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"The GDP Mirage"
The story, by Michael Mandel, is here. Excerpt:
While the statistics don't account for it, there's good reason to suspect intangible investments are falling. Companies are under pressure to cut costs by reducing R&D expenditures and deferring other crucial intangibles, notes Hulten. "Because these are expensed, it looks like a pure win," he says. "You are not seeing the benefits of the intangibles in the financial statements—only the costs."
There is much more of interest in this article.
Posted by Tyler Cowen on October 30, 2009 at 12:13 PM in Data Source, Economics | Permalink
Comments
Ah, but during the "Bush boom" GDP was a completely adequate measure of the economy's health? How transparently partisan.
Posted by: JSK at Oct 30, 2009 12:33:00 PM
Inventing a phrase said neither by Tyler Cowen nor in the article? How transparently partisan and a revealing changing of the subject, JSK.
Posted by: John Thacker at Oct 30, 2009 1:06:48 PM
i would guess that spending on research shrinks and then expands during every recession. the article doesn't make any recession to recession comparison. i'd also guess that research spending follows a typical pattern of either leading or lagging gdp growth or unemployment or something. whatever the pattern, this article is of no help understanding it. so i'm left with a few anecdotes, scratching my head, not knowing if this is a real phenomena, not knowing if anyone is going to follow up with any real basis for any conclusions.
Posted by: babar at Oct 30, 2009 1:19:52 PM
i would guess that spending on research shrinks and then expands during every recession. the article doesn't make any recession to recession comparison. i'd also guess that research spending follows a typical pattern of either leading or lagging gdp growth or unemployment or something. whatever the pattern, this article is of no help understanding it. so i'm left with a few anecdotes, scratching my head, not knowing if this is a real phenomena, not knowing if anyone is going to follow up with any real basis for any conclusions.
Posted by: babar at Oct 30, 2009 1:21:26 PM
Errr......how would cutting investments lead to higher reported GDP? It might lead to higher reported profits, but I don't understand how it would positively affect GDP.
Posted by: MattM at Oct 30, 2009 1:41:49 PM
In my macro textbook, all of the cyclical flows equal each other, and equal GDP. So if scientists are being laid off, their reduced earnings are caught as a reduction in GDP, no?
I agree with Baber, this is just the usual hyperbole and hand-wrining, the stuff journalists need to put out all the time. Facile, really.
Posted by: bartman at Oct 30, 2009 1:41:51 PM
How can one possibly question the real economic growth as indicated by the GDP numbers?
Everyone knows low taxes leads to robust growth, so with tax revenue down to under 15% of GDP, way down from the sluggish economy of 1999 when taxes were 21% of GDP, the economy today is surely exploding with growth.
How can anyone question the accuracy of GDP growth of 3.5%??
Posted by: mulp at Oct 30, 2009 2:00:31 PM
Here is another article by the author.
http://www.spiegel.de/international/business/0,1518,586959,00.html
In it he blames the economic crisis on the flows of the past 10 years.
Posted by: Andrew at Oct 30, 2009 2:12:09 PM
normally i would apologize for my duplicate comment above, but the cited article was so content free that i am going to apologize for not submitting it more than twice.
Posted by: babar at Oct 30, 2009 2:31:37 PM
@John:
There is a large body of economic literature on the inadequacy of GDP as a measure of welfare. These range from Kuznets' environmental accounting to social capital to happiness studies. Growing GDP may mask disinvestment, as the author notes, and he suggests that this is a recent development. It is not. American firms' spending on basic R&D started falling since the late nineties, for example.
So if its not a new discussion, why bring it up. The first comment under the linked article says it all:
The administration will tout the gdp numbers as long as they can,
Politics, plain and simple.
@andrew:
Your link on the crisis being rooted in the global inbalances of the last years is part of mainstream thinking. Nothing new there.
Posted by: JSK at Oct 30, 2009 2:50:31 PM
Mandel was interviewed for an hour by KQED (NPR affiliate in the Bay Area) today. The audio should be up at this link shortly.
Posted by: Quizman at Oct 30, 2009 2:52:57 PM
JSK,
Actually, it's hardly mainstream. Maybe he didn't make up his title, but he's against the Keynesian critique. He appears clearly in the recalculation camp.
Anyway that was beside the point. Let me spell it out for you. If he blames the crisis on the last 10 years, is he really an apologist for "The Bush Boom?"
Posted by: Andrew at Oct 30, 2009 3:11:35 PM
I don't know if the private sector overhired knowledge workers during the boom, but the public sector definitely did. They also overbought technical infrastructure.
The consulting work I do is nondisclosure so I can't cite any names or specific figures. But, do not be surprised if your state and local governments have 20% more information technology staff than needed.
It should come as no shock that these sort of people are being laid off at higer rates than other workers. They were hired at higher rates than other workers beginning about 2005.
Posted by: Bob Knaus at Oct 30, 2009 3:58:53 PM
Not to worry Mulp. If Glorious Leader and his minions have their way, we will get back up to those levels that you pine for. They'll be working on the numerator and the denominator, just to speed it up.
Posted by: Rich Berger at Oct 30, 2009 4:07:57 PM
Bob,
Could you elaborate on why you think the public sector was so overzealous in its technology hirings? And did you see it in a specific part of tech (GIS, Database, Security) or overall?
Posted by: tgrass at Oct 30, 2009 4:37:44 PM
"Ah, but during the "Bush boom" GDP was a completely adequate measure of the economy's health? How transparently partisan."
Were you this indignant during the hyper-skeptical critique of U.S. economic performance under Bush for the last 8 years, or do you only begin to bristle when something similar begins to touch Obama? I've been grinding my teeth at every turn where "economic reporting" is involved since the 1980s. This is tame, par-for-the-course stuff.
Posted by: BKarn at Oct 30, 2009 4:46:14 PM
"Not to worry Mulp. If Glorious Leader and his minions have their way, we will get back up to those levels that you pine for. They'll be working on the numerator and the denominator, just to speed it up."
Great, GDP will rise for real again as debt is paid down. Considering it is the low taxes and high artifically driven assets that are the problem sucking away real investment from the real economy, what else do you want, a piece of steak on a ice cold rock?(with dirt covered on top?).
Paying down the Bush caused debt is a necessary factor Bush and his minions wanted. I will borrow my low tax rates now and force the next guy to raise them up to make him politically unpopular as the U$ credit card starts running out of room.
Hey, but the tax protests were funded by good ole "leftist" George Soros, oh, it just tells us European Nazi's what we have known for decades: The American Right is run by Jewish finance. You give us guns, we will fight for global capitalism under the guise of patriotism fighting anti-americanism. No wonder the Morgan's loved ole Welch and other birchers. They loved the jewie buck.
Posted by: Evola. at Oct 30, 2009 4:56:18 PM
tgrass,
From my experience, public sector managers derive much of their job satisfaction from the size and quality of the organization they lead. Technology staff are more prestigious than some other kinds of staff, so there is a bias in favor of hiring them.
Also, large-scale government technology projects have high failure rates, in the 30% to 50% range. Failure often occurs partway through implementation. The agency has already staffed up for the new technology, and when it fails the additional staff may not be easy to dismiss.
We generally see overstaffing in the administrative, infrastructure, and desktop support areas rather than in applications support.
Posted by: Bob Knaus at Oct 30, 2009 5:56:35 PM
do not be surprised if your state and local governments have 20% more information technology staff than needed.
About 75% of my business is with the public sector (very little military), and based on what I've observed I'd say that your 20% overstaffing figure would apply to most government departments and agencies, period. Not just IT.
Posted by: anon at Oct 30, 2009 6:48:07 PM
I would agree with Babar that the proper comparison to R&D spending is recession to recession: that during recessions not only does R&D spending decline, but also advertising and other SG&A. Think of the converse: with declining earnings and falling sales, would you expect R&D and SG&A to rise?
Unfortunately, falling R&D can also singnal anticipated future declines in sales and a lengthening of product life cycles.
Posted by: Bill at Oct 30, 2009 8:33:51 PM
If you are a company that has cash, you need to do something with it. You won't be buying real estate right now; you'll be spending less on rent; you probably aren't interested in M&A because you don't really know what sour assets the prospective target is holding. Banking it at 0% is silly.
If you can't find a way to sell a product because of regulations, or because no one is buying, or you don't want to hire because of anticipated tax law changes, R&D is a good place to park your cash while waiting for consumers to return to you.
So R&D might increase or at least not decrease, even during a recession. Data would be nice.
Posted by: Allison at Oct 30, 2009 10:20:33 PM
With a boatload of increased taxes on the way, companies are likely to be parking their cash in their owner's pockets.
This is a really obvious decision if you run any sort of small business. In this case, rational expectations foresee a certain increase in tax rates in 2010 (expiration of the Bush tax cuts), and a likely further tax hikes (Health care, unemployment, corporate, etc). If you take money out of the business now, you take it at a lower rate. If you leave money in, you'll pay a higher rate later.
Posted by: MikeDC at Oct 30, 2009 10:44:34 PM
In thinking about the quote from the article, I realize that R&D as expenses if from a cash flow model, or from the standpoint of a CEO looking to pump up his corporate stocks to dump it and capture bonus capital gains. Emphasize the reduction in spending, hide the cut in R&D, talk about the great future, and you get the $50 million bonus. Then as the firm runs into trouble, take it private with a leveraged buyout to hide the real problems, or in a leveraged acquisition, buy a startup that has done the R&D that you killed off, and in great fan fare, pump up the stock with a $2B deal to accomplish what $50M in in house R&D would have produced.
On the other hand, in-house R&D is for tax purposes a capital investment which normally gets depreciated over the life of the products that result. It has been fairly standard in a recession to promote R&D and manufacturing investment by offering quick write off or accelerated depreciation for investment made in the next one or two years.
The reductions in capital gains tax rates creates the incentive to VC capital to sell a firm once its products begin to look like a threat to an established player. If the company is allowed to run over the long term, taking profits from earnings in dividends it taxed at much higher rates than selling out and creating bigger and bigger market leaders. And the big firms have been favored with better treatment of interest expense than dividend expense, so highly leveraged buyouts to acquire startups is much cheaper tax wise than paying wages.
Google is a company that from Wall Street's standpoint that shouldn't exist. The best deal was for google to be bought by say Microsoft, reaping huge fees for a Goldman or Lehman. The second option was for a Goldman or Lehman to reap huge fees and get a 50% share of the stock at $20 in an IPO that it gets to allocate to its investors in a pump and dump where the low tax capital gains create income at lower tax rates than other methods.
But the scary part of the article is the last one where the view is that the pump and dump can be done using technology and products developed outside the US, reaping huge bonuses for the CEO or fees for a Goldman.
Corporate executives have argued that shifting R&D to China and India benefits the U.S. by improving the efficiency of the research process. If you can pay two trained scientists in China the same amount as one in the U.S., they say, you can get twice as much research output. But if U.S.-based companies are doing their research and product development overseas and their production there as well, it's tough to see how ordinary workers in the U.S. will gain.
From Wall Street's point of view, employment in the US is not something they see they should take responsibility for. And the Obama polices on such matters as green tech are counter to Wall Street interests because building utilities in the US producing power for the US of such a scale that the manufacturing and construction must be done in the US, paying US labor and wage related taxes is just plain counter to Wall Street's fee generating strategy.
Posted by: mulp at Oct 30, 2009 11:31:07 PM
Allison: Buy low. You always have the knowledge problem.
Posted by: rluser at Oct 31, 2009 12:23:59 AM
mulp: "Everyone knows low taxes leads to robust growth"
If the government raised taxes to 100%, tax revenue would be zero; and if MR readers harbor the kind of logic you think they do, they would view this as the best of all worlds. They do not. Alas, it is all too obvious that the government is capable of damaging the economy in ways that reduce tax revenue. Keeping your eye on tax rates will save you from such blunders.
"with tax revenue down to under 15% of GDP"
If we could get get government spending down to 15% of GDP, that would be something to celebrate. BTW, I doubt your statement is true. Have any evidence?
Posted by: Gary at Oct 31, 2009 7:01:42 AM
