Lady Gaga Writing A New Song Is Like A Factory Investing In A New Machine
I spoke yesterday with Dan Sichel, a Wellesley economist and a Lady Gaga fan. Both of these facts are relevant for this story.
The U.S. government is about to tweak the way it measures the economy, and some of the biggest changes will affect the entertainment industry.
Under the current system, Sichel told me, Lady Gaga's sales of concert tickets, online songs and CDs all count toward gross domestic product. But the value of the time she spends in the studio working on new songs isn't counted. That's about to change.
"It's quite analogous to a factory investing in a new machine," Sichel says.
Under the new rules, Lady Gaga sitting in front of her laptop, staring at the sky, thinking up new songs will count as investment, which is part of GDP. A similar change is coming for movies.
Money companies spend on research and development will also be added to GDP.
Why haven't these things counted before? The accounting rules for GDP were written in a simpler time, when most companies produced physical things. But over time, the economy has increasingly shifted toward producing intangible goods.
In all, the tweaks will add an estimated 3 percent to the size of the U.S. economy. Historical GDP numbers will also be adjusted, so the charts won't show any big jump. And for most people, the important thing to pay attention to is not the absolute size of GDP, but the change over time: How much is the economy growing?
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This July the official size of the U.S. economy will be getting a boost. Not because our exports have improved or new jobs. No, it is all due to an accounting change.
David Kestenbaum from our Planet Money Team explains.
DAVID KESTENBAUM, BYLINE: An economy is a tricky thing to measure. You got millions of people buying hamburgers and coffee and cars and socks. Then there's all the stuff you can't touch, like haircuts. There's also all the things the government does, police officers, firefighters; thousands of numbers that we as a country try very hard to add up.
(SOUNDBITE OF NEWS BROADCAST)
UNIDENTIFIED WOMAN #1: Just in to CNN, the latest GDP report. The U.S...
UNIDENTIFIED WOMAN #2: Let's start with the GDP data we're looking at...
UNIDENTIFIED MAN: The economy is picking up speed...
KESTENBAUM: The Gross Domestic Product, the sum total of all goods and services we produce - well, almost all. It turns out we've been missing a few things, like music. To help explain, I called up Dan Sichel. He's an economist at Wellesley.
DAN SICHEL: I'm actually a Lady Gaga fan.
KESTENBAUM: Lady Gaga.
SICHEL: Yeah, so there you go.
KESTENBAUM: What's a Lady Gaga song you like? I ask just 'cause we are going to have to play one now.
SICHEL: Big fan of "Telephone."
(SOUNDBITE OF SONG, "TELEPHONE")
LADY GAGA: (Singing) Stop calling. Stop calling. I don't want to think anymore. I left my head and my heart on the dance floor...
KESTENBAUM: Now, certainly some parts of Lady Gaga empire certainly get counted in GDP.
SICHEL: If Lady Gaga did a concert and sold concert tickets, the concert tickets would count as GDP.
KESTENBAUM: Songs she sold online, CDs, all that gets counted. But something was missing. We weren't including the value of the time she spent working on new songs, working in the studio. That's an investment, he says, and it should be counted as GDP.
SICHEL: It's really quite analogous to a factory investing in a new machine.
KESTENBAUM: Imagine Lady Gaga sitting in front of her laptop, staring at the sky, thinking up new songs. That's economically valuable. It turns out it's not just music we've been doing wrong, movies too, for a long time now.
(SOUNDBITE OF "STAR WARS" THEME MUSIC)
KESTENBAUM: "Star Wars" ticket sales from 1977 - yes, that was in GDP, but not the cost to make the actual movie. The scripts, the Wookie costume, the Death Star, none of that was counted. But that arguably was an investment that went on to pay off handsomely.
We also haven't been counting money that companies invest in research and development. That's another thing that's being fixed.
Why did we get this wrong for so long? One reason is just that the accounting rules for GDP were written in a much simpler time. It used to be when a company made something, that thing physically existed. You could drop it on your foot and it would hurt. But increasingly our economy produces intangible goods; things that are worth something but you can't touch, like computer software.
Steve Landefeld is the director of the Bureau of Economic Analysis, which produces the official GDP numbers.
STEVE LANDEFELD: I mean a lot of this is about intangibles and intellectual property becoming much more important component of GDP, our trade, our competiveness, and it's essential we get a better handle on it.
KESTENBAUM: If you add up all the changes, Landefeld says he thinks they will boost annual GDP by hundreds of billions of dollars. Significant.
LANDEFELD: Roughly three percent.
KESTENBAUM: That's like a big adjustment.
LANDEFELD: Mm-hmm, yeah.
KESTENBAUM: Our economy just magically grew three percent.
LANDEFELD: Well, I think it was always that big but we hadn't been measuring all that.
KESTENBAUM: Historical GDP numbers will also be adjusted. So on the charts it's not going to look like a big jump. Landefeld says for most people the important thing to pay attention to is the change in GDP. Did it go up or down? The actual number, it's always going to just be this mind-bogglingly big thing. Right now U.S. GDP is about $15 trillion.
David Kestenbaum, NPR News. Transcript provided by NPR, Copyright NPR.