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US sees GDP go up, but it isn't any richer

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Jacquelyn Martin/AP

(Read caption) President Barack Obama waves to the media as he walks on the South Lawn of the White House in Washington, D.C. on Aug. 4, 2013. The US saw moderate economic growth in its second quarter.

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The most interesting thing about last week's U.S. GDP report isn't that it indicates that second quarter growth was moderate.

The most interesting thing instead that it asserts that first quarter GDP was $551 billion, or nearly 3.5%, higher than previously reported, $16,535 billion instead of the $15,984 billion previously reported.

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The upward revision is the result of a previously announced methodological change, which entailed classifying corporate outlays on intellectual property as "investments" as opposed to input cost. This matters because investments are included in GDP while input purchases are excluded.

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But as I pointed out in my previous analysis of this issue, this change doesn't make America any richer, because in the long term, investments are in effect input purchases to achieve production. The difference just lies in whether it should be subtracted immediately or gradually through several years through what in national accounting is called "capital consumption" and what in corporate accounting is called "depreciation". In the long term, any re-classification of something as "investment rather than "input purchases" won't increase net income as the increase in "gross income" is cancelled out by an equal increase in capital consumption/depreciation.

And indeed, as Q1 2013 GDP was upwardly revised by $551 billion, capital consumption was upwardly revised by an almost equal amount of $540 billion, from $2,063 billion to $2,603 billion.

There are however two implications of this. One is that it will make cyclical fluctuation look bigger as in the short term in periods of rapid increses in investments, this will briefly raise estimated net income, but once the investment boom is halted capital consumption will catch up.

Another is that unless other countries make the same methodological change this will make America appear richer even as it really isn't.  The illusion of increased cyclical fluctuations and the increased international incomparability are two more reasons why economists should stop focus on comparing GDP and instead compare national income/net national product.