We’re all in favor of journalists with contrarian points of view. Indeed, we suspect that the American press would be a better institution if more of its members did something other than spout the commonly accepted wisdom. But when a newsweekly pronounces that, unbeknownst to just about every economist on the face of the earth, U.S. GDP has been understated by $1 trillion and our trade deficit is actually zero — well, this requires some careful scrutiny.
The gist of the current BusinessWeek cover story, “Unmasking the Economy: Why it’s so much stronger than you think,” is that by failing to take into account various intangible factors unique to the “knowledge economy,” stodgy government statisticians have grossly misrepresented the true state of the American economy.
“You read this magazine religiously,” BusinessWeek begins, somewhat optimistically, “[you] watch CNBC while dressing for work, scan the Web for economic reports. You’ve heard, over and over, about the underlying problems with the U.S. economy — the paltry investment rate, the yawning current account deficit, the pathetic amount Americans salt away. But what if we told you that the doomsayers, while not definitively wrong, aren’t seeing the whole picture?”
BusinessWeek does tell us that, of course, and argues further that GDP statisticians should factor in things like research and development, training, and marketing expenses, none of which are currently included in the national account. By way of illustration we are given the requisite iPod example. The “folks at the [Bureau of Economic Analysis] don’t count what Apple spends on R&D and brand development, which totaled at least $800 million in 2005. Rather, they count each iPod twice: when it arrives from China, and when it sells. That, in effect, reduces Apple — one of the world’s great innovators — to a reseller of imported goods.”
This is a reasonable point. The iPod probably contributes more to the national economy than the average widget. And as BusinessWeek notes, forecasters and policy makers, including Alan Greenspan, have long argued that various intangibles should be taken into account alongside the BEA’s hard numbers.
But while BusinessWeek‘s article reads like it was written by someone who just solved the Rubik’s Cube for the first time, the notion of using intangibles to calculate GDP has been around for some time. And most economists believe it is a bad idea because such numbers are inherently unreliable. They are … intangibles — unknowns. To allow subjective analysis to seep into our GDP statistics would be, in effect, to Enron-ize the national account.
To get a sense of what might happen if statisticians were given license to make up numbers, just read BusinessWeek‘s story. The magazine highlights the work of an economist who assigns seemingly random dollar figures to the “know-how” that we export abroad and to the “human capital” that immigrant workers contribute to the economy.
The result? Voila, the “U.S. current account deficit actually disappears.” Six hundred billion dollars. Gone! What a great trick.
So great, in fact, that we were inspired to try some subjective analysis of our own. First we calculated that America sends a lot of “know-how” overseas. But unlike BusinessWeek, we figured that foreign companies use this know-how to make better products, which they sell to Americans. The net affect on the trade deficit would therefore be … nothing.
Hmm. That wasn’t going to make our story very exciting. So we tried again. We estimated total R&D spending and included that figure in a calculation of America’s GDP. But then we figured that R&D is already factored into GDP. Companies research and develop better products. Gross domestic consumers buy more of these products. So, presto! …… same old GDP number.
Hmm. Come to think of it … this trick is sort of lame. And so is BusinessWeek‘s article.
Gal Beckerman is a former staff writer at CJR and a writer and editor for the New York Times Book Review.