Few Americans may have noticed it but the American economy grew by $560 billion this week, according to the Bureau of Economic Analysis, the office within the U.S. Commerce Department that calculates the official gross domestic product. The “growth” was a result of an accounting change — part of a major revision to how BEA calculates GDP going back to 1929. But it could have real world consequences.
Most of the upward revision reflects a decision to include for the first time an estimate of the value of intangible assets and activities, such as intellectual property and R&D spending. Historically, spending on R&D and the production of intellectual property such as movies, TV shows and software, was treated by both economists and accountants as a simple cost to a business, not as an investment in a capital asset. So its value, as far as GDP was concerned, was negative.
From an accounting perspective, intangible assets are only counted as real assets when a company is bought or sold, and a real price has to be assigned to them.
In an effort to more accurately portray the U.S. economy as it grows ever-more dependent on intellectual property and innovation to create wealth, the BEA has created a new GDP category called “intellectual property products,” which includes “entertainment originals,” such as books, movies, TV shows, games and software. The cost of creating “long-lived TV shows,” such as Seinfeld, and movie franchises like Star Wars, which generate revenue over a period of decades and spawn spin-offs, will now be counted as capital investment rather than a simple expense.
R&D spending in areas like biotechnology, will also be treated as capital investment.
“We’ve been trying to understand the sources of growth in GDP,” BEA director Steve Landefeld told the New York Times. “One of the longstanding gaps in the numbers has been the contributions of intangibles — creations in the arts and entertainment, research and development, things like that — and what they contribute to G.D.P.”
The effort is a worthy one, and probably long-overdue. But it also raises as many questions as it answers.
For one thing, the change in BEA’s methodology does not affect generally accepted accounting principles (GAAP), which still treat IP and R&D as expenses. That’s going to lead to a growing divergence between GAAP-based public valuations of companies and how the government counts their contribution to GDP, which could confuse markets and lead to friction between buyers and sellers.
Another potential problem, as the economists Jared Bernstein and Dean Baker pointed out in a NY Times op-ed this week, the new “entertainment originals” category basically counts only media content that is protected by copyright and is created for purposes of commercial exploitation. Yet an ever-growing percentage of the media content Americans consume is user-generated and made freely available on social media sites.
As Bernstein and Baker note, “We spend billions of hours watching videos free of charge on YouTube. Some people — not the ones with cats — spend considerable time and money putting these together. But since they are available at no cost, this will not add to G.D.P.” Unlike the time and effort put into creating Game of Thrones or House of Cards, in other words, the time and effort that goes into creating millions of Twitter or Tumblr feeds is discounted.
Yet that content unquestionably helps create wealth. Yahoo spent $1.1 billion to buy Tumblr two months ago presumably because it thinks the free content being created there has significant value, or will have significant value once Yahoo figures out how to monetize it. Nearly all of Facebook’s market cap is based on the presumed value of free content.
If you really want to estimate fairly the value of American creativity and innovation, you need to consider the value of uncompensated contributions to open-source software development, user-generated content, wikis and other types of crowd-sourced production.