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.