Pethokoukis, Economics, U.S. Economy

Why the US economy doesn’t weigh as much as we thought it did


America just gained an Argentina — or at least its economic equivalent. Starting in July, the US economy will officially become 3% bigger, or roughly $470 billion, as the government changes how it calculates GDP. The Bureau of Economic Analysis will now take into account book, film, and television royalties, as well as spending on research and development.

The changes to R&D alone will add 2% to GDP with about two-thirds coming from the private sector and around one-third from government. Here’s how the BEA explains the move, via the Financial Times: “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.”

One way of analyzing the changing nature of the US economy is by looking at how much GDP physically weighs. Former Federal Reserve Chairman Alan Greenspan once remarked that the value of US GDP is five times as great as it was 50 years ago. Yet “the physical weight of our gross domestic product is evidently only modestly higher today than it was 50 or 100 years ago.” Very little of the nation’s economic growth “represents growth in the tonnage of physical materials — oil, coal, ores, wood, raw chemicals. The remainder represents new insights into how to rearrange those physical materials to better serve human needs.”

In other words, to paraphrase economist Paul Romer, more and more we create value by coming up with different “recipes” to rearrange the physical world. Ideas and innovation are what truly drive growth. So even though America becomes more productive and the size of the economy bigger, it doesn’t gain any weight — just wealth.

3 thoughts on “Why the US economy doesn’t weigh as much as we thought it did

  1. So Obama found a way to reduce the debt/GDP ratio afterall :-). Hopefully this is truly simply a rational methodology shift, and is being handled in an objective natural fashion, I hadn’t looked at the issue in detail.

    On the surface it makes sense but I’m skeptical of how government tries to fudge numbers when it can find an excuse to make them look better. GAO years ago pointed out how it hides government spending from its total claimed spending (which you will see hidden in the budget in 1 place) and even the BEA admits it does in its claims of “total expenditures”, as pointed out on this page with links to those sources:

  2. OK Jimmy, I’ll play. What about the negative intangibles? After all, what is the drag of a Police State apparatus on the real economy? If an idiot teenage can get the ‘authorities’ to shut down a city until some private citizen figures out where he is hiding what is the damage done? What is the negative value of having someone store every phone call you make and e-mail you send? What is the damage done to the economy when the Fed prints money out of thin air and use it to purchase treasury debt that permits the growth of government and mortgage debt that promotes a new housing bubble?

    Are you guys idiots or just naive? When will you see through the political games being played by the bureaucracy which rules the nation and start to think clearly for yourself? Aren’t you neoconservatives supposed to understand what Machiavelli really meant when he contradicted what he wrote in chapter XXII of the Prince in the following chapter? It seems to me that so many of you flatter yourselves by thinking that you are the A type of mind when it is clear that the B type is the best that you can hope for and that in reality most of you are C types who lack the capacity to think clearly enough to overcome your emotional attachment to failed mythology.

    This day has to be a bad one for AEI. We get one article talking about how great internet taxes are and another that tells us how great it is that the same bureucrats who never bothered redoing the CPI, Unemployment, and GDP data after a massive change in methodology makes another change that will produce another dislocation that will muddy the waters for those that seek to do proper historical comparisons.

    Tell me what makes you guys any different than the big government liberals that you oppose so much?

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