NEWSWIRE: 4/15/19

  • A group of economists led by MIT’s Erik Brynjolfsson asks: How much is Facebook worth to the U.S. economy? The group’s thesis, which is that measured economic output understates the impact of “free goods of the Internet"--to the tune of 0.05% to 0.11% of GDP annually--runs into a host of conceptual problems. (The Wall Street Journal)
    • NH: Erik Brynjolfsson, coauthor of The Second Machine Age and champion of digital triumphalism, has been at this project for a while now. Back in 2014, he coauthored a study that pioneered a new "time value" approach to valuing Internet services. Last month, he expanded his effort with a five-member team in a massive NBER study (link: NBER membership required). Brynjolfsson discusses his findings in a recent interview with Quartz.
    • Conceptual problems? I can't even... Let's start with the most obvious. If Facebook really is worth $42.17 per month for the median user (as Brynjolfsson's surveys and complex calculations indicate), why doesn't Facebook raise a paywall, start charging such a fee, and roughly triple its U.S. revenue? Could it be because Facebook knows it can't? Time spent on social media can't be priced at a "reservation wage," since such time is typically taken at idle moments between ends-oriented tasks. And the problem with surveys is that they come up with widely varying estimates of how much money people would demand in order to leave Facebook. Some randomized studies, indeed, conclude that most people actually report being happier once they are persuaded to abandon Facebook--in which case we might conclude that Facebook generates negative welfare, what we might describe as an addiction. (See: "Trendspotting: 2/19/19.")
    • A bigger problem with nonmarket-based welfare measures is that they undermine any quantifiable approach to national income accounting. Americans have enjoyed "free" ad-supported entertainment for over a century--including radio, newsreels, and network TV. None of this has ever been included as part of consumer welfare. One plausible approach would be to equate its value to consumers with the ad dollars it generates. (Currently, ad spending is considered a business "input.") This would raise GDP in all years by just over 1%. But it would do little to change the trend in GDP growth over time, since the ad-revenue share of GDP has itself not changed over time.
    • Why not go further, and start "pricing" how people spend all of their time? The reason is obvious. We would have to start pricing the satisfaction of a long walk, a wonderful time with friends and family, or any "priceless" experience (as they used to say in the Mastercard ads). As Gary Becker pointed out in his classic 1965 paper, "A Theory of the Allocation of Time," unpriced time is a component of most goods and services we buy. Think of someone who buys a book or game or musical instrument with which they then spend thousands of hours. In all such instances, should we be adjusting the value of what is purchased by the time spent with it? We haven't even mentioned unpriced household production, like cooking your own food and taking out the garbage (though the BEA is gamely trying out some estimates of this.) See David Byrne, et al. in Brookings Papers for a magisterial discussion of many of these problems.
    • Brynjolfsson starts his article with a quote from the originator of "Gross National Product," Simon Kuznets: “The welfare of a nation can scarcely be inferred from a measure of [GDP].” The unwarranted implication is that Kuznets would have wanted GDP to reflect total welfare. He absolutely did not. GDP was always designed as an aggregate measure, comparable over time, of the consumer value of an economy's production of marketplace goods and services. Kuznets famously did not want to include defense spending as part of GDP, though (with his economic leadership as part of FDR's brain trust during World War II) he hardly would have regarded defense spending as irrelevant to the nation's welfare.
    • The word "marketplace" is paramount: An explicit transaction must take place. Admittedly, this is not always a clear line to draw--as happens, for example, when NIPA imputes rent to owner-occupied homes because they are such close substitutes for rentals. But it is a standard that national accounting tries to follow. Needless to say, GDP does not capture most of what is important in life, either to us individually or to us as a society. But trying to remedy this imperfection--by jamming all these more important things into one grand number--risks creating a monstrosity.
  • Fully 16% of recent Xer homebuyers purchased a multigenerational home, the highest share of any generation. More than half of these buyers say they bought a multigenerational home because of their adult children returning to (or never leaving) the nest, which illustrates the enormous impact of “boomerang” Millennials on the housing market. (National Association of Realtors)
    • NH: The full NAR report is worth looking at. The vast majority of Americans buying "multigenerational homes" are over age 40. And contrary to the general impression, these buyers are doing it more for the sake of their grown kids than for their parents. Among all buyers, those in their 40s are most likely to buy a multigenerational home. And among these, 52% said they were motivated by kids who either are returning back home or who never left. Fewer cited the needs of aging parents.

Trendspotting: How Much Is Facebook Really Worth to the Economy? - April15 chart2

  • Contributor Amanda Mull pushes back against the narrative that Millennials are a generation of teetotalers obsessed with living healthy. While it’s true that, as Mull points out, some Millennials have simply swapped alcohol for cannabis or prescription stimulants, her conclusion doesn't acknowledge that this generation has brought about a decline in virtually all forms of risk-taking behavior. (The Atlantic)
    • NH: This is an odd article. In most of it, Mull is basically conceding the other side of the argument. She agrees that teens are drinking a lot less; that public-health campaigns against drinking are succeeding; that alcohol retail sales are declining; and that the alcoholic beverage industry is rapidly moving toward nonalcoholic ("zero proof") drinks. In one respect, she doesn't do her homework. She claims that drinking rates, while declining among teens, are not dropping among 20-somethings. In fact, they're declining here as well according to data from Monitoring the Future (see chart below), though not as dramatically.
    • We've been tracking this Millennial trend for many years--both in America and in Europe. (See: "The Next Big Thing: Where the Wild Things Aren't.") Mull points out some interesting new angles, such as data showing a county-by-county correlation between rising cannabis consumption and declining alcohol consumption. Anecdotally, many Millennials say that they have learned to use a "bowl" instead of a glass to unwind at the end of the day. The emerging cannabis industry will no doubt put such findings to use in its PR. She also points out, uncontestably, that less alcohol doesn't necessarily mean greater happiness. The young-adult suicide rate in recent years has started to trend back up again.
    • Total U.S. alcohol consumption per capita, after trending down during the 1980s and 1990s, has recently flattened out and even begun to rise a bit. But don't blame that on Millennials or Homelanders. Blame that on Boomers, who (as in so much of their behavior) are taking risk-seeking lifestyles with them into older age brackets. Binge drinking among seniors climbed 19% from 2005 to 2014. Liver disease, even aside from Hep C, is rising in prevalence for Americans born after 1945.

Trendspotting: How Much Is Facebook Really Worth to the Economy? - April15 chart3

  • As more attorneys keep practicing well past age 65, law firms are weighing mandatory retirement rules. It’s a delicate balance: The firms don’t want to antagonize longtime partners who balk at the very idea of winding down, but they also need to ensure a smooth transition to the next generation of lawyers. (Bloomberg Law)
    • NH: There are plenty of drivers behind this trend. Overall, the labor force participation (LFP) rate over age 65 has ramped up sharply since 2000. The LFP rate has risen by a third at age 65-69, and by over half at age 70-74 and age 75-79. What's more, this jump has been greatest for high-paid professionals who excel at (what Robert Reich likes to call) "symbolic analysis." This is why the average wage has soared for 70-somethings over the last decade: Suited professionals are expanding as a share of these septuagenarian workers. Might we be talking here about lawyers? We are indeed. And let's add one further fact: Most law firms are organized as a giant chain letter, in which the most senior partners get the largest share of all the billable-hour revenue generated by underlings.
    • To be sure, this creates plenty of generational tension. Many first-wave Boomers (and even late-wave Silent) don't want to retire. And only half of all large law firms have any kind of mandatory retirement policy. What's more, these elder achievers are often at the top of their game (see: "Trendspotting: 3/11/19"), and they may well have close personal relationships with the firm's top clients. If they move to another firm, most of their clients will move with them. On the other hand, Xers and Millennials may feel they can handle the client load perfectly well (or better) on their own. Some firms are experimenting with paying off these long-time partners with long severance agreements.
    • One issue which sometimes forces this question to the firm's immediate attention is dementia. While overall age-adjusted dementia rates are declining over time, advancing age is an obvious risk factor. Once diagnosed, dementia can open the firm to liability suits. According to The American Lawyer, lawyer assistance programs (LAPs) that used to help lawyers mostly with alcohol abuse are increasingly focusing on Alzheimer's.
  • Just 68% of Xers say they’re happy at work, compared to 74% of Boomers and 75% of Millennials. Why? A lack of financial security is a major factor: Nearly half of Xers report living paycheck to paycheck, and this generation is the most likely to believe that they’ll never be able to retire. (MetLife)
  • U.N. projections show that Africa will be responsible for more than half of the world’s population growth over the next three decades. Whether African countries have the political and institutional stability to leverage their surging population growth into robust economic growth, however, remains to be seen. (MercatorNet)
    • NH: Yes, according to the U.N.'s official projection, Africa will account for roughly half of the world's total population growth between now and 2040--and for roughly two-thirds by the year 2060. Why such a large share? Because population in most of the rest of the world will either be shrinking, flat, or barely growing. Even within Africa, nearly all this growth in accounted for by countries south of the Sahara. If you just take those countries, and selectively add to them less than a dozen of the fastest growers in South and East Asia (like India, Pakistan, Iraq, Afghanistan, and the Philippines), you could easily come up with a pretty short list that would account for more than all of the total growth in the world's population. (See: "Investing Webcast: Annual Demographics Outlook.")
    • Keep in mind that the U.N.'s projection understates the imbalance of current demographic trends. In its official model, the U.N. assumes that all societies, in the very long run, will converge to a total fertility rate of 2.1. As such, this projection assumes that very high-fertility African countries will experience a steady decline in fertility while low-fertility developed countries will experience a rise. If you negate that assumption (in what the U.N. calls its "constant fertility" projection), the role of Africa in global population growth is even larger.
    • One big Malthusian question unanswered by any of these projections is, quite honestly, whether they are plausible. And by that I mean whether they are possible. Let me explain. Roughly a third of Africa's population is located in West Africa, mainly comprising Nigeria, the gold coast countries, Mauritania, Mali, and Niger. Nearly all of the three latter countries is the Sahara Desert. If you confine yourself to habitable landmass, you're looking at an area of no more than 1 million square miles, less than 60% of the size of the European Union. According to the official projection, West Africa by 2060 will have nearly a billion people. This is double the EU's population today. So this projection implies a population density roughly 3.5 times higher than that of the EU.
    • Today's West African economy is mostly low-productivity agriculture. It generates one of the lowest per-capita incomes in the world--less than one-fifteenth of Europe's. From this I conclude the following: Either West Africa experiences a multi-decade productivity miracle exceeding China's, or these population projections will not happen. It's about as simple as that.

Trendspotting: How Much Is Facebook Really Worth to the Economy? - April15 chart4

  • A new piece explores the reasons why the internationalization of higher education has lost its luster. Culture clashes, a chillier political environment, and criticism over commercialization have colleges falling in line with the broader retreat from globalism. (Chronicle of Higher Education)
    • NH: As goes globalism in general, so goes the global dream in higher education. Many deans in academia blame President Trump for what's ailing international higher ed, but as this excellent article makes clear, the hopes began to sour five or six years ago--near the end of Obama's first term. Collegiate emphasis on global growth in their strategic plans peaked in 2011. The growth rate in overseas enrollment in U.S. schools peaked in 2012. The number of U.S. collegians studying foreign languages peaked in 2009. Since then, all these trends have been sloping downwards. The decline in collegians studying foreign languages is actually accelerating over time. A couple of months ago, the Modern Language Association issued a panicked press release announcing that colleges have cut a "stunning" 651 foreign language programs over the past three years.
    • To be sure, the "Trump effect" is not imaginary. In the 2016-17 academic year, the YoY growth rate in overseas students turned negative for the first time since the Great Recession amid widespread reports that America was perceived as less "inviting" to foreigners. Uncertain of their visa status, many international students are going elsewhere--and some may be tiring of high tuitions charged by U.S. colleges. The number of overseas students studying "intensive English," after peaking in 2016, is now falling sharply.
    • So what's going on? Much can be attributed to the declining enthusiasm for "globalism" generally across the worldwide public. It's a mood that rubs off on families, young people, government officials, and electorates. Also, among late-wave Millennials going to college in recent years (and certainly among their pragmatic Xer parents), there is a redoubled focus on safety and cost-effectiveness. Will my kids get hurt? And, are we getting the most return from our tuition dollars? When those are your highest-priority questions, semesters abroad and foreign language courses will suffer. Second- and third-tier liberal arts colleges are putting their extra dollars into career prep and career placement--not into exotic cross-border enrichment.
    • The steepest rise--and now the steepest fall--in cross-border enrollment is between the U.S. and China. Perhaps this too should be no surprise. As the relationship between these two nations grows more adversarial, official inquiries into the status and activities of students abroad are becoming more frequent. Chinese-funded "Confucian Institutes" are being shut down and Chinese participation in research consortia is being scrutinized. American universities are hugely popular in China. But on their side, too, the mood may be changing.

Trendspotting: How Much Is Facebook Really Worth to the Economy? - April15 chart5

Trendspotting: How Much Is Facebook Really Worth to the Economy? - April15 chart6

Trendspotting: How Much Is Facebook Really Worth to the Economy? - April15 chart7

  • Apple Music has overtaken Spotify in U.S. subscribers, marking a new front in the music streaming wars. Though Spotify remains far ahead in global subscribers, it’s clearly feeling the heat, expanding discounts in recent months and even filing an antitrust complaint against Apple in Europe. (The Wall Street Journal)
    • NH: Readers following our examination of the music-streaming industry know that we're not bullish on Spotify. It's very highly valued for a firm that has trouble making a profit in an industry with few scale economies and giant (real and potential) competitors. What's especially scary for Spotify about Apple's accelerating subscription growth is that CEO Tim Cook doesn't even care much whether he makes a positive margin off this service. Apple is pursuing it mostly to enhance the value of its devices. What goes for Apple goes double or triple for Amazon or YouTube (Google). Any of these behemoths could throttle Spotify overnight with price cuts without breaking a sweat. No need even to buy out Spotify. Just step on it, and then pick up the pieces.
  • According to the latest jobs report, the employment-to-population ratio among 25- to 34-year-olds hit 86.5% in March, the highest level since June 2008. Labor economists who were worried that older Millennials were “at home playing video games” instead of working can take solace that a tightening labor market has improved this group’s prospects. (MarketWatch)
    • NH: This article is singing from our hymnal. We've gone out of our way to emphasize (see: "The 'Brutal Reality' Of U.S. Working-Age Population") that, at long last, the current recovery has run out of workers. Our evidence: The U.S. age-adjusted employment-to-population ratio in March has risen significantly above the peak year of the last recovery (CY 2006). The best case and point is the employment rate for Millennials age 25 to 34. Thanks to an awesome recent employment surge among Millennial women, and the March uptick among Millennial men, the rate for this entire age bracket is now 0.6 percentage points higher than it was in CY 2006.

Trendspotting: How Much Is Facebook Really Worth to the Economy? - April15 chart8

  • The share of Americans who prioritize environmental protection (65%) over economic growth (30%) is the highest since 2000, with 18- to 34-year-olds and Democrats leading the way. It’s a good time for Democratic leaders to promote policies like the Green New Deal, but with support for the environment tracking the economic indicators, there’s limited time to get the public onboard before the next downturn. (Gallup)
    • NH: The absolute pro-versus-con numbers on these Gallup surveys are pretty much worthless, since so much depends on the wording. Who doesn't want to "protect" the helpless environment? And what sort of economic costs are we talking about? What if we worded the question differently, say, by asking whether federal agencies in charge of protecting the environment should be given freer reign to burden the economy with anti-growth regulations and taxes. I strongly suspect the numbers would be different.
    • But the trend over time in response to an identically worded question is indeed noteworthy. The biggest takeaway, as the report itself points out, is that this indicator is extremely responsive to current economic performance. Its rise and fall closely tracks (positively) the GDP growth rate and (negatively) the unemployment rate. So, yes, a recession in 2020 could take the "Green New Deal" off the table to most Democratic candidates. Unless, like Sen. Ed Markey (D-MA) and Rep. Alexandria Ocasio-Cortez (D-NY), they know how to talk about a "ten-year national mobilization" and thus wed the "green" theme with the "New Deal" theme in the same crisis-laden rhetorical package.

                                                  DID YOU KNOW?

                                                  Managing Great Expectations at Work. An ambitious self-starter is every employer’s dream. But what happens when new hires are too ambitious? That’s the question many managers are facing as late-wave Millennials arrive in the workplace. A recent survey shows that 75% of 18- to 23-year-olds believe they should receive a promotion after just one year on the job. Managers who are used to new hires putting in their time are taken aback. HR executive Ruben Moreno says, “The first time I ran into one of these [ambitious recruits], I thought, who does this person think they are?” Still, Moreno now presents new hires with step-by-step career paths and meets with them once a quarter to discuss their progress. Other firms are offering earlier opportunities for advancement, or, if a promotion is out of the question, are offering lateral moves to give workers a taste of something different. The latter option is enough to satisfy Millennials like Ali Conn, whose concerns span beyond money: “I don’t want to feel stuck in a role for more than a year, feeling I haven’t contributed anything.”