There’s a neat cover article on BusinessWeek this week about how GDP methodology misses the impact of R&D and other knowledge-based expenditures. The writers contend that outdated methods of measuring the economy have made government stats pretty useless. More to the point, they argue that factoring in this “dark matter” will alter our view on the trade deficit.
While showing that the economy is stronger than the accepted stats show, the missing info also explains why the recent recession was worse than it appeared:
Factoring in the knowledge economy also helps us understand why the recession of 2001 seemed worse than the official statistics showed — and why the recovery was so slow. According to the published numbers, the six-month recession of 2001 was so mild the business sector actually grew at a modest 0.4% pace that year. By 2003, however, more than 3 million private sector jobs had disappeared.
One reason for this disconnect is simple: Corporations hacked back their budgets for R&D, advertising, training, and so forth. Yes, that canceled out a ton of high-paying jobs, but had no direct effect on GDP. Remember that R&D and other intangible business investments are not currently counted as national output. Therefore, when a company laid off an engineer doing long-term product development but kept selling the same number of its old products, GDP stayed the same. Productivity even went up, because fewer workers were producing the same amount of output. And if that laid-off engineer went to work, say, building houses? National output might even have risen.
I have no training as an economist (if you’re looking for that stuff, go to Jane Galt and Dismally, and follow some their blogroll links), so I can’t make any substantial assessment about the thesis. As a layman, it seems to hold up with some of my observations about the business world. I mean, the shift of expenditures from capital projects to R&D mirrors some of what my day job is about.
I work on a magazine about outsourcing in the pharma/biopharma industry. The “lesson” of the industry (and of industry in general) is, “If you don’t do it well, don’t do it in-house.” There’s a lot of business-speak about “core/critical competencies,” “skill sets,” etc., but the key is the use of outsourcing/contract service providers to handle tasks that a company is either unable or unwilling to do on its own.
Often, this can boil down to a company’s decision to avoid a massive capital expenditure on a drug facility. While the finished in-house facility may be able to produce Drug X at a lower unit cost than a contract manufacturer could, the resulting tie-up of capital has to be factored into the equation. Also, the flexibility of working with a contractor can trump the fixed costs of running that in-house facility when there’s not enough demand for Drug X.
This isn’t to say that big companies (in my industry) are all abandoning their in-house manufacturing processes. In the last few weeks, Amgen’s made a bunch of announcements about plowing billions into its own facilities. But they’re also pretty darn confident in their sales projections for their products.
But a lot of pharma outsourcing is conducted by smaller companies that know they can’t invest in manufacturing. They have to develop intellectual property, and I’m not sure how that gets evaluated, especially if they don’t have a product on the market yet.
Anyway, just like with that post about News Corp.’s wireless strategy, I find this stuff fascinating. If you do, then read the article.
And if you wanna take up any points with the author, go to his blog entry about it.
