* U.S. GDP data to capture intellectual creation

 
Jeff Sommer
We have undervalued creativity and research. And despite the hoopla whenever Apple or Google releases a new product, we haven’t grasped the full significance of innovation.

That critique wouldn’t be surprising if it came from an underappreciated artist, scientist or technologist. But it’s being made in what may seem an unexpected quarter: the offices of the federal government. It’s the verdict of the experts who measure the American economy.

We live in an increasingly knowledge-based economy, but until now, official statistics haven’t adequately captured that reality, particularly in the single number describing the economy’s size: the

gross domestic product. That’s the view of Steve Landefeld, director of the Bureau of Economic Analysis, the Commerce Department unit that measures G.D.P. “We’ve been trying to understand the sources of growth in the G.D.P.,” he said. “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.”

This week, the bureau is doing something about it. It plans to give a greater economic weighting to the creation of many types of intellectual property — from books to movies to music to biotech drugs. The economy won’t change overnight, but the numbers will. Going all the way back to 1929, the G.D.P. will look bigger.

This is to take place on Wednesday, when the bureau releases the results of an immense revaluation of the size and composition of the American economy from the Great Depression to the present. It undertakes this exercise every five years or so, altering its methods as the economy and data quality change. Among the bureau’s revisions is a change in its treatment of research and development and the creation of what it calls “entertainment, literary and other artistic originals.”

That category seemed startling when I saw it in a bureau study on intangibles and the economy.

Artistic originals include books, movies, TV shows, music, photographs and greeting cards — yes, greeting cards. That may seem strange — it did to me, at first — but bear with me.

Copies of an original card that is designed today can still be sold a year or more from now. In that sense, a greeting card is like a building or a machine tool or computer software — it’s a capital investment that can generate revenue for years to come. Items that fit the bureau’s economic definitions will be given a bigger weight in G.D.P. calculations. They will be considered assets — capital investments rather than expenses — and the cost of producing them will be added to G.D.P. In addition, the revenue generated by the cards will be included in G.D.P. later on, when the money flows in.

Money generally needs to change hands for creative work to be considered an investment. Unpaid authors still won’t count as contributors to the G.D.P. Yet in 2007, the accounting change would have added roughly $9 billion to G.D.P. from book-writing alone, a preliminary bureau study found.

That may bolster the self-esteem of some writers, but it will do nothing for those of us who write for newspapers, magazines, blogs and the like. A newspaper column has no enduring value, from the bureau’s pecuniary perspective.

That made for an awkward moment in a conversation with Robert Kornfeld, a bureau economist. He assured me that he wasn’t making a literary judgment. It’s simply that daily journalism is perishable, he said. It’s not worth much commercially a year after it’s published. In the new digital world, a column might turn into an e-book with long shelf life, and the bureau might be able to embrace it. “Who knows?” he said. “We re-evaluate these things all the time.”

Work in other creative fields is being excluded from the investment category, too, and for similar reasons. “Seinfeld” has long-term commercial value, he said. “Monday Night Football” does not, at least not in the new calculations. TV sitcoms and dramas generally count as investments. Soap operas, reality shows and sports do not.

The big picture is this: Recalculating the treatment of all “artistic originals” that fit the bureau’s definitions would have increased the economy in 2007 by about $70 billion, or 0.5 percent. And R.& D., particularly in the field of biotechnology, would have added more than $200 billion. Combined, these two changes would have swelled G.D.P. by almost 3 percent, Mr. Kornfeld said. How it will affect G.D.P. this year and in the restatement of past numbers was being calculated as we spoke. Brent R. Moulton, the bureau’s associate director for national accounts, said the statistics would be out this week. He noted that other nations had been making such shifts as well.

The changes could have profound implications. R.& D. and the creation of entertainment originals have generally been treated as a cost of doing business, reducing G.D.P. Now they will be recognized for their potential to add economic value for years to come. Business software has been treated this way since the 1990s. “It makes sense to expand our definitions,” Mr. Landefeld said. “That’s something the bureau has done for decades.”

But the bureau’s changes will widen the gap between corporate and national economic accounting, said Baruch Lev, a professor of accounting and finance at New York University. Despite the change in G.D.P. accounting, he said, R.& D. is still generally treated as an expense, not as an investment, in calculating profits and tax liability.

“National accounting — G.D.P. accounting — is giving us a more accurate picture of the world,” he said, adding that various intangibles might constitute as much as 50 percent of the value of publicly traded companies. These assets don’t show up on corporate balance sheets, he said, keeping investors “in the dark about the true value of many of the companies traded in the stock market.”

THE bureau is still in the dark about many things, too. It doesn’t know the commercial value of a new movie or of esoteric R.& D. in biotechnology, Mr. Landefeld said. “Some of these things succeed, some fail, some have no enduring value; we don’t make a judgment,” he said.

When George Lucas made the first “Star Wars” movie in the 1970s, for example, no one knew that it would generate hundreds of millions of dollars in revenue in a stream that continues to this day. Should it have been considered an investment? It could easily have bombed.

“From the standpoint of accounting, we wouldn’t care,” Mr. Landefeld said. The bureau is tallying the production costs of movies, blockbusters and clunkers alike, adding them as assets to the G.D.P. in the years when they were made. The revenue they bring in later will be counted, too.

“Some movies are forgettable; some aren’t,” he said. “We’ll average that out and get the big picture and we hope it will give us a better understanding of the economy.”