Revised Treatment of Disasters in the NIPAs and FAAs Preview of the 2008 NIPA Comprehensive Revision Nicole Mayerhauser National Economic Accounts Data Users’ Conference, BEA April 13, 2007

2 Overview ▪Current treatment of disasters  Distorts the current production measures of national income & personal income ▪Proposed treatment of disasters  Better measures of economic activity related to current production

3 Disaster losses in the NIPAs ▪Losses of capital assets recorded as an increase in depreciation. ▪Insurance payouts recorded as current transfer payments. ▪Leading to swings in the measures of current production.

4 Current treatment ▪Capital losses  increase production expenses (CFC) ▪Insurance payouts  increase in income of claimholder  increase in production expenses for insurer ▪Personal current transfer receipts  insurance payouts for destroyed consumer goods

5 Current treatment cont. ▪Business income ( corporate profits, rental income of persons, and proprietors’ income) are all affected by the amount of uninsured losses measured as the difference between the increase in deprecation less the increase in insurance payouts received. ▪Net operating surplus is affected by the increase in CFC. = Value Added – Compensation of employees – Taxes on production and imports + Subsidies – Consumption of fixed capital or = Business Income + Current transfer payments (net) + Net interest (paid)

6 Reasons for change ▪Depreciation defined as the decline in the current value stock of fixed assets as a result of physical deterioration, normal obsolescence or normal accidental damage. ▪Insurance payments for disaster losses are not financed from current revenue of insurance companies. ▪NIPAs more in line with international guidelines (SNA).

7 Proposed treatment ▪Record capital losses  as other changes in volume of assets  NOT CFC ▪Record insurance payouts  As capital transfer payments/receipts  NOT as a charge against current production expenses/income

8 Effect

9 Enterprise income

10 Personal income

11 Saving and net borrowing

12 Calculating disaster effects ▪BEA will continue to provide the effects of catastrophic disasters on a quarterly basis.  As other changes in volume of assets in the fixed asset account.  As capital transfer payments for catastrophic losses in the capital account.

13 Conclusion ▪Advantages of new treatment:  National income will better reflect economic activity related to current production.  Provides a better picture of capital account activity: funding for replacing capital investment will now be aligned with recorded capital investment.