a room with an open fire or candle is different than with electric lights or a flashlight app, but the consumer benefit was the same. This gave the academic a tool to see how much work was required to pay for lighting a room.
Among other things, he found that “an hour’s work today will buy about 300,000 times as much illumination (than) could be bought in ancient Babylonia.”
By comparing centuries of such figures with official measures of living standards, Nordhaus reached a stunning conclusion. Traditional statistics understate economic growth “by a factor between 900 and 1,600 since the beginning of the 19th century.” In other words, since America’s founding, its standard of living has increased about 1,000 times as much as the official records indicate.
There is no doubt the same phenomenon exists today. Consider the smartphone. What would you compare it to from the 1970s? A landline phone? A calculator? A camera? Board games? The cost of mailing a letter? The true answer is that there was nothing even remotely comparable to a smartphone in the 1970s, and our standard of living is much higher today because we have it.
What all this means is that most political debates based upon official economic statistics are like an episode of “Seinfeld,” a show about nothing.