Read an ExcerptHard-to-Measure Goods and Services Essays in Honor of Zvi Griliches
The University of Chicago Press Copyright © 2007 the National Bureau of Economic Research
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Chapter One Context and Prologue Introduction Ernst R. Berndt and Charles R. Hulten If the data were perfect, collected from well-designed randomized experiments, there would be hardly room for a separate field of econometrics. Given that it is the "badness" of the data that provides us with our living, perhaps it is not all that surprising that we have shown little interest in improving it. -Zvi Griliches (1986, 1466) Great advances have been made in theory and in econometric techniques, but these will be wasted unless they are applied to the right data. -Zvi Griliches (1994, 2) My father would never eat "cutlets" (minced meat patties) in the old country. He would not eat them in restaurants because he didn't know what they were made of and he wouldn't eat them at home because he did. -Zvi Griliches (an old family story, 1986, 1472) Empirical economists have over generations adopted the attitude that having bad data is better than having no data at all, that their task is to learn as much as is possible about how the world works from the unquestionably lousy data at hand. -Zvi Griliches (1986, 1508) Why are the data not better? ... Why does it feel as if the glass is still half-empty? ... The metaphor of the glass half-empty is also misleading. As we fill it, the glass keeps growing. A major aspect of learning is that the unknown keeps expanding as we learn. This should be looked at positively. It is much better this way-especially for those of us who are engaged in research! -Zvi Griliches (1994, 14, 17, 18)
More than fifty years ago, Oskar Morgenstern (1950) pointedly asked whether economic data were sufficiently accurate for the purposes for which economists, econometricians, and economic policymakers were using them. Morgenstern raised serious doubts concerning the quality of many economic data series and implicitly about the foundations of a large number of econometric and economic policy analyses. In 1986, more than thirty-five years later, in the final remarks section of his Handbook of Econometrics chapter entitled "Economic Data Issues," Zvi Griliches commented with sadness on Morgenstern's important observations and criticisms, stating, "Years have passed and there has been very little coherent response to his criticisms" (1986, 1507).
The absence of a coherent response cannot be laid at Griliches's feet. His entire career can be viewed as an attempt to advance the cause of accuracy in economic measurement. His interest in the causes and consequences of technical progress led to his pathbreaking work on price hedonics, now the principal analytical technique available to account for changes in product quality. It also led him to investigate the issue of how research and development (R&D) investment is linked to the growth of real output. His research on human capital and its relation to the production function led him to formulate a measure of human capital-cum-labor quality. This approach to measuring the contribution of labor (and capital) to economic growth was one of Griliches's main contributions to the pioneering work on total factor productivity with Dale Jorgenson. The Jorgenson-Griliches collaboration was especially notable because of its insistence that accurate measurement was inextricably linked to economic theory: the theory of production implied an internally consistent accounting framework for the data, the theory outlined specific measurement methods, and price and quantity data that did not conform to this framework could lead to biased and uninterpretable results. This insight is at the heart of current efforts to improve the U.S. National Income and Product Accounts.
The study of multifactor productivity led Griliches to the question of the accuracy of service-sector output. Aggregate productivity growth had slowed in the 1970s, and one explanation was the shift in the composition of output toward service-producing industries where output growth measures are problematic and likely biased downward. The 1992 NBER Conference on Research in Income and Wealth (CRIW) volume that he edited (Griliches 1992) was the most comprehensive summary of measurement problems in these "hard-to-measure" sectors of its time. Moreover, his 1994 article (Griliches 1994), which coined the terms measurable and unmeasurable sectors (the latter including construction, trade, finance, other services, and government) focused attention on the breadth of the problem and challenged the view that each service industry was a special problem to be dealt with on its own. While improvements in the accuracy of service-sector outputs must recognize the unique characteristics of each sector's products, there is a unity to the problem: in all cases, the problem emanates from the fact that the units of measurement of the underlying product are very difficult to define (what is the "output" of a bank, a lawyer, a consultant, or a college professor?). In other words, one must know what "it" is before trying to measure "it."
Griliches's emphasis on the difficulties in measuring outputs and prices in the service sectors is not just an academic issue but also has substantive policy implications. For example, in his 1998 address at the annual meetings of the American Economic Association and the American Finance Association in Chicago, Federal Reserve Board Chairman Alan Greenspan stated:
Of mounting importance is a deeper understanding of the economic characteristics of sustained price stability. We central bankers need also to better judge how to assess our performance in achieving and maintaining that objective in light of the uncertainties surrounding the accuracy of our measured price indexes.... The published price data indicate that the level of output per hour in a number of service-producing industries has been falling for more than two decades. It is simply not credible that firms in these industries have been becoming less and less efficient for more than twenty years. Much more reasonable is the view that prices have been mismeasured, and that the true quality-adjusted prices have been rising more slowly than the published price indexes. Properly measured, output and productivity trends in these service industries are doubtless considerably stronger than suggested by the published data. (Greenspan 1998)
Many goods and services are easy to measure badly but difficult to measure well, and the units-of-measurement problem is by no means restricted to intangible service-sector outputs. Similar issues arise with tangible outputs and inputs where there is important product variety: different technological vintages of capital goods, workers with varying amounts of human capital, alternative qualities of automobiles. Treating all investment in computing equipment or all worker hours as a homogeneous input with an implicit common unit of measurement, or treating real aggregate expenditure for medical goods and services as a homogeneous output, runs the risk of misstating the true growth of the economy as well as the rate of price inflation.
Some of the consequences of such a misstatement were highlighted in earlier remarks by Greenspan in 1995, who indicated to the Senate Finance Committee that he believed the U.S. Consumer Price Index (CPI) overstated true inflation by between 0.5 and 1.5 percent per year. A bias of this potential was particularly important to monetary policymakers in an environment of low measured inflation in the 1990s. (It is even more critical today, as macroeconomists consider the possibility of low measured inflation actually implying a deflationary environment due to continued failure fully to capture the price index consequences of quality improvements embodied in new goods.) It was also of great importance to fiscal and income security policy as the CPI is widely used for cost-of-living adjustments. A commission was established to study the problem, chaired by Michael Boskin, of which Griliches was a member; this commission concluded that in 1995 the best estimate of the bias in the CPI was about 1.1 percent per year (see Boskin et al. 1996) and that a bias of this magnitude would cost the federal government around $1 trillion over the succeeding twelve years.
Debates over the existence of a "new economy" also depend critically on the accuracy of statistics on real output and input. Based on his study of the history of lighting, one prominent academic researcher, William Nordhaus (1997), was led to observe that "The bottom line is simple: traditional price indexes of lighting vastly overstate the increase in lighting prices over the last two centuries, and the true rise in living standards in this sector has consequently been vastly understated" (Nordhaus 1997, 30). The high-tech meltdown of 2000 underscores the need for accurate statistics on the prices and quantities in an era of rapid technological change. This means that the measurement problems of the hard-to-measure outputs (and inputs) must be confronted head-on. This was the central theme of the conference held to honor the memory of Zvi Griliches.
The CRIW Conferences in Honor of Zvi Griliches
In recognition of Zvi Griliches's contributions to the cause of economic measurement and to identify and build on ways in which further progress can be made in improving the quality of our economic statistics, the CRIW sponsored a conference held in the Washington, D.C. area on September 19-20, 2003. This conference focused primarily on economic measurement issues in the areas of productivity, price hedonics, capital measurement, diffusion of new technologies, and output and price measurement in hard-to-measure sectors of the economy. An earlier conference was held on August 25-27, 2003, in Paris, France; it focused on other legacies of Griliches, such as returns to R&D, international diffusion of new technologies, econometric tools for dealing with measurement errors of various types, and the economics of intellectual property rights. For the most part, though not exclusively, papers presented at the Paris conference comprise a volume edited by Jacques Mairesse (ENSEE) and Manuel Trajtenberg (Tel Aviv University), assisted by Ernst R. Berndt and Charles R. Hulten, under the title of Zvi Griliches's last book, R&D, Education and Economic Growth, while those presented at the Washington conference appear in this volume.
Summary of Papers at the Conference on the Hard-to-Measure Sectors of the Economy
The chapters included in this tribute to Zvi Griliches encompass a series of topics in economic measurement to which he contributed directly, exhibited an abiding interest, or supported indirectly through his role as director of the NBER Program on Technological Change and Productivity Measurement. The chapters are linked by the theme of hard-to-measure goods and services and range over themes mentioned earlier: the measurement of service sector outputs, the measurement of capital and labor inputs, issues in the consistent measurement of input quantities and productivity growth, measurement error, the diffusion of new technologies, and the challenges posed by the definition and measurement of output in the new economy.
We begin and end this volume with chapters that focus specifically on Zvi Griliches's contributions to economic measurement. In chapter 1, "Theory and Measurement: An Essay in Honor of Zvi Griliches," Charles R. Hulten provides an initial overview of Zvi's contributions to the cause of economic measurement in the context of how the field of economics (and its general attitude to measurement issues) evolved during the period spanned by his career. In order to appreciate fully the magnitude of Griliches's contributions to measurement, Hulten argues that it must be recognized that the whole was greater than the sum of its parts. Hulten's chapter also examines the link between data and theory in the context of Koopmans' (1947) famous injunction to avoid "measurement without theory." One of the great achievements of Griliches's career was to demonstrate how this injunction could be implemented. Hulten then looks to the future of the Koopmans' injunction and argues for the need to account for possible feedback effects arising from the impact of mismeasurement on the behavior of economic agents, and the associated need to take into consideration the political economy context of measurement bias.
The final chapter in this volume, chapter 19-"Zvi Griliches's Contributions to Economic Measurement," is based on a luncheon address at the conference by Jack E. Triplett. Triplett reviews the measurement problems on which Griliches worked, those on which he did not work directly but on which he had a significant influence, and those that will likely continue to be important in the future. He also discusses in greater detail Griliches's interactions with government economists and statisticians in the various statistical agencies. Triplett emphasizes that Zvi Griliches's impact on measurement extended far beyond his immediate research, including that on his many students and colleagues (and their students and colleagues), as well as from his leadership in the measurement community as a whole.
In between these two chapters focusing specifically on Zvi Griliches's lasting contributions, are sections devoted to issues involving the role of information technology in productivity growth (chapters 2 through 5), specific issues involving the measurement of capital and labor inputs within a consistent framework (chapters 6 through 9), various aspects of price measurement (chapters 10 through 15), analyses of data sets old and new (chapters 16 and 17), and a surprising update of Griliches's classic paper on the diffusion of hybrid corn (chapter 18).
Classic Input Measurement Issues Revisited
The next set of four chapters deal with an issue to which Griliches made one of his most important contributions: the accurate measurement of capital and labor inputs and the associated hypothesis, with Dale Jorgenson, that much of what is recorded as total factor productivity is actually measurement error. The first chapter in this section, chapter 2-"Production Function and Wage Equation Estimation with Heterogeneous Labor: Evidence from a New Matched Employer-Employee Data Set," by Judith Hellerstein and David Neumark deals with labor rather than capital measurement. Hellerstein and Neumark report on efforts underway to link hours worked to labor force characteristics, an innovation that promises to increase the accuracy of the labor input measures used in various analyses of productivity. This is a subject pioneered by Griliches in his early efforts to incorporate human capital in the structure of production. Here Hellerstein and Neumark use cross-sectional data to derive direct estimates of the impact of human capital on output. These findings are then compared to the conventional productivity approach that assumes wages are a satisfactory proxy for the direct effect.
In chapter 3, "Where Does The Time Go? Concepts and Measurement in the American Time Use Survey," Harley Frazis and Jay Stewart report on a newly introduced Bureau of Labor Statistics survey that eventually will provide time series data on the use of household time, both market and nonmarket. Initial results reported in this chapter indicate that the value of nonmarket household time (i.e., household production) amounted to more than $3 trillion in 2003, or about 30 percent of current gross domestic product (GDP). In addition to providing information of great value to labor economists, this new data series will be useful for gaining insight into the widely noted divergence between the estimates of employment and wages obtained from the household-based Current Population Survey and the establishment-based Current Employment Statistics program.
In chapter 4, "Technology and the Theory of Vintage Aggregation," Michael J. Harper reexamines a well-known and conceptually difficult aspect of the vintage asset problem: the aggregation of different technological vintages of capital. Harper explores several of the salient theoretical issues and provides an important reminder that much of the empirical literature on the sources of economic growth rest on simplifying assumptions that may not be true. A related set of capital measurement issues is addressed in chapter 5, "Why Do Computers Depreciate?," by Valerie Ramey, Matthew Shapiro, and Michael Geske. These authors focus on another difficult capital measurement problem-measuring the economic depreciation of computers using the "vintage" price of used computers and separately identifying and measuring the obsolescence and deterioration components of economic depreciation. This separation reveals that the decline in the price of a computer as it ages is largely due to obsolescence and a decline in replacement cost, with only a negligible effect attributed to physical deterioration.
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