Apocalypse deferred: Is the economy stronger than we think?
By Bill Settlemyer
Executive Publisher
I suppose it’s the ex-lawyer in me, or maybe I’m just a born worrier. Either way, I spend more time focusing on what can go wrong rather than what’s going right. That probably explains why one of my favorite business books is Only the Paranoid Survive by Intel co-founder Andy Grove.
On the national economic scene, there’s plenty to worry about: The ballooning federal deficit, rising health care costs, outsourcing of U.S. jobs overseas, rising global competition, the trade deficit and the looming costs of Social Security and Medicare as the baby boomer generation heads toward retirement age.
Here in South Carolina, while coastal regions are thriving, the state continues to suffer from high unemployment due to manufacturing job losses and the difficult challenge of bringing jobs and opportunity to rural areas of the state.
Red-hot growth
Of course, while I’ve been paying attention to all this negative stuff, the Charleston region has continued its red-hot growth, as has our own business and many other businesses in our region.
And while our state’s unemployment rate sends up red flags, the past few years have also produced some fresh signs of effective cooperation between the state’s business leaders and state government on initiatives that could build a strong foundation for future growth throughout the state.
At the national level, there are some intriguing new ideas appearing in the business press about why the current strength of the U.S. economy may be seriously understated.
Apocalypse deferred
A recent article titled “Apocalypse ain’t nigh” by Fortune editor-at-large Justin Fox notes that the economy grew 3.5% last year and the national employment rate is only 4.7%.
The 2006 federal deficit is projected to be the largest ever in absolute terms, but that would equal only 3.2% of the country’s projected 2006 gross domestic product, “well within the historical range,” according to the White House budget director.
A bigger, long-term problem is the projected cost of Social Security and Medicare as the baby boomers retire.
By some projections, the combined cost could reach 20% of GDP by 2080, exceeding the total current federal tax burden, a clearly unsustainable result. But, as Fox notes, 2080 is a long way off.
Things change, and there’s reason to believe that our political leaders will eventually come to grips with these issues and craft practical solutions we can all live with.
Measuring the wrong economy
Is the gloom and doom about structural problems with the U.S. economy overblown?
Perhaps so, according to the front-page story in a recent issue of BusinessWeek titled “Why the Economy is a Lot Stronger Than You Think.”
The underlying premise of BusinessWeek writer Michael Mandel’s article is that traditional methods used by the federal government to measure the economy’s performance are largely obsolete due to the nation’s ongoing transition from an industrial economy to one that is primarily knowledge-based.
The article makes a persuasive case that in a knowledge-based economy, the most important business investments are in such things as research and development, training, education, process improvement, design and brand development. Physical equipment and facilities are still necessary, but they do not provide an accurate measure of how much the nation’s businesses are investing to spur future growth.
For example, one estimate provided by economists studying this shift shows that from 2000-2003, business investment in “intangibles,” such as R&D, totaled $978 billion as compared to $1,139 billion for physical goods and computer software.
In other words, actual business investment was nearly double the government’s official numbers for this period.
According to BusinessWeek’s calculations, the top 10 U.S. corporations that report on their R&D outlays have boosted R&D spending by 42% since 2000 compared to an increase of only 2% in capital spending.
Here’s another example of the weakness of current techniques for measuring the strength of the economy: Apple’s iPod is designed and marketed in the United States by Apple, but since it is assembled in China, government numbers reduce Apple to a mere reseller of imported goods, ignoring the value of Apple’s $800 million annual expenditures on R&D and brand development.
And what about education? Is it merely consumption, as government statisticians say, or is education an investment?
Ask any parent whether they consider their children’s college tuition “merely consumption.” Not likely.
On the subject of the international trade deficit, the article suggests, once again, that conventional measuring tools miss much of the value that would count in our favor, including the export of knowledge by U.S. multinational corporations to support their overseas operations.
Likewise, there is still a strong inflow of educated and talented immigrants into this country seeking opportunity, and Mandel suggests we should view this as a “free” inflow of human capital (including the man who designed the iPod and iMac) that adds to the investment side of the ledger in our national accounts.
Intel’s Andy Grove was probably right to warn in his book that only the paranoid will survive the rapid changes in the national and world economies.
But I left something out, too: The complete title of Grove’s book is Only the Paranoid Survive: How to Exploit the Crisis Points That Challenge Every Company.
Intel seems to be surviving quite nicely, thank you. And chances are that our national economy will do the same, provided that we make the effort to fully understand how our world is changing and respond with the same energy and determination that has produced the world’s largest economy.
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