Mobile broadband: An under-appreciated economic miracle by Bret Swanson

New research continues to demonstrate that information technologies are even more economically powerful than official data suggest.

via Twenty20.

Over the past five years, I’ve attempted to show that we have underestimated the price declines and performance improvements in smartphones. (See, for example, “The A12 Chip: Estimating innovation with iPhone prices,” in which I estimated that it would have cost $28 million to purchase the basic building blocks of an iPhone XS back in 1991.) Last summer, the Bureau of Economic Analysis (BEA) partially acknowledged this when it revised its historical price and output figures for mobile phones, cloud computing services, and internal software development.

The BEA’s revision was in part based on excellent work by the Federal Reserve’s David Byrne. And now Byrne and other economists are putting even more analytical meat on the bones. In the process, they are once again dramatically raising estimates of the economic impact of smartphones and internet services.

In newly updated work with Carol Corrado, for example, Byrne seeks to capture missing value from broadband connectivity and the content flowing over these networks. His bottom line is that “the innovations boost consumer surplus by nearly $1,700 (2017 dollars) per connected user per year for the full period of this study (1987 to 2017) and contribute more than 1/2 percentage point to US real GDP growth during the last ten (2007 to 2017).”

Erik Brynjolfsson and colleagues use a distinct methodology to estimate welfare gains from the “proliferation of new and free goods” which “are not well-measured in our current national accounts.” They call the new measure GDP-B.  In one empirical analysis supporting the broader idea, Brynjolfsson looked at the camera market. He estimated that in the year 2000, the world snapped 80 billion photos, at an average cost of $0.50. By 2015, he estimates, we took 1.6 trillion photos at a price closer to $0.00, but that much of this value wasn’t captured in the data.

In a new report called “Productivity Paradox 2.0,” Goldman Sachs builds upon Byrne and Brynjolfsson’s work, adds some of its own analysis, and attempts to sum up all these effects. Goldman breaks down the under-appreciated technology benefits into four categories:

• consumer surplus,
• missing consumption,
• mismeasured inflation, and
• business investment in information technology.

Consumer surplus is the difference between the price consumers actually pay for a product and the price they’d be willing to pay — or the value consumers enjoy for “free.” Goldman estimates that things such as broadband, Google Maps, Waze, and the whole range of free apps should add around 0.2 percentage points to nominal GDP.

The next category includes products and services that are simply undercounted because they are new and, in many cases, replace older, more easily counted ones. Think about Uber, Lyft, and AirBnB. Surprisingly, the biggest undercounted item is the most famous product of the last two decades. For smartphones alone, Goldman estimates “that even after upward revisions to spending and downward revisions to inflation, smartphones continue to represent between $100bn and $225bn of missing real consumption.” This category would also add around 0.2 percentage points to GDP.

The final two categories are also highly tech dependent. Goldman estimates that over-estimated inflation would add around 0.3 percentage points to GDP and that properly accounting for the massive sums that businesses spend on internal information technology, which is then sold as cloud services, for example, would also add around 0.3 points.

All told, Goldman thinks today’s actual GDP could be 1.0 point higher than we think. That’s a huge figure. As a techno-optimist, even I think that figure is high, and Goldman acknowledges its estimate is highly uncertain. But directionally, I think it’s correct, and it highlights at least a few important points.

First, it shows just how extraordinarily powerful the diffusion of these technologies across other parts of the non-tech economy can be in the years to come.

Second, it demonstrates just how economically crucial our broadband networks are. In 2018, US broadband providers invested $80 billion in fixed and mobile broadband. None of these mobile devices, inexpensive apps, and huge consumer benefits, both measured and missed, would be possible without the foundation of the network.