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Online Extra: The Knowledge Economy and You


What does the new view of the knowledge economy mean for you as an ordinary investor or a worker? On one hand, it's common sense that companies had to invest in innovation, product development, and brand development in order to compete in the global marketplace. On the other hand, the new numbers really do change our macro understanding of how profits and wages are likely to behave in the future. Here are the important points.

1. The U.S. is more likely to be able to sustain strong productivity growth.

All other things being equal, the higher rate of business investment is good news for productivity. That makes it more likely that wages and profits will rise in the future -- but not necessarily at the same pace.

2. Correctly measured, corporate profits are higher than we think.

Companies are switching their resources from physical capital, which is depreciated over time, to intangible investments, which are generally expensed today. Especially since spending on intangibles is growing, that has the effect of depressing reported profits.

Think about it this way-companies have to subtract from revenue not only the depreciation on past capital expenditures but all of the current expenses on increased R&D, product development costs, and so forth. If accountants could count spending on R&D and product development as investment, at least in part, then reported earnings would rise. That's good news for investors.

3. The share of national income going to capital is rising over time, while the share of national income going to labor is falling.

This is a big point economists Carol Corrado, Charles Hulten, and Dan Sichel made in their research. More and more of the growth of corporations is being generated by innovation and other investments in intangible assets. As a result, capital is getting a bigger share of the pie. This means that everyone should try to participate in the markets in one way or another to get the biggest returns from rising productivity.

4. The odds of a dollar crisis are less, which reduces the chance of a sudden interest rate spike.

The new numbers suggest that the trade deficit, correctly measured, is lower than we thought. Also, a larger share of the money flowing from overseas is going to fund investment in intangibles rather than consumption. That's good news for bond investors.

5. Both the economy and profits are more volatile than we think.

Investors have grown used to thinking of economic growth as relatively smooth. But that's because the GDP numbers leave out fluctuations in intangible investment, including the ups and downs in the amount spent on design and advertising. Booms will be bigger, and busts will be deeper. Investors need to expect that this riskiness will continue. By Michael Mandel in New York


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