Opinion

The Edgy Optimist

Building a better economic yardstick

Zachary Karabell
May 31, 2013 15:33 UTC

This week the government released yet another revision of first-quarter economic growth showing that the U.S. economy grew a tad less than initially reported ‑- 2.4 percent rather than 2.5 percent. This revision was hardly consequential, but over the summer the Bureau of Economic Analysis will unveil a new way to calculate the overall output of the United States. And that revision will be dramatic.

Over the past few decades, gross domestic product (GDP) has become the prima inter pares of economic statistics. It is not only a measure of national economic output, it is a proxy for “the economy.” The number exerts substantial influence on what we spend collectively and individually, not just in the United States but throughout the world. China has five-year plans with GDP targets, and the European Union has rigid – albeit loosely enforced – rules about how much debt a government can take on relative to its GDP. It is, in short, a big-deal number.

And it is treated as an accurate gauge of economic activity. That would have come as something of a surprise to its inventors. Simon Kuznets, the economist most responsible in the 1930s for the formation of the national accounts that provide the data for GDP, was always disturbed that domestic work, volunteer work and, of course, transactions in cash are invisible in GDP. The choice to leave those out may have made sense – after all, what is the market price of preparing a family meal? – but it underscores that GDP is not a complete measure.

The BEA is the government agency responsible for compiling U.S. GDP figures, and it is always looking for better ways to measure. Every few years it tweaks its methodology. This time the tweaks will be more than incidental. In fact, not only will they add several hundred billion dollars – statistically, at least – of annual output, but they will also begin an overdue transition of these numbers away from the 20th century, when they were invented, and into the 21st, where we now live.

The change is relatively simple: The BEA will incorporate into GDP all the creative, innovative work that is the backbone of much of what the United States now produces. Research and development has long been recognized as a core economic asset, yet spending on it has not been included in national accounts. So, as the Wall Street Journal noted, a Lady Gaga concert and album are included in GDP, but the money spent writing the songs and recording the album are not. Factories buying new robots counted; Pfizer’s expenditures on inventing drugs were not.

Two cheers for the tech industry’s goofy energy

Zachary Karabell
May 24, 2013 18:49 UTC

The national conversation of late has revolved around a trio of Washington scandals, a weather disaster, and the seesaw views in financial markets about whether crisis looms. Yet for all their prominence, none are as tied to trends that will shape our collective future as the myriad of events that took place this week in New York City under the banner of “Internet Week.”

Now in its sixth year, Internet Week is a loosely coordinated series of gatherings ranging from daylong symposiums to open houses of tech companies large and small to the Webby Awards, which is the online version of the Oscars. Topics cover the gamut from healthcare in the digital age to marketing your startup to crowd funding. The attendees are young and at times terminally hip. The whole thing is, quite frankly, fun.

The events are filled with strivers and startups. Some may be bought in a few short years, at massive multiples, as Tumblr just was by Yahoo; some may soar higher and become the next Yahoo or Facebook; many will fail. But the collective outcome points resoundingly toward creativity, innovation and continually morphing modes of commerce and connectivity. Half of it may be frivolous, but what matters more is that half of it is serious about changing the world.

Massive, open, online disruption

Zachary Karabell
May 17, 2013 12:19 UTC

The United States has a problem: rapidly rising student debt. It also has a solution: online education. The primary reason for spiraling student debt is the soaring costs of a college education at a physical college. Online education strips away all of those expenses except for the cost of the professor’s time and experience. It sounds perfect, an alignment of technology, social need and limited resources. So why do so many people believe that it is a deeply flawed solution?

Because it means massive swaths of higher education is about to change. Technology has disrupted many industries; now it’s about to do the same to higher ed.

But it is the students who need aid, and not the financial kind. They have too much of that as it is. The amount of student debt is large and getting larger. It will top $1.1 trillion this year; two-thirds of college students will graduate with debt. The average debt burden is $27,000, though that is skewed higher by a small percentage who owe a lot more. Forty percent of students owe less than $10,000. The amount of student debt has doubled since 2007, tripled since 2004, and many economists believe that the effect on the overall economy is negative.

Online sales tax: a good idea done badly

Zachary Karabell
May 9, 2013 11:31 UTC

On Monday, by a comfortable 69-27 majority, the U.S. Senate passed a controversial bill that will require online retailers with annual sales of more than $1 million to collect state sales taxes. Said Republican Mike Enzi of Wyoming: “This bill is about fairness. It’s about leveling the playing field between the brick-and-mortar and online companies, and it’s about collecting a tax that’s already due. It’s not about raising taxes.”

Wait, isn’t it? Leaving aside the anomaly in today’s world of a Republican sponsoring a bill that raises revenue, the proposed law is entirely about raising taxes. The question, then, is whether these are taxes that ought to be raised, and if this is the way to raise them.

The short answers: yes to the first, no to the second. This bill is precisely the wrong way to raise revenue from a growing stream of business. It applies a tax designed for physical entities to new commerce and does so in ways that will do little to help states or to reinvigorate small businesses that are hurting.

Why high corporate profits aren’t so bad

Zachary Karabell
May 1, 2013 17:10 UTC

Over the past month, America’s largest companies reported their earnings for the first quarter of the year. These quarterly reports provide as much insight into our economy as any of our leading indicators. And these results, if read correctly, highlight once again the bifurcated world we live in. Our gross domestic product is growing about 2.5 percent a year for now, but that masks a vast divergence, not between the 1 percent and the 99 but between what works and what does not. What this earnings season demonstrates is that capital and companies are thriving, along with tens of millions of people connected to those worlds, while labor and wages are not. But that is not how it is being interpreted.

The consensus among investors and the financial media is that the quarter was something of a bust, as company after company reported only modest – and in many cases, non-existent – revenue growth. “Revenue still missing as companies beat earnings,” blared a USA Today headline, and that encapsulates what most have said.

The uber-bearish economist Gary Schilling, cited by the widely-read uber-gloomy blog Zero Hedge, put it bluntly: “Pricing power has been non-existent [and] sales volume increases have been very limited so the only route to profit has been cutting costs. That has pushed profit margins to all-time highs.” Enjoy it now, says Schilling, because profit without revenue growth is “unsustainable.” The only reason markets are doing well and corporations aren’t panicking, the thinking goes, is because central banks are flooding the world with money.

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