Posted by: Michael Mandel on February 06
Brad Setser does a long and thoughtful post on my cover story. I will have a longer response later, but here are my immediate reactions. Brad writes:
I do not have an informed opinion on the question of whether the national accounts definition of investment is dated, and too narrow. Should some of McDonald’s advertising budget be considered a long-term investment in McDonald’s brand - an investment with a longer half-life than a new PC - rather than just an attempt to sell more burgers today. That would drive up US investment rates. And US savings rates, as both business investment and business savings would rise.
Maybe the US invests (and saves) more than the national income accounts show. I don’t think, though, that mismeasured advertising investment changes the bottom line: the US now saves a lot less than it used to. The US savings rate may not be negative, but it still fall short of what the US needs to finance all the investment the US does.
First reaction: First, Brad writes, that “the US now saves a lot less than it used to.” How does he know this? Yes, that’s what the official data shows, but so much of what Americans spend on future-oriented activities is currently counted as consumption in the national income accounts, or treated as intermediate outputs (see here for an explanation). So that dollar you spent on your kids education is subtracted from the national savings pool. The money that Apple spends on R&D is not added into the national savings pool, even though it belongs there.
The official data show that the national savings rate has fallen from about 21% in the 1950s to about 15% in this decade—or about a 1 percentage point a decade. However, over the same period, unmeasured investments in business intangibles were rising from 4% to about 9% of GDP. If we add those into both the investment and the savings side of the economy, most of the official decline in savings disappears. Remember: The national savings numbers are among the least reliable numbers that the government publishes, because they are a residual.
My second reaction:
Brad writes that: "The US savings rate may not be negative, but it still fall short of what the US needs to finance all the investment the US does."
My response is, so what? It's a truism among trade economists that whether you run a current account deficit or a current account surplus matters less than what you do with the money. In that vein, pessimists have accused the U.S. economy of importing capital in order to fund consumption.
But according to my argument, that's not true. We seem to be importing capital in order to fund an enormous amount in investment in intangibles, including knowledge, training, brand equity and the like. Then U.S. companies are using those investments to maintain their competitive position in the global economy.
It's a virtuous circle, rather than a vicious one. What's more, it has the additional virtue of being consistent with the facts, including the much faster productivity growth in the U.S., that darned unwillingness of the dollar to drop, and the continued high rate of return of U.S. companies overseas.
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