Why is the economy stronger than we think? Business Week's cover story (Feb. 13) has the long answer. The short answer is the following little truism I read twenty years ago (or thereabouts):
Accountants count what's easy to count, not what counts.
Can't remember where I read that, but I sure wish I'd originated it. It's true in both corporate finance and government accounting. The father of management, Peter Drucker, understood the problem:
First-year accounting students are taught that the balance sheet portrays the liquidation value of the enterprise and provides creditors with worst-case information. But enterprises are not normally run to be liquidated. They have to be managed as going concerns, that is, for wealth creation.
Everybody interested in the health of our economy should read the cover story of the Feb. 13 (2006) issue of Business Week: "Why The Economy Is a Lot Stronger Than You Think," written by Michael Mandel. (Here's a link to the online version, but I recommend the newsstand version because it contains a lot of helpful graphics that didn't make it into the web version.)
In short, the article makes the case that difficult-to-measure intangibles in our knowledge-based economy are resulting in the following effects:
● Investment is rising as a share of the economy, rather than falling.
● The current account deficit is considerably smaller.
● The personal savings rate in 2005 was positive, not negative.
● The part of the federal budget devoted to current spending is in balance.
● The 2001 recession was deeper than we thought. Current growth, however, may be stronger.
Below are a few more snippets from the article:
● People like Carol A. Corrado and Daniel E. Sichel of the Federal Reserve Board... figured out that businesses are spending much more on future-oriented investments than widely believed.
● This stuff is hard to measure, but to ignore [intangibles] is to miss what the economy is telling us. And to miss that is to increase the likelihood of committing policy blunders.
● [Your iPod] says: "Designed by Apple in California. Assembled in China." ...Yet the folks at the BEA don't count what Apple spends on R&D and brand development... Rather, they count each iPod twice: when it arrives from China, and when it sells. That, in effect, reduces Apple -- one of the world's greatest innovators -- to a reseller of imported goods.
The Business Week article is thought-provoking, and in my judgment is right on the money. Among other things, it explains why economic growth is probably higher than we think, and why personal saving is probably positive instead of negative. Read the whole thing. Then send it to several friends.
