Capitalization of Military Weapons Systems in the U.S. National Accounts Brent R. Moulton Working Party on National Accounts, OECD Paris October 25–28, 2011

2 Why SNA 2008 capitalizes weapons ▪ SNA 2008 recognizes that military personnel are engaged in production and use weapon systems continuously in the production of defense services ▪ Weapon systems have value and can be resold ▪ Consistent with international public sector accounting standards ▪ Service lives and depreciation account for decline in value over time and the need for eventual replacement

Effects of new treatment ▪ SNA 1993 treated purchases of weapons systems as intermediate consumption ▪ SNA 2008 reclassifies weapons purchases as gross fixed capital formation (GFCF)  Lowers final consumption expenditures and raises GFCF by equal and offsetting amounts ▪ SNA 2008 includes weapons systems in consumption of fixed capital (CFC)  Raises final consumption expenditures and GDP 3

Effects on U.S. national accounts ▪ GDP level - for 2010:  Purchases of weapons systems were about $105 billion (or 0.7 percent of GDP)  Reclassified from consumption expenditures to GFCF  CFC for weapons systems was about $74 billion (or 0.5 percent of GDP)  Raised general government final consumption expenditures and GDP ▪ Modest effects on GDP growth rate, trends 4

Perpetual inventory method ▪ CFC and net stocks are calculated using the perpetual inventory method (PIM) ▪ Method is described by:  OECD, Measuring Capital: OECD Manual 2009, second edition  Bureau of Economic Analysis, Fixed Assets and Consumer Durable Goods in the United States, 1925–97, (2003), available at 5

Outline of PIM ▪ Determine age-price/depreciation profile for each type of asset  May be geometric or straight-line ▪ Determine retirement profile (straight-line) ▪ Apply profiles to net stock (geometric) or to time-series of investment (straight-line) at constant prices ▪ Calculate end-of-period net stock as beginning stock plus investment less other changes in assets less depreciation (at constant prices) ▪ Reflate to current prices 6

Setting depreciation/service lives ▪ For service lives, BEA staff consulted with staff from the Department of Defense ▪ Declining balance rates were used to convert service-life information to depreciation rates ▪ Geometric depreciation profiles are used for all asset types except missiles, which use straight- line ▪ For more information, see Fixed Assets and Consumer Durable Goods, available at 7

BEA depreciation rates/service lives Examples – selected weapons system assets Asset typeGeometric depreciation rate (percent) Service life (years) Aircraft: Air frames7 to 1115 to 25 Engines286 Strategic missilesN.A. (straight line)20 Ships6 to 725 to 30 Tanks and armored personnel carriers 820 8

Other changes in assets ▪ For weapons systems, other changes in assets may represent war losses or the scrapping of equipment after a war. ▪ War losses affect the PIM calculation in the following ways:  The loss itself is subtracted to derive end-of-period net stock.  Depreciation on the loss is computed using a half- year convention. This “depreciation” is subtracted from both beginning-of-period net stocks and CFC. 9

Implementation in U.S. accounts ▪ Based on advisory expert recommendations, BEA began capitalizing military weapons systems in its national accounts in 1996 ▪ For international comparability, data submitted to OECD apply the SNA 1993 treatment  This is the only NIPA/SNA adjustment that affects GDP ▪ When BEA implements the other major SNA 2008 changes in 2013, it will no longer need to make this adjustment 10