#in If you take away much of the growth in financial services productivity and strip away the method of calculating the GDP deflator using hedonic pricing, the exceptional growth of the US economy looks pretty unexceptional. That’s the argument of Yves Smith.
I am directly plagiarizing the words below from Smith because I want to slim the article into two key points that show a massive distortion of American prosperity. With apologies to Smith, I recommend reading the full post.
1. The chimera of financial services productivity.
The conventional view that European productivity gains lagged those of the US starting in 1995 is increasingly questioned. From Paul Krugman in 2009:
I went back to something that was a hot topic not long ago, and will be again if and when the crisis ends: the apparent lag of European productivity since 1995…I noticed something that gave me pause.
In their paper, van Ark etc. identify the service sector as the main source of America’s pullaway — which is the standard argument. Within services, roughly half they attribute to distribution — roughly speaking, the Wal-Mart effect. OK.
But the other half is a surge in US productivity in financial and business services, not matched in Europe. And all I can say is, whoa!
First of all, how do we even measure output of financial services? If I read this BEA paper correctly, we more or less use “checks cashed” — or, more broadly, the number of transactions undertaken. This may be the best we can do, but it’s a pretty weak measure of actual work done by the financial system.
And given recent events, are we even sure that the expansion of the financial system was doing anything productive at all?
In short, how much of the apparent US productivity miracle, a miracle not shared by Europe, was a statistical illusion created by our bloated finance industry?
Dean Baker has argued for some time that, properly measured, the productivity gap between America and Europe never happened. I’m becoming more sympathetic to his point of view.
2. The fallacy of the “hedonic price index”
Let’s look at GDP. That’s a fundamental figure, surely beyond question or compromise. Really? Our GDP stats include something called a “hedonic price index” basically to allow for the fact that computers are becoming more powerful at lower costs. In essence, the US grosses up the price of computers in its GDP reports to adjust for the fact that computer prices are dropping.
These adjustments are significant. The US is the only country that uses hedonic indexing. The Bundesbank complained that if they calculated GDP the way we did, their GDP growth would be 0.5% higher. And the cumulative distortion is massive. In 2005, Michael Shedlock contacted the Bureau of Economic Advisers and they supplied some dated information on hedonics (including a spreadsheet). Even so, he found that hedonic adjustment to GDP was 2.257 TRILLION dollars, or 22% of then-current GDP.