US economy gets a Hollywood makeover
The US economy will look different from July.
That is not because of a shift in its underlying prospects, but because of a comprehensive update to the national accounts by the Bureau of Economic Analysis, producing the most dramatic change to the way gross domestic product is measured in more than a decade, with preliminary estimates adding about 3 per cent to US GDP.
1. Research & Development
The single biggest revision to the national accounts will be the inclusion of R&D as capital investment instead of just a cost of producing other goods.
“The world economy is changing and there’s greater and greater recognition that things like intangible assets are very important in the modern economy and play a role similar to tangible capital that was captured in the past,” said Brent Moulton, head of national accounts at the BEA.
Initial estimates show that R&D will add a little more than 2 per cent, $300bn in 2007 (the base year of the new methodology), to GDP. About two-thirds will come from the private sector and around one-third from government. Amounts spent on R&D will be the measure.
The changes will have a ripple effect. The new methodology will make corporate profits look larger, as companies will no longer be counting net R&D after depreciation as a cost, the savings rate for individuals and government will rise to reflect the increase in capital investment.
Steve Landefeld, the BEA director, said that the inclusion of R&D was just the beginning to help get a more accurate picture of growth. “You need to go further in this exploration of investment in intangibles. R&D – the scientific and engineering stuff – is just a piece of the puzzle.”
2. Artistic Originals
The Internet Movie Database may not seem like a natural source of data for the national accounts, but it was one of many combed by BEA researcher Rachel Soloveichik, who went through film studio records as far back as the 1920s to build a series on investment in movies.
The result is not only an estimate of the capital value of all America’s books, movies, records, TV programmes, plays and greeting card designs but also a fascinating picture of how their importance to the economy has changed over time.
A film or book is produced in one year but enjoyed for many – the Financial Times recently reported that the sitcom Seinfeld has generated $3.1bn in revenue since it went off air in 1998 – and the accounting change is meant to capture that capital value.
Preliminary research by the BEA puts investment in artistic originals at $70bn for 2007 so that figure will go into GDP. The figures may ignite some controversy because they will amount to the first official estimate of the value captured from the laws of copyright.
Investment in movies peaked during the Great Depression at nearly 0.3 per cent of the economy but has fallen below 0.1 per cent today. TV is now the biggest category.
3. Pension Accounting
The change with the most counterintuitive results is pension accounting. At the moment, the BEA counts what companies pay into a defined benefit pension as wages, and ignores whether the plan is in deficit or surplus. After the change it will measure what companies have actually promised to pay.
One odd effect will be an increase in GDP, estimated at about $30bn in 2007, because employers promised bigger pensions than they funded. Measured federal government spending will fall, because it has funded its plans better, while state and local government spending will rise because they have promised more than they paid.
“Where we’ll see large effects is in the area of deficit numbers, saving, corporate profits and other measure that are related to those,” said Mr Moulton. “The imputed interest costs that are associated with the unfunded liabilities are really large.”
Having a BEA estimate of the size of pension deficits and their cost could prompt an important shift in the political debate over the future of defined benefit plans.
4. Other changes
Some other changes are technical but important. For example, the BEA plans to alter how it measures the cost of running a bank account, which should make the price of banking services less volatile. That will affect the volatility of the PCE index – the Federal Reserve’s preferred measure of inflation.
“It won’t be huge but big enough that people who really care about and follow our numbers will notice,” said Mr Landefeld.
Another update will be to treat all of the costs of buying a house – such as stamp duty and attorney fees – as investment rather than spending. That is expected to add about $60bn to GDP for 2007. At present, only estate agent commissions are capitalised.
But the BEA will also speed up the depreciation of those commissions, writing them off over the average 12 years that people stay in a house, instead of the 80-year life of a structure. As a result, the change will lower net savings and corporate profits.
It just isn't the only reason to change the calculation methods though.
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