Opinion Editorial | |
| Monday, July 20, 1998 | |
Income Growth Another Sign Output is Undercounted |
There is considerable debate going on in Washington over projections
for the budget in future years. Some economists, such as Larry Kudlow and
Steve Moore, believe that federal revenues will continue to rise strongly,
providing a large budget surplus that can be used to cut taxes. However,
Congress's budget-scoring agency, the Congressional Budget Office, believes
that future surpluses will be modest, putting a brake on tax reduction efforts. One reason why there is such divergence in budget forecasts may be mismeasurement
of the gross domestic product (GDP), our official measure of economic output.
To calculate GDP, the Department of Commerce's Bureau of Economic Analysis
adds up personal consumption expenditures by individuals, gross private
domestic investment by businesses, consumption and investment by all levels
of government, and exports minus imports (net exports). Last year, the
sum of these components came to $8,080 billion. However, our national economic accounts are like business accounts --
debits must equal credits. In this case, output must equal income. Thus
the Commerce Department also calculates a figure called gross domestic income
(GDI), which sums all of the income in our economy. GDI includes compensation
of employees, corporate profits, interest and rents, earnings by the self-employed
and other measures of income. In theory, GDI should equal GDP. The problem is that in recent years, GDI has grown much more rapidly
than GDP. In 1997, GDI equaled $8,166 billion -- $86 billion more than
GDP http://www.ncpa.org/pd/gif/gdigdp.gif">(see figure).
And the trend appears to be accelerating. In the first
quarter of 1998, GDI exceeded GDP by $114 billion. The reason why this statistical discrepancy may be important is because
taxes are paid on incomes, not production. With GDI growing faster than
GDP, this may explain why tax revenues are rising faster than forecasters
expected, when basing their forecasts on GDP. A revenue forecast based
on GDI would be higher than one based on GDP. It is not clear why GDI is growing faster than GDP. Some economists
believe it may be a more accurate measure of economic performance today
than GDP. In other words, measured GDP may be too low, because much output
is not being picked up by Commerce's traditional measures. For example,
it takes considerable time for the production of new startup companies to
be counted, thus causing Commerce to miss some of the output in fast growing
sectors of the economy such as computer software. Eventually, the GDP data may be revised to eliminate the discrepancy
between GDI and GDP. But for now, the faster growth of GDI seems to be
a better indicator of our nation's economic health. Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis,
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