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The art of measuring the size of the economy just got a new box of crayons.
The Bureau of Economic Analysis announced last week it would be changing the guidelines with which it calculates Gross Domestic Product, more familiarly known as the GDP, the standard by which the size and growth of the economy is measured.
The change comes after more than five years of economic stagnation that, despite frequent claims of a strengthening recovery, have seen high unemployment and extremely slight growth in the size of the economy.
GDP is calculated by adding up the total amount of private consumption, investment, government spending, and net exports. The new changes, which will include definitional changes to expand what is counted in GDP, are expected to add 3 percent to the GDP report, while not changing the actual output of the economy.
The agency claims the changes in calculation “more accurately portray the evolving U.S. economy and to provide for consistent comparisons with data for the economies of other nations.”
Outspoken investment broker and financial commentator Peter Schiff describes the change as “propaganda” in his radio show.
“That’s what the government does. Whenever they don’t like the results, they change the methodology for calculating those results,” Schiff says in a new SchiffRadio report.
“Now it doesn’t mean that the economy is actually any bigger, but it means they can pretend it’s bigger,” he added.
Schiff, the CEO of Euro Pacific Capital, asserts that the underlying reason behind making the GDP looking bigger is so that the debt looks smaller. Economists agree that if public debt continues to exceed GDP past sustainable levels, economic growth will suffer because more and more of the economy is dedicated to paying interest on loans rather than spending on investment or consumption or things that create growth within an economy.
“[I]f you have a BS GDP, that’s artificially inflated based on creative accounting, than it means the economy isn’t generating enough income to service all of that debt,” Schiff says.
Many important economic numbers are politically decided and have been changed throughout history. For example, the method used to calculate the unemployment number changed in 1994. The number we use to today does not tell a full unemployment story, but rather indicates who’s working relative to who is looking for work. The resulting number is typically lower and more politically favorable.
Inflation measurements have also been manipulated in various ways, notably by excluding energy, food and other necessities of daily survival from “core” inflation measurements. Many economists criticize the way the BEA’s GDP measure already assumes every dollar of government spending creates one full dollar in economic growth.
Under the new GDP calculation methodology, research and development is included as an investment expense. This will result in corporate profit appearing inflated and more government spending accounted in the GDP. Schiff points out that most R&D expenses are salaries, and many expenditures never result in a new project or gadget and are effectively wasted money. Nevertheless, that money will come under the umbrella of economic output defined by the GDP.
Schiff also criticized the R&D coming from defense contractors. “Why should that research [to build better bombs] be considered investment?…what if the result is that the bombs aren’t even any better?” Schiff demands.
“These are expenses, not investment,” he says.
Still, government economic experts are under pressure to produce a rosier picture. Since the putative end of the recession in 2009, job creation has been consistently negative relative to population growth. Wealth formation has also been negative, with income growth flat or falling and personal debt steadily increasing. And massive fiscal and monetary expansion has prevented Americans from enjoying any benefits of a strengthening currency that would ordinarily accompany economic doldrums; officially measured inflation has taken 12 cents off the value of the dollar since the start of the recession in 2007. As Americans become poorer across the board, Washington’s economic indifference or incompetence is attracting more negative attention. A study released Monday claimed President Obama has spent more time vacationing than attending to economic issues.
Other changes to GDP measurement include artistic originals being counted at their capital, present value. “Preliminary research by the BEA puts investment in artistic originals at $70bn for 2007 so that figure will go into GDP,” the Financial Times writes.
Also, the new accounting for pension plans will include what companies have promised, not the present value of the pension, ignoring the large current deficits that many pensions are running.
“Where we’ll see large effects is in the area of deficit numbers, saving, corporate profits and other measures that are related to those,” Brent Moulton, head of national accounts at the BEA, told Financial Times. “The imputed interest costs that are associated with the unfunded liabilities are really large.”
Schiff notes that even under current measures, GDP is fictional, and he posits that actual economic growth is much smaller than what the government claims. He points out that the debt-to-GDP ratio is “already far bigger” than most observers admit.
“[I]t’s going to look like the economy is getting bigger even though it isn’t,” Schiff concludes. “Our GDP is one big lie.”
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