RALEIGH – Michael Mandel, chief economist for Business Week, fired a shot across the bows of the economic-statistics establishment with a cover story for the magazine that challenges the basic assumptions behind standard measurements of gross domestic product, investment, and government budgets. It may not be persuasive in every detail – or persuasive at all, judging from some of the reader comments on the website (nice use of interactivity, by the way) – but Mandel surely deserves credit for shaking things up.
His point isn’t brand new. Economists who study human-capital theory and authors interested in tax reform have already discussed the extent to which traditional ways of measuring investment exhibit a bias in favor of physical and financial capital and against the formation of human capital. Spending money on a new machine or factory is typically counted as investment. Spending money on education or training is typically not counted as investment. How come?
Mandel’s piece excels in putting this issue in the context of national debates about recent economic history, budget deficits, and trade deficits. “Intangibles such as research and development, training, education, and exports of knowledge are poorly tracked by today’s statistics,” he writes. Among the implications he discusses:
• Investment is rising as a share of the economy, not falling as some worrywarts in the media claim. The adjusted figure was 23.8 percent in the 1970s, rising to 25.1 percent now (the unadjusted share represented by investment is 18.3 percent now).
• The current-account deficit, or trade deficit in common parlance, is considerably smaller than people think (because, among other things, it does not properly account for American exports of knowledge via training and information). One researcher Mandel quotes is arguing that, adjusting for knowledge exports, the deficit disappears altogether if measured across multiple years.
• The personal-savings rate in 2005 was positive, not negative as widely reported. Actually, there are many reasons why the savings-rate data paint a distorted picture, not just the ones Mandel provides. And even if correctly measured, the rate is still lower than it would be in the absence of government’s punitive taxation of savings and investment, I would contend.
• The non-investment portion of the federal budget is in balance, not in deficit. The investment portion – including capital assets – is certainly not, but the argument is that borrowing money to build capital assets is a far different proposition from borrowing money for current consumption. This argument is true, though in the wrong hands it could be misused to reclassify all sorts of wasteful spending as “investment” and fuel government growth.
• Most ingeniously, Mandel contends that correctly measuring human capital in the economy would depict the 2001 recession as being more severe, and today’s economic growth more robust, than the old statistics would lead us to believe. I’m not sure I buy this one yet, but it is certainly a notion worth chewing on.
Reworking the standard measurements of economic activity will generate opposition from a variety of camps. Some will argue that the resulting disruptions won’t be offset by policymaking benefits. Others will debate the finer points (and they should). But if you want some clues about what is likely to be a major, if under-the-radar, debate among officials and academics in the coming years, Mandel’s primer should come in handy.
Hood is president of the John Locke Foundation.