Bloomberg Anywhere Remote Login Bloomberg Terminal Demo Request


Connecting decision makers to a dynamic network of information, people and ideas, Bloomberg quickly and accurately delivers business and financial information, news and insight around the world.


Financial Products

Enterprise Products


Customer Support

  • Americas

    +1 212 318 2000

  • Europe, Middle East, & Africa

    +44 20 7330 7500

  • Asia Pacific

    +65 6212 1000


Industry Products

Media Services

Follow Us

Bloomberg Customers

Unmasking the Economy

Posted by: Michael Mandel on February 02

My new cover story is now up on the website here. Let me know what you think.

TrackBack URL for this entry:

Reader Comments


February 2, 2006 09:43 PM

Yesterday's R&D investments show up in today's GDP numbers.

Today's R&D investments will show up in tomorrow's GDP numbers.

There is no guarantee that R&D spending will lead to anything worthwhile.

Your article seems to say we should double count R&D spending to make a crappy economic picture look brighter.


February 2, 2006 10:28 PM

Excellent perspective.

I have one major issue. With these additions to GNP and account balances we lose a good historical comparison. Although these softer components all have value, is it equal to, a fraction of, or a multiple of their more traditional metrics? We may be comparing apples and avacados.

I would keep the tradition metrics as they are and create a new seperate basket to track. Then we could track swings in one or the other and see their impact on things like jobless rates (your 2001 recession example).

We might find that over time the "non-traditional metrics" are have more influence then the tradition goods and service measure.

But that is just a different way to stack the numbers. At the end of the day, I agree with your hypothesis.


February 3, 2006 09:51 AM

I am in agreement with the assessment that economic measures are inaccurate. While I have long argued that these mismeasurements were underestimating the problems in the economy, I can also see the argument that they are underestimating the strength. However, it seems quite clear to me that people in the US are grinding out more work yet are not getting ahead. Very few families can survive on one income where it was perfectly viable even 30 years ago. People living at the median income are "paycheck to paycheck." Real income for the *majority* of the population seems to be declining. If the US economy is stronger and wealthier than economic measures show, then that wealth is not going into the hands of most of the population; it is going into the hands of the already-wealthy investment class (perhaps the top 10%). In which case, perhaps the income gap is far greater than our measurements are telling us? What's more, if knowledge is so valuable, then knowledge workers may be highly underpaid for the value they are giving to the company and, in essence, the investors. If they are thus underpaid, then this is one - and only one of many - indentifiable example of enormous value (wealth) being transferred cheaply into the hands of the investment class.


February 3, 2006 10:02 AM

You're offering a really interesting perspective, but a somewhat irrelevant one to the average American. The fact remains that the middle class - the engine of a healthy economy - is earning less money today and is facing higher costs and higher bubble threats (first their savings, now their homes). Historically, our economy was fuled by immigrants who became working class and then middle class consumers. During the majority of the 19th and 20th century, an immigrant could have completed this cycle in 1-2 generations. This fabric is now being erroded, if not wiped out. With the income gap and cost-of-living gap widening, we have broken that cycle. In the long term, i don't see how the "shadow economy" you discuss will be relevant to most Americans. If anything, is underlines the weakness of our economy.

Doug Jones

February 3, 2006 11:31 AM

(Paragraph 17) - What portion of the "top 10 biggest U.S. corporations" R&D budget is being spent overseas in India, Communist China, Indonesia...?


Mike Mandel

February 3, 2006 11:59 AM

Two points here.

Brandon, you are probably correct. It looks like a bigger share of national income is going to capital, rather than labor. I didn't put that in the story, though, because I couldn't be sure that it wasn't going to the holders of the human and intellectual capital, i.e. the skilled workers.

Doug, we have no way right now of knowing how much of the R&D is being spent overseas. The BEA's supplementary R&D accounts, when they come out, will probably give some hint of this.


February 3, 2006 02:30 PM

This is why I read everything that Michael Mandel writes, because he really is thinking ahead, and in a way that no one else can match.

People haven't even begun to think how companies with only $5-$8 billion in revenue could have $50-$100 Billion in valuation (like Google, Yahoo, eBay). They aren't considering the rate at which these businesses can infinitely link the knowledge of different people together.

I think I'm going to link the material of this cover story to an article on my own blog, too. It is at :


February 3, 2006 04:02 PM

Nicely written article; i've linked to it on my own blog at'd be nice to track-back but firewall settings dont allow.
At any rate, I think you raise a number of great questions, precisely the type that evolutionary economics scholars and Science and Technology policy students (like myself and others in my MA program) struggle with.
A few thoughts:
Capturing (let alone defining) R&D spending has always been a troublesome task...firms differ on what constitues R&D and measuring the ROI from R&D
poses a whole other set of measurement problems. R&D spending is, of course, only part of the bigger picture - patenting, journal publications/citations and newer more robust forms of measurement help, but its still not easy to get an idea of what impact such activities have on the firm, much less an entire country.

Great point on the foreign subsidization of educated workers...just a day or two ago I attended a lecture in which one of the speakers - a State Dept. official- recalled an astounding case. Apparently Texas Instruments (while it still manufactured electronics in Texas) paid teachers in the Texas school system something like 100,000/teacher/year to make sure that a certain number of *highschool* graduates would have *8th grade* math skills because the highschool math skills were the minimum requirement to work on the TI factory assembly line. That point bears repeating. TI was paying *twice* (once as a tax-payer and again as an extra payment) to make sure that texas highschool graduates had at least 8th grade math skills. This apparently worked for a while, until TI realized that it could manufacture in Korea for less. NOT, mind you, because labor in Korea is cheaper than the US -as an OECD country it pays workers as much or more than we do-but because it was easier to find well-educated workers. I think that there may be some gross underestimations of how much we rely on the educated workers of the rest of the world.

Anyways, great article, I look forward to reading more.


February 3, 2006 05:52 PM

I agree with Monkeyboy: >

But I strongly disagree that we have a "crappy" economic outlook. The recent trend has been vigorous growth in GDP and productivity, and very strong employment and very low unemplyment. Those are the stats that matter. (Yeah, last qtr was weak on GDP and productivity but so far that's just one qtr in isolation -- nothing goes up in a straight line).

People view trade deficits and shifting employment pattern and signs of a bad economy, and that is simply wrong. Those are merely signs of strong consumer demand, and change. Again, unemployment rate is VERY low, 4.7% fer cryin out loud.

Brandon's wrong: people in general are clearly far wealthier than they used to be. That's proved by the fact that they spend a significant portion of income on things that simply did not exist in years past -- and I wish the gov't would track THAT stat.

Today we have everything people in the past had that has any value to us, but we also have bigger better cars, much bigger houses, and all kinds of goods and services unknown in the past. (Save your sob story, we're talking aggregates here.) In some juicy areas maybe houses are very costly etc. -- but it's a big country, and home ownership is all-time high.

I agree with Mandel's suggestion that the economy is stronger than people seem to think -- but I think the story is more about biases, fears, misconceptions, and politics, than inadequte data reporting.


February 3, 2006 06:04 PM

If Google were only that cheap, 10-20x earnings. It is at 85x earnings, an earnings yield of less than 1.2%.


February 3, 2006 06:39 PM

So they hacked R&D during the recession but have doubled it since? How did they double it if they haven't done any hiring? Offshore it all?


February 3, 2006 09:48 PM

To simplify my point: Let's assume we have a dollar to split between us. I take 80 cents and give you 20 cents. Well, that's not fair, but hey, I own the company and you work for me. You're really good at what you do, and your knowledge makes the company more efficient, and you innovate some cool new products. Now the company has been doing better and better, and we now have $100. Because you're such a fabulous employee, I'm going to give you a 25% raise. That's a pretty fantastic raise, isn't it? So now I'm going to give you a WHOLE DOLLAR! Wow! You're richer. You can buy that dream car you've always wanted. What does it matter that I get the other $99, right?

Mahesh Khatri

February 4, 2006 01:07 AM

It is surely surprising that the US which has led the way for most scientific and management discoveries falls way behind when applying measurement of Intangible Assets like Brands, Knowledge, Human and Relationship Capital.

Mike McCarthy

February 4, 2006 08:11 AM

I think this is an important issue and I wish our friends in the accounting and finance world would take it on seriously. As a professor and consultant in branding, I believe that we need better metrics for capturing the investment, development and value of intangibles such as brands and intellectual capital. We also need ways to "teach" these important concepts to our current and future business leaders. Otherwise, we doom ourselves, and them, to viewing the world through an increasingly distorted lens.

As an analogy, assume that when the US (and the world for that matter) was an agrarian economy that there were well-established measures to capture the health of the economy. How valid would those measures have been in capturing the real health of the economony during the move to industrialization? I think that the same argument could be made here.

Clearly, the need to "make" "things" is becoming, for better or worse, increasingly less important for our economy. If the US is to continue to lead the world economies, we need a better way to think about what we do and measure how well we're doing it.


February 4, 2006 08:14 AM

"À propos de" Why The Economy Is A Lot Stronger Than You Think:

Its an important and good point of view, yet all those intangible investments like R&D , though not actually accounted on the GDP, will - if they are good RD investments- return positive results in the GDP as soon as the products resulting from that RD are introduced in the business flow of those companies. So maybe in real terms there is just a delay in time for those investments to become measured in the GDP, which probably explains a higher volatility both for the GDP as well as for the productivity functions. So probably this higher volatility is a result from the fact that american economy is year after year more involved in the Knowledge and Creativity sector were intangible investments are more and more predominant.

a)Maybe its time to study a way of measuring and considering Knowledge and Creativity related investments, in GDP calculation;
b)In the meantime its crucial to not disconsider the major implications of the fundamental shifts of the twin deficits, to the futur of economy, of the dollar, and of the world polical equilibrium...

Ari Tai

February 4, 2006 10:47 PM

Great article. I suspect our metrics lag behind in many areas as they were created to measure products and investment in an industrial age, where today's free enterprise is less dependent on capital(ism) than ever before - meaning that the savings rate need not be what it was to fund, say, creation of (the profits from) the Pittsburg (now rust-)belt. The citizen and their enterprise have never been more free to pursue their dreams.

I suspect that the measure of middle class (family) income is equally biased (in that it does not include the a measure of how that individual benefits from salary-reducing regulation and other wealth transfers). Especially now that even the Europeans are admitting that our poor live as well or better (in terms of consumption) than their middle class. Call it the miracle of compound productivity rates that have continually exceeded our socialistic friends'. Ant and the grasshopper recast.

Jim P

February 5, 2006 11:00 AM

I read your article and think it is one of the best articles I have read in a long time. I personally have thought for a while things were better than were being reported. I want to know what the average person can do to spread this this message to more people so they can see how good things really are. Your analysis is the first thing I have seen in a long time that would support the economic data that continues to be reported better than expected ie: consumer confidence. This number has been good for a long time. If consumer confidence is positive and rising there has to be an underlying reason why. Your article is the first thing I have seen that would help explain this. I would also like to see this article discussed on national tv with the same vigor as the negative news stories and let people decide if there is merit.



February 5, 2006 05:05 PM

Mike, it seems that many of the comments here relate to whether or not your analysis actually speaks to the life of the everyday American. Interestingly, while virtually every income and lifestyle indicator published recently show a decline in middle class livability and long term purchase power, some of the folks commenting here are eager to show that "shadow economy" numbers influence middle class prosperity. What are your thoughts here? Saying that the US economy is shifting from to a knowledge-based one and that many of the related measures are not being captured is great (and true) - but saying that things are better implies that they are better for the average Joe. Since pretty much every indicator we've seen in recent years says differently, I'd love to hear your thoughts on the matter.

Marc Machbitz

February 5, 2006 05:10 PM

Regarding Mandel's recent essay on "Why The Economy is a lot stronger than you think" An insightful article. Two comments: 1) I agree that we are probably miscounting parts of our economy, but does that mean the aggregate GDP is understated? Your article was not crystal clear on that. If the GDP is understated why not also provide a "revised" GDP that takes into account the intangibles you went to great lenghts to explain? 2) The number of 18 years olds is expected to peak just in time for the college freshman class of 2008, which means that the number of kids entering college will increase between then and now. Doesn't that also explain the shift in savings? It could be that net savings is on the decline precisely becuase kids enrolled in college is on the increase. I suspect the two trends are related.


February 5, 2006 06:28 PM

With per capita cost of government hovering around $20,000 and rising rapidly there's a real drag on the economy no matter how it is portrayed... with a mask or without.


February 5, 2006 06:48 PM

Fuzzy logic ...

... may be needed here.

Is the issue really the time value of (tangible/intangible) assets, and how to "correctly" amortize that value?

Presently "tangibles" seem to be valued over (nearly) 100% of their (arbitrary) "life expectancy", while "intangibles" over (nearly) 0% of theirs.

IF "the truth" lies somewhere in between, then "fuzzy logic" may be needed to find the "best" degree of grey - or correct life expectancy of imprecisely variable expectations.

Secondly, is there an "echo" effect? Do decisions made on the basis of present (or changed) data standards then affect the subsequent data? (etc., etc.)

Mike Mandel

February 5, 2006 07:12 PM

A lot of great comments here. I'm going to pick up on Yariv's point in particular. He noted

"many of the comments here relate to whether or not your analysis actually speaks to the life of the everyday American. Interestingly, while virtually every income and lifestyle indicator published recently show a decline in middle class livability and long term purchase power."

Here are some points:

1) The hidden investment in intangibles means that more of the income pie goes to capital, and a falling share to labor.

2) However, it's not 100% clear where that extra capital income is going to show up. In fact, it could show up as lower interest rates, which in turn drives up housing prices, which in turn benefits the middle class.

3) As far as we know, the real wealth of the middle class has actually risen in this period because of home prices, and is now higher than their parents at a similar age.

4) So the income and wage indicators are not good, but the wealth indicators are much better.

More on this later.


February 6, 2006 01:19 AM


In your response you wrote. Very few families can survive on one income where it was perfectly viable even 30 years ago.

30 years ago the average middle class family lived in a house that was built in the late forties and the 1950s. These are the post depression era houses that brought us the 8-foot ceiling. (they were often 9 feet before this and are going back to that today) Today I live in alone a condo that is larger than the house my childhood family of 5 lived in, in 1980. My 11 foot closet, a feature not available or needed in a 1950s house, is more than half full which means fitting a wife in my condo would be a squeeze. I bought this condo because it was the cheapest overall cost of housing I could find in my area. The houses in my area are much bigger and nicer than my condo. I'm having a hard time making ends meet here but If I were to buy the house my parents had in 1980 I would have a much easier time. So the reason it takes two people to make it in America today and the reason I am having a hard time by myself is because we live in a time when two people can work and we have adjusted our expectations to match our new situation.

That said we do have one massive expense today that we didn't have in the 1970s and it does nothing for our standard of living. Urban sprawl. I’ll use my town as an example. According to census data, in Metro Detroit between 1970 and 1990 we built on and paved over enough real estate to house 3.4 million people at 1950s density. Based on my own observations (I've seen entire new suburbs built since 1990) that pace has not slowed one bit. That means we should have enough room for 6.1 million more people today than we had in 1970. In reality our population is almost the same size today as it was in 1970. Now just imagine the massive infrastructure cost this puts on our population. No wonder Michigan can’t keep the roads paved.

Despite urban sprawl we are still better off today than in 1970.


February 6, 2006 09:34 AM

Death of Equities all over again huh? BW's talent at marking tops is astounding...this reminds me so much of the talk that went on during those halcyon days of tech bubbledom. People come up with any reasoning imaginable to convince themselves that things are different, that previously heeded warning signs need to be ignored, and that new benchmarks should be implemented in order to "properly take into account the dynamic nature of the current economic paradigm," or some such nonsense. Hedonics is a perfect example. I would vernture that it is never different. History will repeat itself in the US just as it has in the Roman Empire, France in the days of John Law, the Tuplip and South Sea manias, Weimar Germany, etc., etc. To me, suggesting that the US is on sound economic footing when the dollar has seen devaluation of 95% since its creation, is tantamount to the suggeestion that a real estate bubble does not exists because it is concentrated in only a few markets. That is the nature of a bubble. Well whatever, I think I'm way off topic here anyway.


February 6, 2006 11:52 AM

Great article overall. Opened my eyes to something I was unaware of -- namely the failure of government statistics to account for income from knowledge exports. But, I don't buy the idea that government spending on education and R & D should be counted as an "investment." I mean, probably most everything anyone spends money on could be construed as an "investment." How bout the bloated transportation bill -- is that counted as an "investment" in our infrastructure? How bout medicare or medicaid spending -- should that be counted as an "investment" in the health of Americans (and thus productivity, etc). Or school lunches I said almost everything. To me, the bottom line has to be is the gov't spending more money then it is taking in. The same is true for business spending. Businesses can "invest" all they want, but eventually will go bankrupt if income does not exceed expenses.

So, I don't buy that the federal budget deficit should be considered smaller then it is. It is what it is. And, once you realize that, then you have to ask other tough questions like -- without the huge budget deficit we are running, where would the economy be without that huge stimulus. And, that makes you wonder how strong our economy really is -- however you count the numbers.

But, it is comforting to know that good things are happenening that we don't think about and that might explain the resiliance of the U.S. economy. And, regardless, the article is illuminating and thought-provoking. More articles like that might get me to renew my BW subscription!

David Foster

February 6, 2006 06:44 PM

Very thought-provoking and well-written article...a significant contribution to the understanding of our economy.

A few concerns, though:

1)Much of the money spent on education is, in fact, wasted. If someone goes through 12 years of school and emerges basically illiterate and innumerate, it's hard to see how the $100K spent on his education represents an economically-meaningful investment. (Indeed, some of the things the public schools do, like the excessive preaching of "self-esteem," probably have *negative* economic value, as they tend to mass-produce people with attitude problems.

How about college education? Certainly there's economic value to an engineering degree; maybe there's economic value to an MBA. (Economic value to the overall economy: beyond the signaling value of the degree to the individual) But is there any real economic value to a course of study in, say, postmodernist literary criticism? (Which often means mainly the inculation of particular political views rather than developing an understanding of how to analyze texts)

Sadly, much of the economic value that we obtain through the skills of immigrants is probably really just a substitute for skills not gained by native-born people because of the failures of the education system.

Corporate training, too, has very signifcant waste factors. There are indeed meaningful courses, like the Intel process course you mentioned, and some management training, sales training, etc, but there is also an awful lot of useless activity.

Seems to me that investments in education should probably be discounted by 50% or so in order to obtain a reasonable estimate of their true value.

David Foster

February 6, 2006 06:46 PM

2)Advertising...much, though not all, advertising is of a zero-sum nature: it may help the individual corporation, but not the overall economy. And much advertising is useless even at the individual-firm level: I'm specifically thinking of 4-page "institutional" ads in which a company chairman explains his philosophy of life....Do we really want to count these things as investments?


February 10, 2006 08:54 AM

I've been thinking about this article and some of the debate surrounding it. There does seem to be a real failure by current measurements to track intangibles such as intellectual property. But this problem counts for both exports and imports. If we count knowledge as having a value (which I believe we should), then knowledge being exported by the United States should also be balanced against knowledge being imported. Intellectual property and things like brand image value should count in import accounts as well as export. Thus, Intel's knowledge being exported to Ireland should very well be counted, but so should Sony's knowledge being imported into the United States. Once this fair measurement of both occurs in both accounts, how do the balance of payments work out?

What's more, exporting of knowledge doesn't always return a fair value. For example, Starbucks has replicated its business model throughout the world. American intellectual value has been exported. However, because many of these are joint ventures and licensees, Starbucks does not see a comparable return on this knowledge (their business model). They have exported 100% of their key asset and only receive 50% (or less) of the net profits in return. How does this work into the accounts?

Importing so much more than we export, and fairly counting knowledge value from imports as well as exports, I wonder if the trade imbalance is exacerbated and not moderated as Mike suggests.

Rich Mallory

February 12, 2006 11:50 AM

The article seems to fill in the void of why our economy has continued to grow despite negative indicators of pervasive budget and trade deficit. Good job.

My fear in being too optimistic about this news is two-fold. First, a lot of the continued US economic stability is the result of foreign savings (Chinese particularly) that has been loaned to support our economic growth. Second, if investment in knowledge workers makes our economy so strong, what happens when the number of graduate engineers in China and India outnumber the US by 50 to one - which is predicted to happen in the near future.

It seems that our economy is too frail to support robust future growth, no matter how you look at it.


February 13, 2006 05:10 PM


I have been following the intangible assets debate since "The New Economy" was born (when was the last time you saw that phrase pop up?).

During the prime of this point in our lives (2001/02) several of your BW peers cited the work of academics (e.g., Baruch Lev) and Big Five consultants who said that it is not just about reporting these assets, but how to extract the value within a company. Fast forward to current life, and I think the issue is still relevant.

Don't you think there are still way too many executives and companies out there who just don't know how to pull the value out of their companies?

I look at GM and Ford as two classic examples. Their business models are based on process and not people--no matter how many ad & marketing campaigns say that their people make the difference. I can only guess how much innovation is being housed/lost in engineering or computer files. Note to Mssrs. Ford and Waggoner--figure it out before undertaking mass layoffs and restructuring.

Henrique Plöger Abreu

February 14, 2006 10:50 AM

Great thoughts expressed here,..if we want to have good quality in executives we have to start with basic education, it is not a question of quantity but rather quality. Traditional education systems are not meeting increased challenges from young people, many of them are becoming more and more disappointed with current teaching approaches and start to feel that their education is becoming obsolete to their daily lives and future careers . The first aim and goal of all education should be to bring enlightenment to the students. TRAINING THE MIND, and NOT STUFFING THE BRAIN with facts and formulas, is what they need.

Henrique Plöger Abreu

February 14, 2006 10:53 AM

Great thoughts expressed here, .... if we need more quality in management we should try to fix basic education first. It is about quality rather than quantity.
Traditional education systems are not meeting increased challenges from young people, many of them are becoming more and more disappointed with current teaching approaches and start to feel that their education is becoming obsolete to their daily lives and future careers . The first aim and goal of all education should be to bring enlightenment to the students. TRAINING THE MIND, and NOT STUFFING THE BRAIN with facts and formulas, is what they need

Bill Jackson

February 26, 2006 10:19 AM

An excellent article.
Fresh thinking.
Keep up the good work.

Thank you for your interest. This blog is no longer active.



Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

BW Mall - Sponsored Links

Buy a link now!