How America Creates Something From Nothing

By Shlomo Maital   


   Here’s a neat trick – Create something from nothing. America just did it.  The Bureau of Economic Analysis has redefined how it computes GDP, and at one fell swoop added $560 b. (more than twice Israel’s entire GDP) to America’s GDP, or 3.6 per cent.   How?

    By creating a new category called “intellectual property products”, including “entertainment originals”, and treating them as part of capital investment.  So not only will America’s GDP rise, so will its moribund gross capital formation (investment), which ranks a dismal 123rd in the world (at only 16.2 % of GDP, barely enough to cover obsolescence). 

   How does this work?  As Jared Bernstein notes in the Global New York Times, long-lived TV shows like “Seinfeld” that generate a stream of revenues for many years will now be treated as investment.  Makes sense – capital, after all, is simply a product that generates an annual flow of other products, or services. 

    So, not only did America get some GDP from nothing, it is now counting ‘nothing’ (by everyone’s clear admission, Seinfeld is a show about literally nothing) as investment.   

   The big problem with this, is that in modernizing the GDP national accounts,  America has left behind the financial accountants, whose rules (GAAP Generally Accepted Accounting Practices)  do not permit the same definitions.  Intangible assets are hugely important in today’s high-tech world, yet find little expression in balance sheets.    At some point, the accountants will have to fall in line with the national accounts GDP people.

    Bernstein makes another good point.  If we’re modernizing GDP, it’s time we also took into account the huge damage we do annually, through pollution, to our environment. That’s a negative investment.  If you count Seinfeld, as positive, you should count all the CO2 belchers as negative.   That, however, would make politicians look bad, and perhaps force us to face up to the damage we do daily to our environment.  The economists aren’t yet ready for that challenge.