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Revising how the US calculates GDP will not have a happy ending Revising how the US calculates GDP will not have a happy ending
(6 months later)
Hollywood creates fairytales on movie screens. Now it's going to help create fairytales about America's economic growth.Hollywood creates fairytales on movie screens. Now it's going to help create fairytales about America's economic growth.
For the first time, the US is changing the way it measures its economic growth, the measure we call our gross domestic product. Starting in July, the keepers of US economic data at the Bureau of Economic Analysis will stand over the usual cauldron of GDP – a stew that includes how much Americans consume, government spending, investment, exports and imports. They'll begin to add new ingredients that, in a puff of smoke, will create a more favorable, higher gross domestic product.For the first time, the US is changing the way it measures its economic growth, the measure we call our gross domestic product. Starting in July, the keepers of US economic data at the Bureau of Economic Analysis will stand over the usual cauldron of GDP – a stew that includes how much Americans consume, government spending, investment, exports and imports. They'll begin to add new ingredients that, in a puff of smoke, will create a more favorable, higher gross domestic product.
The new ingredients include Hollywood royalties from TV, movies and songs – some Tinseltown magic, really – as well as revenues from scientific research and development. Like a feelgood movie, this will make us feel positive, briefly – boosting our GDP by as much as 3% from its currently anemic level of 0.4%.The new ingredients include Hollywood royalties from TV, movies and songs – some Tinseltown magic, really – as well as revenues from scientific research and development. Like a feelgood movie, this will make us feel positive, briefly – boosting our GDP by as much as 3% from its currently anemic level of 0.4%.
Right now, our GDP stands at about $15tn a year. It was never designed to become a measure of the country's well-being, but since 1944, it has been exactly that. GDP is our leading metric to review how the US economy is doing. It is our economic heartbeat. We measure its growth every three months: when GDP is higher, it means the US is producing and consuming more goods and services, which shows the economy is doing better.Right now, our GDP stands at about $15tn a year. It was never designed to become a measure of the country's well-being, but since 1944, it has been exactly that. GDP is our leading metric to review how the US economy is doing. It is our economic heartbeat. We measure its growth every three months: when GDP is higher, it means the US is producing and consuming more goods and services, which shows the economy is doing better.
It will be nice to see the fairytale come true: to see GDP rise. Later, however, our mood will come down when we leave the theater of economic drama and realize that our lives haven't actually changed. Worse still, higher GDP will allow Washington to keep putting one over on the populace. Lawmakers, already avoiding the hard work of coming up with answers to our severe unemployment crisis, will be able to dodge that responsibility even more easily if they can point to a higher GDP and "recovery". As economist Paul Krugman pointed out, "we're creating a permanent class of jobless Americans." It's already hard enough to get Congress to pay attention; the political class will pay even less when GDP looks rosy.It will be nice to see the fairytale come true: to see GDP rise. Later, however, our mood will come down when we leave the theater of economic drama and realize that our lives haven't actually changed. Worse still, higher GDP will allow Washington to keep putting one over on the populace. Lawmakers, already avoiding the hard work of coming up with answers to our severe unemployment crisis, will be able to dodge that responsibility even more easily if they can point to a higher GDP and "recovery". As economist Paul Krugman pointed out, "we're creating a permanent class of jobless Americans." It's already hard enough to get Congress to pay attention; the political class will pay even less when GDP looks rosy.
Economic inequality of all kinds will be papered over. America's growing problem with poverty will move to the backburner. Stunted wage growth will pale beside the glowing GDP numbers. Our economy won't actually be growing any faster. It will just appear that way – the same way Brad Pitt looks like he's in his 30s, but isn't.Economic inequality of all kinds will be papered over. America's growing problem with poverty will move to the backburner. Stunted wage growth will pale beside the glowing GDP numbers. Our economy won't actually be growing any faster. It will just appear that way – the same way Brad Pitt looks like he's in his 30s, but isn't.
What's actually changing? A lot. As Robin Harding wrote in the Financial Times:What's actually changing? A lot. As Robin Harding wrote in the Financial Times:
"The changes will affect everything from the measured GDP of different US states to the stability of the inflation measure targeted by the Federal Reserve. They will force economists to revisit policy debates about everything from corporate profits to the causes of economic growth.""The changes will affect everything from the measured GDP of different US states to the stability of the inflation measure targeted by the Federal Reserve. They will force economists to revisit policy debates about everything from corporate profits to the causes of economic growth."
And Brent Moulton, with the BEA, told Harding:And Brent Moulton, with the BEA, told Harding:
"We are carrying these major changes all the way back in time – which for us means to 1929 – so we are essentially rewriting economic history.""We are carrying these major changes all the way back in time – which for us means to 1929 – so we are essentially rewriting economic history."
In other words, it will destroy everything we already know about GDP, because we will have to recalculate every number from decades of economic research. There's also the issue of all the economic research that's already been done. As of July, most economists will have to toss out nearly all the work they've already done.In other words, it will destroy everything we already know about GDP, because we will have to recalculate every number from decades of economic research. There's also the issue of all the economic research that's already been done. As of July, most economists will have to toss out nearly all the work they've already done.
This will have a wide impact on how we judge economic legislation, as well as policy decisions. That's because we use GDP not only on its own, but as a measure of economic health in other ways.This will have a wide impact on how we judge economic legislation, as well as policy decisions. That's because we use GDP not only on its own, but as a measure of economic health in other ways.
For one, it will be harder for us to know when we're in a recession. Right now, a recession means several quarters of negative GDP. Getting to negative from where we are now isn't hard; getting there when we're 3% higher will be. While it may seem useful to avoid recession right now, that is actually a bad thing: it means that in periods when we do get negative GDP, we'll be in truly terrible shape.For one, it will be harder for us to know when we're in a recession. Right now, a recession means several quarters of negative GDP. Getting to negative from where we are now isn't hard; getting there when we're 3% higher will be. While it may seem useful to avoid recession right now, that is actually a bad thing: it means that in periods when we do get negative GDP, we'll be in truly terrible shape.
Lastly, you have to wonder whether these new additions are actually necessary to measuring the country's GDP, whether they tell us anything worthwhile. In fact, the new measures are notoriously unreliable.Lastly, you have to wonder whether these new additions are actually necessary to measuring the country's GDP, whether they tell us anything worthwhile. In fact, the new measures are notoriously unreliable.
Hollywood royalties, for instance, are not secure measures of investment. That's because, even in Hollywood, it's hard to measure what royalties are, or should be. Studios rely on notoriously tricksy accounting. Four major studios were hit with lawsuits this year over their accounting of royalties dating all the way back to the 1970s. "Hollywood accounting" is a shorthand for the obscure methods the industry has of turning profit into loss, or losses into hidden profits.Hollywood royalties, for instance, are not secure measures of investment. That's because, even in Hollywood, it's hard to measure what royalties are, or should be. Studios rely on notoriously tricksy accounting. Four major studios were hit with lawsuits this year over their accounting of royalties dating all the way back to the 1970s. "Hollywood accounting" is a shorthand for the obscure methods the industry has of turning profit into loss, or losses into hidden profits.
This chaotic mess of financial reporting will now be part of our national measure of economic health. What could possibly go wrong?This chaotic mess of financial reporting will now be part of our national measure of economic health. What could possibly go wrong?
There's no question that, without any changes at all, GDP was set to be depressing for the foreseeable future: people aren't consuming as much as they used to, so that part of GDP seems to be falling. Government spending is also on the way down – thank you, fiscal cliff and sequestration – so that part of GDP is falling, too. Exports are doing fine, but not enough to make up for the way the other two elements are dropping.There's no question that, without any changes at all, GDP was set to be depressing for the foreseeable future: people aren't consuming as much as they used to, so that part of GDP seems to be falling. Government spending is also on the way down – thank you, fiscal cliff and sequestration – so that part of GDP is falling, too. Exports are doing fine, but not enough to make up for the way the other two elements are dropping.
You can't force people to consume more. You can't force the government to spend. You can't force foreign countries to buy more of our stuff. So, what's left to raise GDP? You boost the "investment" part of GDP by redefining what counts as an investment. We end up with scientific research and development – which is perfectly legitimate, if inexact – and these artistic royalties, which, all the litigation implies, are notoriously unreliable.You can't force people to consume more. You can't force the government to spend. You can't force foreign countries to buy more of our stuff. So, what's left to raise GDP? You boost the "investment" part of GDP by redefining what counts as an investment. We end up with scientific research and development – which is perfectly legitimate, if inexact – and these artistic royalties, which, all the litigation implies, are notoriously unreliable.
So here we are: a nation that, rather than confronting economic reality head-on, is choosing the Dream Factory instead. The BEA can come up with good arguments for revising GDP; it was not a perfect measure, by any means. But changing it now, adding to the economic doubt we already face, won't give us a Hollywood ending. The real data on which smart economic policy-making depends will get left on the cutting-room floor.So here we are: a nation that, rather than confronting economic reality head-on, is choosing the Dream Factory instead. The BEA can come up with good arguments for revising GDP; it was not a perfect measure, by any means. But changing it now, adding to the economic doubt we already face, won't give us a Hollywood ending. The real data on which smart economic policy-making depends will get left on the cutting-room floor.
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