The Bureau of Economic Analysis is doing a “comprehensive revision” of the data that form the raw material for gross domestic product, the most widely cited measure of how the economy is doing. And it appears that the numbers, due out this summer, will increase the size of the U.S. economy by about 3 percent (as Robin Harding of the Financial Times, who first reported the story, points out, that’s like tacking an extra Belgium onto the U.S. economy).
So what is the BEA doing, and why should anyone care?
First, some basics: GDP aims to capture the value of goods and services produced within U.S. borders in a given periods. The Bureau of Economic Analysis generally does this by measuring the value of goods purchased by consumers. The logic goes like this: When you buy a washing machine, the price you pay captures the value of the work of everybody in that chain of labor and materials that went into creating that washing machine: The sales clerk who sold it to you, the trucker who delivered it to the store, the factory worker who assembled it, the marketing person who designed the logo, the steel and copper that are the raw materials for the machine, and the chief executive of the company that made it. Instead of trying to measure each of those inputs from the ground up, they are all encapsulated in the “personal consumption expenditure” that takes place when you buy the washing machine.
But when the washing machine company invests in long-lasting assets—a factory, for example, or a package of accounting software—it contributes to GDP through a second column, for fixed investment. Investment—spending money on things expected to have a payoff over a long period of time—are treated differently than the routine expenses involved in making something.
Which brings us to George Lucas. When he made a Star Wars movie, his company spent a lot of money to create the film. It then owned a copyright, and could make money for many years afterward on that investment. In other words, it’s a lot more like our washing machine company building a factory than it is like the routine process of making washing machines. The same is true for a lot of types of intellectual property: When Apple researchers develop the iPad, or Suzanne Collins writes a Hunger Games novel, it is an upfront investment that will have a long payoff.
So now BEA will treat research and development and creation of artistic works as longer-term investments, not unlike factories, equipment, or software. On a purely technical level, this should more precisely match GDP in any one quarter to the actual economic value the nation generates in that span. In the old system, the value of the economic output of a Star Wars movie would only show up in GDP over decades to come, in the form of personal consumption expenditures like movie tickets and DVD sales.
Indeed, BEA will revise data going back to 1929 using the new approach, essentially creating a new historical record of the U.S. economy (while it will change the level of GDP, it shouldn’t result in any meaningful change in the ebb and flow of business cycles, however).
There are a couple of bigger lessons here.
One is just that measuring economic performance is really hard. We are a nation of 311 million people and $16 trillion (-ish) in annual output. The assumptions you make in creating your benchmark economic statistics can create big swings in the reality you see. Per capita personal income has been growing reasonably well over the last 15 years, but median household income has been stagnant to falling. The unemployment rate has fallen to 7.6 percent from 9.9 percent over the last three years—but a big chunk of that has come from a decline in proportion of Americans who are in the labor force. Given the murkiness of these statistics, it is important for people looking to draw conclusions about where we are and where we’re heading to look at a wide range of statistics, and to understand how they interrelate. There is no single reality about the economy, and any one indicator probably isn’t capturing the full picture, and almost certainly has measurement flaws that you should understand.
Second is that we have an increasingly knowledge and information based economy, with all that entails. Think of it this way: U.S. economic output is about to be 3 percent higher than we thought it was. But most of that mismeasurement came from inadequately capturing the contributions of some of the highest-paid, most skilled members of society: The researchers who develop new computers and pharmaceuticals and the creative types who come up with blockbuster movies.
In other words, the U.S. economy is even more heavily driven by the iPad designers and George Lucases of the world—and proportionally less by the guys who assemble washing machines—than we thought.