The Obama administration is re-jiggering the numbers that describe our economy, so that the description of how we are doing will improve even when the reality remains unchanged. Shocker, huh?
The current change is to the method of calculating Gross Domestic Product (GDP). The Seeking Alpha blog explains:
In March 2013, the U.S. government invented a new way of calculating GDP. The Financial Times reported that starting from July 2013, U.S. GDP would become 3% bigger due to a change in statistics. [GDP] now includes R&D spending, art, music, film royalties, books, theatre. This change in GDP statistics has not been implemented elsewhere in the world. So the U.S. is the first to accomplish this rewriting of the GDP number.
Research and development (R&D) spending, which shouldn’t even be accounted for as investment, adds a significant amount to the U.S. GDP number. It accounts for around 2% of U.S. GDP. Art, music, film royalties, books and theatre add another 0.5% to U.S. GDP. Another adjustment has been made to pension accounting. Previously, pension spending was included in GDP. After this adjustment however, we also look at the “promise” to pay out pensions. So we are talking about imaginary numbers that are now included in GDP. A last example is found in real estate. Commissions, legal bills and expenditures on real estate transactions are included in GDP as “investment.” Obviously these expenditures aren’t associated with real production.
One of the consequences is that comparing the GDP number between other countries and the U.S. is not transparent anymore. It is like comparing apples and oranges. GDP should measure real production (like building a factory) and what the U.S. government added here is not real production. It is a measure of spending in the economy and there are items in the GDP number that don’t add real value to the economy (like writing books).
Bad enough. But the GDP number is already a joke in many ways. Let me describe one: the way that it favors government expenditures over private expenditures. As Peter Schiff recently pointed out on his podcast, when government hires someone, we count that as part of GDP, but when private industry hires someone, we don’t. The example given by Schiff is this: an engineer is fired from private industry, and takes a government job as a janitor at 1/2 his former wage. GDP now increases, because his private industry job did not count in GDP — but his government job does.
After hearing this, I sought out a link that would explain the concept. I found one here, at the Library of Economics and Liberty:
Today I’d like to draw attention to one of the peculiarities of GDP. For your consideration:
Scenario 1. Tomorrow, ExxonMobil spontaneously hires an unemployed petroleum engineer for $100K per year. She spends a year looking for new oil, finds nothing.
Scenario 2. Tomorrow, the federal government spontaneously hires an unemployed petroleum engineer for the same $100K. She spends a year looking for new oil, finds nothing.
So, how do these two alternative scenarios impact the official GDP figures?
Scenario 1 has zero impact on GDP: No oil to sell=no extra consumer purchases=no extra GDP. As the Bureau of Economic Analysis says, “Personal consumption expenditures…is goods and services purchased by persons…”
Scenario 2 raises GDP by $100K. As BEA says, “Government consumption expenditures…consists of…compensation of employees…”
That particular example is becoming moot, with the inclusion of R&D in GDP, but the distinction between most government and private jobs remains.
Hiring a worker who (through no fault of her own) accomplishes absolutely nothing raises GDP if the government does the hiring. Hiring a worker who (through no fault of her own) accomplishes absolutely nothing does nothing to GDP if the private sector does the hiring.
Why? Because GDP counts government salaries as “government expenditures” as soon as the government hires a person. But the “consumption” and “investment” parts of GDP only count genuine purchases by the private sector (leaving the oddities of imputed spending for the coda below).
(That particular example is becoming moot, with the inclusion of R&D in GDP, but the distinction between most government and private jobs remains.)
We’ve discussed on this blog how economic data and indicators are often flawed. The Dow Industrial Average is a joke. Unemployment numbers don’t begin to give an accurate picture of the true state of unemployment in the nation, and ignore the explosion of disability claims. And now, I learn, GDP is distorted to favor government spending, and is manipulated by politicians to make imaginary improvements in the economy appear real.
Thank God we have Big Media in our corner, at least, explaining these deficiencies to the general public at every turn, so that voters are not misled.
I’m OK! I’m OK! I’m not passing out, don’t worry, I’m fine. That was just a more pronounced eye roll than usual, that’s all.