Rethinking GDP: Counting Creativity

By Shlomo Maital   

               GDP            

    We have long known that the key measure of our wellbeing, known as Gross Domestic Product, invented by J.M. Keynes, is flawed.  Now, America’s Bureau of Economic Analysis is rethinking GDP measurement.  Among other things, spending on innovation, known as Research and Development, will now be reclassified.  No longer will it be a mere business expense, as generally-accepted accounting procedures.  Instead, as it should be, R&D will be included in gross capital formation or investment.   As Bloomberg Business Week notes, in its latest edition:

    On July 31, the U.S. Bureau of Economic Analysis will rewrite history on a grand scale by restating the size   and composition of the gross domestic product, all the way back to the first year it was recorded, 1929. The biggest change will be the reclassification—nay, the elevation—of research and development. R&D will no longer be treated as a mere expense, like the electricity bill or food for the company cafeteria. It will be categorized on the government’s books as an investment, akin to constructing a factory or digging a mine. In another victory for intellectual property, original works of art such as films, music, and books will be treated for the first time as long-lived assets.

The effect of the change on America’s GDP will be quite small.  The impact will largely be a morale-booster.   For gross capital formation as a per cent of GDP, America ranks 123rd in the world (!) out of 142 countries, according to the Global Innovation Index 2013.    America invests only 16.2 % of its GDP.  If you account for depreciation and obsolescence, and deduct it from that 16 % (which is ‘gross’,  to get ‘net’), about 15% of GDP,  you find that America barely increases its capital stock at all.  U.S. infrastructure (roads, bridges, airports, public transportation, trains)  all show it.  Now, U.S. infrastructure will still look Third World. But at least the investment number will look a bit better.