Positive Growth may be at the Expense of "Intangible Investments"

Gross Domestic Product in the third quarter showed a 3.5% annual growth rate – the first positive growth experienced in the last five quarters. Although this may come as encouraging news, some are concerned that this increased production comes at the expense of reduced “intangible investments” in non-production areas like Research and Development and Worker Training.

In a recent Business Week piece, Michael Mandel discusses how these types of investments are neglected in government statistics, and how that may affect the GDP as a realistic indicator of our recovery.

The trouble is that those GDP and productivity growth figures could be significantly overestimated—perhaps by one percentage point or even more.
That’s because the official statistics are not designed to pick up cutbacks in “intangible investments” such as business spending on research and development, product design, and worker training. There’s ample evidence to suggest that companies, to reduce costs and boost short-term profits, are slashing this kind of spending, which is essential for innovation. Without investment in intangibles, the U.S. can’t compete in a knowledge-based global economy. Yet you won’t see that plunge reflected in the GDP and productivity statistics, which are still too focused on more traditional sectors, such as motor vehicles and construction.

The employment situation for scientists and engineers is a reflection of how firms are scaling back to temporarily increase production:

Over the past year, U.S. employment of scientists and engineers—the people who create the next generation of products and make the U.S. more competitive over the long term—has fallen by 6.3%, according to a BusinessWeek tabulation of unpublished data. Yet overall employment has fallen only 4.1%. “There are really bright people who are struggling to find a job,” says Josh Albert, managing director at Klein Hersh International, an executive search firm for life scientists.

As I have noted before, small businesses and startups are key for propelling us out of this recession; however, the declining investments in knowledge and technology are not a good sign. See what Mandel has to say about the state of Venture Capital, which accounts for a large portion of R&D and startup investments:

One clear-cut sign that GDP growth is being overestimated: the sharp drop in venture capital investment, which goes directly to new businesses. VCs invested about $12 billion in the first three quarters of 2009, barely half the $22 billion plunked down during the first three quarters of 2008. Some of this shortfall would have been spent on computers and other physical equipment, which would have been picked up in GDP. But most of the drop in VC money would have gone to pay for scientists, engineers, and new product development—all valuable intangible investments that show up nowhere in the published stats.

And the effects on worker-training:

R&D isn’t the only type of intangible investment that seems to be declining. U.S. companies spend an enormous amount on worker training—$134 billion worldwide—but they have been cutting back. The drop started in 2008, when employers reduced their per-worker “learning expenditures” by 3.8%, according to the American Society for Training & Development. No data are available for 2009, but “from anecdotal evidence, obviously there’s a lot of cutback,” says Pat Galagan, executive editor of publications.
Ideally, a big burst of training would occur during a period of creative destruction such as this so that people can acquire the skills needed for the jobs of the future. The problem is how to pay for that training, since unemployed people don’t dare spend money on long-term training when they’re worried about short-term survival.

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