NCPA - National Center for Policy Analysis

UNMASKING THE ECONOMY

February 22, 2006

Economists say the United States is facing a perilous economic future unless we cut back on spending and change our profligate ways. That is not exactly true, according to Michael Mandel of Business Week, who says the economy might actually be on stronger footing than we think.

As Mandel explains, the government's decade-old system of number collection and crunching captures investments in equipment, buildings and software, but for the most part misses the growing portion of gross domestic product. Knowledge-based intangibles -- like research and development, training, education and exports of knowledge -- are not included in the tally but are creating growth-generating ideas, says Mandel. For example:

  • Government outlays for research and development and education are incorrectly labeled as current consumption, rather than future-orientated investment.
  • Business investment in intangibles such as product development and training is critical for long-term profitability, but it does not get counted in GDP.
  • Household outlays for education, the most important investment in the future of the next generation, are improperly counted as consumption in the published data.
  • Additionally, foreign trade statistics do not reflect the human capital being brought into the country by skilled immigrants, or the flows of knowledge that enable the U.S. multinationals to reap high returns on their overseas operations.

Moreover, since companies are now putting more emphasis on research and development and less on capital investment, a better counting of intangibles is needed. Mandel says counting intangibles alters our picture of the economy and makes it look a little brighter:

  • Investment is rising as a share of the economy, rather than falling.
  • The current account deficit is considerably smaller and the part of the federal budget devoted to current spending is in balance.
  • The personal savings rate in 2005 was positive, not negative.
  • The 2001 recession was deeper than we thought; however, current growth may be stronger.

Source: Michael Mandel, "Why the Economy Is a Lot Stronger Than You Think," Business Week, February 13, 2006.

For text:

http://www.businessweek.com/magazine/content/06_07/b3971001.htm

 

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