The New Economist provides links to a piece by Michael Mandel noting his usual argument that the national income account definitions understate savings as well as a reply from Brad Setser and the Michael’s reply to Brad. As you will notice in a moment, I’m a bit biased to what Brad said so let me start with a couple of things that Michael said starting with his opening salvo:
But what if we told you that the doomsayers, while not definitively wrong, aren’t seeing the whole picture? What if we told you that businesses are investing about $1 trillion a year more than the official numbers show? Or that the savings rate, far from being negative, is actually positive? Or, for that matter, that our deficit with the rest of the world is much smaller than advertised, and that gross domestic product may be growing faster than the latest gloomy numbers show? You’d be pretty surprised, wouldn’t you? Well, don’t be. 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.” The statistical wizards at the Bureau of Economic Analysis in Washington can whip up a spreadsheet showing how much the railroads spend on furniture ($39 million in 2004, to be exact). But they have no way of tracking the billions of dollars companies spend each year on innovation and product design, brand-building, employee training, or any of the other intangible investments required to compete in today’s global economy.
In other words, Michael is still lecturing us that the national income accounts might be not properly measure investments in intangible assets. While that may be a fair point, there are other data sources that allow us to review how much is spent on items such as R&D each year.
In his rebuttal to Brad, Michael writes:
First, Brad writes, that “the US now saves a lot less than it used to.” How does he know this?
In other words, why should we simply trust the dramatic reduction in the amount of national savings as reported by the national income accounts. In keeping with my New Year’s resolution, let me offer up from the folks over at the National Review, the David Malpass measure of wealth accumulation. To be fair to Michael, he has a variation of this measure that corrects for two of the problems with the National Review continued nonsense on this matter: (1) Michael includes the rising Federal debt as a deduction (Ricardian Equivalence types rejoice); and (2) Michael deflates the increase in nominal wealth by the ever rising price level. Let me simply suggest to Michael that he look at the fact that his measure of real wealth today is only slightly higher than it was at the end of 1999.
Brad reminds us that the Malpass and Mandel argument is also the essence of the Dark Matter explanation as to why those massive current account deficits are nothing to worry about. But note that Brad and I have been wondering how much of the net foreign income from abroad puzzle can be explained by transfer pricing manipulation rather than the Dark Matter claim that we are somehow creating more intangible wealth than the national income accounts capture.