KEITH CHROSTOWSKI

The art of revising the gross domestic product

Updated: 2013-06-19T04:22:28Z

By KEITH CHROSTOWSKI

The Kansas City Star

The BEA is revising NIPAs to update how we tote up our GDP.

Now, take a deep breath.

What that means is that the U.S. Bureau of Economic Analysis is changing the “national income and product accounts” to better reflect our economy as measured by the gross domestic product.

The two most notable changes: The bureau will now recognize spending on research and development. And, take another deep breath, it will begin counting investment in the creation of entertainment, literary and other artistic originals.

In the government’s words, the GDP will now include “creative work undertaken on a systematic basis to increase the stock of knowledge, and use of this stock of knowledge for the purpose of discovering or developing new products, including improved versions or qualities of existing products, or discovering or developing new or more efficient processes of production.”

It’s surprising that the government’s economic mavens weren’t doing this already.

In the U.S. over the last few decades, investment in R&D has become ever-more important and a growing part of the economy.

As articles by Reuters and the Wall Street Journal pointed out, selling the results of R&D — say, selling robots to a factory — has long been counted in the GDP. But the spending on the R&D to invent the robots wasn’t.

Neither was, for instance, drug company spending on inventing new drugs.

The recommendation to add artistic investment to the GDP is raising more eyebrows.

But more and more Americans are making a living on what you could call creative capital.

The investment movie studios make in creating films? That song your kid wrote for his garage band?

Under the new BEA standards, the production cost of the movie should be counted as adding value to the economy. If your kid’s song becomes popular and generates royalties, the bureau will add in how much he spent in writing it.

Production costs for movies aren’t difficult to get, even with Hollywood’s sometimes bizarre accounting.

Estimating the investment in writing a song will be trickier. Here’s the bureau’s explanation for how it will do this:

“Because adequate information on production costs is not available for most entertainment originals, BEA will estimate the value of these assets based on the net present value of expected future royalties or other revenue obtained from these assets, net of any associated sales costs.”

So in the case of a song, as with any intangible asset, it will take how much money a song made during a year and apply a financial model to estimate the investment in writing it.

Critics say that will lead to mischief, with BEA analysts jiggering the numbers. They also charge that adding R&D investment will make the GDP look bigger than it actually is.

As for manipulating numbers, if that happens private analysts who track the economy will call the BEA on it. And many critics don’t realize how much estimating goes into tracking the GDP in the first place.

Every quarter’s number is revised twice. The BEA does a comprehensive revision of the GDP every five years.

In a $16 trillion economy, the effects of counting R&D and artistic investment are relatively small. The BEA says that counting R&D in 2007 would have boosted the GDP about $300 billion, or 2 percent. Investments in movies, TV, music and the like would have added $70 billion.

Adding in both changes also won’t make it look like the economy has suddenly improved. As part of its five-year GDP review, the BEA does a historical recalculation. When it unveils the final tweaks and new numbers next month, the GDP will be refigured all the way back to 1929, so that percentage rises and declines over time will stay about the same.

And it’s not as if anybody will feel richer because of a bigger GDP. The wealth from R&D and creative output has really always been part of the economy; it’s just not been counted.

The Reuters article, a column by Zachary Karabell called “The Edgy Optimist,” also pointed out another effect of rethinking the GDP: The changes will highlight the growing gap between those “benefiting from education and skills that are pegged to the creation of intellectual property and those who do not.”

“It’s long been true that the real gulf in employment and opportunities is between those with college educations and skills to navigate in an idea-driven economy and those with skills for a manufacturing- or farming-driven economy.”

The new GDP will count the 21st century economy, not the economy from 20th century we’re leaving behind.

To reach business editor Keith Chrostowski, call 816-234-4466 or send email to chrostowski@kcstar.com. Follow him at Twitter.com/keithc3.

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