Our techniques for measuring economic performance are obsolete. So we reach improper conclusions about the state of the economy.
The economic recovery is probably more robust than we realize. It is possible that the standard of living for many members of the middle class is improving while their incomes shrink. Many economists, policy makers, and politicians think otherwise, because they are using 20th-century methods to analyze our 21st-century economy.
The problem is caused by the fact that we live in two worlds, physical and virtual.
The physical economy is anemic, struggling, biased toward inflation, and shrinking in many developed countries. Almost everything we do in the physical economy is paid for with money. We use dollars to measure most of the activity. If more dollars are spent or earned, we conclude that the economy is growing.
The virtual economy is robust, biased toward deflation, and growing at staggering rates, everywhere. A lot of the services provided to us in the virtual economy are free. If we paid dollars for those services, they would be counted as part of the GDP and would add to economic growth. But we don’t so they are not counted.
Using the virtual economy in place of the physical economy enables consumers to save lots of money. For example, consumers can substitute Google News for their newspaper. The cost of a USA Today subscription is $275. His earnings will look the same, but he has more money at his disposal and more or less the same consumption. Essentially, he is earning more, but neither his income nor GDP will show it.