Intermediate Consumption - Criticisms

Criticisms

One criticism that is made of official national accounts in respect of intermediate consumption concerns the treatment of income from rents, especially business rents.

In UNSNA, a distinction is drawn between property incomes and the rentals receivable and payable under operating leases by producing enterprises.

Such rentals payable by lessees to lessors are treated as purchases of "services produced" by the leasing enterprises, and recorded either as intermediate consumption of renting enterprises, or as the final consumption of households or government.

Yet at the same time owners of funds, land or subsoil assets who exclusively rent out these assets are not considered to be themselves engaged in productive activity at all, and therefore excluded from the production account. The assets loaned, rented or leased are regarded as not being produced in this case, and no capital consumption is considered to be incurred in respect of their use. On the other side, having been included in intermediate consumption, the property incomes payable by enterprises that borrow funds or rent land or subsoil assets do not enter into the calculation of their value added, or operating surpluses, at all.

Thus, even although rents must be paid out of the gross revenue of producing enterprises, they are to a large extent excluded from value-added and GDP. This may be consistent from the point of view of the definition of value-added used, but will provide a misleading view of economic activity and gross profit income, if in fact the proportion of property income in the national income increases.

At the same time, value-added includes the imputed rental value of owner-occupied housing. This is the average market rent owner-occupiers would receive if the housing they occupy is rented. But this addition to GDP is largely fictitious, because the huge majority of owner-occupiers do not rent out their dwellings. The imputation is based on a value theory according to which owner-occupiers receive a "service" provided by dwellings.

According to some estimates, about one in five dollars of profit income in the USA nowadays consists of rentier income, but this is difficult to trace in the accounts (see Epstein & Jayadev 2005 and Michael Hudson 2005 for some discussion). In reality, insofar such estimates are themselves derived from gross product data, they will underestimate the true significance of property income from rents, because many those rents are excluded from gross product accounts.

In Marxian economics, net rents paid out of the current gross income of producing enterprises are not regarded as intermediate expenditure, but as part of the value product. Marx himself commented: "The line between repairs proper and replacement, between costs of maintenance and costs of renewal, is rather flexible. Hence, the eternal dispute, for instance in railroading, whether certain expenses are for repairs or for replacement, whether they must be defrayed from current expenditures of from the original stock. A transfer of expenses for repairs to capital account instead of revenue account is the familiar method by which railway boards of directors artificially inflate their dividends." (Das Kapital, Vol. 2, chapter 8, section 2).