April 29, 2013 at 7:43 AM ET
Until recently, you were probably safe in assuming that time and money spent dreaming up Robot Unicorn Attack 2 - the second-most popular iTunes free app - was not adding much to the official tally of the total output of the U.S. economy.
Starting in July, that's going to change.
The Bureau of Economic Analysis – the government agency tasked with adding up the total volume of all the goods and services produced in the U.S. – is about to overhaul the way it tracks the growth of the American economy. The new accounting rules will give more weight to “intangible and intellectual” assets – from new blockbuster pharmaceutical drugs to greeting card designs to, yes, inexhaustible, rainbow-maned unicorns collecting pixies on your iPhone screen.
“We have also all sorts of policies to encourage innovation, we ought to have some sort of solid baseline data on the effects of innovation and intangible assets on the economy,” BEA director Steve Landefeld said.
It turns out all those intangibles are a pretty substantial chunk of business. According to the BEA’s new math, the U.S. economy is about $500 billion larger than we all thought.
That's about 3 percent of the roughly $16 trillion measured by the old rules. The new rules will add the equivalent of another Pennsylvania to the economy.
The overhaul recalculates how money has been earned, invested and spent -- and rewrites thousands of pieces of historical data across hundreds of lines of dozens of spreadsheets -- all the way back to 1929.
Here’s what’s behind the revisions and what it means for you:
Dude,those space whales in Robot Unicorn Attack are awesome. But what have they got to do with gross domestic product?
A lot more than they used to. Over the last several decades, entertainment properties, technical innovations and other “intangible” assets have played an increasingly greater role in U.S. economic growth. But the data hasn't accurately captured the full impact of these new businesses.
Gross Domestic Product is the total value of all goods and services produced in the U.S. – from vacuum cleaners to mobile apps to a weekend at Disneyland. To calculate total GDP, the BEA typically measures the value of those products based on what consumers, businesses or governments paid for them, minus the cost of producing them. Until recently, money spent on software research and development or movie production was logged on the BEA’s books as a cost of creating that product.
The BEA also tracks what it calls “fixed investment” on a separate line on their spreadsheets. That category represents money spent, for example, to build a factory to expand production or upgrade a bank ATM network.
To better capture the economic value of intellectual production, money spent creating "intangibles" -- a new work of art, a catchy iTune download or a reality TV show -- will now be classified as an investment.
OK. But why does that make the economy bigger?
Money classified as “investment” adds to GDP much sooner than if it’s considered a “cost.” A new Ford assembly plant that cost $100 million to build adds value to the economy on the day it’s completed. (Not exactly $100 million in value, but if it's all the same we'll skip the accounting rules on accelerated depreciation and net present value of future production.)
Under the old rules, not all production is treated the same way. The $100 million spent to make a new Hollywood blockbuster thriller had been considered a “cost” – and the new movie only slowly added to GDP over the months or years that tickets were sold.
Under the new calculations, that movie’s production budget now gets entered in the “fixed investment” line and shows up much sooner. So the past production costs of all movies ever made will now show up as “fixed investment.” So will the R&D costs of all the other “intangible” assets that now move to this category, giving the total GDP tally a small, one-time lift all the way back to 1929.
This sounds a lot like Hollywood accounting. Does it also mean the economy is in better shape than we thought?
No. The new math doesn't change the current rate at which the economy is expanding. The economy is "bigger" but it's not growing "faster."
According to the latest reading, GDP expanded in the first quarter at a fairly sluggish 2.5 percent annual rate. That won’t change when the new formula is applied to the old data.
Nor will past revisions alter the record on the dates of past recessions -- the change will amount to no more than a fraction of a percentage point in any given quarter.
Is this just about movies, games and TV shows?
No, the new revisions cover everything from research and development costs for new drugs to how to account for income from pensions. The new rules, for example, will value a pension benefit based on the amount of money the fund is legally obligated to pay future beneficiaries. (The old rules just looked at how much cash was paid into the fund.)
That change will add a slight bump to the levels of personal income in the BEA’s spreadsheets, along with a slight increase in the personal savings rate. Corporate profits will also get a bit of a nudge upward.
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