By Bartlett D. Cleland

Last summer the Bureau of Economic Analysis (BEA) began to track “R&D for entertainment, literary and artistic originals as fixed investment,” and created a new investment category of “intellectual property products,” which will also include expenditures for software. This change corrected a problem with GDP being understated by approximately $400 billion annually. Of course, such research and development should always have been included. Why would ticket sales to a Broadway musical count as GDP but not the time spent writing the songs and dialogue? Those are the inputs into the final product, the production line of intellectual property.

Beginning soon the BEA will add a new quarterly economic “gross output” (GO) report on the measure of total sales volumes at all stages of production, which will show the added value of each stage of production. Why another quarterly number?  What happened to gross domestic product (GDP)?  In part, for the same reason as the change this summer, the U.S. economy is increasingly a knowledge economy based on intellectual property; improved and various measurements are needed to capture an accurate economic view of the U.S.

GDP measures only the final output of a society, not the value of the entire production process, and so many inputs, such as intellectual property, are lost. In an age where investment in technology and IP development are critical, these should show up in economic measurements. GO shows it. As Mark Andrew Skousen, an economist, college professor, and promoter of GO says, “GO gives a better sense of total economic activity, because instead of just focusing on final production and consumption, it focuses on all the money businesses have to put up to create products. They have to hire workers, buy supplies, etc.”

With an economy largely based on intellectual assets, skipping over them is a concern. The BEA estimates that 40 percent of current U.S. economic growth tends to be attributed to intangible assets, which accounted for approximately 4.5 percent of GDP during the post-WW II era, rising to between 6.5 percent and 8.5 percent of GDP in recent years.

The narrow focus of the GDP measurement has led to wrong conclusions. Routinely, politicians and reporters hold up consumer or government spending as the key to the U.S. economy. In fact, neither is the case. What GO exposes is that technology enhancements, business investment and savings drive our economy.

Skousen explains, “Looking at GDP gives the erroneous impression that consumer spending accounts for 70 percent of the economy, government spending for 20 percent and business spending for the rest. As a result, the media incorrectly reports that consumer or government spending reductions are automatically bad for the economy. But GO data shows that business spending actually accounts for more than 50 percent of the economy and the consumer for only 40 percent. The consumer is the effect, not the cause, of prosperity.”

Identifying GO reveals the errors of many public policies and demonstrates that innovation, capital expenditures and growth, not greater government spending or rampant consumerism, are the keys a growing U.S. economy.

Bartlett Cleland is a Resident Scholar with the Institute for Policy Innovation. Read more at www.ipi.org