Mandel versus Setser: Intangibles and the US economy

The US economy is cover story for the latest issue of Business Week. Michael Mandel writes about Unmasking the economy: Why it's so much stronger than you think. Mandel's central thesis is that national accounts no longer accurately estimate national output:

In a knowledge-based world, the traditional measures don't tell the story. Intangibles like R&D are tracked poorly, if at all. Factor them in and everything changes.

...Everyone knows the U.S. is well down the road to becoming a knowledge economy, one driven by ideas and innovation. What you may not realize is that the government's decades-old system of number collection and crunching captures investments in equipment, buildings, and software, but for the most part misses the growing portion of GDP that is generating the cool, game-changing ideas. "As we've become a more knowledge-based economy," says University of Maryland economist Charles R. Hulten, "our statistics have not shifted to capture the effects."

Quite. The piece has sparked an interesting response from Brad Setser, Is national income accounting biased against the US? Brad does not fully 'buy' Mandel's argument on the national accounts:

Mandel's core argment is that the national accounts understate US investment in the knowledge economy and other intangible assets, understate savings by counting investment as consumption and fails to capture US knowledge exports.

...I don't buy the broader argument, at least not in full. Mandel didn't mention the Japanese knowledge Toyota exports to its US plants.  Or the German knowledge that Mercedes and BMW export to their US (and Eastern European) plants.  Or the French knowledge exported in the perfume, fashion and wine businesses ...

The flow of intangibles in the global economy is not one way. Nor do US firms capture all of the benefits of their "intangible" knowledge exports.  A US firm sets up a plant in China, and teaches its employees the secrets of building cars or computer chips.  And then a Chinese firm poaches its US firms' employees.   This is no doubt good for economic development, as it helps increase the productivity of Chinese firms.   But it makes it harder for the US to continue to reap monopoly profits on its knowledge.  Or its brands.

Mandel replied yesterday on his Economics Unbound blog: Brad Setser on Intangibles is worth reading - as are the comments on both blog posts. This is an important debate to have, and I am sure will be a recurring theme in future years.

Comments

[Arthur Eckart]

There's a great deal of wealth creation that cannot be measured in the national income accounts. For example, the value of output by biotech firms is understated, because value is measured in revenues. Those values are understated, because new technologies are typically underpriced and eventually become cheaper. Consequently, the rise in living standards is greater than the rise in production. So, the national income accounts cannot capture the true rise in living standards.

[Ninjaplease]

"because new technologies are typically underpriced"

Please re-read this statement and quote a new technology that starts typically underpriced.

Currently a DVD+/-RW 16x goes for about $40. The newly released Blu-Ray drives are going for $1000. Is $1000 underpriced?

Intel 486 DX2-66 with 4MB of RAM and a 540MB hard drive used to cost $3500- $4000. Was this item underpriced at it's launch?

Is there even one, just one pharmaceutical item that started out "under priced?"

Perhaps you mean, the bicycle? or the Loaf of Sliced bread?

Living standards have little to do with corporate revenues / profits, they have to do with the wage vs tax rate vs inflation vs consumer price indexes that people face daily.

"Consequently, the rise in living standards is greater than the rise in production."

These two items are completely unrelated and you cannot overlay them in a graph and draw a conclusion.

[Arthur Eckart]

How much is the first DVD, first 486 chip, or a new drug really worth? You can buy a computer today with far more power than a mainframe 30 years ago and it's about $1 million cheaper. Some new drugs are priceless and yet they're priced at far lower prices than consumers are willing to pay. Thanks for supporting my point there's a disconnect between production and living standards. However, there's more to living standards than wages, taxes, and inflation. Living standards are more difficult to measure, because goods are priced in dollars and only partially reflect consumer surplus. Nonetheless, it's obvious, living standards are rising faster than production (why is the U.S. saving rate so low?, think about it).

[NinjaPlease]

The intrinsic value of those items is nil. Companies deliberately overcharge for newly released products, partly due to lack of competition's lack of product or product performance / features in that product area and to cover their cost of development.

Drug companies also get a freebie in the case of 21 years of drug patent profits. There is no such thing as a priceless drug, period. I love your "willing to pay" line. They're price lower due to either subsidies or competition from non-brand names.

Why on earth do you think people were buying as many drugs from mailorder houses who buy from Canada? If people were willing to pay more, why would they be doing this?

Living standards are easy to measure. It's income vs outlays. If you're negative, your standard of living will drop.

This is why Income vs Cost Of Living is important to consider. We (Americans) are in our 5th year where the average wages of non-farm workers has lagged behind the inflation of cost of goods. Meaning that you now make less money than you did 5 years ago, because you're buying power has dropped (goods became more expensive and you're salary didn't rise at the same rate as the rise in prices happened.)

There isn't just a disconnect between production and living standards---they're completely not related.

You:
"For example, the value of output by biotech firms is understated, because value is measured in revenues."

It appears that you are suggesting that biotech firms estimate their "value" in terms of what "a consumer may be willing to pay" rather than what they actually create and sell. This sounds like lying to me. Would you invest in a firm who ran their quarterly earnings estimates this way?

Supply vs demand is what drives prices unless there is government intervention--and clearly there is none in the case of biotech firms. Instead of forming a price cap on drugs, or better yet and more Capitalist--change the 21year patent on new drugs to 5 years after FDA approval, which would help us all, but provide something of a disincentive to drug companies to release "non blockbuster" drugs, the President creates Medicare Part D.

"Potential value" is another way of saying "completely worthless right now and in the near future."

[Arthur Eckart]

Your statements contradict each other, are full of value judgments, and have little economic meaning. Of course, consumers want the lowest price and producers want the highest price. However, goods are traded at equilibirums. Your definition of living standards is "income vs outlays" That's not an orthodox equation. However, you stated if outlays exceed income, living standards "drop." So, you believe, if person A buys twice as many goods than what he earns, while person B with the same income buys half as much, person's A's living standard is lower? I'd like to see your simple equation to measure living standards. The true values of many goods exceed the budget constraints of consumers. However, that doesn't prevent value from rising faster than incomes.

[NinjaPlease]

"Your statements contradict each other, are full of value judgments, and have little economic meaning"

I think the exact same about yours.

"if person A buys twice as many goods than what he earns, while person B with the same income buys half as much, person's A's living standard is lower?"

Over time (a short time, thanks to new Chapter 11 laws,) person A's standard of living will decline significantly due to repossession of goods, default on credit, and the subsequent bad credit history will prevent him / her from getting back to where person B has been all along.

Yes, I supposed if you took an instantaneous snapshot of the two person's lives at the point before debt collectors came knocking on Person A's door, it would APPEAR that he/she has a better standard of living. But the inevitable truth is that Person A will be far worse off than Person B. Note the recent hike in California's Mortgage Defaults on loans. Please be sure to tell those people the even though they bought outside their means and made unwise purchasing decisions, that they are living much better than they were before they bought goods that they couldn't afford.

If I invest every discretionary dollar I own, and the investment becomes successful (read: it's value increased) then EVENTUALLY the money I spent will in effect increase my standard of living, when I sell the investment. If I bought the investment with every dollar I had, I would quickly become homeless and have my wages garnished and my investment sold and collected by debt collectors.

My simple equation?

How about (Income - Outlays) x time. If the number is zero you're living at the highest standard of living you can afford, by spending all that you make. If the number is negative, you aren't because monthly / weekly debt has dropped your individual purchasing power. If the number is positive, you aren't because you're restricting your purchasing power.

Consider the person who buys an expensive home and mortgage, who has to put plastic lawn furniture in the house and keep the heat off because they can't afford otherwise. Then consider the person who bought a house within their means, paid it off and now has plenty of discretionary income to buy a new car, or another home, or go on vacations, or retire, or play golf all day, or send their kids to college, etc.

I have no idea how YOU measure standard of living. Standard of living rises with accumulated wealth assuming you spend the wealth to better your life, like say buy drugs that you need for your cholesterol.

"The true values of many goods exceed the budget constraints of consumers. However, that doesn't prevent value from rising faster than incomes."

The true value of any item, and I mean any item on earth is the amount a buyer is willing to pay for it. That amount varies from person to person based on their income with significant repercussions if they go above their income for an extended period of time.

No painting (next to zero intrinsic value) is worth $100,000,000 if there is no one with $100,000,000 to spend on it, or no one who can get a $100,000,000 loan to buy it.)

A ground breaking concept: The longer you're in debt, the more your standard of living has dropped, because you can't afford the necessities that make your life easy to live---SHOCK DA WORLD!

Having to choose between food & heat & rent is an awful decision that I wish people didn't have to make everyday.

[Arthur Eckart]

I'd like to see you support your statements with facts or economic theories. The U.S. has been consuming more than producing for over 20 years. So, according to your assumptions that has lowered U.S. living standards. Your living standards measurement "(income - outlays) X time" ignores many influencial factors, e.g. discoveries, technologies, innovations, etc. Moreover, your making conclusions without regard to influencial variables, e.g. prices, cost of capital, return on investment, etc. When the value of a product increases more than its price (i.e. the price consumers are willing to pay, given their budget constraints), then living standards rise faster than incomes. There are many products where quality increased, while prices fell. Moreover, there are many new products where their values are far higher than their prices, because of income constraints. It's obvious living standards are rising faster than incomes.

[Gem Hudosn]

One dose go into business for themselves and the one will know their business inside and out. You know what to sell and sell what you no longer produced but thought up now. Where ever your success is. Go for it.

[Felix V]

Economic growth in the United States have been very slow, making people believe that they are experiencing recession. People are very much affected by painful credit crunch and their behavior are very much affected by it – making them more cautious. Economy is the biggest talk in town. I’ve been hearing industries asking for emergency cash amid a recession. It seems everywhere I turn there’s bad news about the economy or about payday loans. So I went in search of some good news. I knew there had to be some companies and industries out there that were doing well. Turns out, recession is actually good for some industries such as discount, retail and fast food. Particularly, places with dollar menus are doing very well. And, of course, as unemployment rises, so do video game sales. Some of the things in this article on the payday loans blog about industries that do not need emergency cash is somewhat surprising, though.

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Education is a progressive discovery of our own ignorance.