Friday, May 22, 2015

Texas Pastors Are Wrong about School Choice

By Jason Bedrick.
"Today, the Fort Worth Star-Telegram published my op-ed addressing the claims of a group called Pastors for Texas Children. For the last month, the pastors have been flooding the pages of Texas newspapers with op-eds opposing school choice. Although they raise some legitimate concerns about school vouchers, their charges against scholarship tax credits—and school choice laws generally—range from lacking substance to being demonstrably false.  
There wasn’t enough space to address all of their claims in a single op-ed, but fortunately, here at Cato@Liberty we buy megapixels by the barrel (or whatever they come in).

The claims made by six Fort Worth pastors in this op-ed were typical. I’ll address their major claims point by point:
The Texas Senate recently passed Senate Bill 4, providing tuition tax credits to donors giving scholarships to private schools. These are plainly private school vouchers.
Actually, the scholarships plainly are not vouchers. Voucher programs are government-funded and administered. Tax-credit scholarships are privately funded and administered by nonprofit scholarship organizations. As I wrote in the Star-Telegram, it’s like the difference between government-issued food stamps and nonprofit food banks. Donors to both scholarship organizations and food banks have their tax burden lowered as a result, but in neither case do the donated funds transmogrify into government property.
Our state Legislature has repeatedly rejected private school vouchers because they divert public money to religious schools in violation of the First Amendment of the U.S. Constitution, which prohibits any establishment of religion.
First, the U.S. Supreme Court ruled in Zelman v. Simmons-Harris that school vouchers are constitutional because they serve a secular purpose, are neutral with respect to religion, and the funds are given to parents who can choose among religious or secular options. This is no more offensive to the First Amendment than holding a Bible study in a Section-8 subsidized apartment or using Medicaid at a Catholic hospital with a crucifix in every room and chaplains on the payroll.

Second, as noted previously, tax-credit scholarships are private funds. In ACSTO v. Winn, SCOTUS held that private funds do not become government property until they “come into the tax collector’s hands.”

Nevertheless, whoever runs the Pastors for Children Twitter account argued that “Tuition tax credits reduce the public treasury in diverting money for [a] religious cause.” But if that’s all it takes to turn private donations into government money, then the churches to which the pastors belong are entirely government-funded. After all, donors to those churches receive tax deductions and the churches themselves receive 100 percent property-tax exemptions. Fortunately for the pastors, no one really believes that.
Moreover, unlike the tax benefits that churches receive, well-designed education tax credits reduce the overall tax burden by reducing state expenditures more than they reduce state tax revenue. Whenever a child leaves her assigned district school to accept a tax-credit scholarship, the state no longer has to fund that child. In 2010, Florida’s Office of Program Policy Analysis and Government Accountability calculated that the Sunshine State’s scholarship tax credit produced $1.44 in savings for every $1 of reduced tax revenue, saving Florida taxpayers more than $36 million in a single year.
Religious liberty is at stake. The separation of church and state is intended not to protect the state from the church, but to protect the church from the state.
With Thomas Jefferson, we believe it is sinful and tyrannical for government to compel people to pay taxes for the propagation of religious opinions with which they disagree, or even with which they agree. Authentic religion must be wholly uncoerced. [emphasis in the original]
Indeed! Of course, the pastors don’t extend that logic to its conclusion: public schools regularly propagate opinions with which many citizens disagree. If the pastors truly held that principle sacred, if they truly believed that such compulsion is “sinful and tyrannical,” then they would seek to end government-run schooling altogether.

Moreover, even school vouchers have an advantage over the government’s near-monopoly in K-12 education because they allow parents to enroll their children in schools that reflect their views and values, rather than forcing parents into social conflict. And, of course, tax-credit scholarships achieve that end through voluntary contributions. In any case, given the pastors’ rhetoric, they should support school choice.
As a practical matter, vouchers channel public monies to private schools with no public accountability.
Actually, vouchers and tax-credit scholarships enhance accountability by making schools directly responsible to parents. This is especially true in low-income communities where parents have no financially viable options besides their assigned district school.
Private schools could use public money to discriminate on race, gender, religion and special needs.
There are four claims here. The first is patently false; as Patrick Gibbons noted at RedefinED, all schools—public and private—are forbidden by law to discriminate based on race. The U.S. Supreme Court settled the issue in its 1976 decision in Runyon v. McCrary. The pastors should issue a retraction.

The second and third claims are red herrings. Of course, in a free and pluralistic society that treasures freedom of association, a private school can be single-sex or have a particular religious affiliation. Do the pastors object to Wellesley College or Notre Dame accepting students on Pell Grants?
The fourth claim is more complicated. Not all private schools are equipped to handle particular special needs, but any school that accepts federal funding must comply with the Americans with Disabilities Act (ADA). Moreover, there are numerous private schools that cater to students with special needs. Indeed, more than a dozen states have school choice programs that specifically benefit students with special needs, such as the child in this video:

Returning to the pastors’ op-ed:
Texas benefits from a robust economy, yet hovers near the nation’s bottom in per-pupil spending. We feast at bounty’s table while some children subsist on crumbs.
The underlying but unstated assumption here is that more money means higher performance. However, there is no good evidence to suggest that’s the case. Texas public schools already spend north of $10,500 per pupil on average–how much do the pastors think should they should spend?
Education is a core component of democracy.
Indeed it is! Yet as Neal McCluskey noted recently, the best evidence shows that private schools do a better job instilling civic knowledge and values.

In a second op-ed, a Pastors for Texas Children member takes a different approach:
As tempting as it may be for private, religious schools to pluck the low-hanging fruit of “free” public money, the cost is too great. … Vouchers come with government strings attached.
Here the pastor raises a good point. Vouchers do tend to come with strings attached—but tax-credit scholarships do not. For that matter, the government could impose regulations on private schools even in the absence of vouchers. School choice or not, the price of liberty is eternal vigilance.
These government payouts seek to fill in for faith. They whisper from the shadows that they are the answer to the problems of funding a Christian school. God does not need vouchers.
Frankly, I’m not even sure what to make of that. Does that mean that there are no religious schools with a waiting list? And does God also not need public schools?

Whether or not God needs vouchers (whatever that means), there are low-income families who need financial assistance to send their kids to a decent school. Ideally, those funds would come through private charity, but we don’t live in an ideal world. Instead, we live in a world in which the government provides “free” education that crowds out most alternatives. Tax-credit scholarships would reduce that crowd-out by encouraging private giving to empower low-income families to choose private schools.

At one point, the pastor strays into darker territory:
There however, are some faith-based schools ready to receive the funds. I don’t want tax dollars diverted to them anymore than I want them diverted to my school. In North Carolina’s voucher program, 8 percent of the public money is diverted to a single school, the Greensboro Islamic Academy. Louisiana’s voucher system only passed the state legislature when an Islamic school’s request for funds was withdrawn. Where public funds are diverted to faith-based schools, all faiths will have access to the funds.
Why raise the specter of Islamic education if not to appeal to the assumed bigotry of the reader? We should expect better from a man of the cloth.

In short, none of the pastors’ central claims withstand scrutiny. Let us hope that after prayerful reflection on the evidence, they will—like the Texas Catholic diocese—come to support education for all students."

Legalizing drugs could well reduce the demand for all age groups.

From David Henderson of EconLog.
"In 2009, Glenn Greenwald wrote, for the Cato Institute, a study of the effects of drug decriminalization in Portugal. Among his findings were that drug usage actually decreased among various populations.
Greenwald writes:

In fact, for those two critical groups of youth (13-15 years and 16-18 years), prevalence rates have declined for virtually every substance since decriminalization (see Figures 4 and 5). 
For some older age groups (beginning with 19- to 24-year-olds), there has been a slight to mild increase in drug usage, generally from 2001 to 2006, including a small rise in the use of psychoactive substances for the 15-24 age group, and a more substantial increase in the same age group for illicit substances generally.
I was quite surprised.

The decrease among the very young did not completely surprise me. When I give talks on the drug war, I point out that there are two contrary effects on drug usage of reducing the penalties for using illegal drugs. The reduced penalties cause the price to be lower, thus moving people down a given demand curve and increasing the amount consumed. But the simply fact of decriminalization makes illegal drugs less of a "forbidden fruit," causing a downward shift in the demand curve. I point out that we don't know a priori which effect dominates, but that my gut feel is that the price effect dominates, leading to more consumption. I do point out, though, that the forbidden fruit effect is likely to be stronger for younger people and I illustrate by singing a few bars from a song my mother taught me about not putting "beans in my ears." That is why Greenwald's data showing that usage by the young declined is not totally surprising.

But the fact that usage increased only a little among 19 to 24 year olds did surprise me. I would have expected a much bigger effect of price.

I should note that I'm using the word "price" in a more-inclusive way than the usual. The price includes not just the cash outlay per unit but also the legal risk that comes with buying and using. Decriminalization would cause this legal risk to fall substantially, thus reducing the price.

But what if much of illegal drug use is a response to isolation? Then imposing harsh penalties can actually shift the demand curve higher because criminalization results in isolation. In that case, decriminalization would shift the demand curve lower not just for the youngest but for everyone.
That's the point of a recent article at the Huffington Post. Of course the author does not put it in terms of demand curves and movements along demand curves. But that's what's going on.

An excerpt from Johann Hari, "The Likely Cause of Addiction Has Been Discovered, and It Is Not What You Think:"

One of the ways this theory [that drugs cause addiction] was first established is through rat experiments--ones that were injected into the American psyche in the 1980s, in a famous advert by the Partnership for a Drug-Free America. You may remember it. The experiment is simple. Put a rat in a cage, alone, with two water bottles. One is just water. The other is water laced with heroin or cocaine. Almost every time you run this experiment, the rat will become obsessed with the drugged water, and keep coming back for more and more, until it kills itself. 
The advert explains: "Only one drug is so addictive, nine out of ten laboratory rats will use it. And use it. And use it. Until dead. It's called cocaine. And it can do the same thing to you."
But in the 1970s, a professor of Psychology in Vancouver called Bruce Alexander noticed something odd about this experiment. The rat is put in the cage all alone. It has nothing to do but take the drugs. What would happen, he wondered, if we tried this differently? So Professor Alexander built Rat Park. It is a lush cage where the rats would have colored balls and the best rat-food and tunnels to scamper down and plenty of friends: everything a rat about town could want. What, Alexander wanted to know, will happen then?
In Rat Park, all the rats obviously tried both water bottles, because they didn't know what was in them. But what happened next was startling.
The rats with good lives didn't like the drugged water. They mostly shunned it, consuming less than a quarter of the drugs the isolated rats used. None of them died. While all the rats who were alone and unhappy became heavy users, none of the rats who had a happy environment did.
OK, so that was about rats. What about humans? Hari continues:
At first, I thought this was merely a quirk of rats, until I discovered that there was--at the same time as the Rat Park experiment--a helpful human equivalent taking place. It was called the Vietnam War. Time magazine reported using heroin was "as common as chewing gum" among U.S. soldiers, and there is solid evidence to back this up: some 20 percent of U.S. soldiers had become addicted to heroin there, according to a study published in the Archives of General Psychiatry. Many people were understandably terrified; they believed a huge number of addicts were about to head home when the war ended. 
But in fact some 95 percent of the addicted soldiers--according to the same study--simply stopped. Very few had rehab. They shifted from a terrifying cage back to a pleasant one, so didn't want the drug any more.
The bottom line: Legalizing drugs could well reduce the demand for all age groups. The Portuguese puzzle is not so puzzling."

Competing Hypotheses About L.A.’s Minimum-Wage Hike

From Don Boudreaux of Cafe Hayek.
"In this earlier post I argued that if real-world hikes in the minimum wage were in fact premised on scientifically sound economics – the economics that pro-minimum-wage economists point to in order to justify such hikes and without at the same time denying that the law of demand applies to low-skill labor – then there is no reason why such hikes would be phased-in over time rather than increased immediately.

Daniel Kuehn very quickly accused me of error.  (He did so in the comments to the above-linked post.):
The increases are nominal, that’s why they’re introduced gradually – to smooth the real value. That’s why the same people that want gradual nominal increases also want to peg to inflation.
In other words, my argument is factually mistaken (according to Mr. Kuehn) because in reality the Los Angeles city government’s phased increases of the minimum wage are meant only to keep pace with expected inflation between now and 2020 (when that legislated wage is scheduled to hit $15 per hour).

Mr. Kuehn’s argument, alas, still fails and my criticism of the L.A. government’s action remains valid and germane.  The reason is that – according to the very legislation that Mr. Kuehn and others celebrate as a scientific effort to raise the pay of low-skilled Angelenos without simultaneously destroying some jobs for these workers – there will be no minimum-wage hike in Los Angeles until July 1, 2016 (when it rises from its current level of $9.00 per hour to $10.50 per hour.  That’s more than 13 months from now.  Further, because of inflation between now and then – inflation that Mr. Kuehn plausibly notes the L.A. city council anticipates – there will actually be a minimum-wage decrease, in real terms, between now and July 2016.

So even if every scheduled nominal increase in L.A.’s minimum wage between July 1, 2016, and July 1, 2020 is designed (however roughly and imperfectly) simply to keep the wage adjusted for expected inflation over those four years, why wait until July 1, 2016 to raise the minimum wage?  Why not raise it now, in full with no phase in, to whatever level the government thinks will correct for problems caused by monopsony power?  The fact that this wage is not being raised immediately – now, in Spring 2015 – is strong evidence against the proposition that governments raise minimum wages in order to correct for the baneful consequences of alleged employer monopsony power.  If such monopsony power exists, there’s absolutely no reason to delay raising raise the minimum wage; there’s no need for any phase in of increases in the real value of the wage to whatever level government officials deem is textbook appropriate.

The only even remotely plausible way that I can see to salvage the L.A. government’s action in order to square it with Mr. Kuehn’s theory of what motivates governments to raise minimum wages is to claim that L.A. government officials believe that today – May 2015 – the $9 minimum wage is pretty close to being the textbook appropriate wage, and that all the L.A. government did is to arrange to index today’s minimum wage for expected inflation between now and 2020.

But of course if this claim is to carry the day, why all the hoopla about L.A. raising its minimum wage?  On this account, all the L.A. government did was to rather noisily index that city’s minimum wage for expected inflation starting in 2016 – meaning, in other words, that despite all the news coverage of the past few days, there has been no move by the government there to really increase in the minimum wage.

So I’ve a question for Mr. Kuehn: Do you believe that the recent, much-discussed action by the L.A. government actually did raise the real minimum wage or did it not do so?  If your answer is the latter, fine; we can join each other in being mystified at all the hoopla and celebration.  But if your answer is the former, then how do you justify or explain the L.A. government’s decision to delay until July 2016 any increase in this wage?  How do you square this delay with the monopsony model?
A fun exercise, which I just did but will leave to Cafe patrons themselves to do on their own, is to calculate the annual rates of inflation that, if Mr. Kuehn’s explanation of their actions is correct, the L.A. city council likely anticipates over the next five years.
In my opinion (which is shared by a large number of other economists), minimum-wage hikes, such as that recently done in Los Angeles, are not remotely motivated by government officials’ belief in, or even awareness of, the real-world relevance of textbook theories of monopsony power.  Such legislation is instead the harmful consequence of a combination of politicians pandering to economic ignorance and political pressure by labor unions and other rent-seeking groups who do stand to gain from legislation that prices some of the most vulnerable low-skilled workers out of jobs."

Thursday, May 21, 2015

Long Mass Transit Commutes Are Horrible for Your Health

From Marc Scribner of CEI
"Joseph Stromberg at has an article up arguing that “commuting alone by car” is “associated with obesity, high blood pressure, sleeplessness, and general unhappiness” relative to other transportation modes. His solution to unhealthy lengthy commutes is to increase carpooling.
Back in 2012, I argued against another now-Voxxer, Matthew Yglesias, on the supposed health harms of auto commuting. The problem, as Census data make clear, is that other than those who walk to work, people commuting by driving alone generally have the shortest commutes. Those using public transit take on average twice as long to make their commuting journeys as those who drive by themselves.
With that core fact in mind, let’s continue with Stromberg’s article. To support his claims about allegedly unhealthy car commuting, he cites the following 10 studies:
That’s a lot of evidence supporting the claim that automobiles are making us unhealthy, right? Wrong. Out of all of these studies, only Flint, Cummis, Sacker (2014), Christian (2009), Lindström (2008), and Lopez-Zetina, Lee, Friis (2006) made explicit comparisons between transit and auto commuting. The majority of the studies Stromberg cites as evidence of the dangers of driving alone to work found longer commutes—regardless of the mode—were associated with negative well-being.

For more on why the Hoehner et al. (2012) study is very limited and doesn’t lend itself to broad national conclusions, see my write-up of it after it was published.

Christian (2009) finds a positive relationship between commute times and obesity, similar to the results of Lopez-Zetina, Lee, Friis (2006) and Walsleben et al. (1999). However, as Christian notes, “Commute length may be associated with body mass due to either causality or self-selection.” This is to say, we don’t know if long commutes make us fatter or if fatter people make decisions that lead to long commutes. This is a classic correlation-does-not-equal-causation point.
Where does all of this leave us? I suggest the following takeaways:
  • Transit commutes are the longest commutes;
  • Driving alone results in the shortest commutes after walking;
  • Long commutes are associated with worse health outcomes; and
  • Unhealthy people may make choices that lead to long commutes.
While not directed at this Stromberg piece, I personally find it hilarious that transit boosters implicitly accept that the direct mobility benefits of transit are so low that they need to fling every possible co-benefit spaghetti at the wall in order to justify unjustifiable mass transit subsidies. But to you who drive alone to work and are now scared your car is secretly killing you, don’t worry. It’s the transit riders with commutes twice as long as yours who may need to worry."

Pointless economic regulation cripples innovation and speeds the growth of big government

See The Tip of the Regulatory Iceberg by Veronique de Rugy of Reason.
"In 2014, the government issued 2,400 new regulations, including 27 major rules that may cost $80 billion or more annually. They range from forcing restaurants to list the number of calories in food—even though past experiments have revealed that such measures fail to change consumers' behavior—to reducing consumer choices and increasing energy prices by imposing tighter energy efficiency mandates on the plugs that we use to charge cellphones, laptops, and even electric toothbrushes.

These figures can be found in a new paper by Heritage Foundation scholars Diane Katz and James L. Gattuso, in which they tally the number and cost of government regulations over the past six years of President Barack Obama's administration—and show that Washington's control over the economy and Americans' lives is intensifying. According to their count, during the first six years of the Obama administration, the number of new major rules reached 184, but another 126 are in the pipeline. That's more than twice the number imposed by President George W. Bush, who wasn't shy about regulating the economy.

Katz and Gattuso explain, "The cost of just these 184 rules is estimated by regulators to be nearly $80 billion annually." But this is only the tip of the iceberg. Official regulatory costs are vastly underestimated, among other things, because of the large number of rules for which costs have not been fully quantified.

More importantly, it doesn't appropriately account for the businesses, innovations, and economic growth that will never exist because of the incessant accumulation of regulations. Take the bureaucrats at the Federal Aviation Administration, who have effectively banned the use of commercial unmanned aerial vehicles, commonly referred to as drones. This and the myriad other questionable drone regulations proposed by the FAA have been widely criticized as arbitrary and nontransparent. Another example was the FAA's proposal to require drone pilots to obtain the same license as old-school airplane pilots. Thank goodness it appears that the FAA is walking away from this bad idea. But the bottom line is that the FAA has demonstrated its penchant for imposing destructive constraints on this new technology.

Meanwhile, a more hands-off approach to regulating drones in other countries has led to new, exciting commercial uses for drones all over the world. For instance, a startup called Matternet uses drones to deliver critical supplies in places where roads can keep people isolated for months at a time. The potential is huge, considering that over 1 billion people live in such places. Germany's DHL already uses drones to deliver medicine to the small city of Juist on a small island in the North Sea. And a few weeks ago, we saw how the charity GlobalMedic was using drones to help aid relief operations in Nepal after the country was ravaged by earthquakes.

Yet the FAA continues its destructive approach with new proposed rules to further constrain drones that are less than 55 pounds. The rules would, among other things, prohibit them from conducting deliveries and prohibit operation outside the hours of official sunrise and sunset.
In other words, forget about sending medication or food to people in areas where ground travel is not possible, and forget about the 30-minute delivery service Amazon Prime Air—in the United States, that is.

But that's a drop in the bucket compared with dozens of other costly rules, including 13 regulations of the financial system that saw the light of day in 2014. According to Katz and Gattuso, eight of those were the product of Dodd-Frank, an act that was supposed to reduce the risk of a major bank failure but is actually a regulatory burden that cripples small banks while further protecting even larger institutions. In other words, Katz and Gattuso conclude, the need for reform of the regulatory system has never been greater."

Wednesday, May 20, 2015

The Washington Post's Misleading Pictures On Industrialization

See Industrialization’s Staggering Effect on Humans by Don Boudreaux of Cafe Hayek.
"Here’s a letter to the Washington Post:
Your recent photo-essay entitled “Humans’ staggering effect on Earth” – featuring pictures of the likes of crowded cities, debris in an ocean wave, and factory emissions – is from a new book entitled “Overdevelopment Overpopulation Overshoot.”  The intent, as revealed by the caption to the first of your series of photos, is to frighten viewers into believing that we are pointlessly destroying the environment with “materialism, consumption, pollution, fossil fuels and carbon footprints.”
This photo-essay is all emotion and no perspective.
Never mind that nearly half of the photos are from countries such as Brazil, Ghana, and Russia with poor records of protecting property rights and encouraging market activities that promote the modern industry, trade, and economic growth that the publishers of this book think are harmful.  Instead, consider running a follow-up photo-essay entitled “Industrialization’s staggering effect on humans.”  This photo-essay would feature full-color, hi-def pictures of benefits that would not exist without modern industrialization and global trade.  Photos, for example, of
– grandparents in Arizona smiling to reveal their own straight and gleaming white teeth (as opposed to the toothless gums of pre-industrial grandparents);
– the hard roof and solid floor of a middle-class home in London (as opposed to the dirt floors and thatched roofs of the flimsy huts that were the norm for most of human history);
– one of the central-heating ducts in that London home (as opposed to the sheep and goats that slept in pre-industrial families’ huts in order to help supply warmth for the family);
– a flush toilet in Marseilles (as opposed to a hole in the ground);
– antibiotic pills (as opposed to the dead bodies of children who were routinely killed by pneumonia or even by infections from simple cuts);
– an ordinary woman standing erect in jeans and a fashionable blouse in Vancouver (as opposed to a pre-industrial woman made stooped and hunched by malnutrition and dressed in drab and filthy homespun);
– a modern washing machine in Stockholm (as opposed to women carrying buckets of water from streams in order to do the laundry);
– a mother and father in Brooklyn surrounded by their three happy and healthy children (as opposed to the pre-industrial family in which the wife died while giving birth, one of the three children died of dysentery, and the still-surviving children with faces scarred by smallpox).
Such a list can be greatly extended.  Its point is to make clear that while economic growth isn’t costless, its benefits are easy to overlook precisely because they are today so common.
Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030"

Martin Feldstein on how GDP accounting underestimates growth and improvements in economic well-being

From Mark Perry.
"In today’s WSJ, Harvard University economics professor Martin Feldstein has an excellent op-ed (“The U.S. Underestimates Growth“) about a recent topic covered in a series of posts on CD  — how “the official statistics are missing changes that are lifting American incomes” (see especially the post “Another possible limitation of GDP accounting – it may fail to capture improvements in economic well-being in the Information Age“). Here’s an excerpt of Professor Feldstein’s op-ed (my emphasis):
Today’s pessimists about the economy’s rate of growth are wrong because the official statistics understate the growth of real GDP, of productivity, and of real household incomes. Government statisticians are supposed to measure price inflation and real growth. Which means that, with millions of new and rapidly changing products and services, they are supposed to assess whether $1,000 spent on the goods and services available today provides more “value” or “satisfaction” to American consumers than $1,000 spent a year ago. Even more difficult, they are tasked with estimating exactly how much it costs now to buy the same quantity of “value” or “satisfaction” that $1,000 could buy a year ago.
These tasks are virtually impossible, and the problem begins at the beginning—when an army of shoppers go around the country at the government’s behest to sample the prices of different goods and services. Does a restaurant meal with a higher price tag than a year ago reflect a higher cost for buying the same food and service, or does the higher price reflect better food and better service? Or what combination of the two? Or consider the higher price of a day of hospital care. How much of that higher price reflects improved diagnosis and more effective treatment? And what about valuing all the improved electronic forms of communication and entertainment that fill the daily lives of most people?
In short, there is no way to know how much of each measured price increase reflects quality improvements and how much is a pure price increase. Yet the answers that come out of this process are reflected in the CPI and in the government’s measures of real growth. This is why we shouldn’t place much weight on the official measures of real GDP growth. It is relatively easy to add up the total dollars that are spent in the economy—the amount labeled nominal GDP. Calculating the growth of real GDP requires comparing the increase of nominal GDP to the increase in the price level. That is impossibly difficult.
The measurement problem is particularly severe for new products. Consider a new drug that improves the quality of life, reducing pain or curing a previously incurable disease. The ability to buy that new product means that a dollar is worth more than it used to be, and that the properly measured level of real GDP is higher. The official method of calculating the price index doesn’t incorporate this new product until total spending on it exceeds some threshold level. It is then added to the government’s price calculations, but only to record whether the cost of the drug goes up or down. The main effect of raising well-being when the drug is introduced is completely ignored. The same is true of other new products.
The result is that the rise in real incomes is underestimated, and the common concern about what appears to be the slow growth of average household incomes is therefore misplaced. Official statistics portray a 10% decline in the real median household income since 2000, fueling economic pessimism. But these low growth estimates fail to reflect the remarkable innovations in everything from health care to Internet services to video entertainment that have made life better during these years, as well as the more modest year-to-year improvements in the quality of products and services.
While changes in officially measured real GDP statistics don’t fully capture increases in Americans’ standard of living, year-to-year fluctuations are still useful as one indicator of business-cycle conditions.
MP: As I concluded in my related post, perhaps all of the discussions about GDP being below potential GDP and fretting about sub-par economic (GDP) growth are really simply a reflection of the fact that GDP is really no longer the best measure of economic performance, economic growth and economic well-being in the Information Age. Professor Feldstein seems to come to the same conclusion.

And here are a few other economic factors that have significantly improved our economic well-being over time that aren’t captured at all in official GDP statistics: a) increased convenience and b) increased selection of products.

Convenience. We can now shop from home using the Internet as a convenient alternative to the much more time-consuming process of physically driving to a store, paying to park in some cases, dealing with crowds of people, waiting in line to pay, etc. According to GDP accounting, $1,000 worth of expenditures on clothes, books, DVDs, wine, food, electronic goods, and footwear counts exactly the same for GDP whether you purchased those items online from the convenience and comfort of your home using websites like Amazon, eBay, Zappos, Lands End and Jos. A Bank or whether you physically visited brick-and-mortar stores to make those purchases. For many consumers today, the economic value of the significant increase in the convenience of shopping from home using the Internet never gets captured, even though $1,000 of goods purchased online must have more economic value than $1,000 of goods purchased in stores because so many of us now make a majority of our purchases online.

Selection. When I look through old Sears catalogs from previous decades like the 1950s, 1960s and 1970s, I’m always impressed by the relative lack of selection for items like household appliances. Especially in the 1950s and 1960s, the selection of appliances like refrigerators, freezers, ovens, ranges, dishwashers, washing machines and dryers was extremely limited – sometimes to fewer than 5 or 6 models, frequently with no choice of color. Today, the Sears website offers more than 400 different ranges, more than 500 different refrigerators, more than 100 washers, more than 200 dryers, and about 50 different freezers. Want a gas grill? Choose from almost 80 different Sears models from $39 to $5,000. The increased selection over time available to consumers for hundreds of other items generates significant economic benefits that are never captured by official GDP statistics.

For transportation, we now have more options than ever before, and those options increase economic well-being without ever necessarily making a contribution to increasing GDP.  For local travel, we can now choose between traditional taxis and options that never existed before like Lyft, Uber, Sidecar, Gett (in NYC), Zipcar and Car2Go; and for long-distance travel we have new options available like Megabus, Bolt Bus, Peter Pan, Best Bus, Vamoose, in addition to Amtrak and air travel (there are 123 options daily for travel between DC and NYC by bus or train).

The selection and variety of food and restaurants available today is greater than ever before, there are more than 3,000 breweries now in America, Airbnb and EatWith give us new travel options that never existed, and the list goes on and on.

Bottom Line: Increased convenience and increased selection definitely make our lives better, raise our standard of living, and increase our economic well-being – even though that economic value can’t be measured and therefore won’t ever be captured easily by GDP accounting. I’ll take 1-2% sub-par economic growth measured by real GDP if it means I’ll continue to experience an increase in my economic well-being from the continuing introduction of new products, ongoing increases in the quality of existing products that can’t accurately be measured, continued increases in the selection and variety of products and services available, and increases in convenience that save me time and make consumption easier than before."