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.
But the problem persists. Even as manufacturing jobs migrate to lower-cost economies, the United States continues to lead the world in digital production, including software, services and content. Ignoring the new economy risks stalling the innovation engine that is driving much of our growth.
To pick just one telling data point, according to the most recent report from Kleiner Perkins analyst Mary Meeker, 12 of the 20 most valuable Internet companies in the world are U.S. based, with nearly all of the rest coming from China. Other than Apple, none of these companies even existed in 1995, yet they now have a combined market value close to $3 trillion.
The scale of that success may not make enough of an impression on U.S. trade policymakers, but our innovation surplus hasn’t been lost on some of our largest trading partners, particularly the deeply troubled European Union.
For the past several years, the European Union has accelerated efforts to shore up its technology businesses by restricting U.S. enterprises, inventing broad new definitions for antitrust and other anti-competitive harms. U.S. companies including Intel, Microsoft, Google and Qualcomm have been on the receiving end of whopping fines — some well over $1 billion — for increasingly creative infractions.
Eighteen months ago, the European Union launched its Digital Single Market initiative, which, on paper at least, was aimed at improving digital trade among member nations. But buried in the plan was a promise to deeply scrutinize “platform” companies, notably Facebook and Amazon, which compete in multiple markets, such as search, video, advertising and e-commerce. “The way they use their market power raises a number of issues,” the plan noted ominously, “that warrant further analysis beyond the application of competition law in specific cases.”
The antitrust proposals in the DSM seem to be the only part of the plan the Europeans have put into action. New investigations of Google and Amazon are taking novel approaches to defining “dominance.” Uber and Airbnb have encountered violent protests and outright bans in some countries. Streaming video services, including Netflix, are being ordered to fund local content.
And after a European court voided the long-standing safe harbor that allowed U.S. companies to easily comply with complex E.U. privacy law, the United States signed a new Privacy Shield agreement. Although the court had objected solely to U.S. government surveillance, the Privacy Shield principally limits information collection and use by private companies.
Seeing the writing on the wall in Europe, a growing number of U.S. companies, including Microsoft, Amazon Web Services, Apple and Facebook, are now spending billions to build local data centers in Europe, hoping for a chance to offer growing cloud-based services. But it’s hard not to view their investment as something closer to extortion.
E.U. authorities are also rattling a hefty tax saber. The commission ruled in late August that Apple’s Irish affiliate had abused local tax laws, and ordered the company to pay more than $14 billion in back taxes. (The U.S. Treasury Department, which hopes to repatriate some of that money and subject it to U.S. tax, responded meekly that the ruling was “disappointing.”)
Although dressed up in the language of consumer protection, privacy and localism, it doesn’t take much reading between the lines to see these aggressive moves as what they really are: efforts to raise trade barriers against U.S. Internet companies.
The European Union is engaging in digital protectionism, as insidious — and illegal — as it would be if applied to physical goods and the companies who make them. Put plainly, Europe is dangerously close to declaring a trade war on U.S. information companies.
The European Union’s witch hunt may have gone largely unanswered by Washington, but not in Silicon Valley. As early as 2010, Google raised the alarm in a white paper that characterized growing technical and legal blockades of some or all Internet content as audacious violations of trade agreements promising a free flow of goods and services, including information.
The paper called on governments to “develop and aggressively implement a proactive agenda that aligns Internet policy with the core principles of international trade.” But since then, all that seems to have happened is that innovators are being punished even more severely for their success, and by more governments.
Whatever you want to call it, Washington’s tepid response to the European Union’s aggressive moves suggests that policymakers are dangerously neglecting the output of the digital economy.
Solving the problem will take much more aggressive enforcement of existing trade agreements. But we also need, once and for all, to correct the mismeasurement of Internet goods and services. Until we start accounting for digital dark matter, U.S. trade negotiators, tax authorities, law enforcement agents and others may continue to grossly undervalue the importance of our most vital source of innovation.
Read more from The Washington Post’s Innovations section.