How much value do free online services contribute to the U.S. economy? Ask any user of Google, Facebook, YouTube or Twitter, and the answer would most likely be, “A lot.” But according to every statistic created by the U.S. government, the answer is actually zero.
That’s because key benchmarks including gross domestic product (GDP) historically ignore everything without a price. Because consumers do not pay for many information services, these “building blocks of the digital economy,” as Harvard Business School economist Shane Greenstein wrote in a 2013 paper, simply aren’t measured by standard economic tools. Greenstein refers to the vast difference between actual and measured value as our “digital dark matter.”
Ignoring free goods may not have mattered much in the past, but today a growing range of crucial software and digital services are simply not being counted. Well, so what? Consumers and investors obviously place high values on these services and the companies that offer them. Google is valued at more than $500 billion, and last year reported revenue of $75 billion.
Bragging rights aside, what difference does it make if government statistics don’t give the digital economy any credit? A lot, it turns out. GDP and other economic measures are used to determine government policies, particularly those related to investment, regulation, law enforcement, taxes and other incentives. And, perhaps most important of all, trade relations.
Although key agencies, including the Commerce Department and the U.S. Trade Representative, are deeply involved in negotiations involving digital goods, there is growing evidence that undercounting the value of these goods has created a blind spot in trade deals and enforcement.
“There is a lack of appreciation for what’s happening in Silicon Valley,” Google chief economist Hal Varian told the New York Times recently, “because we don’t have a good way to measure it.”
To the government’s credit, the most recent annual Economic Report of the President at least acknowledges digital dark matter and says it is a likely “source of missing GDP growth.” It also notes related undercounting problems with other key measures, including productivity growth and “consumer surplus” — the value of a good to a buyer beyond what they actually pay for it.
