Srikanth Hari sent the following BusinessWeek ANALYSIS & COMMENTARY I thought
others might want to read...


Software: A New Calculus for the New Economy
How reclassifying it as an investment boosts growth

The U.S. truly has seen the birth of a New Economy over the past several 
years.
That's one way to read the results of a comprehensive revision of historical
data on the gross domestic product released on Oct. 28 by the Commerce Dept.'s
Bureau of Economic Analysis.

The most stunning data in the report are about the acceleration of 
productivity
in the 1990s. Official revisions of productivity data, incorporating the 
latest
output figures from Commerce, won't be released by the Labor Dept. until Nov.
12. But a BUSINESS WEEK analysis of the new data from the Commerce Dept. shows
that nonfarm business productivity growth in this decade will likely be 
revised
upward, to roughly 2% a year, from 1.4%. Productivity growth will be boosted
for the 1980s as well, but not by as much (chart).

What's even more striking is the upward revision in productivity growth for 
the
last three years, from 1.9% to a stunning 2.6% rate. That explains how the 
U.S.
has been able to grow at a 4.2% rate over that stretch without creating
inflationary pressures.

KEEPS ON TICKING. While the rate of increase in economic output in the 1990s
isn't as impressive as the growth in productivity, it is not as low as the old
statistics indicated. From 1990 through 1998, the Commerce Dept. statisticians
say, the economy grew at an annual rate of 3.1%--about even with the 1980s
growth rate of 3.2%. And, the report confirms what everyone senses: Growth has
accelerated recently. Commerce revised the economy's growth rate for 1996-98
upward to an average of 4.2% from a previously reported 3.8%.

By comparison, annual average GDP growth for the entire 40-year span covered 
by
the revisions was pushed upward to 3.4% from 3.2%. The implication of the
revisions: The U.S. economy may now be able to sustain a higher rate of growth
without inflation than was previously believed.

The Commerce Dept. now says that the GDP last year was $8.76 trillion, which 
is
about $250 billion--or 3%--higher than previously believed. A new calculus for
software investments accounted for about two-thirds of the upward revision in
GDP. And since software sales are growing far faster than the economy as a
whole, adding them into the GDP raises the economy's official growth rate--and
will likely continue doing so for years to come.

Indeed, the biggest factor in the Commerce Dept.'s revisions is the new way of
accounting for software, the poster product of the New Economy. The government
now treats software purchases by business and government as investments, which
are part of GDP. Until now, the only software sales that counted toward GDP
were sales to consumers and the sale of software that came bundled with
computers and was included in the computer's purchase price. Now all software
sales are factored into the GDP figures.

The new treatment of software isn't just some statistical trick. Until now,
software spending by business and government was considered an expense, and
expenses are left out of GDP to avoid double-counting. For instance, it would
be double-counting to list the steel that goes into a car as part of GDP and
count the car, too.

But software is not consumed in the production of new goods and services. And
the government is acknowledging now that software shouldn't be considered an
expense such as steel or stationery. It's being reclassified as an investment,
like a machine tool, in recognition that it has a useful life of at least a
year.

PIGGY-BANK BLOAT. By recognizing software as an investment instead of an
expense, the Commerce Dept. also increases the national savings rate. Savings
are the mirror image of investment. While the national savings rate was 
revised
downward for 1959-73, it was revised upward for the years since. The biggest
revision was for the most recent year covered: 1998. The government now says
that total national savings were 18.8% of gross national product last year, a
jump of 1.5 percentage points from the previous calculation. Of that increase,
fully 90% was accounted for by the government's recognition of business and
government software purchases as an investment.

The Commerce Dept. also rejiggered the composition of the national savings
accounts, raising personal savings while lowering government savings by an
equal amount. That's because of a new way of accounting for government pension
plans, contributions to which are now considered a form of personal rather 
than
governmental savings.

The reshuffling means that the personal savings rate is now calculated as 3.7%
for 1998 instead of a previously reported 0.5%. The new methodology will
undoubtedly turn the current personal savings rate from negative to positive.
But since the government's savings fell by a corresponding amount, the
reshuffling had no impact on the overall national savings rate. And the
downward trend in personal savings is still in place. By the new measure, the
personal savings rate declined from 10.9% in 1982 to 3.7% last year, instead 
of
from 9% to 0.5% as had been previously reported.

KINDER HINDSIGHT. The GDP revisions were wide-ranging and included hundreds of
large and small tweaks. For instance, the government is now using a better way
to measure the value of banking services such as automated teller machines and
electronic funds transfers. That increases the sector's official output and
productivity. Also, new inflation measures developed by the Labor Dept. are
being incorporated all the way back to 1978, not just since 1995.

One footnote: The government now says the recession of 1990-91 was milder than
previously thought. From its peak in the second quarter of 1990 to its trough
in the first quarter of 1991, GDP fell 1.8%. The old figure was a 2.7% drop.

The Commerce Dept.'s rewrite of economic history doesn't mean that the Federal
Reserve can afford to be any less vigilant about inflation. Regardless of the
official growth rate, Fed Chairman Alan Greenspan has to keep his eye on the
same warning signs: tight job markets, busy factories, rising commodity 
prices.
The real significance is that government statistics are finally reflecting the
reality of the high-growth, high-productivity, low-inflation New Economy.

By Peter Coy in Washington


My comments:
        The article is a bit unclear on whether software was ever counted.  
The
key point is that the value of software not yet depreciated is a percent or 
2of
GDP.  Thus, GDP is a few % larger than the old accounting system that expensed
all software immediately.  Consider your own desktop: What % of your salary is
the market value of the software you have on the machine?  (Not the original
cost, as Word95 has a very low market cost, even if it was $500 4 years ago.)

David I. Levine                 Associate professor
Haas School of Business    ph: 510/642-1697
University of California    fax: 510/643-1420
Berkeley CA  94720-1900                            email:
levine@haas.berkeley.edu
http://web.haas.berkeley.edu/www/levine/
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