It is amazing how much the economy improves when you make stuff up.
A change in the way the government accounts for the size of the U.S. economy will result in a 3% increase. Did the economy expand? Are more people working? No, billions of dollars of intangible assets will enter the GDP calculations. How does this happen?
At present, R&D counts as a cost of doing business, so the final output of Apple iPads is included in GDP but the research done to create them is not. R&D will now count as an investment, adding a bit more than 2 per cent to the measured size of the economy.
GDP will soar in small states that host a lot of military R&D, but barely change in others, widening measured income gaps across the US. R&D is expected to boost the GDP of New Mexico by 10 per cent and Maryland by 6 per cent while Louisiana will see an increase of just 0.6 per cent.
Is it all positive? Well, in fairness,
Deficits in defined benefit pension schemes will also be included because what companies have promised to pay out will be measured, rather than the cash they pay into plans.
“We will now show a liability for underfunded plans, which particularly has large ramifications for the government sector, where both at the state level and the federal level we have large underfunded plans,” said Mr Moulton.
Gee, I wonder what the impact will be. So do the government statisticians.
Steve Landefeld, BEA director, said it was hard to predict the overall outcome given the mixture of new methodology and data updates. “What’s going to happen when you mix it with the new source data from the economic census . . . I don’t know,” he said.
But he said the revisions were unlikely to alter the picture of what has happened to the economy in recent years. “I wouldn’t be looking for large changes in trends or cycles.”
A mystery. What could the effects of adding intangible assets to the GDP calculation, even with an offsetting liability for underfunded plans. That’s the beauty of adding R&D, it can be unlimited. But doesn’t the pension calculation balance it out?
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.
There you have it. Unfunded liabilities increase GDP. The economy soars. Money descends from the skies and the streets are paved with gold.