the bistro off broadway
The views expressed on this page are soley those of the author and do not
necessarily represent the views of County News Online
Townhall Finance
Changing the Conversation
by Peter Schiff

Don Draper, Mad Men's master advertiser likes to say "when you don't like what they are saying, change the conversation."  When it comes to the current economic weakness, which was confirmed again today by the release of lower than expected GDP data, Washington would love do just that. Fortunately for them, they consistently outdo the master minds of Madison Avenue when it comes to misdirection. If the government doesn't like what people are saying, they don't bother just to change the conversation, they change the meaning of the words.
 
The latest example of this was revealed earlier this week when the Bureau of Economic Analysis (BEA) announced new methods of calculating Gross Domestic Product (GDP) that will immediately make the economy "bigger' than it used to be. The changes focus heavily on how money spent on research and development (R&D) and the production of "intangible" assets like movies, music, and television programs will be accounted for. Declaring such expenditures to be "investments" will immediately increase U.S. GDP by about three percent. Such an upgrade would immediately increase the theoretic size of the U.S economy and may well lead to the perception of faster growth. In reality these smoke and mirror alterations are no different from changes made to the inflation and unemployment yardsticks that for years have convinced Americans that the economy is better than it actually is.
 
Today's data release confirms that the economic "recovery" is weaker than expected and remains heavily dependent on Federal support. Personal spending was indeed up 3.2%, the biggest jump in two years, but real earnings were down by 5.3%, the biggest fall since 2009. Not surprisingly the buying was made possible by a drop in the savings rate, which came in at just 2.6%, the lowest since the 4th quarter of 2007. No doubt, rising home prices and falling mortgage rates (made possible by Fed stimulus) allowed Americans to refinance their homes and to borrow and spend the money that they did not earn.  With GDP continuing to disappoint, a statistical make-over couldn't come at a more convenient time.
 
In the simplest terms, GDP is calculated by combining a nation's private spending, government spending, and investments (while adding trade surplus or subtracting trade deficits).  Business spending on R&D, a portion of which comes in the form of salaries, has traditionally been considered an expense that does not explicitly add to GDP. But now, the United States will lead the rest of the world in redefining GDP. Washington has now declared that the $400 billion spent annually by U.S. businesses on R&D will count towards GDP. This equates to about 2.7% of our nearly $16 Trillion GDP. The argument goes that, for example, the GDP generated by iPhones has far exceeded the cost spent by Apple to develop the product. Therefore, Apple's R&D is not an expense but an investment.
 
The BEA also argues that the cost of producing television shows, movies, and music should count as investments that add to GDP. Supporters of the change often hold up the blockbuster television comedy Seinfeld as an example. Given that the show's billions in earnings far exceeded its initial costs, they argue that the production expenses should be considered "investments" (like R&D) and be added into GDP.
 
Economists who have staked their reputations on the efficacy of Keynesian growth strategies have argued that such changes will more accurately reflect the realities of our 21st century information economy. But their analysis ignores the failures so often associated with R&D and artistic productions. For every breakthrough iPhone there are dozens of ill-conceived gizmos that never get off the drawing board. For every Seinfeld, there are countless failures and bombs that leave nothing but losses.
 
In essence, the new methodology is an exercise in double accounting.   For instance, suppose a company employs an accountant who works in the sales department, who is then transferred to the R&D department at the same salary. He still counts beans but now his salary will be billed to the R&D budget rather than sales.  In the old methodology, the accountant's impact on GDP would come only from the personal consumption that his salary allows.  Going forward, he will add to GDP in two ways: from his personal consumption and his salary's addition to his company's R&D budget. The same formula would apply to a trucker who switches from a freight company to a movie production company (for the same salary). If he moves refrigerators, he only adds to GDP through his personal spending, but if he hauls movie lights, his contribution to GDP is doubled.  It makes no difference if the movie bombs.
 
These double shots are different from traditional investments, which inject savings (or idle cash) back into the marketplace. Until money from personal or corporate savings is invested, it is not adding to GDP.
 
Another change that will artificially boost GDP concerns how government salaries will be counted.  Unlike most private sector compensation, wages, salaries, and pension contributions paid to government workers are added directly to GDP. This distinction makes sense and eliminates potentially double accounting.  Profits generated by private companies add to GDP when they are ultimately spent or invested by the company. Wages reduce profits, and therefore reduce GDP. But that reduction is cancelled out by the consumption of the employee receiving the wages. Governments do not generate profits, so salaries are the only way that public spending adds back to GDP.
 
Read the rest of the article at Townhall Finance


 
senior scribes
senior scribes

County News Online

is a Fundraiser for the Senior Scribes Scholarship Committee. All net profits go into a fund for Darke County Senior Scholarships
contact
Copyright © 2011 and design by cigs.kometweb.com