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Sat Apr 27, 2013, 07:00 AM

The Misuse and Meaning of GDP, the main gauge of economic growth


Friday’s report on America’s Gross Domestic Product (GDP) held a few surprises. But the real story lies behind the data. The economy grew at a 2.5 percent annual rate in the first quarter of 2013. That was a little less than what most economists had guessed, even though business invested more and consumers spent more than predicted. The key takeaway: Americans were clearly feeling better about their own prospects, since consumer spending accelerated. The bad news came mainly from misguided austerity politics, at home and abroad. Under our current nitwit sequester policy, government cutbacks continued to drag down growth. In addition, trade detracted from growth for the first time in a year, in large part because exports to austerity-stricken Europe are falling.

In this Tuesday, Dec. 4, 2012, file photo, shipping containers are seen as port operations are halted during a strike at the Port of Los Angeles. (Nick Ut/AP)

It’s no mystery why markets and politicians track the GDP figures so zealously. Compiled by 2,000 economists and statisticians at the Bureau of Economic Analysis (BEA), GDP pulls together everything they can measure about how much American households and industries earn, consume and invest, and for what purposes. But earlier in the week, the BEA also tacitly acknowledged that its current GDP measure lags pretty badly behind the actual economy. Earlier in the week, the Bureau released a set of changes in how it will calculate GDP which will take effect in the second quarter report to be released on July 31. The main point of those changes is to take better account of the economic value of ideas and intangible assets. Few among us today question the notion that new ideas can have great economic value. And some 15 years ago -- long before smart phones, tablets and protein-based medications -- the BEA started to study how to revise the GDP measure to better measure that value. Finally, this week, the Bureau announced that starting soon, and for the first time, when a company undertakes research and development or creates a new book, music, or movie, BEA will count those costs as investments that add to GDP, rather than as ordinary business expenses, which do not.

BEA also will apply these changes to its GDP numbers going back more than a half-century. In the present, the revisions, in an instant, will add some $400 billion to the official accounting of the economy’s current total product. Voila! Business profits also will look larger – now and for the past half-century -- because ordinary business expenses reduce reported profits, while investments do not. Most important, the revisions tell us that American businesses and government, together, now invest just 2.1 percent of GDP in R&D – that’s less investment than in the 1990s, especially by businesses.

While this week’s BEA changes bring us closer to an accurate picture of GDP, last week we also learned how naďve we can be about blatant misuses and distortions of GDP. This story began four years ago, when two well-respected economists, Carmen Reinhardt and Kenneth Rogoff, published an economic history of financial crises. R&R’s timing (2009) was impeccable, and their book was a bestseller. More important, it gave its authors wide public credibility when they issued a paper the following year, “Growth in a Time of Debt,” that claimed to have found a deep and strong connection between high levels of government debt and a country’s economic growth. The data, they reported, showed that when a country’s government debt reaches and exceeds the equivalent of 90 percent of GDP, its growth slumps very sharply.

The broader takeaway from this week’s wonky discussion of economic growth? We shouldn’t put too much stock based on a single GDP report. (Andrew Cowie/AFP/Getty)

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