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Slaughter & Rees Report - Counting the “Gimmick-Hungry Yobs Digging Gold from Rock and Roll”

August 5, 2013
 

A remarkable thing happened to the U.S. economy last week. At precisely 8:30 a.m. Wednesday, the total value of output the U.S. economy produced last year expanded by $559.8 billion.

How? The Bureau of Economic Analysis of the U.S. Department of Commerce released comprehensive revisions to America’s GDP accounts. Tracking the value of a country’s total output of goods and services has long required a judicious amount of art beyond science. For example, the basic framework for most countries’ GDP accounts was set generations ago when output was predominantly agriculture and manufacturing. As services have grown more important—often through the creation of entirely new industries, such as information technology—statistical agencies have endeavored to keep pace.

Last week’s data revisions were massive (dating back to 1929) while also extremely well designed and executed (the leaders and staff of the BEA have long set a standard to which other countries aspire). The most important change was to treat spending on research and development and on entertainment, literary, and artistic originals as an investment rather than an expense. This capitalizing of spending on intangible assets—i.e., on ideas with value—added $471 billion to 2012 U.S. GDP. It also acknowledged in official U.S. statistics what creative artists, inventors, and scientists have long known and lived: discovering and developing ideas with value boosts output in existing companies and industries and creates entirely new industries.

For academics, business leaders, and policymakers alike, these new data greatly advance the accuracy and timeliness of America’s national accounts. We think these new data also carry at least three important policy messages for all countries.

First, any comprehensive tax reform should not favor a specific type of business or income. In particular, many voices argue that manufacturing is special and should receive tax preferences, such as a lower corporate tax rate. But why should the fruits of intangible assets, many of which are embodied in services, not manufactured goods (e.g., software), be taxed more heavily? The innovation springing from new ideas has long created new jobs and higher standards of living for all American workers and their families. Indeed, of the rise in real U.S. output per person over the 20th century, over 80 percent was accounted for by innovation—as captured by rising educational attainment and research and development—and technological progress. (One of us has recently authored a white paper examining the contributions of intangible property to the U.S. economy.)

Second, America needs comprehensive immigration reform that includes expanding high-skilled immigration. Why? Talent drives much of America’s discovery and development of intangible assets and the resulting economic growth. Among these talented workers, most critical for many innovations are workers in science, technology, engineering, and mathematics (STEM). Immigrants have long been a key part of America’s talent pool that provides the foundation of this innovation. Today, foreign-born individuals make up 20 percent of STEM workers with bachelor’s degrees and 40 percent of those with advanced degrees. Among U.S. workers both with a STEM doctorate and in a STEM career, a remarkable 60 percent are immigrants.  (One of us has recently co-authored a white paper examining the contributions of high-skilled immigrants to U.S. innovation.)

Third, conducting monetary policy is extremely difficult. We say this not to state the painfully obvious. Rather, our point is that central bankers must decide and execute policy based on information that is not just limited but that is often revised years later and sometimes dramatically. GDP revisions like those last week, in particular, should give pause to voices calling for central banks to target nominal GDP. Whether this goal makes sense in principle is a challenging question in its own right. But whether this could work in practice seems to us to be the more fundamental question. Example: As of last Wednesday at 8:30 a.m., U.S. GDP growth in 2012 rose from the previously reported 2.2 percent to 2.8 percent—along with GDP-growth revisions all the way back to 1929. Had the U.S. Federal Reserve been targeting some growth rate for nominal GDP, what would it do now?

In their epic song “Death or Glory,” The Clash sang of aspiring rock musicians per the quote in our title. Whatever heights of stardom they achieve, these musicians are at least being counted more accurately in GDP statistics. That’s indeed something to sing about.

Note to Our Readers:  With many business and policy leaders around the world now on August holiday, we, too, will be resting our pens for the month. The Slaughter & Rees Report will resume on Monday, September 2. Happy August.

Articles © 2013 Matthew Slaughter and Matthew Rees. All rights reserved.
Publication © 2013 Trustees of Dartmouth College. All rights reserved.

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