(What’s Left of) Our Economy: New Reminders of Why Growth’s Quality Mustn’t be Ignored

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an economy built to last, business investment, capex, CBO, Congressional Budget Office, debt, Financial Crisis, GDP, growth, manufacturing, NABE, National Association of Business Economics, tariffs, Tax Cuts and Job Act, Trade, {What's Left of) Our Economy

For years I’ve been beating the drum about the need for American to pay as much attention to the quality of growth generated by the economy as they pay to the rate of growth itself. And in just the last 24 hours, two great examples have emerged of how ignoring the former can produce worrisomely off-base policy conclusions.

To repeat, the quality of growth matters because even growth that seems satisfactory, or even better, on a quantitative basis can be downright dangerous if its composition is wrong. Go back no further into the nation’s economic history than the last financial crisis to see why. Excessive reliance on intertwined housing, personal consumption, and credit booms nearly led to national and global meltdowns because, in former President Obama’s apt words, America became a “house of cards” overly dependent for growth on borrowing and spending. And he rightly emphasized the need to recreate an economy “built to last” – i.e., one based more on investing and producing.

In numerous posts, I’ve documented how little progress the nation has made in achieving this vital goal. And new reports by the Congressional Budget Office (CBO) and the National Association for Business Economics (NABE) valuably remind of one big reason why: This crucial challenge remains largely off the screen in government, business, and economics circles.

The new CBO study is its annual projection of U.S. federal budget deficits and federal debts, and the agency helpfully describes in detail the economic assumptions behind these forecasts. One key finding concerned the impact on American growth of the Trump administration’s various tariffs on certain products and U.S. trade partners.

Largely echoing the conventional wisdom, CBO predicted that if the levies remained unchanged, the tariffs would “reduce U.S. economic activity primarily by reducing the purchasing power of U.S. consumers’ income as a result of higher prices and by making capital goods more expensive. In the meantime, retaliatory tariffs by U.S. trading partners reduce U.S. exports.”

Specifically, according to CBO, “new trade barriers will reduce the level of U.S. real GDP by roughly 0.1 percent, on average, through 2029” – although its economists acknowledged that the estimate “is subject to considerable uncertainty.”

So that sounds pretty like a pretty counter-productive outcome for the President’s trade policies. But check out what else CBO said about the short-term impact of new U.S. tariffs. “Partly offsetting” the negative effects of those rising prices, along with the damage done by retaliatory foreign tariffs, the levies will also

“encourage businesses to relocate some of their production activities from foreign countries to the United States….In response to those tariffs, U.S. production rises as some businesses choose to relocate their production to the United States. In the meantime, tariffs on intermediate goods encourage some domestic companies to relocate their production abroad where those intermediate goods are less expensive. On net, CBO estimates that U.S. output will rise slightly as a result of relocation.”

In other words, the Trump tariffs will lower overall growth a bit, but more of that growth will be generated by domestic production, rather than by consumers and businesses purchasing more imports – primarily financed of course with more borrowing, and boosting debts. For anyone even slightly concerned with the quality of growth, that could be an acceptable price to pay for a healthier American economy over the long run.

Over the longer run, CBO speculates that the tariffs will reduce private domestic investment and productivity (and in turn overall growth), though it admits that this outlook is even more uncertain than that for the short run. Moreover, it’s easy to imagine public policies that could negate considerable tariff-related damage. For example, if the trade curbs do indeed undermine productivity in part by reducing the competition faced by domestic businesses – and therefore reducing their incentives to continue to improve – more overall competition could be restored through more vigorous anti-trust policies. So the tariffs could still result in growth that’s somewhat slower, but more durable.

The NABE’s January survey of members’ companies painted a pretty dreary picture of another Trump initiative – the latest round of tax cuts. As reported by the organization’s president, “A large majority of respondents—84%—indicate that one year after its passage, the 2017 Tax Cuts and Jobs Act has not caused their firms to change hiring or investment plans.”

As a result, even though the sample size was pretty small (only 106 companies responded to the organization’s questions), these answers significantly undercut tax cut supporters’ claims that the business-heavy reductions would lead to a capital spending boom.

Yet a closer look at the results offers greater reasons for (quality-of-growth-related) optimism. And they represent some evidence that the tariffs are achieving intended benefits as well. In the words of NABE’s president, “The goods-producing sector…has borne the greatest impact, with most respondents in that sector noting accelerated investments at their firms, and some reporting redirected hiring and investments to the U.S.”

This goods-producing sector includes manufacturing, and its outsized reaction to the tax cuts makes sense upon considering how capital-intensive industry has always been. In addition, manufacturing dominates U.S. trade flows, so it makes perfect sense that the tariffs’ jobs and production reshoring impact has been concentrated in this segment of the economy.

And once again, the bottom line seems to be more growth spurred by more domestic production – which can only improve the quality of the nation’s growth, and the sustainability of its prosperity.

Of course, the best results of new American economic policies would be the promotion of more and sounder growth. But as widely noted, big debt hangovers resulting from financial crises make even pre-crisis growth rates difficult to achieve even when quality is ignored – as the specialists quoted in this recent New York Times article appear to admit. So in order to achieve the best long run results, Americans may need to lower their short-term goals and expectations somewhat. That greater realism – and sharper focus – will surely come a great deal faster if important institutions like the CBO and the NABE start paying them at least some attention.

(What’s Left of) Our Economy: U.S. Growth Isn’t Only Worsening, its Quality Keeps Falling

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an economy built to last, bubbles, consumption, Financial Crisis, GDP, gross domestic product, housing, Obama, real GDP, recovery, {What's Left of) Our Economy

Although you wouldn’t know it from the candidates or the press coverage they’ve generated, one of the biggest questions facing America this election year is whether it’s learned the main lessons of the last financial crisis – and therefore stands a good chance of avoiding a repeat. Last week’s official data on U.S. economic growth shed new light on the answer, and the message they’re sending is “Hold onto your hats!”

The main problem: Along with its advance estimate on the economy’s overall performance during the second quarter of this year (which was feeble), the Commerce Department also released revisions for the past three years. They make clearer than ever that the current, historically weak recovery is getting just as dangerously bubbly as the previous decade’s expansion. As usual, the main evidence is the outsized growth of the two sectors of the economy whose bloat paved the way for that last meltdown – personal consumption and housing. In other words, the nation had been borrowing and spending way too much, and saving, investing, and producing way too little.

As the United States sailed toward its scary Lehman Brothers moment, that toxic combination hit a record for its all-time share of total American economic activity: 73.27 percent of the gross domestic product (GDP) adjusted for inflation. Consumption peaked at 67.84 percent during the first quarter of 2007, and housing topped at 6.17 percent in the third quarter of 2005.

During his first term, President Obama put it well: America needed to become “an economy that’s built to last.” The crisis and ensuing depression did reverse those worrisome trends. But the new GDP statistics show that movement back toward those levels lately has been even stronger than previously reported. And what have we heard from American politicians and journalists? Nada.

Prior to the latest release, the toxic combination was reported (by me) to have reached a recovery-era high of 72.31 percent. Now we know that the figure was actually 72.42 percent. And the new (initial) second quarter number? An even higher 72.85 percent. Worse, the growth gap separating consumption and housing from the rest of the economy – particularly genuinely productive activity, like business investment – has been getting wider.

Housing is still far below its bubble-era levels – standing at just 3.57 percent of real GDP in the second quarter after totaling 3.64 percent in the first quarter. But for most of the last two years, consumption has been even more economically predominant than during the last decade. As of the second quarter, it represented 69.28 percent of real GDP.

History of course never repeats itself exactly, so there could be some “unknown unknowns” out there that will once more spare the United States and the global economy from repeating the last financial crisis – or a full-blown collapse – despite the resurgence of low-quality growth. But what kind of country would place all its eggs in that basket?

(What’s Left of) Our Economy: Growth is Now Not Only Bubbly, but Increasingly Government-Fueled

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an economy built to last, bubble, bubble decade, GDP, government spending, gross domestic product, housing, inflation-adjusted growth, Obama, personal consumption, recovery, state and local government, stimulus, {What's Left of) Our Economy

Popes and Chinese leaders and the like come and go through history and through Washington, but the basic developments shaping the U.S. economy keep rolling on – and not for the better. So I’ve decided to focus today on those that have been revealed by the latest government report on the economy’s growth rate, and on two especially disturbing takeaways.

The first should be familiar to RealityChek readers: The makeup of the U.S. economy is still excessively dominated by personal consumption and housing, the same toxic combination that inflated the bubble of the previous decade whose bursting nearly collapsed the American and global economies. The second is less familiar largely because it’s much newer – and because the media hasn’t picked it up yet: Government spending is now unmistakably making a comeback as a significant growth driver – but not where you might think.

Although President Obama, as I’ve noted, has done a great job in identifying the need to create an “economy that’s built to last” in America, consuming and housing still comprise a bigger share of the total economy than during that bubble decade. When the recession started, at the end of 2007, these two components of the inflation-adjusted gross domestic product GDP) added up to 71.16 percent of the economy after inflation.

Thanks largely to the recession and housing bust (which fed on each other), this share fell to 70.94 percent by mid-2009, when the recovery officially began. That drop of course wasn’t big, but at least it represented progress. Since then, however, the numbers have resumed moving in the wrong direction. So it was welcome to learn, last Friday morning, that the economy grew at a solid 3.90 percent annual rate in the second quarter of this year, according to the government’s final (for now) reading. But less decidedly less encouraging was learning that the personal spending and housing share of the economy had hit 71.65 percent.

Indeed, that’s only slightly lower than the 71.67 percent figure for the first quarter, and considerably higher than the 71.13 percent during the second quarter of 2014 and the 71.19 percent of the second quarter of 2013.

The new prominence of government as a growth engine isn’t good news, either – that is, if you believe that the private sector is the nation’s best hope for better and sustainable prosperity and living standards (which you should).

That latest second quarter GDP report estimated that government spending at all levels in the United States grew at a 2.60 percent annual rate during that three-month period – its best performance by far since the 2.90 percent advance in the second quarter of 2010, when government stimulus spending was fueling much of the emerging recovery. Just as important, the second quarter government spending gain represented the third such rise in the last five quarters. You’d need to go back to the recovery’s earliest stages, starting in mid-2009, to find a stretch like that.

Government’s contribution to real growth, therefore, has picked up notably, too. According to the (for now) final reading for the second quarter of this year, government’s growth accounted for 0.46 percentage points if the 3.90 percent overall annualized expansion. That’s 11.79 percent of total economic growth. As with the government growth rate as such, that’s the biggest growth contribution in absolute terms since the second quarter of 2010, although then, government’s growth role accounted for 15.35 percent of that quarter’s (identical) 3.90 percent real expansion.

Also as with government’s growth per se, government’s contribution to growth has now been positive for three of the last five quarters – which hasn’t been seen since that early, public-spending-led phase of the current economic recovery. Significant as well – the government contribution to growth during this year’s overall strong second quarter has been much greater than in the last quarters when growth has been impressive.

For instance, in the second quarter of 2014, when annualized real growth clocked in at 4.30 percent, higher government spending only generated 7.67 percent of that growth. In the following quarter, the economy’s hot streak continued, but the government spending increase came to only 4.57 percent of that improvement.

One other important aspect of the resurgence of government spending: It’s happening largely on the state and local level, and this was especially the case during the second quarter. During that period, state and local government spending in real terms grew by 4.30 percent on an annualized basis – the fastest rate since way back in the fourth quarter of 2001. Federal spending was literally flat. 

To repeat a point I’ve made before: Nothing in this or previous posts should be taken as an argument that government spending is either “good” or “bad,” or that government now, at whatever level, is spending too little or too much. But again, if you consider the private sector to be likelier to generate healthier growth than government, the public sector’s increasing role in fostering economic vigor should be a matter of concern. The big remaining questions facing the nation is whether this rebound represents a return to pre-financial crisis norms, and whether that in and of itself should be praised or condemned. You can bet I’ll be weighing in on that matter before long!

(What’s Left of) Our Economy: Greek Lessons

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an economy built to last, big government, bubbles, business spending, Eurozone, Financial Crisis, GDP, Greece, gross domestic product, growth, housing, personal consumption, {What's Left of) Our Economy

RealityChek’s more discerning readers might recall that I spend a fair amount of time commenting on the quality of America’s growth and the makeup of its economy. The idea is that, although economic growth is economically good, all else equal, the way the economy grows is crucially important, and that it needs to result in a healthy balance between production and consumption. That lesson (should have been) brutally brought home for Americans by the financial crisis – which was preceded by several years of quasi-respectable but very low-quality growth. More specifically, that expansion was led by interlocking housing, borrowing, and personal spending booms, which lacked the underpinning of adequate output and income growth.

These days, the battered population of Greece is getting an even harsher tutorial on the imperatives of high quality growth and an “economy built to last.” But judging from the political tumult shaking the nation in recent days in particular, there’s little evidence that its population or leaders – or its creditors and the rest of the global economic policy – understands the message. 

The available economic data for Greece aren’t exactly the same as those I use to show the quality of America’s economic structure and growth, and they don’t cover all the bubble years, but they’re still awfully suggestive. In particular, they illustrate how during the global bubble decade, Greece’s economy and growth, too, were dominated by household spending, along with a lots of Big Government.

There’s no doubt that, viewed from 30,000 feet, Greece enjoyed banner years from 2000 to 2007. In inflation-adjusted its gross domestic product rose by 4.0, 3.7, 3.2, 6.6, 5.0, 0.9, 5.8, and 3.5% – much better than the performance of the rest of the Eurozone. Statistics from the Organization for Economic Cooperation and Development (OECD), however, indicate that throughout this period, Greece’s economy was incredibly household- and government spending-heavy.

According to the OECD, a grouping of high income countries, in 2006 and 2007 (the earliest available data years), household spending made up 56.33 percent and 54.99 percent of Greece’s gross domestic product. For those years, the averages for the Eurozone were 29.59 percent and 29.44 percent – a little over half of Greece’s levels. In 2006 and 2007, government spending comprised 17.87 percent and 16.66 percent of Greece’s economy. For the rest of the Eurozone, the figures were 13.97 percent and 14.04 percent. And whereas Greece’s corporate spending represented 25.8 percent and 28.4 percent of its GDP, the comparable Eurozone numbers were more than twice as great – 56.4 percent and 56.5 percent.

As numerous analysts have (correctly) noted, the United States isn’t Greece. Most important, Americans and their government can borrow in their own currency, and have substantial control over their financial fate. Yet even so, the U.S. economy has suffered painful and wrenching change since the financial crisis broke out roughly eight years ago, and the damage inflicted by that near-catastrophe is by no means completely fixed.

In other words, because the United States spent its first nearly 200 years generally managing its economy responsibly, it enjoys the wealth and creditworthiness that can long protect it from Greece-style tragedies. But even if a climactic Day of Reckoning never comes, America’s poor quality growth and subpar economic structure appears to have pushed it into a stretch of secular stagnation that should worry everyone.

Im-Politic: A Worrisome Early Economic Message from Hillary Clinton

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2016 elections, an economy built to last, bubbles, Hillary Clinton, Im-Politic, inequality, minimum wage, Obama, Populism, recovery, structural reform

Hillary Clinton’s formal announcement of her presidential candidacy yesterday has triggered so much reaction and commentary – on top of what’s been written during her prolonged run-up – that it’s legitimate to wonder if much of value can be added before she actually starts campaigning. But this point seems worth making about the core claims in her declaration.

According to Clinton, “Americans have fought their way back from tough economic times. But the deck is still stacked in favor of those at the top. Everyday Americans need a champion, and I want to be that champion – so you can do more than just get by. You can get ahead – and stay ahead. Because when families are strong, America is strong.”

Of course, these words were hardly chosen at random. To me, they signal the Clinton strategy for embracing the economic record of an Obama administration in which she served, while spotlighting urgent national needs that remain unmet. In fact, they closely resemble the president’s position (as most recently voiced in his latest State of the Union): “[T]onight, we turn the page [on a “vicious recession”]. Tonight, after a breakthrough year for America, our economy is growing and creating jobs at the fastest pace since 1999…. It’s now up to us to choose who we want to be over the next 15 years and for decades to come. Will we accept an economy where only a few of us do spectacularly well?”

No one can reasonably doubt that this message is astute politically. It enables Democrats to claim vital accomplishments while demonstrating their awareness how narrowly distributed the economic recovery’s benefits have been. This message also dovetails nicely with the idea that government assistance of various types, ranging from minimum wage hikes to more worker-friendly regulations on business, is mainly what’s needed to broaden prosperity.

Economically, however, the message could not be more misleading. For the bulk of the evidence clearly shows that whatever recovery America has experienced is overwhelmingly due to monetary steroids provided by the Federal Reserve. The Fed itself admits this. Largely as a result, the crucial quality of the nation’s recent growth remains as low – and therefore as dangerous – as it was during the previous decade’s dangerous bubble inflation.

Interestingly, during his first Inaugural Address, Mr. Obama blamed the economy’s woes on “greed and irresponsibility on the part of some but also our collective failure to make hard choices and prepare the nation for a new age. “ Subsequently, he’s repeatedly, and rightly, emphasized the imperative of creating “an economy built to last.” It’s bad enough that the president is now suggesting that even much of the job of structural reform is already done. It would be even worse if his likeliest Democratic successor perpetuated this myth.

(What’s Left of) Our Economy: The U.S. Recovery is Still Lagging and Low Quality

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an economy built to last, bubbles, business spending, consumption, GDP, growth, housing, Obama, recovery, Trade, {What's Left of) Our Economy

One of the great things about fourth quarter gross domestic product (GDP) statistics – even if they’re going to be revised at least twice more – is that they allow us to see how the economy performed over a full year. And as usual, some of the most important insights can be gleaned from some of the data that are most widely ignored.

This morning, I detailed the GDP-related news that trade flows were a total loser for the U.S. economy during the last three months of last year, the full year (for three of its four quarters), and for the entire economic recovery. When was the last time you saw or heard that in an article or speech or news program about the new trade deals President Obama is pursuing? And in about a week, I’ll be able to specify the growth hit from that portion of trade flows that are strongly influenced by trade deals – which will be much bigger, since this number strips out the revolutionary improvement we’ve seen in U.S. energy trade.

Consistent with the trade deficit surge, however, the new GDP numbers also told us that the nation is actually slightly further from achieving the president’s vitally important goal of creating “an economy built to last” than at the start of the last recession. As Mr. Obama has warned, if we’re to restore real economic health and prevent another financial catastrophe, it’s crucial to reorient the national business model away from borrowing and spending, and toward saving and producing.

My favorite way to measure steps forward or backward is to examine the share of the economy made up of personal consumption and housing combined. They after all comprised the toxic combination that poisoned growth during the bubble decade. Thanks to the new GDP numbers, we know that as a nation we’re still hooked on borrowing and spending. In 2007, the year the recession began, personal consumption and housing represented 71.91 percent of gross domestic product, adjusted for inflation. Last year, that number fell to 71.25 percent, which looks like (some) progress.

But if you look at the quarterly numbers, the story’s a little worse. The recession began in December, 2007 – and then, the personal consumption-housing share of real GDP was 71.16 percent. The new figures show that the fourth quarter 2014 figure was 71.23 percent. True, that’s not much worse. But it’s also been seven full years since we began suffering the consequences of our profligate ways.

Moreover, even though the quality of America’s growth remains dangerously low, the growth itself has been nothing special. In fact, last year’s inflation-adjusted 2.40 percent, while better than 2013’s 2.20 percent, was still below the recovery peak of 2.50 percent hit in 2010. So the economy is clearly flunking the test of returning to acceptable growth rates while simultaneously laying a more solid foundation.

Finally, the new GDP figures – plus the previous set – continue challenging the widespread belief that the U.S. economy’s financialization has helped addict America to bubbles by undermining business’ interest in building new factories and buying new machinery, and making other productive investments, in favor of fast-buck schemes. As I wrote for the Marketwatch.com website, the GDP numbers show that pretty much the opposite has happened.  Since financialization took off (as it unmistakably has), productive business spending has become a more important engine of overall growth, not a less important one.

This pattern held into the third quarter (the first data available since my article was published in late-September), with business spending generating 22 percent of inflation-adjusted growth. That share actually is a bit smaller than the 28 percent that had been holding so far during the current recovery. But it’s still more than twice the level of the pre-financialization period that preceded the 1980s.

In the fourth quarter, business investment’s growth contribution fell back into that pre-financialization range (to 9.23 percent). But for all of 2014, the figure was above the recovery norm – clocking in at 31.25 percent.

All the same, despite business investment’s health, the new GDP figures overall make for a description of American growth’s quality that sounds like college students’ description of campus food (back in my day): “It’s lousy and there’s not enough of it.”

(What’s Left of) Our Economy: The Trickle of Savings from Cheap Oil

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an economy built to last, cheap oil, consumers, consumption, gasoline, GDP, growth, spending, {What's Left of) Our Economy

We just got some good news about the impact of cheap oil on American consumers in 2014, and the likely effects in 2015. In the process, we got an important lesson in presenting data in context.

According to no less than AAA, last year, cratering oil prices saved Americans $14 billion on motor fuel, and the total could reach $75 billion this year. What’s not to like?

But these figures also warn against viewing cheap gas as a game-changer for the U.S. economy.  The reason? In the third quarter of this year – during which the economy grew by an excellent annualized 6.27 percent before inflation – consumer spending was running at an annualized rate of just over $12 trillion. So the gasoline savings equaled less than 0.12 percent of that total.

Even if the gasoline savings do hit the AAA’s most optimistic $75 billion level, they would only amount to 0.62 percent of the 2014 consumer spending total. And if the growth of overall consumer spending matched this year’s 4.20 percent pre-inflation rate over the third quarter of 2013, the cheap oil effect will be even smaller proportionately.

The $75 billion in gasoline savings is of course a bigger (21.50 percent) share of the annualized $348.7 billion in consumer spending growth from quarter to quarter. But it’s only a little over a tenth of the $727.5 billion in total annualized growth during that period.

Moreover, the gasoline savings will only boost growth if they result in even more spending on goods and services generated domestically.  As indicated in this previous post, that’s far from the case.  In fact, even if consumers simply substituted non-gasoline spending for spending on other domestic output, the growth effect would be nil. And every dollar of imports bought with these savings, or put into the bank or under the mattress, actually slows growth.

Further, the gasoline bonanza may actually move America farther from President Obama’s goal of creating “an economy built to last” – i.e., less reliant on binge-borrowing and buying, and financial gimmickry, and more on turning out conventional goods and services. For although cheap gas might in theory boost spending on net on domestic goods and services, it’s at least as likely that it will reduce the value of domestic energy production – and leave the economy more consumption-heavy than ever.

(What’s Left of) Our Economy: Right and Wrong Ways to Think About the Quality of Growth

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an economy built to last, business spending, growth, Hilsenrath, innovation, intellectual property products, Mainstream Media, manufacturing, Obama, process innovation, R&D, Wall Street Journal, {What's Left of) Our Economy

Today’s revisions to the second quarter’s figures on gross domestic product (GDP) growth conveniently provide an opportunity to comment both on the vital issue of the quality of that growth, and on a related subject raised by one of the most boneheaded points raised recently by a Mainstream Media Journalist (a high bar as most of you recognize).

The quality of growth matters decisively for the U.S. economy because a prime lesson Americans should have learned once the financial crisis struck (but in too many cases didn’t) is that the wrong kind of growth (e.g., fueled by mutually reinforcing credit and housing bubbles) eventually tends to crash and burn. That’s why President Obama deserves lots of credit for speaking about the need to create a U.S. economy that’s “built to last.”

As per previous posts, however, it’s hard to spot much progress being made by the U.S. economy toward this vital objective, and the new GDP numbers leave that problem essentially unchanged. Once more, let’s look at the share of the economy taken up by personal consumption and housing together – the toxic combination that inflated most of the bubble.

The new figures show that these two sectors made up 71.30 percent of gross domestic product after inflation. That’s a smidgeon better than the 71.34 percent recorded in the advance estimate of GDP, which was released last month. (A third and “final” – for a while, anyway – estimate will come out next month.) But it’s higher than the 70.94 percent level in the second quarter of 2009. In other words, the recovery has rendered the economy even more consumption- and housing-heavy.

Even more troubling, the economy is more consumption- and housing-heavy than when the last recession began at the end of 2007. Then, those two sectors comprised 71.16 percent of real GDP, and according to the President, the economy at that point was definitely not built to last. The trend only looks good when the latest data are compared with those at the height of the previous decade’s bubble – the 73.24 percent of inflation-adjusted GDP taken up by housing and consumption in the third quarter of 2005. And this improvement looks all the less impressive given that now everyone with a lick of sense now understands that the economy was on an insanely reckless course at that time.

Wall Street Journal chief economics correspondent Jon Hilsenrath showed in a post Tuesday that he’s thinking about the quality of growth, too, which is encouraging. If only his thinking weren’t so inanely ignorant. Hilsenrath bemoaned how little growth since the end of the recession has been fueled by “ideas” – meaning what the Commerce Department calls “intellectual property products.” These products consist of “Expenditures for research and development (R&D) and for entertainment, literary, and artistic originals.”

What has upset Hilsenrath so is that business investment on intellectual property products has risen only by 17.18 percent in real terms during the recovery, whereas investment on business equipment has surged by 58.30 percent. His interpretation? “American firms have been investing much more aggressively in stuff than in ideas in this upturn,” and he concludes that “An ideas-driven recovery would be…more encouraging.”

The author doesn’t explain his reasoning, but it looks like he views creating a movie as being more valuable than producing a machine tool. And here’s why such (widespread) views are so utterly goofy – at best: It’s not because machine tools etc are in fact necessarily more valuable than movies. It’s because machine tools – and other types of business equipment and manufactured goods more generally – necessarily incorporate lots of intellectual property (i.e., “ideas”). And these ideas come both on a product side and on a process side. Unless Hilsenrath thinks that these devices, along with aircraft and semiconductors etc, result from mindless brutes wielding hammers and bellows and working from blueprints that come from – actually, where does Hilsenrath think the blueprints come from?

The flip side of course is true, too. The creation of many intellectual property products often requires lots of what Hilsenrath dismisses as “stuff.” In fact, the author would know this had he read one of the Commerce Department’s announcements of the decision to track intellectual property spending in its GDP data. The first example of such investment is the development of “a new cancer drug.” In other words, a manufactured good. Which was conceived with the help of major investments in laboratory equipment.

Of course, maybe Hilsenrath isn’t entirely to blame for drawing such sharp distinctions. At the least, the government’s very decision to break out intellectual property spending from other types of business spending strongly encourages this practice. At the same time, the observations in this post aren’t exactly rocket science. But they do spring from something that’s vital to economic (and analytical) success even though it’s not tracked (yet) by the Commerce Department – common sense.