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Jan 7, 2013

How the internet killed GDP as a reliable economic barometer

The shift from newspapers and physical retailers to the internet has dragged down GDP -- but that isn't a bad thing in itself. It's the economic measure that may now be wrong.

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If you’re an economist you probably shouldn’t like the internet — it’s turned the notion of GDP into a fool’s errand.

But it hasn’t stopped banks, governments and the media from slavishly using GDP as their economic indicator of choice. Recessions are defined by GDP (a recession being two consecutive quarters of GDP negative growth); Central Banks, the unelected bastion of economic fortitude, closely monitor GDP and inflation when it determines the price of money. In reality, as a key indicator — especially of living standards — GDP data tells us little of what we really want to know.

And if GDP was misleading before, it’s been rendered almost irrelevant by the internet.

Consider the effect on media, specifically newspapers — an outlet for advertisers to reach an audience, traditionally through classified ads. In order to reach the largest possible audience, newspapers combined classified advertisements (their actual business) with the provision of news (which was an ancillary service intended only to assist with the furtherance of their actual business, which was selling advertising).

It worked well for about 150 years. And the effect on GDP was significant. For a start, newspapers needed to hire journalists to write the news, plus editors and designers, photographers, typesetters (to ensure the ads appear as they should), with layers of management and finance and marketing teams. Plus the staff employed in the physical production of papers, newsagents, delivery boys and girls, etc.

Along the entire chain GDP was being “created” by newspapers — and built into the price paid by advertisers and readers — and in the significant investment needed for offices and printing presses. The internet changed all that.

In hindsight, all that GDP wasn’t especially efficient, as investment essentially creating a way for advertisers and their customers to connect (the side effect of providing news and greasing the wheels of democracy was merely a bonus). The internet connected classified advertisers with people looking to buy things, for a fraction of the investment.

In Australia, Seek took a stranglehold on employment advertisements, Carsales took over vehicles while RealEstate.com.au (itself partially owned by a newspaper company) dominated the market for property advertisements.

While few would criticise their contribution to the economy, in pure GDP terms those three companies contribute far less than old fashioned newspapers. Seek (which has a market value which is more than double that of Fairfax), Carsales and RealEstate.com.au achieve all the benefits of a newspaper business but without most of the costs and investment. To place an advertisement online all an advertiser needs is a website, some support staff and advertising to tell people the website exists. No need to invest $500 million in a printing plant (which would lead to a significant boost to GDP), no need to pay for journalists, editors and copywriters.

The internet turned an inefficient model for connecting advertisers and customers into an efficient one — and in doing so, reduced GDP.

The same thing is happening in retail (although to a lesser extent). Successful online retailers like Catch of the Day or Kogan operate with far less staff and, more importantly, far less investment than traditional “bricks and mortar” retailers like Harvey Norman or Myer. Kogan is arguably the most pure retailer, acting in effect as a translator of sorts between overseas-based manufacturers and customers. No need to spend hundreds of millions of dollars building and fitting out (and owning) a stores. Kogan turns every computer or mobile phone into a shopfront. That’s bad news for GDP.

Few would dispute the tectonic changes the internet has caused in media and retail. In both sectors, the internet has reduced inefficiencies and removed much of the need for capital and labour, allowing costs to be brought down for consumers. This of course causes GDP to be less than it otherwise would have been (consumption and investment make up most of it).

Like newspapers or rent-geared retailers, has GDP’s time come as a key indicator? Surely economists need to consider a new metric to determine success or failure. If the last decade has shown us anything, sometimes, lower GDP may actually be a good thing.

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