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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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