BEYOND THE MARKET

Designing Nonmarket Accounts for the United States

Panel to Study the Design of Nonmarket Accounts

Katharine G. Abraham and Christopher Mackie, Editors

Committee on National Statistics

Division of Behavioral and Social Sciences and Education

NATIONAL RESEARCH COUNCIL OF THE NATIONL ACADEMIES

THE NATIONAL ACADEMIES PRESS
Washington, D.C.
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Beyond the Market: Designing Nonmarket Accounts for the United States BEYOND THE MARKET Designing Nonmarket Accounts for the United States Panel to Study the Design of Nonmarket Accounts Katharine G. Abraham and Christopher Mackie, Editors Committee on National Statistics Division of Behavioral and Social Sciences and Education NATIONAL RESEARCH COUNCIL OF THE NATIONL ACADEMIES THE NATIONAL ACADEMIES PRESS Washington, D.C. www.nap.edu

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Beyond the Market: Designing Nonmarket Accounts for the United States THE NATIONAL ACADEMIES PRESS 500 Fifth Street, NW Washington, DC 20001 NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the committee responsible for the report were chosen for their special competences and with regard for appropriate balance. This study was supported by an unnumbered contract between the National Academy of Sciences and Yale University and the Glaser Family Foundation. Support of the work of the Committee on National Statistics is provided by a consortium of federal agencies through a grant from the National Science Foundation (Number SBR-0112521). Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the views of the organizations or agencies that provided support for the project. Library of Congress Cataloging-in-Publication Data Beyond the market : designing nonmarket accounts for the United States / Katharine G. Abraham and Christopher Mackie, editors. p. cm. Includes bibliographical references. ISBN 0-309-09319-8 (pbk.)—ISBN 0-309-54592-7 (pdf) 1. Accounting—United States. 2. Social accounting—United States. 3. National income—Accounting. I. Abraham, Katharine G. II. Mackie, Christopher D. HF5616.U5B473 2005 339.373—dc22 2004026247 Additional copies of this report are available from The National Academies Press, 500 Fifth Street, NW, Lockbox 285, Washington, DC 20055; (800) 624-6242 or (202) 334-3313 (in the Washington metropolitan area); Internet, http://www.nap.edu. Printed in the United States of America. Copyright 2005 by the National Academy of Sciences. All rights reserved. Suggested citation: National Research Council. (2005). Beyond the Market: Designing Nonmarket Accounts for the United States. Panel to Study the Design of Nonmarket Accounts, K.G. Abraham and C. Mackie, eds. Committee on National Statistics, Division of Behavioral and Social Sciences and Education. Washington, DC: The National Academies Press.

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Beyond the Market: Designing Nonmarket Accounts for the United States THE NATIONAL ACADEMIES Advisers to the Nation on Science, Engineering, and Medicine The National Academy of Sciences is a private, nonprofit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters. Dr. Bruce M. Alberts is president of the National Academy of Sciences. The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. Wm. A. Wulf is president of the National Academy of Engineering. The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examination of policy matters pertaining to the health of the public. The Institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, upon its own initiative, to identify issues of medical care, research, and education. Dr. Harvey V. Fineberg is president of the Institute of Medicine. The National Research Council was organized by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy’s purposes of furthering knowledge and advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in providing services to the government, the public, and the scientific and engineering communities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Bruce M. Alberts and Dr. Wm. A. Wulf are chair and vice chair, respectively, of the National Research Council. www.national-academies.org

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Beyond the Market: Designing Nonmarket Accounts for the United States PANEL TO STUDY THE DESIGN OF NONMARKET ACCOUNTS KATHARINE G. ABRAHAM (Chair), Joint Program in Survey Methodology, University of Maryland DAVID CUTLER, Department of Economics, Harvard University NANCY FOLBRE, Department of Economics, University of Massachusetts, Amherst BARBARA FRAUMENI, Bureau of Economic Analysis, U.S. Department of Commerce, Washington, DC ROBERT E. HALL, Hoover Institution, Stanford University DANIEL S. HAMERMESH, Department of Economics, University of Texas, Austin ALAN B. KRUEGER, Woodrow Wilson School, Princeton University ROBERT MICHAEL, Harris School of Public Policy, University of Chicago HENRY M. PESKIN, Edgevale Associates, Nellysford, VA MATTHEW D. SHAPIRO, Department of Economics, University of Michigan BURTON A. WEISBROD, Department of Economics, Northwestern University CHRISTOPHER MACKIE, Study Director MICHAEL SIRI, Senior Program Assistant MARISA GERSTEIN, Research Assistant

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Beyond the Market: Designing Nonmarket Accounts for the United States COMMITTEE ON NATIONAL STATISTICS 2004 JOHN E. ROLPH (Chair), Marshall School of Business, University of Southern California JOSEPH G. ALTONJI, Department of Economics, Yale University ROBERT BELL, AT&T Laboratories, Florham Park, NJ LAWRENCE D. BROWN, Department of Statistics, University of Pennsylvania ROBERT M. GROVES, Survey Research Center, University of Michigan JOHN HALTIWANGER, Department of Economics, University of Maryland PAUL HOLLAND, Educational Testing Service, Princeton, NJ JOEL HOROWITZ, Department of Economics, Northwestern University WILLIAM KALSBEEK, Department of Biostatistics, University of North Carolina ARLEEN LEIBOWITZ, School of Public Policy Research, University of California, Los Angeles VIJAYAN NAIR, Department of Statistics, University of Michigan DARYL PREGIBON, AT&T Laboratories, Florham Park, NJ KENNETH PREWITT, School of International and Public Affairs, Columbia University NORA CATE SCHAEFFER, Department of Sociology, University of Wisconsin, Madison CONSTANCE F. CITRO, Director

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Beyond the Market: Designing Nonmarket Accounts for the United States Preface One of the long-standing goals of the Committee on National Statistics (CNSTAT) is the improvement of economic measurement and the data sources crucial to that measurement. In working toward that goal, recent CNSTAT panels have produced reports on price and cost-of-living indexes, poverty measurement, measurement of the economy’s government sector, and the design of environmental and natural resource accounts. The last report in this list, Nature’s Numbers, focused on goods and services associated with the environment, which are in many cases not transacted in markets and hence not captured in conventional economic accounts. That report did much to set the conceptual stage for this panel’s broader study of economic activities that are largely nonmarket in character. This report is the product of contributions from many individuals. The project was sponsored by the Yale University Program on Nonmarket Accounts which, in turn, was funded by a grant from the Glaser Foundation. The Yale program is directed by William Nordhaus, whose long history of pioneering research in this and related areas—dating back three decades to his work with James Tobin on measures of economic welfare and continuing through his chairing of the Nature’s Numbers panel—helped to establish the foundations for this panel’s work. Dr. Nordhaus, along with Martin Collier of the Glaser Foundation, attended the first meeting and, in articulating their hopes for the study, helped the panel sharpen its vision of their charge. The panel is grateful also to Dan Melnick who served as liaison to the panel for the Yale Program and contributed valuable suggestions and points of clarification along the way. Many others generously presented material at panel meetings and answered questions from panel members, thereby helping us to develop a broader and

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Beyond the Market: Designing Nonmarket Accounts for the United States deeper understanding of key methodological and data issues relevant to the construction of nonmarket accounts. The panel especially thanks Steven Landefeld, director of the Bureau of Economic Analysis, who provided insights based on his long experience and extensive knowledge of economic accounting; Diane Herz and Lisa Schwartz, of the Bureau of Labor Statistics, who educated the panel about that agency’s important new time-use survey; Thomas Juster, University of Michigan, and Robert Pollak, Washington University, who shared their expertise on conceptual and measurement issues relating to time use and the theory of time allocation; Suzanne Bianchi, who provided tabulations of time-use data and information about the underlying surveys; and Peter Harper, Australian Bureau of Statistics, and Sue Holloway, Office for National Statistics, United Kingdom, who informed the panel about some of the exciting work on nonmarket accounting underway in other countries. The meetings of the panel also provided many opportunities for the panel members to learn from one another. Each of the panel members contributed indispensable special expertise to the preparation of the panel’s final report. Katharine Abraham and Robert Hall wrote the first draft of the report’s introduction; Barbara Fraumeni prepared a description of the existing national accounts that makes up part of Chapter 2; Daniel Hamermesh contributed a description of the new American Time Use Survey that also appears in Chapter 2; Nancy Folbre and Daniel Hamermesh prepared the first draft of Chapter 3, on the topic of household production; Nancy Folbre and Robert Michael wrote the initial draft of the material on the role of families in the production of human capital that eventually found its way into Chapter 4 of the panel’s final report; Barbara Fraumeni and Alan Krueger took the lead on the preparation of Chapter 5, on accounting for investments in education; David Cutler and Matthew Shapiro provided a first draft of Chapter 6, on accounting for investments in health; and Henry Peskin and Burton Weisbrod worked together on the initial drafts of Chapters 7 and 8, on accounting for the activities of nonprofits and governments and accounting for the environment. All of the report’s chapters underwent several rounds of significant revision, reflecting intensive discussion and debate that involved the full panel, but these productive exchanges could not have occurred had individual panel members not taken the lead in preparing the first drafts that served as our starting point. A special comment is needed about one of our panel members, Barbara Fraumeni, who is the chief economist at the Bureau of Economic Analysis (BEA). Although government employees who are technical experts in their fields may serve on study panels for the National Academies, precautions are taken in such cases to ensure against real or perceived conflicts of interest. In this case, the institution recognized both that this panel might make recommendations directly related to the work of the BEA and that Dr. Fraumeni’s unrivaled expertise on national economic accounting in general and the U.S. National Income and Product Accounts in particular would be critical to the panel’s work. After careful

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Beyond the Market: Designing Nonmarket Accounts for the United States consideration of these factors, the institution invited Dr. Fraumeni to serve on the panel. We also note the contributions of two original panel members, Dora Costa, Massachusetts Institute of Technology, and Daniel Kahneman, Princeton University, who attended meetings early in the panel’s 2 1/2 years of work and provided keen insights that helped the panel to chart its course. We are sorry that they were unable to continue as active members. The panel could not have conducted its work without an excellent and well-managed staff. Andy White was the director of CNSTAT at the time the panel was formed, and we appreciate his support for the panel’s work. Project assistants Michael Siri and Marisa Gerstein provided excellent administrative, editorial, and research support. The panel also benefited from the work of Eugenia Grohman and Kirsten Sampson Snyder, both of the Division of Behavioral and Social Sciences and Education, who were responsible for editing the report and overseeing the review process. The entire panel owes a special debt of gratitude to Christopher Mackie, the panel’s study director. During the course of the panel’s deliberations, he played an invaluable role in facilitating communication among panel members, drawing the panel’s attention to relevant studies that we might otherwise have overlooked, helping to develop the structure for the panel’s final report, and directing the panel’s attention to gaps and inconsistencies in the discussion of different topics that needed to be addressed. Over the past year, in collaboration with various panel members, he read and reworked each of the report’s chapters multiple times, making improvements on each pass and helping to turn an initially disparate set of individual chapter drafts into a more integrated whole, and then shepherded the report through the final review process. For me personally, working with Chris was a great pleasure, and I know I speak for the entire panel in expressing my gratitude to him for his dedicated professionalism, reliable good cheer, and many substantive contributions. The report has been reviewed in draft form by individuals chosen for their diverse perspectives and technical expertise, in accordance with procedures approved by the Report Review Committee of the National Research Council (NRC). The purpose of this independent review is to provide candid and critical comments that will assist the institution in making the published report as sound as possible and to ensure that the report meets institutional standards for objectivity, evidence, and responsiveness to the study charge. The review comments and draft manuscript remain confidential to protect the integrity of the deliberative process. We thank the following individuals for their participation in the review of this report: John C. Bailar, III, Department of Health Studies (emeritus), University of Chicago; Robert Haveman, Department of Economics, University of Wisconsin-Madison; J. Steven Landefeld, Bureau of Economic Analysis, Washington, DC; Arleen Leibowitz, Department of Policy Studies, University of

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Beyond the Market: Designing Nonmarket Accounts for the United States California, Los Angeles; Robert A. Margo, Department of Economics and History, Vanderbilt University, and Research Associate, National Bureau of Economic Research; Timothy Smeeding, Center for Policy Research, Syracuse University; Frank P. Stafford, Department of Economics, University of Michigan; and Frances Woolley, Department of Economics, Carleton University, Ottawa, Ontario Canada. Although the reviewers listed above provided many constructive comments and suggestions, they were not asked to endorse the conclusions or recommendations, nor did they see the final draft of the report before its release. The review of this report was overseen by Robert A. Pollak, Department of Economics, Washington University, St. Louis, MO, and Joseph P. Newhouse, School of Health Policy and Management, Harvard University. Appointed by the National Research Council, they were responsible for making certain that an independent examination of this report was carried out in accordance with institutional procedures and that all review comments were carefully considered. Responsibility for the final content of this report rests entirely with the authoring committee and the institution. Katharine G. Abraham, Chair Panel to Study the Design of Nonmarket Accounts

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Beyond the Market: Designing Nonmarket Accounts for the United States Contents     EXECUTIVE SUMMARY   1 1   INTRODUCTION   9      Background and Overview,   9      Motivation,   12      Priorities, Scope, and Objectives,   14      A Conceptual Framework,   23 2   ACCOUNTING AND DATA FOUNDATIONS   39      Overview of the National Income and Product Accounts,   40      Measuring Time Use,   43      Demographic Data,   52      Other Data Needs,   54 3   HOME PRODUCTION   55      The Household as a Factory,   59      Measuring Inputs,   63      Valuing Inputs,   68      Measuring and Valuing Output,   74      Data Requirements,   76

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Beyond the Market: Designing Nonmarket Accounts for the United States 4   THE ROLE OF THE FAMILY IN THE PRODUCTION OF HUMAN CAPITAL   79      Conceptual Framework,   79      Defining Human Capital,   81      The Human Capital Production Function,   83      Family Inputs to the Development of Children’s Human Capital,   88      Valuing the Time Parents Devote to Children,   91 5   EDUCATION   93      Conceptual Framework,   94      Measuring and Valuing Inputs,   97      Measuring and Valuing Output,   105      Other Issues,   116 6   HEALTH   117      Conceptual Framework,   119      Measuring and Valuing Inputs,   125      Measuring and Valuing Health,   131      Data Requirements,   140 7   THE GOVERNMENT AND PRIVATE NONPROFIT SECTORS   141      Conceptual Framework,   143      Volunteer Labor,   146      Donated Goods,   153      Measuring and Valuing Output,   153      Data Requirements,   159      Conclusions,   160 8   THE ENVIRONMENT   163      Definition and Scope of Coverage,   164      Current Accounting Approaches,   169      Future Directions,   171      A Note on the Social Environment,   175     REFERENCES   179     APPENDIX Biographical Sketches of Panel Members and Staff   195     INDEX   201

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Beyond the Market: Designing Nonmarket Accounts for the United States BEYOND THE MARKET

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