“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.

Comments

Ah, but during the "Bush boom" GDP was a completely adequate measure of the economy's health? How transparently partisan.

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.

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.

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%??

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.

Mandel was interviewed for an hour by KQED (NPR affiliate in the Bay Area) today. The audio should be up at this link shortly.

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.

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?

"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.

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.

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.

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.

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?

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