MNI INTERVIEW: US Inflation May Be Negative In Digital Era

By Jean Yung

     WASHINGTON (MNI) - The U.S. growth rate would be higher and inflation lower

if government statistics adequately captured the digital domination of the

modern economy, Philadelphia Federal Reserve Bank emeritus economist Leonard

Nakamura said in an interview this month, arguing that this could mean that

current interest rates are significantly too high.

     Even as Google, smartphones and social media have transformed the world

over the past dozen years, U.S. growth has failed to register even 2% on

average. At the same time, advancing technology has caused some prices to

collapse, said Nakamura, noting that it took hundreds of millions of dollars to

sequence a human genome for the first time in 1999 whereas today the cost has

fallen to just $1,000.

     "People think we're just a half percent or a few tenths from a 2% inflation

rate when maybe inflation is still negative," Nakamura said. "The FOMC and other

central banks have been puzzled by how economies could slow down when interest

rates are as low as they are. But maybe we're not being so stimulative. Maybe

real rates are not near zero -- they're at 2% or 3%. At this point I'd argue we

don't have a good way of saying that's got to be wrong."

     Nakamura, who formally retired from the Philadelphia Fed last year, is now

devoting all of his time to studying how welfare statistics could be improved to

better reflect the true size of the modern economy, with its multitude of free

services which have raised quality of life and lowered the cost to consumers.

His research kicked off the IMF's annual Statistical Forum last fall and he's

consulting with the UK's Office for National Statistics to improve their data

measures.

     Aside from freely available and widely used mapping and messaging apps,

renting services like Uber and AirBnB have made resource utilization more

efficient, and bundling services like Spotify and Netflix have eliminated the

marginal cost of consuming another song or show. But these improvements are

difficult to measure.

     "We have a lot of trouble integrating these new business models into our

economic thinking," Nakamura said. "There's all this stuff which no longer has a

transaction price attached to it, and yet GDP and the way we think about

economics is all through transactions."

     --TIME ACCOUNTING

     In a Fed working paper published in February, he and Diane Coyle of

Cambridge University proposed that economists could account for how people spend

their time in addition to how they spend their money. A new wider economic

welfare measure would draw on time-use statistics and well-being data, together

with direct survey evidence, such as the willingness to pay for leisure time.

     A second idea, detailed in a National Bureau of Economic Research paper

last month and co-authored with Charles Hulten, professor emeritus of economics

at the University of Maryland, would be to incorporate a "willingness-to-pay"

metric of the value of output-saving innovation to consumers into an Expanded

GDP measure

     Both of these methods are at very preliminary stages of development. One

concern is some survey-based estimates have turned up huge values for digital

services. For example, the median response for how much a person would need to

be paid to stay off the Internet for a year is around $10,000, according to one

study.

     "That's like adding 15% to GDP -- that's about what we pay for health

care," Nakamura said. "We need to check those answers in a lot of different ways

because those answers have big implications for GDP."

     His colleagues at the Fed are listening, but Nakamura reckons it is

unlikely that his ideas are adopted in the near future.

     "A lot of the things Hulten and Coyle and I are proposing can't be done in

real time," he said. "We've been in the Age of Communication for 15 years at

most, but it's clearly a very different world."

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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