A Balance Sheet for Economic Capital
Earlier chapters have sketched balance sheet principles for tracking environmental capital and human capital. A later chapter will do the same for civic capital. In this chapter, I propose a set of diagnostic perspectives for capturing an all-sided view of the nation’s economic capital.
One should begin with a pause. What is it that we would want to embrace when we employ the term “America’s economic capital”? Is it just the sum total of our productive assets, the nation’s factories and machines and inventories and stores and office buildings, on the one hand, and on the other, all the financial assets that mirror the value of the tangible assets? Or is it something more? This isn’t really self-evident, is it? We will have some work to do, wrestling down our ideas and turning them into concepts for guiding the design of an Economic Capital Balance Sheet.
“Resources,” we will say. “Don’t we want to know something about America’s resources, in the sense of minerals and forests and farmlands and topsoil and annual stream flows, and so on?”
“What about land assets?” we will wonder. “Shouldn’t an economic capital balance sheet somehow capture real estate values, and land values, and habitat acreage?” “Don’t we want a clear view of how the nation’s acreage is divided into various categories, and don’t we want to know something about the condition of each of those categories, today and over time?”
“Tangible assets,” we will muse. “Surely we want to know the condition of America’s tangible assets, from the condition of bridges and highways and water mains to the value of America’s factories and telecom networks.”
“Yes,” we will think, “tangible assets are important, but, then, so is human capital. Without talented people, how is the nation to prosper?” We will want to know something of our nation’s talents, key talent set by key talent set.
“Ah,” we will say, “we will also have to measure our nation’s capacity to place economic capital in the hands of all its people. Do Americans up and down the entire workforce receive reasonable shares of the nation’s fruit?”
“It won’t be enough to know how the nation’s earnings are distributed among its people,” we will think to ourselves. “We will also want to know how well each group does in accumulating savings of its own.”
“Financial savings, though, tell only part of the story. What about the ownership of the nation’s assets?”
And these thoughts will lead us to a few more.
“How will we know whether America contains the seeds of tomorrow’s leading industries?”
“How will we know how much of America’s GDP is based on sustainable technology and green business practices?”
“How will we know if America has gone too far into the red?”
There is more to measuring America’s economic well being than just the monthly GDP report from the Department of Commerce and the daily stock market reports from Wall Street. If we are to know America’s economic capital well and truly, we will want an online document that’s responsive to a broad range of descriptive and diagnostic interests. Let’s look at each of these concerns just a little more closely.
Resource Capital Visibility
Economic capital is physical as well as financial. Our capital begins as raw materials: forests, crops, topsoil, water, minerals, marine life, oil, coal, solar energy, geothermal energy, and so on. While some are captured on the Balance Sheet for Environmental Capital, they have an economic personality as well.
Resource capital falls into two broad categories – renewable and non-renewable. Coal is a none-renewable resource. Use it once and it’s gone forever. Water can be a renewable resource if the usage rate is small enough to allow for full replenishment. Pump water out of underground aquifers faster than the aquifer can be recharged, though, and we will have to count it as a finite resource that’s being liquidated. On the other hand, resources captured from the nation’s many waste streams can legitimately be classified as renewable.
A wise nation insists on having a clear-eyed understanding of its physical resources. It quantifies, resource by resource, its current and anticipated stocks. From a balance sheet perspective, its sustainable resources should be counted as permanent assets. Its wasting resources are temporary.
Land, Real Estate, and Habitat Visibility
Real estate is a special case. No human society can exist without occupying land and turning it into real estate. At the same time, if habitat is destroyed, entire ecosystems can be sent to their extinction.
So we want a way of capturing both sides of the picture. Does our real estate acquire its value in a sustainable context of habitat protection, or in a non-sustainable context of ongoing habitat destruction? And within that larger picture, we also want a nuanced picture of real estate values and how they’re evolving. Is the value of real estate tied to something stable, so that its current value can be trusted? Or is it tied to something unstable, with its long-run value at significant risk?
Tangible Economic Capital
The heart of any economy is its stock of tangible capital. It is owned by business, government, non-profits, and households. But it is not enough to capture simply the financial totals. A true nuts and bolts balance sheet reporting system also captures the physical quantities.
We can begin with the obvious tally of things: lane miles of highways, size and quantities of dams and bridges, square footage and quality of buildings, equipment variety, quantities and age of inventory. Think, also, of utilization rates. Equipment is given meaning by knowing the intensity with which it is used. A wise nation understands not only the financial value of its tangible capital, but knows as well their physical condition and the remaining years of service they can give.
Green Technology/Dirty Technology
A society whose core principles lean toward irresponsibility and corruption won’t mind if its technologies are damaging to the environment and incompatible with lasting sustainability.
A society that insists on integrity as its organizing norm will want to have its needs met with technologies that are non-polluting and Earth-friendly.
The trend toward green technology is already well under way, and it is actively generating higher business standards in many areas. A competitive American economy goes green in order to put itself ahead of the curve; an American economy that ignores sustainability is well on its way to being uncompetitive.
We will want to know, as a measure of America’s long run economic promise, how much of its technology base would still be classified as environmentally damaging, and how much would be classified as environmentally responsible. And we will want to know, as well, what portion of the nation’s GDP is generated by dirty technologies and what portion by clean technologies.
“The assets walk out the door every night” is a familiar way of honoring the economic value of people themselves. As our economy has moved into the information and services age, its human talent more and more becomes the marker of its wealth.
“Talent,” though, misleads us, because as a singular noun it conveys too much interchangeability. What we need to understand is the texture of America’s human talents, with an emphasis on talents in the plural. In which industries do we have the world’s most talented people? In which industries are we competitive but not dominant? Where are we still in the game, but trailing? And where have we been driven out of the game altogether? To know the caliber of our talent, we need to track our human talent category by category and rate it on scales established by international competition.
Flows of Earnings
An Economic Capital Balance Sheet ought not leave us in the dark about income distribution. Such patterns tell us much about the distribution of labor market bargaining power. They illuminate a society’s sense of fairness. And within that context, they clarify the market value and earnings potential of various occupations.
Wait a minute, one might say. Isn’t the issue under discussion the creation of a balance sheet?
Yes. But there are two reasons to take an interest in datasets that illuminate the nation’s income distribution patterns.
Income distribution profiles tell us about purchasing power – how much there is, and how it’s distributed. Purchasing power is not only an income flow, it represents capital on the move. A middle class with rising purchasing power is a source of growth; a middle class with stagnant purchasing power is a symptom of decline.
Another window into our economy are the savings and debt profiles for business and the public. How much household savings do Americans have? How much household debt? In total, and stratified by income levels? How have the savings and indebtedness trends changed over time?
We will ask the same of business. What kind of savings and borrowing profiles do we see for American business? We will ask the same of nonprofits.
And, of course, we will ask the same question about governments at all level. Savings pools – small or large? Trust funds – small or large? Government indebtedness – how much? What kind of trends?
A related window into the economy is the asset ownership profile. Start with business equity. All business assets have end owners – households, in most cases, but also trusts and nonprofits. Those distinctions can be used to characterize the ownership patterns for business assets.
This becomes more challenging when one shifts to the ownership of financial assets. If Financial Company A owns $10 million dollars worth of Operating Company R, and Financial Company B owns $10 million dollars worth of Financial Company A, should we add together A’s $10 million and B’s $10 million and report total financial assets of $20 million? Not a good idea, right? That’s called pyramiding, and it disguises the underlying economic. Weeding out double counting is an easy standard to set, but not an easy standard to carry out.
New Industry Potential/Tomorrow’s Growth Assets
Tomorrow’s economic wealth is disproportionately a function of today’s leading edge industries and businesses. Any time a key American industry demonstrates superior performance and productivity in world markets, it attracts foreign customers and protects/creates American jobs. What matters is whether this economy is capable of creating strong new business sectors at a strong the same pace as elsewhere.
Let’s give the balance sheet an Incubator Section. If our infant industries incubator is brimming, we will feel good. If our infant industries incubator is almost dry, we will be worried indeed.
Growth, Earnings, and Employment
After summing up the American economy on all the measures suggested above, we will also want to see the standard measures. GDP growth. Earnings growth for the American workforce. Employment levels and unemployment rates.
In each of these categories, we will see signs of strength and signs of weakness. Where we see strength, we see promise for our nation and our people. Where we see weakness, we see warnings of trouble.
And that’s what users will want to know. Are red flags showing? If so, where are they?
We should ask ourselves: What are the Top Ten Danger Metrics? That might not be enough. Maybe we gather the Top Twenty. The point is that a competent public needs to be on top of its danger signals in plenty of time to take action.
A Step Forward for Competence
Pull all these pieces together, and we will have at our disposal an invaluable profile of America’s economic capital. Do this balance sheet well, and we will pull back the curtain of our collective ignorance. As citizens, we will be smarter about the economy whose vitality is ultimately our responsibility. The better the Economic Capital Balance Sheet, the better our capacity for stewardship.
Steven Howard Johnson. 14.1, Version 2011-06-27.