What Are America's Intangible Exports?

Brad Setser continues to think about "dark matter" and related issues:

RGE - Mandel v. Setser. Round two. More on intangible exports and dark matter : [Michael] Mandel makes two points in response to my argument. Both are worth a bit of further discussion. First, he challenges the conventional wisdom that the United States has taken out external debt to finance a surge in consumption... relative to income and a surge in investment in residential real estate.... [He says] we in the US are borrowing from China to invest in ourselves. We are borrowing to invest in our human capital.... Mandel thinks pessimists are wrong on a second count as well.... We are investing in assets that generate external revenues - revenue that can be used to pay the US import bill once we stop exporting so much debt.... No worries, according to Mandel. Starbucks China may pay rent to the Chinese communist party (and its well-connected friends), and employ Chinese labor to operate Italian expresso machines. But the (predominantly) American owners get most of the profits, and those future profits in China can pay for lots of low-end electronics assembly....

Is Mandel right? Are we in the US taking on external debt to ramp up our investment in ourselves... intangible assets - human capital, management training, R&D, brands - that will generate enough dark matter and intangible exports to allow the US pay for lots of imported Asian assembly?.... Mandel thinks the worry warts (i.e. the gloom and doom caucus, trade deficit division) pay too much attention to the United States' lack of "tangible" exports.... [M]anagerial genius ekes out higher returns on US investment abroad than foreigners get on their investment in the US....

Should our image of the US economy shift from a home equity line financed by the Chinese central bank -- OK, really, the Chinese central bank, the Saudi monetary authority, the Russian central bank, the Abu Dhabi investment authority and a few less visible central banks in the emerging world -- to a college loan and corporate bond issue to finance US firms R and D?... Mandel wants to compare the US today with the US in the 1950s, and argue that since the 1950s, investment in intangibles is way up, even if investment in tangibles is way down.... My baseline world is one where the US current account deficit expanded during the US investment boom (and Asian bust) of 98-00, but then comes down.... Redefining a lot of spending as investment in intangibles doesn't change the balance between corporate savings and investment unless firms are investing a lot in intangibles than at the peak of the .com bubble. That's unlikely....

What of Mandel's second argument - one that parallels the argument of Hausmann and Sturzenegger. Will US investment in new intangible assets (the Starbucks brand, The Ipod's software, design and brand, and so on) allow the US to pay the bill for all its tangible imports?... There is no doubt that the US does better exporting intangibles than exporting tangibles. But that is a low bar for a country that imports twice as many tangible goods as it exports. The only question is does it all add up.... A point of clarification. The export of "intangibles" can come from foreign direct investment. Starbucks had the genius to marry Italian café culture with American drive-through (and walk-through) habits. The profit margins are higher if you take your tall skinny latte to go. In Mandel's vision, the profits from exporting the Starbucks experience -- the return on Starbucks investment in China -- will pay the US import bill. Coffee is a commodity. As is the labor required to make a tall skinny latte. Starbucks is an experience.... What matters... is the net external revenue.... The profits on Starbucks Beijing. The royalties on Microsoft's software.... Boeing's external sales.... The question is... whether [the US] can export enough intangibles to pay for all the tangible goods that enter US ports every month.... Mandel's argument is that the US right now is investing in ways that will generate future external revenues....

Why am I skeptical. Fist, the US will need to sell an awful lot of intangibles to make up for the exceptionally large gap between its (large) tangible imports and (small) tangible exports.... Second.... Third, I am not convinced that the US economy is gearing up to produce "intangible" goods that can readily be exported -- rather than just shifting into the production of domestic intangibles.... I don't see US firms doing a wonderful job building up the kind of intangible assets that easily translate into future exports. Like Calculated Risk, I see a lot of investment in housing, and lots of people training to be real estate brokers.

Fourth, I suspect that a lot of what Hausmann and Sturzenegger call dark matter - or what Mandel would call the gains from exporting "intangible" US expertise at financial and brand management - will turn out to be the product of exporting the Federal Reserves super-low US interest rates. I would be the first to concede the world has been -- and still is -- wiling to loan the US money at very generous terms. My big concern is that those terms are too generous to last....

Let me conclude by noting that in 2006, the US will export about one trillion less - counting both US exports of tangible goods and intangible services, including the service of financial intermediation - than it imports. It will - if all goes well - maybe borrow $1.2 trillion from the rest of the world. About $900 billion of that will go to pay for US impost of goods and services, and about $70 billion will go to pay interest on past US imports of goods and services (US debt).... About $200 billion will be used to finance US foreign direct investment abroad and US portfolio equity investment. Is there any plausible way that the $200 billion investment will generate sufficient investment income to pay for the interest on the $1 trillion the US takes on, let alone generate enough investment income in the future to let the US pay for its ongoing imports of tangible goods out of the returns on its past investment?

Try doing the math. It doesn't work.