U.S. Updating Its Economic Measurements
It sounds like stuff only accountants could appreciate: This week the Commerce Department will change the way it measures the size and shape of the U.S. economy.
But the broad results figure to be of intriguing and potentially far-reaching significance.
The economy, we may learn, has been growing even faster than we had been told. Inflation, already known to be barely creeping ahead, may be moving more slowly still. And America’s profligate consumers, thought to have been spending money faster than they could earn it over the past year, may be saving some of their earnings after all.
These outcomes should give economic optimists something to cheer. If Americans aren’t spending faster than they earn, for example, then our economic boom is not being built on a quicksand of debt.
And if economic growth is rejiggered upward, then productivity--a devilish tease of a statistic that defies accurate measurement--will follow. From there it’s a short step to extrapolating that today’s sky-high stock market results not from “irrational exuberance” but from an economy whose workers are using new technologies to produce goods and services ever more efficiently.
Yet the skeptics will have their own reasons to exult. Government officials make policy according to what they think is going on in the economy; the Federal Reserve, for example, raises interest rates if it sees signs of inflation. Are today’s policies as mistaken as the premises on which they rest?
On the whole, however, private-sector economists nod approvingly at the changes, which are part of a comprehensive review that the Commerce Department conducts every five years to try to make its measuring sticks keep up with the fast-changing economy.
In a jittery age when basic assumptions are being challenged and investors pounce on each new scrap of government data, when just a few tenths of a percentage point can make the markets soar or dive, everybody would like more precision.
“Financial markets operate in black and white,” says Diane C. Swonk, chief economist for Bank One Corp. in Chicago. “Every day, they have to make a bet: yes or no. But [with government statistics] we are operating in shades of gray. There is an inherent mismatch.”
Alas, Commerce admits that the shades of gray will survive this week’s changes.
“The debate will still rage,” says Larry Moran, spokesman for the Bureau of Economic Analysis, Commerce’s number-crunching arm. “If I tell you that the economy has grown by 1.6%, you can be pretty sure it grew between 1% and 2%. But the 0.6? We just can’t be that precise.”
Commerce will unveil the magnitude of its changes Thursday, and it cautions against expecting huge swings. Economic growth may be revised upward from 0.15% to 0.3% a year, with the greatest increases in the most recent years, when the pace of technological change has been fastest.
The most important revisions represent Commerce’s efforts to account for the information revolution. If the statisticians could ever agree on a way of doing this, it would do much to resolve the debate over whether America is enjoying a wondrous “new economy,” in which the tedious old give-and-take between labor markets and inflation no longer applies. “New economy” theorists suggest that the increasing use of computers has led to such spectacular gains in productivity that bosses can hire more people than ever before, without having to pass on the resulting labor-cost increases to consumers.
The theory is attractive because it suggests that stock prices are rational: The stock market “knows” there is a degree of value in go-go, tech-based companies that conventional statistical measures don’t capture.
The problem is that there is no statistical evidence to prove the theory. Even as the information revolution has streamlined the way Americans do business, it has made a hash of the statistical methods used to measure the gains.
“We’re like a tailor who’s trying to take measurements for a suit from somebody who’s running,” says the Commerce Department’s Moran, adding that things might be better if his agency’s budget requests didn’t always get shot down by Congress.
Most people assume that computers enhance productivity--otherwise why use them?--but when improvements finally appeared in official economic measurements, they were smaller and later than expected. This has led many analysts to fault the way productivity is measured, and indeed, there is much to find fault with. How to come up with a good gauge that includes the output per hour of both, say, a Bill Gates and a janitor? Is one schoolteacher twice as productive as another whose class is half as big?
Commerce has still not found a magic solution to this problem, but some of the forthcoming changes attempt to address it at least in part.
For one thing, Commerce is going to start counting software, when purchased by business, as an investment in plant and equipment. Until now, software has been treated as a raw material, like so much copper or rubber. The category switch may sound like a technical triviality, but it makes a difference because raw materials aren’t included in the most basic measure of U.S. economic output, the gross domestic product. Investments are.
Once Commerce starts adding in the software, the gross domestic product will rise. Commerce is making the revisions as far back as 1959, the dawn of the computer era, and the difference between the old and new figures should help solve at least some of the mystery about where the economic benefits of the computer revolution have been hiding all these years.
The trouble, economists say, is that the price of software keeps changing. “It’s very difficult to know what to measure,” warns Dean Baker, senior researcher at the Preamble Center, a Washington think tank. “If you make a mistake, it will be very costly.”
Commerce is also changing the way it tallies pensions. The pensions of private-sector employees are now counted as household savings, but the pensions of government personnel are included in a separate category that also includes the government’s budget deficit or surplus.
Under the new system, government employees’ pensions will be included in the household savings figure. That will push government savings down and household savings up--and presto, American families will suddenly seem to be saving at least a little of what they earn.
