Executive Summary

BACKGROUND AND PANEL CHARGE

National income and product accounts (NIPAs) are, in most countries, the data source for the most influential measures of overall economic activity. Key benchmarks derived from these accounts—most notably gross domestic product (GDP)—along with other economic data such as price and employment statistics, are widely viewed as indicators of how well a nation is doing.

Nevertheless, since their earliest construction for the United States by Simon Kuznets in the 1930s, concerns have been voiced that the accounts are incomplete. While broadly accepted and precisely estimated, the NIPAs omit a large part of the nation’s product. They emphasize market transactions and reveal little about production in the home and other nonmarket settings. Furthermore, in some areas in which activity is organized in markets (e.g., medical care), the existing accounts do not capture key elements (e.g., the social value of medical innovations or unpaid time spent caring for the sick).

Nonmarket accounts would be particularly helpful in improving our understanding of the sources of growth in the economy. Researchers now must supplement data from the national accounts with external estimates of the contributions of research and development, natural resources, and investments in human capital. These limitations of national accounting data reflect the reality that neither economic production nor contributions to social welfare stop at the market’s border, but extend to many nonmarket activities. Failure to account for these activities may significantly distort policy makers’ sense of economic trends and the desirability of potential policy interventions.



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Beyond the Market: Designing Nonmarket Accounts for the United States Executive Summary BACKGROUND AND PANEL CHARGE National income and product accounts (NIPAs) are, in most countries, the data source for the most influential measures of overall economic activity. Key benchmarks derived from these accounts—most notably gross domestic product (GDP)—along with other economic data such as price and employment statistics, are widely viewed as indicators of how well a nation is doing. Nevertheless, since their earliest construction for the United States by Simon Kuznets in the 1930s, concerns have been voiced that the accounts are incomplete. While broadly accepted and precisely estimated, the NIPAs omit a large part of the nation’s product. They emphasize market transactions and reveal little about production in the home and other nonmarket settings. Furthermore, in some areas in which activity is organized in markets (e.g., medical care), the existing accounts do not capture key elements (e.g., the social value of medical innovations or unpaid time spent caring for the sick). Nonmarket accounts would be particularly helpful in improving our understanding of the sources of growth in the economy. Researchers now must supplement data from the national accounts with external estimates of the contributions of research and development, natural resources, and investments in human capital. These limitations of national accounting data reflect the reality that neither economic production nor contributions to social welfare stop at the market’s border, but extend to many nonmarket activities. Failure to account for these activities may significantly distort policy makers’ sense of economic trends and the desirability of potential policy interventions.

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Beyond the Market: Designing Nonmarket Accounts for the United States Given that limitations of the NIPAs have long been recognized, why is this report needed at this time? Few would dispute the existence of economically valued nonmarket inputs and outputs. Examples are easy to find: the higher value of a house sold after home improvements are made by the homeowner, the development of attitudes and skills that have value in the marketplace resulting from nurturing that takes place in the family, and so on. Yet, we do not know how to measure or value much of what constitutes nonmarket production. The Panel to Study the Design of Nonmarket Accounts was charged with evaluating current approaches, determining priorities for areas of coverage, examining data requirements, and suggesting further research to strengthen the knowledge base about nonmarket accounting. SCOPE AND PRIORITIES An overarching question for nonmarket account design is scope—where in the range of economic-related activities to draw the border of inclusion. The panel recommends the development of satellite accounts that cover productive inputs and valuable outputs that are not traded in markets, focusing on areas for which improved accounting would contribute to better policy making and to science. These accounts would provide a framework for examining difficult-to-measure activities that are excluded, or inadequately treated, in the NIPAs. Though one objective of nonmarket accounting is to support alternative aggregate measures of economic performance, satellite accounts are not intended to replace the current national accounts but to exist alongside them. Most of the work proposed by the panel would be conducted on an experimental basis and would not change the way the headline GDP is estimated. While acknowledging that different users require different kinds of data and that new methods may be developed for valuing outcomes previously considered noneconomic, it is the panel’s view that resources should initially be directed toward developing a more complete accounting of the population’s productive activities rather than attempting to measure happiness or well-being. Throughout the report, the panel defends this position on practical measurement, as well as conceptual, grounds. Because improving output (and corresponding input) measures is a prerequisite to any vision for an expanded set of accounts, this is where the panel focused its energies. The potentially valuable areas of nonmarket accounting are at different levels of development with respect to measurement concepts and available data. For that reason, the panel favors a staged approach. In general, the panel emphasizes areas for which new data sources offer opportunities to improve measurement of inputs or outputs, and excludes areas for which the likelihood of developing credible valuation estimates seems especially low. The staged approach allows work to proceed without commitment to a rigid framework, which might be difficult to agree upon across different areas of interest. Experimental methods—

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Beyond the Market: Designing Nonmarket Accounts for the United States potentially inconsistent with an integrated system—can be pursued in a framework of separate satellite accounts. A number of productive activities are candidates for inclusion in a set of augmented accounts. Within the set of possibilities that might conceivably be of interest, the panel believes that priority should be given to the development of experimental accounts for areas that incrementally expand coverage of the conventional market accounts. This report focuses on five areas that the panel identified as being among the most promising and to which we would accordingly give high priority: household production, investments in formal education, investments in health, selected nonprofit- and government-sector activities, and environmental assets and services. Household Production. The value of goods and services produced by households for their own consumption is quite likely large and, therefore, its measurement is essential for estimating a nation’s overall level of economic activity. Evidence indicates that including household production as part of a nation’s output also alters measured trend growth rates and their fluctuations over the business cycle. Given current knowledge and data, constructing an account for home production represents a logical early phase augmentation to the NIPAs. A major catalyst for this activity—and for prospects of future progress—is the development of time-use surveys, which generate data that are useful for estimating the extent and nature of work done in the home. Investments in Formal Education and the Resulting Stock of Skill Capital. Although gross domestic product includes expenditures for education, it fails to adequately capture the contribution of related nonmarket activities to future economic growth, the well-being of individuals, and society in general. Because human capital, particularly that arising from education, is such a large component of the capital stock, a separate education account would contain essential data for improving research on investment, capital, and ultimately economic growth as measured by the traditional accounts. An education satellite account would incorporate market factors, as well as introduce experimental measures of nonmarket inputs and outputs. Successful development of an education account will require improved information on student and parent time inputs to schooling and further research on measuring and valuing the impact of education on the population. Investments in Health and the Resulting Stock of Health Capital. A fully developed health account would enable researchers to estimate the effect that an array of inputs have on the stock of health and the value of associated changes in it. Additionally, measuring health is an important prerequisite for improving estimates of productivity in medical care. There are at least six major inputs into the production of health: medical care provided in market settings; care services provided without payment; time that individuals invest in their own health; consumption of other goods and services (some of which improve health and others of which are harmful) and nonmedical technology and safety devices; research and development; and environmental and “disease state” factors. There are two

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Beyond the Market: Designing Nonmarket Accounts for the United States outputs of the health sector: the value of health capital, which can be defined as the expected flow of health consumption over the course of a person’s remaining life, and the additional income that a healthier population generates. Selected Activities of the Government Nonprofit Sectors. The initial focus of nonprofit-sector accounting should be on developing an account for tax-exempt organizations that are providers of public and charitable goods and services (as opposed to being providers of outputs to their members). The most quantitatively significant nonmarket input into nonprofit production is time, specifically that of volunteer labor. Therefore, construction of these accounts requires data on the number of volunteers and hours worked. The focus of experimental public sector accounting work should be on developing improved measures of output. In fact, full and independent (non-input based) valuation of goods and services is an important goal for comprehensive accounting for both the government and the economy’s nonprofit institutions. Fulfilling this goal will entail more basic research. Environmental Assets and Services. Environmental accounting has a long history. This panel is in agreement with the overarching recommendations of Nature’s Numbers (National Research Council, 1999): Congress should authorize and fund recommencement of work with the ultimate goal of producing a comprehensive set of market and nonmarket environmental accounts. The accounts should focus on changes in values of the stocks of domestic natural resources and, probably more importantly in terms of nonmarket value, externalities associated with air and water pollution. The areas listed above are substantial components of the economy—and the level of activity associated with each has the potential to change significantly over time—so focusing attention on them should improve our understanding of the nation’s total production. Several of these areas overlap with coverage in the NIPAs and therefore may complement existing official statistics or help clarify policy issues based on those official accounts. Recommendation 1.1: The statistical agencies should develop a set of satellite accounts for household production, government and nonprofit organizations, education, health, and the environment. These accounts would provide a more complete picture of the nation’s productive activities in these areas. In addition to the five areas of nonmarket activity identified in this recommendation, the report includes a chapter on the role of the family in human capital development. Though something is known about the magnitude and the value of family inputs to human capital creation, the panel concluded that, given the current state of knowledge and data, it would be impossible to develop a comprehensive human capital investment account. Nonetheless, a fully specified set of nonmarket accounts would include a family care component or a more comprehensive human capital account, so this remains a worthwhile, albeit very long-term, goal. Such an account would formally recognize the investments

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Beyond the Market: Designing Nonmarket Accounts for the United States families make in preparing children for lives as productive members of society, including the necessary foundation for later investments in formal education and health. Though the panel considered other kinds of activities as well, we do not claim to have fully documented all areas of nonmarket production that contribute to social or private well-being. On the grounds hinted at above and elucidated further in the report, some other important areas—e.g., safety and security, leisure activities, and the underground economy—receive limited attention. This narrowing of scope notwithstanding, we believe that scholars and policy makers interested in a broad range of nonmarket topics will benefit from the principles laid out in this report. Even within the set of areas identified here, there are differences in readiness to begin the construction of new satellite accounts. At this time, accounts for household production and the environment would rest on the firmest foundations; indeed, the Bureau of Economic Analysis and other national statistical offices already have done substantial work in these areas. In the remaining areas for which we advocate development efforts—the government and nonprofit sectors, education, and health—further conceptual thinking and new data collection are needed, and we encourage such work. We acknowledge the difficulty of drawing boundaries between the areas of nonmarket activity we have identified as priorities. Improved health, for example, may result from better medical care, better education that contributes to better individual decisions about diet and exercise, or improved air and water quality. Nonetheless, the panel sees no realistic alternative to considering the different areas of nonmarket activity separately, but nonetheless recognizes the need to delineate the interactions and complementarities among them as the development of supplemental accounts proceeds. Because the accounts proposed in this report will unavoidably overlap with one another (and with the market accounts), aggregate cost or product values will not be derivable by simply adding these accounts up—there would be extensive double counting. Nonetheless, given the current stage of development of frameworks and data relating to nonmarket activities, independent accounts will likely be more useful than a system that forces the accounting into a framework designed to eliminate overlap. Such a framework would require arbitrary allocation of costs or outputs across accounts. CONCEPTUAL ISSUES Complementing decisions about scope, a conceptual framework must be adopted on which to develop an economic account. For a number of reasons, the panel believes that experimental satellite accounts will be most useful if their structure is as consistent as possible with the NIPAs. Because the national accounts have undergone extensive scrutiny, reflecting a long history of research

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Beyond the Market: Designing Nonmarket Accounts for the United States and policy use, the underlying principles are well tested and practice shows they can be implemented. Moreover, researchers are interested in developing augmented measures of output that are compatible with GDP. These considerations argue for pursuing an approach that uses dollar prices as the metric for relative value and, wherever possible, values inputs and outputs using analogous observable market transactions. Perhaps most importantly, nonmarket accounts should maintain a double-entry structure in which valuation of inputs to production (such as time) and outputs (such as child care) are based on separate price and quantity information. Recommendation 1.3: Nonmarket accounts should measure the value and quantity of outputs independently from the value and quantity of inputs whenever feasible. Only with an independent measure of the value of output can we hope to address many of the questions for which nonmarket accounts could be most valuable. A central issue is how to value inputs and outputs when market prices are absent. Quantitatively, people’s time is the most important unmeasured input in nonmarket production. Recommendation 1.4: A replacement cost measure, adjusted for differences in skill and effort between nonmarket and market providers, should be adopted for valuing time inputs devoted to nonmarket production in cases in which someone else could have been hired to perform the work in question. Where this is not the case, an opportunity-cost-based measure, ideally adjusted to account for the intrinsic enjoyment associated with the activity in question, should be used for valuing time devoted to nonmarket production activities. The report lays out in detail the contexts in which various input valuation approaches are appropriate. As with the input side, valuation of nonmarket outputs should follow the principle of treating nonmarket goods and services as if they were produced and consumed in markets. Under this approach, the prices of nonmarket goods and services are imputed from a market counterpart. Even for the near-market cases, however, many goods exist for which the degree of replacement comparability—and, hence, substitutability—is not at all clear. More difficult yet are the cases for which a nonmarket good is an asset that has no direct market counterpart and is never sold. These kinds of outputs are prevalent in such areas as education and health and will require application of creative valuation methods. DATA ISSUES In addition to the many conceptual challenges that clutter the path toward construction of nonmarket satellite accounts, another barrier is the limited scope

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Beyond the Market: Designing Nonmarket Accounts for the United States and quality of data available to support quantification and valuation of nonmarket activities in a way that is even remotely comparable to that which is done for the NIPAs. Fortunately, there is recent progress to report. The new American Time Use Survey (ATUS) will provide rich information about the most important input to nonmarket production—people’s time. Recommendation 2.1: The American Time Use Survey, which can be used to quantify time inputs into productive nonmarket activity, should underpin the construction of supplemental national accounts for the United States. To serve effectively in this role, the survey should be ongoing and conducted in a methodologically consistent manner over time. What makes the ATUS particularly valuable for the purpose of creating nonmarket accounts is that its information will be provided year after year. Despite the tremendous step forward represented by the ATUS and its role as an essential building block for most nonmarket accounts for the United States, there are concerns about its reliability and validity for this purpose. Lower-than-expected response rates—and the possible resulting nonresponse bias—are worrisome. Efforts to assess the extent of biases in survey responses—and, if necessary, to confront that bias by raising response rates or making appropriate adjustments to the estimates—should be a priority. Recommendation 2.2: The Bureau of Labor Statistics should commit resources adequate to improve response rates in the American Time Use Survey and to investigate the effects of lower-than-desirable response rates on survey estimates. Demographic data go hand in hand with time-use data in laying the foundation for nonmarket accounts: time-use data can be used to answer questions about what individuals with particular characteristics are doing with their time; demographic data describe the distribution of characteristics in the population. Although we recognize that creation of better coordinated demographic data would require significant effort by statistical agencies and other suppliers of data, the development of such data is an important goal. Recommendation 2.4: A consistent and regularly updated demographic database should be assembled as an input to nonmarket accounts. The database should include information on the population by age, sex, school enrollment, years of education and degrees completed, occupation, household structure, immigrant status, employment status and, possibly, other dimensions. The fact that high-quality demographic data are already collected by the Census Bureau and other agencies improves the feasibility of implementing this recommendation. The American Community Survey also will help advance the effort to produce a more fluid demographic description of the population. Given budget

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Beyond the Market: Designing Nonmarket Accounts for the United States constraints of the statistical agencies, the demographics database should be built, to the maximum extent possible, using existing data. Full development of nonmarket accounts also requires further research and data development directed toward defining and measuring output. It is not always obvious what the outputs associated with various nonmarket activities are, especially in such service-oriented areas as education, health, social services, culture and the arts, and recreation. Frequently, in difficult-to-measure sectors, the value of output is not measured directly, but set equal to the aggregate value of the inputs used in its production. Accordingly, little is known about growth, quality improvements, or productivity in these sectors. The data that will be needed to create independent output measures are discussed throughout the report. We offer numerous recommendations on this topic and more generally about the next steps needed in research and data development to advance nonmarket accounting.