Peter Schiff on US GDP Accounting Hocus Focus

Slow economic growth? No problem. All what is needed is for the government to change the methodology of computation. 

Explains Peter Schiff  at the lewrockwell.com (bold mine) [italics-my comment]

In the simplest terms, GDP is calculated by combining a nation's private spending, government spending, and investments (while adding trade surplus or subtracting trade deficits). Business spending on R&D, a portion of which comes in the form of salaries, has traditionally been considered an expense that does not explicitly add to GDP. But now, the United States will lead the rest of the world in redefining GDP. Washington has now declared that the $400 billion spent annually by U.S. businesses on R&D will count towards GDP. This equates to about 2.7% of our nearly $16 Trillion GDP. The argument goes that, for example, the GDP generated by iPhones has far exceeded the cost spent by Apple to develop the product. Therefore, Apple's R&D is not an expense but an investment.

The BEA also argues that the cost of producing television shows, movies, and music should count as investments that add to GDP. Supporters of the change often hold up the blockbuster television comedy Seinfeld as an example. Given that the show's billions in earnings far exceeded its initial costs, they argue that the production expenses should be considered "investments" (like R&D) and be added into GDP.

Economists who have staked their reputations on the efficacy of Keynesian growth strategies have argued that such changes will more accurately reflect the realities of our 21st century information economy. But their analysis ignores the failures so often associated with R&D and artistic productions. For every breakthrough iPhone there are dozens of ill-conceived gizmos that never get off the drawing board. For every Seinfeld, there are countless failures and bombs that leave nothing but losses. (Such is called survivorship bias-Benson)

In essence, the new methodology is an exercise in double accounting. For instance, suppose a company employs an accountant who works in the sales department, who is then transferred to the R&D department at the same salary. He still counts beans but now his salary will be billed to the R&D budget rather than sales. In the old methodology, the accountant's impact on GDP would come only from the personal consumption that his salary allows. Going forward, he will add to GDP in two ways: from his personal consumption and his salary's addition to his company's R&D budget. The same formula would apply to a trucker who switches from a freight company to a movie production company (for the same salary). If he moves refrigerators, he only adds to GDP through his personal spending, but if he hauls movie lights, his contribution to GDP is doubled. It makes no difference if the movie bombs.

These double shots are different from traditional investments, which inject savings (or idle cash) back into the marketplace. Until money from personal or corporate savings is invested, it is not adding to GDP. (This is why statistical GDP is an unreliable gauge for real growth-Benson)

Another change that will artificially boost GDP concerns how government salaries will be counted. Unlike most private sector compensation, wages, salaries, and pension contributions paid to government workers are added directly to GDP. This distinction makes sense and eliminates potentially double accounting. Profits generated by private companies add to GDP when they are ultimately spent or invested by the company. Wages reduce profits, and therefore reduce GDP. But that reduction is cancelled out by the consumption of the employee receiving the wages. Governments do not generate profits, so salaries are the only way that public spending adds back to GDP.

The new system magnifies the GDP impact of government pensions, which are a principal component of public sector compensation. Going forward, the pensions will be calculated not from actual contributions, but from what governments have promised. Under the old system, if a state had a $10,000 pension obligation but only contributed $1,000, only the $1,000 would be added to GDP. Under the new system the entire $10,000 would be counted. So now governments can magically grow the economy simply by making promises they can't keep.

The bottom line is that now certain private sector salaries (in R&D and entertainment) will be counted twice and public pension contributions will be counted even if they aren't made. The economy will not actually be any larger or grow any faster, but the statistics will claim otherwise. With the stroke of a pen, our debt to GDP ratio will come down. Will this soothe the fears of our creditors? Will critics of big government take comfort that spending as a share of GDP may be lower? My guess is that the government is confident that its trick will work, and that distracting attention with a statistical illusion is the sole motivation for the change.

Pls read more of the accounting chicanery here.

So by changing the accounting method, the US government hopes that the risks will be simply wished away from her profligate spending ways which also justifies more of the same. 

Yet another proof that governments have been engaged in wholesale manipulation markets directly and indirectly.