Phantom Rental Income Boosts U.S. GDP By Over $1 Trillion Every Year

Daniel Drew,  6/23/2015


The government's economists continue to impress us with their mental gymnastics. As Zero Hedge recently reported, the US Department of Commerce's Bureau of Economic Analysis announced they would double seasonally adjust GDP data. An even closer inspection revealed something even more outrageous: the inclusion of phantom rental income. Officially called "imputed rent," it assumes that every owner-occupier is essentially "renting" the home to himself. This economic activity is included in the GDP calculation, and it artificially inflates GDP by over $1 trillion every year.

Such a mind-bending concept demands an explanation, and the BEA did their best to provide one:
Gross domestic product (GDP) is a comprehensive measure of the nation's production. In order to be comprehensive, it must include some goods and services that are not traded in the market place. Those components of the GDP are called imputations. Examples include the services of owner-occupied housing, financial services provided without charge, and the treatment of employer-provided health insurance.

Imputations approximate the price and quantity that would be obtained for a good or service if it was traded in the market place. The largest imputation in the GDP accounts is that made to approximate the value of the services provided by owner-occupied housing. That imputation is made so that the treatment of owner-occupied housing in the GDP is comparable to that of tenant-occupied housing, which is valued by rent paid. That practice keeps GDP invariant as to whether a house is owner-occupied or rented. In the GDP, the purchase of a new house is treated as an investment; the ownership of the home is treated as a productive activity; and a service is assumed to flow from the house to the occupant over the economic life of the house. For the homeowner, the value of that service is measured as the income the homeowner could have received if the house had been rented to a tenant.

The BEA just laid forth a compelling measure of economic activity: self-dealing. Using BEA logic, all self-dealing is a GDP contribution. Did you drive yourself to work? That's imputed taxi driver income. Did you cook dinner for your children? That's imputed chef income. Did you have sex with your spouse last night? That's imputed prostitution income. Just imagine how under-reported GDP actually is! We are probably in a recovery right now, but we just don't know it yet. If only we had more sophisticated ways of calculating all the self-dealing that goes on, we could know for sure.