The problem is GDP is really measuring an economy that doesn't exist in the same way any more. GDP is good at measuring rolled steel or pairs of shoes. It is bad at measuring software investment or organizational efficiency.
One paper I read a few years ago really stunned me. Leonard Nakamura of the Philadelphia Fed - and let's face it, the Fed is not a flaky organization - argued that our current statistics do not capture much of our economy.
The title What is the gross US investment in intangibles? (At least) a trillion dollars a year(2001) says it all. When you are talking a trillion dollars, that's real money.
Currently, I estimate that US private gross investment in intangibles is at least $1 trillion.
For historical reasons, much of this US investment in intangibles still remains
uncounted. Both in US generally accepted accounting principles, and in US national income accounting dating at least back to Kuznets, investment in intangibles has been expensed, that is, treated as an intermediate input consumed in producing current output rather than as investment that produces a long-lived asset.
What are intangibles?
In this paper, I will define intangible investment as private expenditures on assets that are intangible and necessary to the creation and sale of new or improved products and processes. These include designs, software, blueprints, ideas, artistic expressions, recipes, and the like. They also include the testing and marketing of new products that are a necessary sunk cost of their first sale to customers. It is the private expense to create private rights to sell new products.
If we are not measuring it properly, does it matter? Well, yes:
An intangibles investment rate of $1 trillion suggests that US businesses are investing nearly as much in intangibles as they are in plant and equipment (business investment in fixed nonresidential plant and equipment in 2000 was $1.1 trillion). It also suggests that a third of the value of US corporate assets are intangibles, an estimate I document in part three. That means that the economics of creative destruction -- also known less colorfully as endogenous growth -- are rapidly becoming as important as the economics of the invisible hand.
Additional investments in intangibles are made by writers, artists, and entertainers. None of these are recorded as part of research and development. For example, in 1997, according to the US economic census, publishing, motion picture, and sound recording industries had a total revenue of $221 billion. Associated with this stream of revenues are investments in creativity, and in finding, developing, and publicizing artists and their work (Caves, 2000). While some of this revenue stream results in personal consumption expenditures (motion picture theater tickets) or in advertising intangibles (media buys by advertisers), additional cultural intangible assets are created. The backlists, paperback rights, and foreign rights of book publishers, the film libraries, video rights, and TV, hotel, and inflight licensing rights of the major studios, and the song catalogs of music publishers and recording houses constitute intangible assets that represent a substantial investment. Much of these rights are not represented in the corporate equity of publishing and entertainment corporations, as they
are retained by individuals, partnerships, and unlisted corporations.
If we sum the data for advertising, software, and research and development in
2000, we get a total of $597 billion, or 6 percent of 2000 GDP.
(My bold). So US GDP has not been fully accounting for such things as Hollywood - and indeed Silicon Valley, some of the key drivers of the US economy.
BEA and BLS are aware of the problem. Indeed, I had a long conversation over drinks one evening with the head of BEA once at a conference, and she openly acknowledged the problems. They do their best with limited budgets.
But our existing measures increaingly measure the economy of another age.