The Progressive Fix

Why GDP and productivity growth may be underestimated

On Friday, the very fine economists at the Bureau of Economic Analysis will release their estimate of fourth quarter GDP growth.  Current estimates peg the US economy’s growth at roughly 3% for the quarter.

But here’s the rub:  The rise of the data-driven economy means government economic statistics may significantly understate US GDP growth and productivity growth. Official numbers are afflicted by huge and growing blind spots that increasingly distort the published figures.  To summarize, we are building a mammoth data-driven economy that, perversely, is only partly visible in the economic data.

To give just one simple example:  As of January 29, the official statistics report that the real value of of Internet access consumed by households has fallen by 5% over the past year.   The official statistics also report that real value of cable and satellite television and radio services has fallen by 2% over the same stretch.  And supposedly the real consumer value to households, as measured by the government, of mobile, cable, and internet access together has risen by a measly 0.4% over the past year.

These numbers can’t be right (for more of the theory here, see PPI’s 2012 paper “Beyond Goods and Services:The (Unmeasured) Rise of the Data-Driven Economy” )

Or to give another example, private investment in big data.  All sorts of organization are building up huge data stores with long-term value.  For example, the shift to electronic health records is predicated on the value of that data for lowering health care costs and improving patient treatments. (see, for example

In theory, the investment in big data should be reported as part of GDP. Indeed, the BEA has recently started reporting spending on R&D and “entertainment, literary, and artistic originals” as part of investment spending.  And the original researchers on intangible investment did in fact include investment in databases.

However, in practice, the BEA does not include investment in big data in GDP: The tech equipment and the programming, yes, but  not the actual labor and costs necessary to collect and clean the data. For example, when a hospital employs medical coders to clean up their electronic patient records, that coder’s salary is recorded as an expense, but not as a contribution to GDP.  Similarly, the costs of converting from paper to electronic records is not being counted a part of GDP.

The distortion in the statistics from omitting big data is becoming bigger as big data becomes more important.  I cite health care because health care organizations are devoting vast resources to electronic health records, but the same holds for any company collecting big data.

We can list example after example where the data-driven economy is simply missed by the current statistics.  An earlier PPI paper,   Data, Trade and Growth, showed that the government does a terrible job measuring cross-border data flows, because many of them do not leave a monetary footprint. to the extent that the US holds a commanding position in cross-border data trade, this omission may be important for GDP and productivity growth.

Finally, it’s worth noting that reshoring may be artificially depressing the growth and productivity statistics, just as offshoring artificially inflated growth and productivity gains in the early part of the 2000s (this give me a chance to plug a new conference volume edited by myself and Susan Houseman, entitled “Measuring Globalization: Better Trade Statistics for Better Policy“). I will address this point at length in a future post.








Press Release: Osborne to Lead PPI Project on Reinventing America’s Schools

For Immediate Release
January 21, 2015


WASHINGTON, D.C.—David Osborne, co-author of Reinventing Government and other highly regarded books on public sector reform, will direct a new Progressive Policy Institute (PPI) Project on Reinventing America’s Schools. The project will examine K-12 innovation, with a special focus on the emergence of new governance arrangements that allow for more school and teacher autonomy, tailored instruction to diverse student needs, and greater accountability to the public.

“As one of America’s leading experts on public innovation, David is uniquely suited to lead our work on public school reinvention,” said PPI President Will Marshall. “As our political leaders turn their attention to reducing economic inequality, it’s hard to imagine a more urgent priority than closing the achievement gaps in our K-12 system.”

“I am delighted to be working again with PPI, which played a pioneering role in the public school choice and charter school movements,” said Osborne. “We believe that creating a public education system of charter and charter-like schools is the key that will unlock the door to dramatic improvement, as it already has in cities such as New Orleans, Washington, D.C. and Denver. Our hope is that this research will speed the transformation of school districts throughout the country.”

In an op-ed for last Sunday’s Washington Post, Osborne argued that giving teachers more control would improve school performance and help retain quality teachers in the classroom.

Osborne is the author of the forthcoming book, Reinventing America’s Schools: Creating a 21st Century Education System, and the co-author of five books including: The Price of Government: Getting the Results We Need in an Age of Permanent Fiscal Crisis (2004), The Reinventor’s Fieldbook: Tools for Transforming Your Government (2000), Banishing Bureaucracy: The Five Strategies For Reinventing Government (1997), and Laboratories of Democracy (1988). He has also authored numerous articles for the Washington Post, the Atlantic, the New York Times Magazine, Harpers, The New Republic, Governing and other publications.

In 1993, Osborne served as a senior advisor to Vice President Gore, to help run what the Vice President often called his “reinventing government task force,” the National Performance Review. He was the chief author of the September 1993 NPR report, which laid out the Clinton Administration’s reinvention agenda, called by Time “the most readable federal document in memory.”

The Project on Reinventing America’s Schools is made possible by generous support from the Walton Family Foundation and The Eli and Edythe Broad Foundation.


Obama’s Muni Broadband Initiative: Bad Economics, Bad Politics

Here are some staggering statistics: Since 2006, state and local real investment in highways and streets has fallen by 22%.  Their spending on sewer systems, in real terms, is also down by 22%. And real investment by state and local governments in water systems has fallen by a stunning 34% (chart below).

Meanwhile, over the same period, private real investment by telecommunications and broadcasting companies is up by 13%, according to statistics from the Bureau of Economic Analysis.


Why, then, does President Obama want to load yet another spending burden–muni broadband–on localities that are already stretched too thin to cover their existing obligations? On Wednesday the President unleashed a set of initiatives designed to make it easier for cities and towns to build their own broadband networks.   Setting up muni broadband networks certainly has some superficial appeal—apparently creating more competition for private ISPs and offering cheaper rates to poor residents.

But there’s an enormous problem: State and local governments are already  struggling to come up with the funds to maintain the current infrastructure of roads, bridges, sewer and water systems.  Government infrastructure spending in real terms is way down compared to before the recession, leading to potholed roads, leaky water systems, and inadequate sewers.

Meanwhile private investment in telecom and broadcasting has continued to rise, boosting network speeds for both wireless and wired broadband.  Private companies are putting private money into improving the nation’s networks, without any cost to the taxpayers.

So if state and local governments have any spare change—or rather, if they have any of the taxpayer’s spare change—they shouldn’t put it into building broadband networks that would duplicate already existing private networks. Rather, they should fix the roads, bridges, and other infrastructure for which they are legally and politically responsible, and for which there are no private alternatives.

Focusing on rebuilding traditional infrastructure can have big economic payoffs. As Diana Carew and myself noted in a March 2014 PPI policy memo– ”Infrastructure Investment and Economic Growth:  Surveying New Post-Crisis Evidence”–recent studies show that investment in transportation infrastructure can have large positive multiplier effects on the local economy.

Finally, running a muni broadband network is hard and expensive, especially since broadband networks–unlike roads and water systems–need continuous upgrading to keep with technological change.  Does the Democratic party–and local politicians—really want to be on the phone when voters complain about their Internet service? In the end, Obama’s muni broadband plan looks like both bad economics and bad politics.


Fixing Shabby America

America’s infrastructure is like a house where the carpets are worn, the shower is leaking, and cracks in the wall let through the winter winds. The average age of U.S. highways and streets now stands at about 28 years, almost double the average age fifty years ago. (That figure factors in the amount spent on repairs and upgrading).

To avoid the U.S. becoming a shabby nation, Congress should act on raising the gas tax.  By itself, that won’t solve America’s infrastructure woes. But at least we can patch the biggest cracks.




Congress Answers PPI Call, Exempts End-Users From Dodd-Frank

The Senate voted 93-4 Thursday to reauthorize the Terrorism Risk Insurance Act (TRIA) for six years. The legislation, which is expected to be signed into law by President Obama, includes a provision exempting “end-users”– non-financial institutions, such as farms, ranches, manufacturers, small businesses, etc.– from certain inadvertent regulations imposed by the 2010 Dodd-Frank Wall Street reform law.

In a 2011 policy brief, The Risks of Over-Regulating End-User Derivatives, PPI Senior Fellows Jason Gold and Anne Kim warned policymakers to be wary of these unintended requirements as they implemented the law and called on Congress to rectify the issue:

No one doubts that the abuse of some forms of exotic derivatives contributed to the systemic risk that led to the 2008 crisis. But derivatives are an important tool used by major American manufacturing and service companies (“end users”) to manage and protect against risks—not create them. These derivatives contribute little—if anything—to systemic risk.

Federal agencies are nonetheless contemplating regulations that could put the conventional derivatives companies use to hedge against risk in the same categorical box as the speculative trades or trades done by systemically risky firms, even though Congress did not intend for this to occur.

Subjecting these derivatives to the same limitations as riskier speculative trades—such as by imposing “margin” requirements and other overly tough regulations—would unnecessarily burden American companies. It would tie up capital that would otherwise be directed to investment and hiring, drive up the cost of producing goods and services, and ultimately cost American jobs. Ironically enough, the result would be to create more potential risk for the economy, not less.

As we emerge from the worst recession in generations, policymakers are confronted with the dual task of implementing regulations that promote private sector economic growth while also mitigating systemic risk. Sensible regulations to deal with end-user derivatives and the companies that use them are an important piece of meeting this challenge.

See: The Risks of Over-Regulating End-User Derivatives.

The Permanent Campaign: Lowlights of 2014

It’s time for the traditional end-of-year reminiscences of 2014, with plenty of best-and-worst lists for political people.  I’ll fish in with a few lowlights of the political year.

1) Worst primary campaign:  there were too many underwhelming primary campaigns to count, much less list, but you’d have to include on any list the early-favorite Tea Party candidates for the Senate in Georgia, Paul Broun and Phil Gingrey, who finished fourth and fifth; Milton Wolf of Nebraska, whose own issues kept him from taking advantage of an incredibly vulnerable Sen. Pat Roberts; and Lt. Gov. Mead Treadwell of Alaska, who managed to lose both Establishment and Tea Party support to finish third in a U.S. Senate primary.  Democratic Gov. Neil Abercrombie of Hawaii deserves Honorable Mention status for losing his re-election primary by an astounding 66/31 margin.

2) Worst general election campaign: Again, there are plenty of competitors, but Michigan Republican Terri Lynn Land managed to make her Senate candidacy non-viable down the stretch; Oregon GOP Senate candidate Monica Wehby self-destructed with repeated personal problems and gaffes; Maryland Democratic gubernatorial nominee Anthony Brown squandered a huge lead to lose in a heavily Democratic state; and Ohio Democratic gubernatorial nominee Michael Fitzgerald’s campaign completely imploded just as he should have been making a move.

3) Worst candidate moment:  There’s a hands-down “winner” here: Iowa Democratic Senate nominee Bruce Braley’s comments to Texas trial lawyers urging them to keep an “Iowa farmer,” the much-revered Chuck Grassley, from taking over the Judiciary Committee.

We’ll have some more positive memories next week.

Earnings for Young Americans: Which City Tops the List?

For young Americans, Washington, D.C. may have more to offer than government jobs and free museums.  It may also provide more opportunities to get a raise than any other top 10 U.S. city.

According to my analysis of new Census data on young Americans, Washington, D.C. was the only top 10 U.S. city, by population, where young workers saw an increase in real median earnings since 2000 (in addition to having the highest real median earnings overall).  Young workers in every other top 10 U.S. city experienced sizable declines.  More than half – six – of the top 10 cities saw declines greater than 10 percent, with young workers in Miami and Atlanta enduring real declines of more than 15 percent.

The table below shows the 2000-2013 change in real median earnings for young Americans age 18-34 working full-time by major U.S. city, where 2013 is measured as a five-year average over 2009-2013. Data for 2000 comes from the 2000 Census long form, and data for the 2009-2013 five year average comes from the American Community Survey 2009-2013 five-year estimate.

Median Earnings for Young Americans Aged 18-34 in the Ten Most Populated Metro Areas

  2013 Median Earnings         (in 2013$)* 2000-2013 Change           (in 2013$)** 2000-2013 Percent Change** Percent of 18-34 year-olds with a college degree or higher, 2013**
Washington, D.C. 47,380 1,560 3.4% 38.9
Boston 44,548 -2,196 -4.7% 38.9
New York City 42,108 -3,216 -7.1% 33.3
Philadelphia 39,413 -3,582 -8.3% 28.5
Houston 33,674 -4,082 -10.8% 21.0
Los Angeles 33,667 -4,200 -11.1% 23.6
Chicago 38,415 -5,111 -11.7% 30.2
Dallas 33,369 -5,660 -14.5% 22.6
Miami 30,728 -5,683 -15.6% 20.6
Atlanta 34,573 -7,203 -17.2% 25.4
US Average 33,883 -3,472 -9.3% 22.3
*Full-time, year round workers aged 18-34, where 2013 is the average median real earnings over 2009-2013
**Where 2013 is the five-year average over 2009-2013
Source: 2000 Census Long Form, 2009-2013 American Community Survey, PPI

That real median earnings increased in Washington, D.C. while falling elsewhere might help explain why the nation’s capital has become an increasingly popular place to be for young people. The number of 18-34 year-olds living in the D.C. metro area has increased by 19 percent, or 226,000, since 2000, compared to one percent increases in Chicago and New York, and 9 percent nationally. Washington, D.C. also has a high share of employment dependent on the federal government, and a highly educated youth population, both of which may have been less affected by the economic downturn. (Houston, however, was the top city for youth inflows in spite of falling real median earnings, which saw its 18-34 year-old population increase 25 percent since 2000.)

Still, falling real median earnings across the board outside Washington, D.C. suggests the underlying issues affecting young workers is not solely about educational attainment or geography. Other major cities with a higher than average share of young college graduates, such as New York and Chicago, also experienced a decline in real median earnings. This is consistent with my previous research, which shows falling real average earnings for young college graduates at a time when many are questioning the value of a college degree.

Overall, the sharp decline in real median earnings for young workers is troubling. It suggests young Americans continue to face strong financial headwinds during their professionally formative years. Moreover, it could hinder young people’s ability to fully participate in the greater economy long-term. That has significant implications for politicians on both sides of the aisle, especially Democrats who care about creating a more convincing pro-growth agenda.

The Permanent Campaign: GOP’s Best Laid Plans Endangered

The president’s partial normalization of relations with Cuba spurred widespread Republican fury (with the conspicuous exception of Sen. Rand Paul).  You have to begin wondering if the multiple layers of conservative outrage over the president’s various executive actions could overwhelm the best-laid plans of GOP congressional leaders to make their takeover of Congress appear a calm ascension of governing-minded grownups. Add it up: the president’s environmental executive orders; his climate change agreement with China; his immigration action; and now Cuba–all on top of such “scandals” as Benghazi! and the IRS disrespecting of conservative non-profits that have never achieved any sort of resolution.  Conservatives will demand that “their” new Congress conspicuously address each and every one of these examples of “overreach” and “tyranny,” in a spectacle that will affect perceptions of the GOP going forward even if high-stakes collisions over government funding are somehow avoided.

If that’s not enough, there’s the burning question of what Republicans will do if the Supreme Court at the end of current term invalidates health insurance premium subsidies for millions of people in 36 states.   This week conservative health wonks Yuval Levin and James Capretta proposed that congressional Republicans pass legislation just before or immediately after a decision creating an Obamacare replacement system.  But the instinct of many conservatives if SCOTUS strikes a blow at Obamacare will be simply to celebrate.  And so it is not at all clear that the famous “taming” of the Tea Party branch of the GOP by Republican elites, even if it’s credited as a real phenomenon, will survive the pressures–or to put it another way the presidential provocations–of 2015.

What to Make of a CFO’s Musings on Regulatory Hypotheticals?

In recent days, the net neutrality crowd has seized on select, abbreviated versions of comments by certain executives of Internet service providers (ISPs) as evidence that ISPs are in fact supportive of the public-utility-style regulations being considered by the FCC for internet access service. Even the Chairman of the FCC made hay with the comments to advance his regulatory agenda.

As it turns out, the “gotcha” quotes were amplified in the media, while statements consistent with the “regulation-can-be-harmful” thesis were neglected. Even if we ignore what else those executives said, corporate financial officers (CFOs), or any executive for that matter, don’t have complete say over their firm’s investment decisions. That’s because external investors who lend money to ISPs are equally if not more important, particularly over the long run.

A small helping of investment theory is in order. Tim Karr at Free Press is fond of characterizing the ISP investment decision as an all-or-nothing affair, but in reality, investments (like any decision in economics) are made at the margin. Each project has a different expected return. And even within a project—say, fiber to the home (FTTH)—the expected return will vary depending on the city in which the investment would be made.

As any CFO knows, basic investment theory teaches that a firm invests in a project so long as the internal rate of return (IRR) on a project is greater than the minimum required rate of return, as measured by the firm’s the cost of capital. This is simple, folks: Line up your projects from highest to lowest IRR, and fund the ones that exceed your cost of capital. More »