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On The Issues
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Back to School: Reviewing the Strengths of Our 21st Century Economy


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Our Changing Economy


February 16, 2006

Mr. Speaker, last night I stood here to talk about our out-of-date jobs surveys. I discussed the changing nature of job creation in our 21st century economy. We have evolved into a technologically advanced, upwardly mobile, highly flexible workforce. The types of jobs, the way jobs are created, and our methods for finding new work have all changed dramatically in the six and a half decades since our current jobs surveys were developed. And yet, our surveys remain fundamentally unchanged over that time. The result has been jobs statistics that are increasingly incapable of accurately tracking job growth in a dynamic economy.

Tonight I’d like to talk about another economic indicator that is unable to fully portray the true state of our modern economy – gross domestic product. Growth in GDP is our broadest measure of economic strength. And as such, it is perhaps the most commonly cited and heavily relied-upon statistic. And yet, like our jobs surveys, our methods for calculating GDP were developed in the industrial age and have remained unchanged while our economy has been transformed dramatically.

The need for assessing and tracking GDP was borne out of the Great Depression. As our nation faced the worst economic crisis in its history, policy makers found they lacked the tools to assess whether our economy was getting better or getting worse. And so the Department of Commerce began the first accounting of national income and output. In an industrial economy, this meant tallying such tangibles as machines, tractors and buildings.

Purchasing new factory equipment or building a new facility was counted as long-term investments, while spending on research or training was not. For example, AT&T;’s investment in Bell Labs, where the transistor radio was invented, didn’t show up at all in the GDP numbers. Even at the time, the economists who developed the methodology recognized these limitations. But an economy based on heavy industrial manufacturing could be adequately analyzed on the basis of tangible, easily identified and easily quantified investments.

However, today’s economy is drastically different than the Great Depression’s.

Our knowledge economy is based on ideas rather than things.

Investing in R&D;, developing brand equity and exporting best practices are driving successful businesses in our innovation economy. Yet they are absent from our most important measure of economic vitality. And by missing these intangible but fundamentally important factors, our GDP numbers can be misleading.

For example, since 2000, the 10 largest U.S. companies that report R&D; spending have increased capital spending by only 2%. That means that the types of investments that are captured in the GDP calculation – new buildings and more equipment – have been meager over the last half decade. Based on this number, we would be led to believe that some of the country’s greatest engines of growth are stagnating and failing to make long-term investments.

But these same ten companies have actually increased R&D; spending by a whopping 42% over that time. They are investing rigorously in tomorrow’s innovations – better products, better services, better ways of doing things.

Our economy’s creative thinkers are propelling our economy forward and ensuring growth in the future. Yet our Old Economy calculations miss this good economic news entirely.

To give another example, look at how the value of Apple’s iPod is incorporated into GDP. While superior design, quality and marketing – all developed in California – have led to a global powerhouse brand, the actual product is assembled in China. So when Commerce’s Bureau of Economic Analysis calculates GDP, it does not count the $800 million Apple spent on R&D; and brand development last year. It merely counts the number of units shipped here from China and sold in the U.S. As Business Week put it, this sort of accounting “reduces Apple – one of the world’s greatest innovators – to a reseller of imported goods.”

There’s no doubt that quantifying intangibles like technical innovation and marketing savvy presents some formidable challenges. And adopting hasty changes that make our GDP numbers too confusing or complicated would obviously be no improvement to the status quo.

But it is essential that we begin to look at ways to make our economic statistics more meaningful by bringing them into the 21st century. While our economy has changed dramatically, our need for accurate and reliable data has not.

When we look at growth in GDP – which was a robust 3.5% last year and on track to be as much as 5% this quarter – we must remember that it’s not the whole story. And as we consider ways to modernize our methodologies, we must recognize that our knowledge-based, innovation-driven economy is far bigger than a mere tally of buildings and widgets.