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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
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