What’s the crazy old man in Venezuela talking about, you ask? Well, according to our government, as of 8:30 am yesterday, all Americans (as a whole) are $300 billion dollars richer than when you went to bed the night before. But, you don’t feel any richer, do you? That’s because you’re not. You are theoretically richer because your government, in its infinite wisdom, decided to change the way they measure wealth creation,i.e., the way the nation’s GDP is calculated and they have gone back and rewritten history as far back as 1929.
A.Z. Leader at the Inform the Pundits blog did a piece on this change in the GDP calculation yesterday. You should check it out. AZ explains that the US Bureau of Economic Analysis (BEA) has changed the way corporations account for certain costs. The change that has the biggest impact on the GDP is the way companies account for Research and Development (R&D). Now, this is not just window dressing. This change in how R&D costs are accounted for is an important change and it will have consequences. If you’re not familiar with the accounting rules for businesses, let me give you a simplified explanation.
Businesses have basically two types of expenditures. The have operating expenses, which are deducted from gross income as they occur and they have capital expenses, which are not deducted from gross income as they occur. Typically capital expenses are for fixed assets (land, buildings, vehicles, and Machinery). The accounting principle that has been historically used is that these kinds of “capital” assets have a life and so the expense should be spread over the estimated life of the asset ( a building, for example, might be given a life of thirty years). Also, historically, Research and Development expenses, which may or may not lead to development of anything useful and can hardly be described as fixed assets, have always been deducted from gross income as the expenses occur. Now, however, the BEA has decide that R&D expenses should be treated as a capital expense. How they are going to decide over what “life” R&D expenses should be amortized, I have no idea.
So, how is this accounting change for R&D going to affect businesses, the government, and Americans in general? First, understand that some businesses do no Research and Development and others spend huge sums each year. For those companies that do have R&D, their cash flow out the door for R&D will be the same; but their allowed expense deduction will be a fraction of what was actually spent. With lower deductions, profits will appear to be higher, which will make their price earnings ratios appear to be higher, which may have a positive effect on their stock price, which means upper management will make more money on their stock options; BUT, because their reported profits will be higher, Uncle Sam will claim more in taxes and the company’s total cash flow out the door will go up. That’s not likely to be very positive job creation, will it? In my opinion, middle class Americans are going to be hurt by this change in how GDP is calculated.
The reference to Americans being theoretically wealthier in the opening paragraph as a result of the BEA change to GDP calculation came from this Zero Hedge article.
We are delighted to advise Americans everywhere that you are all now making some $300 billion more than you were before the 8:30 AM revision. At least that’s what the Bureau of Economic Analysis says: according to the quarterly revision, the revized annualized Disposable Personal Income is really some $300 billion higher compared to the pre-revision number. You are all richer!
And, with tongue in cheek, the author went on to say:
What’s that? You don’t feel a dollar richer compared to this morning? That’s irrelevant: everyone is now making about 2.4% more. A revised number in an Excel spreadsheet on a government computer said so, so it must be true.
So please go out and spend this extra income that was just created in some BEA spreadsheet. Your banker overlords will thank you.
Unless you are in the upper 29% income bracket and I hope each one of you is that fortunate, you did not suddenly feel wealthier yesterday and you had no reason to feel that way. If anything, you probably had reason to feel poorer. There is another article at Zero Hedge that explains why that may be true. It’s titled: 44 Facts About The Death Of The Middle Class That Obama Should Know. Some of the stats the author lists are eye-popping. Do give this article a good read. For now, I will share the first seven of them:
1. According to one recent survey, “four out of five U.S. adults struggle with joblessness, near poverty or reliance on welfare for at least parts of their lives”.
2. The growth rate of real disposable personal income is the lowest that it has been in decades.
3. Median household income (adjusted for inflation) has fallenby 7.8 percent since the year 2000.
4. According to the U.S. Census Bureau, the middle class is taking home a smaller share of the overall income pie than has ever been recorded before.
5. The home ownership rate in the United States is the lowest that it has been in 18 years.
6. It is more expensive to rent a home in America than ever before. In fact, median asking rent for vacant rental units just hit a brand new all-time record high.
7. According to one recent survey, 76 percent of all Americans are living paycheck to paycheck.
I’m wonder who will get the chance to write the history of this “Progressive” era,; the progressives or someone honest?
Well, that’s what I’m thinking. What are your thoughts?