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Originally published May 25, 2013 at 8:00 PM | Page modified May 29, 2013 at 10:54 AM

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The story behind the new and improved GDP number

Difference of opinion about if revised GDP calculation better reflects the 21st-century economy or another example of creative accounting.

Special to The Seattle Times

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American gross domestic product (GDP) will show a marked increase, as much as 3 percent, when the federal government releases its report in July.

This won’t happen due to stronger growth in the real economy, but because of a comprehensive revision by the U.S. Bureau of Economic Analysis in how GDP is measured.

The government has tweaked the components of GDP 13 times before, but none as substantial as this. The most significant result will be to count artistic works and research and development as capital investments that depreciate over time. They have been treated as one-time expenditures.

The revision has been planned for years, so it’s not an attempt by the Obama administration to make the economy look better. And the goal is to produce a GDP snapshot that better reflects the 21st-century economy.

But critics say this is creative accounting or worse, Hollywood make-believe. It will offer pretend growth that lets politicians avoid addressing our serious economic challenges.

“Economic inequality of all kinds will be papered over,” wrote the Guardian’s Heidi N. Moore. ”America’s growing problem with poverty will move to the back burner. 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.”

Moore makes an important point. GDP is but one measurement of economic performance, but it carries far greater weight than any other, with the possible exception being a very high unemployment rate.

This was a misgiving of Nobel laureate economist Simon Kuznets’, often credited with creating the modern GDP measure when he helped the Commerce Department standardize its data during the Great Depression and World War II. He wrote that “the welfare of a nation can scarcely be inferred from a measure of national income.”

But that happened anyway. The National Bureau of Economic Research declares a recession if the economy sees two consecutive quarters of GDP contraction. America’s GDP of $15 trillion is our marker as the world’s largest economy. Those who worry about U.S. decline see China overtaking us in GDP.

Washington boasts the 14th largest state GDP, at $311 billion in 2011.

Now we’re in a recovery because GDP is expanding, albeit slowly. It has passed its pre-recession highs. Tellingly, however, per-capita GDP has not.

Presidents are considered successes or failures in managing the economy based on GDP growth. The recent push for austerity was given credibility when economists Carmen Reinhart and Kenneth Rogoff wrote an influential paper warning about the level of government debt to GDP. Their argument was based on an error, but austerity continues.

This is no dry measurement that gathers dust.

The shorthand definition of gross domestic product is “the total market value of all final goods and services produced within a country in a given period of time,” according to the Oxford Dictionary of Economics.

But the components the government uses to calculate GDP are more complicated and have been changing in the United States as manufacturing has declined and finance has become more important.

Personal consumption now makes up 70 percent of GDP. Within this, 47 percent is services, up from 30 percent in the 1960s. The remainder of GDP is business investment and government spending.

The new GDP measure has been pushed not only by Hollywood but also by technology companies such as Microsoft. The goal is to account for the value of intellectual property and research and development. Software was introduced into GDP in the recalculation of 1999.

Another important element of the Puget Sound-area economy — trade — won’t be affected by the change, according to Lisa Mataloni, an economist with the BEA’s National Income and Wealth Division.

Thus, an airplane assembled in Everett reflects the cost of the final good for consumption. Any imported components are subtracted from that figure.

The overall effect of the recalculation remains to be seen. Some fear that data and analyses going back to 1929 could be distorted, as well as the danger that the United States is counting GDP differently from other countries.

When I put the question to Mark Thoma, the University of Oregon professor who writes the influential Economist’s View blog, he wasn’t as worried.

“Basically, the different approach to measurement will lift the time-series for GDP a bit (the 3 percent), but it shouldn’t have that much impact on our view of variation in GDP over time (e.g. business cycles will be pretty much the same),” he told me in an email.

But Dean Baker, of the Center for Economic and Policy Research, warned that the new measures will only increase the rent-seeking already rising in the economy. Rent-seeking involves getting the government to change the rules to make a business more profitable, as opposed to producing real goods and services.

“If Pfizer has a patent for a great new cancer drug we will now pick this up as an increase in the investment component of GDP,” he wrote. “Suppose Merck develops a drug that does the exact same thing, except that it gets around Pfizer’s patent. According to the new methodology this would further increase GDP.”

Meanwhile, if a software developer made a new app for free, it wouldn’t be counted as adding to GDP “even though our living standards will certainly be improved by much more than if they had patented the software and charged for it.”

Other important gold-standard measures exist. Among them are the United Nations Human Development Index and the Economist Intelligence Unit’s quality of life index. These and others arguably give a more complete assessment of national well-being. Other efforts try to measure the costs of climate change and environmental degradation.

But for now, none trumps GDP in its influence.

Not much may be different in your pocketbook at the end of July, but the American economy will be suddenly larger.

You may reach Jon Talton at jtalton@seattletimes.com

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About Jon Talton

Jon Talton comments on economic trends and turning points, putting them into context with people, place and the environment in the Pacific Northwest
jtalton@seattletimes.com

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