August 1, 2013

USM professor helped argue for big change in calculation of GDP

By J. Craig Anderson canderson@pressherald.com
Staff Writer

University of Southern Maine professor Barbara Fraumeni and a former colleague have an unprecedented claim to fame: They single-handedly raised the country's gross domestic product by nearly $400 billion in 2012.

On paper, anyway.

Fraumeni, a former chief economist for the U.S. Department of Commerce's Bureau of Economic Analysis, and her then-colleague Sumiye Okubo wrote a paper in 2002 that became the basis for a sweeping change in the way the nation's GDP is calculated. That change, and a handful of others, took effect this week.

The paper by Fraumeni and Okubo, former associate director of industry accounts for the Bureau of Economic Analysis, was published in 2005 and took several years to implement. It argued that business expenditures on research and development should be included in GDP because they represent investments in future revenue generation.

Fraumeni noted that it took a team of people to add the capitalization of research and development expenditures to the nation's GDP after she left the bureau in July 2005. She is now a professor of public policy and management at USM.

"To us, it was obvious," she said. "R&D has benefits that stretch out into the future."

The adjustment, which added $396.7 billion to the nation's gross domestic product in 2012, is part of an effort to make GDP figures more accurate at a time when the U.S. economy is so heavily dependent on knowledge and innovation, Fraumeni said.

Other changes implemented this week include adding the cost of producing entertainment, such as movies and TV shows, that is expected to generate additional revenue for its creators in the future, such as through syndication and reruns. That adjustment added $74.3 billion to GDP in 2012.

More of the costs associated with transferring ownership of a home also have been added, such as title insurance and attorney's fees, boosting 2012's GDP by an additional $42.3 billion.

The final adjustment was to include interest from the unfunded portion of defined-benefit pension programs, which added $12.6 billion to GDP in 2012.

The changes suggested by Fraumeni and Okubo represent about 70 percent of the value added to GDP in 2012 by all of the new adjustments.

For her work, Fraumeni received a gold medal for distinguished achievement in the federal service from the Department of Commerce in 2006.

She said developing and presenting her argument involved long hours and sleepless nights that finally have paid off in a more accurate accounting of the nation's economic progress.

"Yeah, I'm giving myself a bottle of champagne," she said.

 

J. Craig Anderson can be contacted at 791-6390 or at:

canderson@pressherald.com

Twitter: @jcraiganderson

 

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