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Introduction

POLICY AND TECHNICAL CONTEXT

National economic accounts—with the national income and product accounts being the most prominent in the United States—provide a framework for the systematic organization of economic data describing the nation’s economic condition. Governments around the world have found these accounts indispensable for purposes relating to the analysis and design of economic policies and for gauging the success of these policies.

While national accounts have a long history, their widespread use by governments is a comparatively recent phenomenon, resulting from the policy demands engendered by the Great Depression and by World War II. As their use in government has grown, the general public has become more familiar with the accounts, especially certain aggregate totals drawn from the accounts such as the Gross Domestic Product (GDP). These benchmarks, along with other economic data such as price and employment statistics, are widely looked on as indicators of how well a nation is doing.

Along with the growth in popularity has been a growth in criticism of the accounts—due less to their use as a data framework and more to their (mis)use as an indicator of national well-being. Since their first construction for the United States by Simon Kuznets in the 1930s, there have been concerns that the accounts are incomplete and misleading because they omit such nonmarket activity as unpaid work, volunteer activities, the value of leisure time, and most investment in human capital. Additionally, data from the accounts provide only a partial measure of the size and sources of growth in the economy. Since their inception, researchers concerned with explaining economic growth have supplemented the national accounts with estimates of the contributions of



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1 Introduction POLICY AND TECHNICAL CONTEXT National economic accounts—with the national income and product accounts being the most prominent in the United States—provide a framework for the systematic organization of economic data describing the nation’s economic condition. Governments around the world have found these accounts indispensable for purposes relating to the analysis and design of economic policies and for gauging the success of these policies. While national accounts have a long history, their widespread use by governments is a comparatively recent phenomenon, resulting from the policy demands engendered by the Great Depression and by World War II. As their use in government has grown, the general public has become more familiar with the accounts, especially certain aggregate totals drawn from the accounts such as the Gross Domestic Product (GDP). These benchmarks, along with other economic data such as price and employment statistics, are widely looked on as indicators of how well a nation is doing. Along with the growth in popularity has been a growth in criticism of the accounts—due less to their use as a data framework and more to their (mis)use as an indicator of national well-being. Since their first construction for the United States by Simon Kuznets in the 1930s, there have been concerns that the accounts are incomplete and misleading because they omit such nonmarket activity as unpaid work, volunteer activities, the value of leisure time, and most investment in human capital. Additionally, data from the accounts provide only a partial measure of the size and sources of growth in the economy. Since their inception, researchers concerned with explaining economic growth have supplemented the national accounts with estimates of the contributions of

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natural resources, research and development, and investments in human capital. These concerns reflect the reality that economic and social welfare, and even productive output, does not stop at the market's border, but extends to many nonmarket activities. The traditional national accounts include primarily the output of marketed goods and services—that is, goods and services that are bought and sold in market transactions. Notwithstanding the importance of the traditional accounts, limiting them to transactions that take place in the marketplace may distort certain accounting aggregates as measures of economic activity and, certainly, of well-being. For example, nannies' services figure in GDP, while parents’ services do not; the value of swimming in a commercial swimming pool is captured by GDP, while the value of swimming in the Atlantic Ocean is not (Nordhaus, 2002). In developing guidelines for an expanded accounting system, questions immediately arise concerning its scope, the classification of variables, and data coverage. First, one must consider what is meant by an “expanded” or “augmented” system. Augmented accounts are designed to measure human economic activity that takes place outside the marketplace and beyond the coverage of the core national accounts—to measure more fully what consumers currently enjoy in the way of goods and services and the accumulation of capital, of all kinds, that permits the future production of goods and services. Although many different approaches have been taken, one would ideally like to set the analytical boundaries of augmented economic accounts so as to measure as much economic activity as is feasible, regardless of whether it takes place inside or outside the marketplace. This is only a guiding principle, however, and determining the exact set of activities that should fall within the purview of a national accounting framework is far from obvious. When goods and services are not bought and sold in markets, it is generally not possible to use conventional approaches to measure their value. Stocks of some natural resources, such as oil and gas, are priced in markets. But for many other environmental services—such as the value of clean air—and for much nonmarket economic activity— such as unpaid time spent exercising or teaching a child—valuation is more difficult. In addition, data covering nonmarket activities are not well developed, in part because there is no agreed-on valuation methodology. Also at issue are how to organize satellite accounts for nonmarket activity and how (and whether) to integrate them into the conventional national accounts. Most recently, attention has focused on extending the accounts to include natural resources and the environment. The issues involved in environmental accounts were reviewed in a recent report, Nature's Numbers (National Research Council, 1999). In addition to its analysis of environmental accounts, that panel recommended adopting a program for developing a comprehensive set of near-market and nonmarket accounts: The panel concludes that developing a set of comprehensive nonmarket economic accounts is a high priority for the nation. Developing nonmarket accounts to address such concerns as environmental impacts, the value of nonmarket natural resources, the value of nonmarket work, the value of investments in human capital, and the uses of people's time would illuminate a wide variety of issues concerning the economic state of the nation [National Research Council, 1999, p. 3].

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While Nature's Numbers examined many of the issues involved in environmental accounting, the construction of many other components of nonmarket accounts has not been thoroughly studied. Issues involved in valuation and pricing—along with measuring the quantities of goods, services, and assets—are imperfectly understood for a wide range of areas, including unpaid household work, volunteer activities, health status and life expectancy, and investment in education, wealth, and the environment. No one with an understanding of the national economic accounts ever believed that they could fully capture all these, and other elements, that affect societal well-being. While there is much agreement in the scholarly community about these limitations, there is disagreement about what should be done about them. This disagreement likely stems from different perceptions about appropriate uses of, and objectives of, the accounting system. The panel concludes that, for a number of sectors of activity, nonmarket accounts can be developed that will generate meaningful and useful data to inform policy and to advance research. Within the panel, there is a range of opinion about (1) how urgent it is that these accounts be developed, (2) the magnitude of potentially measurable nonmarket output, and (3) the extent to which supplemental accounts can be designed to integrate with the core accounts. Regarding the last point, it is perfectly consistent and logical (even for a proponent of expanded accounts) to argue that the purpose of the core national accounts is to provide a picture of aggregate market activity. The panel’s final report will make recommendations about the potential scope of any system of nonmarket accounts, provide guidance as to how specific accounts might be designed, and address questions about the underlying conceptual framework. In this interim report, the panel identifies the key, and often controversial, issues in nonmarket accounting; provide some initial insights about these issues; and indicate what topic areas and types of activities should be priorities for work on nonmarket accounts. PANEL’S WORK Panel Charge and Work Plan The charge to the panel is as follows: The Committee on National Statistics (CNSTAT) will establish a panel to examine the design of nonmarket accounts that would parallel the market-based national income and product accounts. The panel will review current approaches, examine data requirements and limitations, determine the priorities for developing nonmarket accounts, and suggest further research to strengthen the knowledge base about nonmarket accounting. The panel will consist of about 12 specialists in national income accounting and in the major methodological areas to be covered by nonmarket accounts—areas such as valuation, measuring nonmarket flows and assets, and nonmarket data. The panel was charged to meet periodically over a 2-year period.

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The panel’s charge includes four specific tasks: to review efforts to develop nonmarket accounts developed by government agencies as well as by private organizations and scholars, including theoretical as well as empirical studies and actual implementation of nonmarket accounting frameworks. to make specific recommendations on the framework and sectors for developing nonmarket accounts and determine a set of priorities with respect to developing or phasing nonmarket accounts. to examine and make recommendations with respect to key data that are needed to develop nonmarket accounts, considering such efforts as BLS's time-use survey. to investigate and make recommendations for methodological research on nonmarket accounts in the areas of statistics, economics, psychology, survey research, and related disciplines. Activities to Date The panel has held four meetings. At its first meeting, members were briefed by the project’s initiators, Martin Collier of the Glaser Foundation and William Nordhaus of Yale University. Collier discussed the background leading up to the Glaser Foundation’s interest in economic measurement. Nordhaus discussed his work in the area, as well as the work of a previous CNSTAT study, which he chaired, that resulted in Nature’s Numbers, and he offered his perspectives on the topic. Steve Landefeld of the Bureau of Economic Analysis (BEA) presented information on the nonmarket accounting efforts at BEA and abroad. The panel’s second meeting included a small public workshop, with two sessions designed to inform the members on key issues related to nonmarket accounting. In the first session, on time-use surveys, Diane Herz of the Bureau of Labor Statistics (BLS) provided an overview that agency’s and other time-use surveys, and Steven Landefeld of BEA discussed how time-use data might best be used in the construction of satellite accounts. Thomas Juster, of the Institute for Social Research at the University of Michigan, commented on conceptual and measurement issues in time-use surveys; Robert Pollak, of the Olin School of Business at Washington University in St. Louis, and Robert Michael, of the Graduate School of Public Policy at the University of Chicago, discussed the theory of time allocation, approaches to estimating associated behavioral relationships, household technology, and the limits of time-use data. The second session, on alternative accounting and indicator frameworks, began with a discussion of the Jorgenson system of national accounting. Peter Harper, of the Australian Bureau of Statistics, discussed ongoing work on experimental nonmarket accounts in Australia, and Sue Holloway, of National Statistics-UK, provided a detailed overview of the new Household Satellite Account in the United Kingdom. Christopher Mackie, of the CNSTAT staff, provided a summary assessment of social indicators, focusing on the Genuine Progress Indicator. The panel’s third meeting was a closed session devoted to refining the scope of its work. At the fourth meeting, the panel received an update from Dan Melnick, of the Yale Program on Nonmarket Accounting, and other activities of the program. His

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presentation focused on projects designed to assess and improve the value of BLS’s American Time Use Survey to researchers working on nonmarket accounting. The panel will have two or three additional meetings in 2003; its final report is expected to be completed and published in 2004. PREVIEWING THE FINAL REPORT One of the main objectives of the panel’s final report will be to provide practical recommendations on the measurement of nonmarket activity in a variety of areas the panel has identified as important. Each chapter in the final report will begin with a discussion of an identified issue area, considering its importance and the sense in which it constitutes an area of nonmarket activity. As noted throughout this report, in many of the areas the panel has chosen to explore, market activity coexists with nonmarket activity. Students pay tuition to attend universities (a market transaction), but there is no market transaction that captures directly the value of the time they devote to this endeavor. Nonprofit organizations may hire employees (a market transaction), but the wage these employees receive may well not reflect the value their time would be assigned if devoted to for-profit endeavors, and the value of the time contributed by unpaid volunteers is nowhere reflected. Central to each chapter will be a discussion of the conceptual issues related to the measurement of nonmarket activity in the area it covers. Each chapter will discuss how one might measure input quantities—both market and nonmarket—and the resulting nonmarket output quantities. The transformation of inputs into outputs presupposes, of course, a production technology, and in a number of the chapters this technology will also be discussed. Another matter that will figure prominently in each chapter is how to attach values to specified quantities of nonmarket inputs and outputs. The panel’s approach, in essence, is to seek prices that can be assigned to the identified quantities. In some cases, a satisfactory price measure or measures can be identified; in other cases, available information may be unsatisfactory, either because of deficiencies in its conceptual foundations or because it is insufficiently precise to be useful in the implementation of an accounting scheme. Each chapter will devote substantial attention to the discussion of whether and how satisfactory price measures might be developed. In many cases, researchers have already developed input or output valuations of the sort the panel contemplates. On the basis of these topic-by-topic evaluations, the panel will recommend which areas should be considered as high priorities for the development of nonmarket accounts and which areas should be considered as lower priorities. Finally, for those areas in which the panel believes further work holds promise, the individual chapters will include recommendations about the ideal data for the intended purpose and steps that might be taken toward the production of such ideal data—or at least better data—for the United States. These recommendations concerning specific steps to improve the data available for measurement of these important areas are, we believe, likely to be among the report’s major contributions.