How the U.S.'s GDP is Going to Grow By 3% in One Week
This week, the Bureau of Economic Analysis (BEA) will surreptitiously rewrite U.S. economic history. A change in the way the U.S. calculates its GDP is going to increase American output by the equivalent of a Belgium-sized country.
It is a bold move, and one can't help but wonder what the true motivations behind this methodological revision are. Technical necessity or political maneuver? Maybe a little of both, with a little bit more of the latter. Indeed, a close look at some of the technical consequences of this change reveal a plethora of accounting modifications that seem to serve the purpose of the incumbent government a little too well.
The most significant modification to the national accounts is going to come from the classification of Research & Development (R&D) as capital investment rather than as an expense. Bret Moulton, head of national accounts at the BEA, defended the decision by claiming that "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." The alteration is estimated to add over 2%, or $300 billion in 2007 (the base year of the new methodology), to GDP — about two-thirds of which will come from the private sector; and together with some other, less consequential, changes, including a reform of pension accounting, the US economy is expected to instantly "grow" by a whopping 3%.
The political consequences will be striking. As Robin Harding, who has been covering this newfound creative accounting for the Financial Times, explains: "At a time when Republicans argue the growth of federal government is out of control, the revisions are likely to lower federal spending as a share of GDP by a half percentage point. They should also lower federal debt as a percentage of GDP by about 2 percentage points."
Furthermore, the adjustment will also lead to a significant reevaluation of individual state economies. Those states that see a lot of R&D will see their GDP rise considerably. New Mexico and Maryland, for example, are expected to receive a 10% and 6% boost in GDP, respectively. Contrastingly, other states that are not R&D heavy will barely see their GDP change — Louisiana will experience an estimated 0.6% increase. Consequently, income gaps will be remeasured across the U.S., and there will be an immediate re-balancing of the economic standing of individual states.
In the end, the change in methodology does little to change the current state of the American economy. BEA director Steve Landefeld even admitted that one "shouldn't be looking for large changes in trends and cycles" of the economy as a result of the modifications. Nevertheless, the modifications will most definitely serve a crucial purpose for the rhetoric of the Democratic Party, who will be able to gain ground on the recalculations to take place this week. It is thus the timing of the changes, rather than the changes itself, that are behind my suspicions. As the French newspaper Le Monde justifiably points out, there is a big difference between adjusting the rules of the game to fit a changing economy and doing so in order to gain time in political terms. It seems like the economic analysts of the BEA have decided to take politics into their own hands.