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January 18, 2005
Underestimating savings
While the account profession continues to resist counting research and training as an investment, there is some slight movement at the level of macroeconomic statistics. Recently, the Bureau of Economic Analysis (BEA) and the National Science Foundation (NSF) announced a new project to look at the issue. The project would create a "satellite account" for the R&D portion of the GDP numbers -- including looking at the issue of treating R&D as an investment (i.e. capitalizing the cost over a number of years, similar to what is already done with plant and equipment, rather than expensing it). According to research by BEA economists, our current treatment of R&D as an expense underestimates our national rate of savings by approximately 2 percentage points.
As Michael Mandel points out in a recent column in Business Week, this underestimation distorts our policy debates and focuses attention on the wrong priorities:
The coming debates over tax reform and private accounts for Social Security are going to be framed in terms of the savings rate as well. All the proposals for overhauling the tax system are geared toward putting more of the weight of taxation on consumption, and less on savings and investment. And many supporters of Social Security privatization claim that the current system lowers savings, because Americans rely on the government to fund their retirements rather than putting money away themselves.
In the end, what will propel growth is human capital and innovation. It's the hidden savings rate that deserves the attention, not the official one.
This mirrors an argument that Baruch Lev has repeatedly made about the expensing of corporate R&D. It has always surprised me that the high-tech community has focused exclusively on the issue of stock opinion and completely ignored the issue of capitalizing of R&D. Part of the problem has been accountants' concern over the validity of the procedure. The movement by the economists in charge of macroeconomic statistics toward capitalization of R&D in the national accounts may give a new push to the business accounting issues. After all, these folks are hardly a radical bunch. And if they say this is the right thing to do for the national accounts, it is going to be harder for people to say it can't be done at the firm level.
Posted by Ken Jarboe at January 18, 2005 8:46 AM
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