Why The Economy is Doing Better Than You Think

Wonder why the US dollar manages to defy gravity with the twin deficits, the federal budget deficit and the merchandises trade deficit?

Maybe it’s because we aren’t counting our gross domestic product properly, according to staid Business Week.

Everyone knows the U.S. is well down the road to becoming a knowledge economy, one driven by ideas and innovation. What you may not realize is that the government’s decades-old system of number collection and crunching captures investments in equipment, buildings, and software, but for the most part misses the growing portion of GDP that is generating the cool, game-changing ideas. "As we’ve become a more knowledge-based economy," says University of Maryland economist Charles R. Hulten, "our statistics have not shifted to capture the effects."

The numbers used to generate GDP statistics were developed in the 1930s, and don’t really count many of today’s wealth building activities. For instance, your iPod reads “Designed by Apple in California Assembled in China.” So how do we count the value of the iPod?

Or look at Intel as it cranks up a fabrication plant in Israel. Intel doesn’t just build a new plant and hire a bunch of people.

To get its new plants running quickly, the chipmaker brings 800 or 900 employees from the new fab to spend a minimum of six months in Hillsboro, Ore., where Intel develops new production processes. By the time they return home, these people will have picked up not just the details of the process but also tribal knowledge -- the unwritten lore of how Intel works. With that info in their heads, they’re equipped to get the new factory up and running at high volume within a quarter, rather than taking a year or more. In economics speak, this is a classic transfer of human capital. So why isn’t it called an export?

Imagine this sort of thing happening all over the economy. Now you begin to understand why people are flocking to the United States from all over the world, why house prices are out of sight, and why investment money is pouring into US securities markets.

And don’t forget lowly Wal-Mart. It’s workers are the most productive retail workers in the world.

Go on, read the whole thing.