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Tuesday, June 4, 2013

Counting Lady Gaga In The GDP

GDP has been a good indicator of economic progress, and because of its international standardization, one can easily compare performance by country.  It is a simple measure – the value of goods and services produced in a country per year.  That is, it measures output and in so doing relies on objective, observable results of the investment of labor and capital.

Now, however, the government is considering calculating the input to these results and including them into GDP.  The R&D budgets of corporations, universities, and similar institutions would now be counted.  If a widget costs X, then calculating the cost of years of intensive intellectual labor, laboratories, field experiments, etc., then the real cost would be X+Y, a more realistic number. Zachary Karabell, writing in The Atlantic (6.4.13) explains:

As the BEA (Bureau of Economic Analysis) explains, it will now count "creative work undertaken on a systematic basis to increase the stock of knowledge, and use of this stock of knowledge for the purpose of discovering or developing new products, including improved versions or qualities of existing products, or discovering or developing new or more efficient processes of production."

In more practical and easily recognizable terms, the cost of songwriting and production would be added to the value of Lady Gaga’s songs and albums.

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The BEA and its counterpart agencies in other countries have avoided the subjective judgment involved in evaluating non-traditional services such as homemaking or volunteer work.  First of all, since there are no W-2 forms for these activities, how could the actual hours of work be calculated?  Second, should all housework be treated the same? If a woman in a two-income earning family also does the cooking and the cleaning, is that the equivalent of a farm housewife whose labor enables the work of her husband whose agricultural yields are counted in GDP.  If a retired adult works at a dog pound as a volunteer, what calculable value does that have relative to GDP?

While adding creative input to economic goods and services is much more manageable and objective, it still has inherent problems.  For example, should the BEA count failure? What if Company X spends $1bn on research and development on a new product, but by the time it is ready to come to market, consumer demand has moved in another direction and the product never sees the light of day? Should this R&D be counted? What about all the songs, movie scripts, novels, plays, and paintings which are thrown into the trash bin because they had no market value?  Should the costs of producing them be counted?

In addition, is the value of a Lady Gaga song equal to a new software program?  Does her music do more for the economy in terms of emotional uplift than a new computer game? Or a new way of analyzing traffic flow?  How does one even begin to make that assessment?

No one has ever argued that the GDP calculations are perfect; but they do provide a universally-accepted standard against which countries can be compared (GNP).  Once countries stray into the netherworld of subjective analysis, all bets are off.  Why should countries which rely far less on intellectual property – such as those developing nations still dependent on agriculture or extraction industries – be penalized.  Their GDP would not have the added value of R&D, songwriting, or software design.

What's more, critics are partly correct that the new numbers will only accentuate the gap between those benefiting from education and skills that are pegged to the creation of intellectual property and those who do not. It has long been true that the real gulf in employment and opportunities is between those with college educations and skills to navigate in an idea-driven economy and those with skills for a manufacturing- or farming-driven economy. Recognizing the output of intellectual property highlights that.

This all seems like a politically-motivated decision to increase the size of the American economy and make us feel richer than we really are.  It is a good idea to keep trying to refine so-called ‘objective criteria’ such as IQ and SAT tests, teacher performance, and highway safety; but it is always a good idea not to stray too far from direct, observable, tested and reliable indicators.

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