The Economist: Intangibles do matter, but how much?
The recent Economics Focus column in the Economist takes up the raging discussion about intangibles as a measure of wealth and whether we are underestimating the American economy's trade deficit and economy in general, in short; are official statistics omitting data which are becoming increasingly more important in measuring the real state of the konwledge economy?
For an overview of the subject of intangibles, dark matter, and the American trade deficit see my three previous posts on the subject.
This week's article in picks up on Michael Mandel's recent cover story in Businessweek - Why the economy is stronger than you think.
"Arguing that America is ill served by its economic statistics has become fashionable. Stodgy old national-income accounts are said to do a poor job of measuring the modern “knowledge” economy. They are especially bad at picking up firms' “intangible” investments, such as building brands or training staff. Measure this spending properly, the argument runs, and America's true economic health would be revealed. Investment and output growth would be higher; the pesky external deficit would be lower. As Business Week put it recently, the “unmasked” American economy is “a lot stronger than you think”.
Really? It would certainly be convenient if America's much-vaunted macroeconomic weaknesses (a falling saving rate, over-reliance on foreign borrowing to finance consumption) were mere statistical mirages. Unfortunately, things are not so simple. Although measuring intangibles does change the picture of America's economy, it does not necessarily improve it."
Elaborating further the Economist points us to two recent work papers from NBER;
The data is clear:
"The authors [of the first paper] find that the pace of intangible investment by American firms has risen sharply in recent decades: by the late 1990s, it was around $1 trillion a year, about the same as expenditure on traditional fixed assets."
Moving on to the case/dispute in a nutshell ...
"If investment is higher than today's statistics suggest, so, automatically, is saving. With firms' current spending lower and profits fatter, corporate saving (and so national saving) must be higher. It follows that the capitalisation of intangibles alone does not affect America's external deficit, which is the difference between what the country saves and what it invests."
"Not exactly, argue some knowledge-economy optimists. First, they claim, ignoring intangibles affects America's external accounts directly. Were intangibles measured properly, the current-account deficit might be smaller, since America exports lots of managerial know-how and other intangible assets." - The dark matter thesis
and secondly ...
"The optimists' second argument is that the reliance on foreign capital may be real, but it is less worrisome. Borrowing to boost skills or research is quite different from borrowing to fuel a consumption binge"
"Of course it's not quite as straight forward as that, and the piece continues several caveats. But it seems clear they are onto something important, and I am sure in time National Accounts will incorporate this work."
Update 09.14 3/3-06
Brad Setser also reports on the Economist's article in saying; "It is official: the current account deficit doesn't stem from a boom in investment in intangible assets."
"Mandel's argument that the recent surge in the current account deficit reflects a surge in intangible investment, not a surge in consumption, doesn't look so hot. His argument that it also reflects a surge in investment in residential real estate (investment in real estate now matches investment in tech at the peak of the tech boom) looks a lot better. But I don't think even the trade deficit optimists think residential housing will generate future intangible export revenues, or create "dark matter."