Everyone from Main Street to Wall Street watches the inflation numbers. If the numbers are going up, we assume the Federal Reserve will take action. With so much riding on the veracity of the numbers, it was vital that a full review of their accuracy be instituted.
Accordingly, a Congressional Advisory Commission on the consumer price index (CPI), chaired by Michael Boskin, was formed. After study, the commission reported that the CPI overstated the change in the cost of living by about 1.1 percentage points per year. This number seems small, but compounded over time, the effects are enormous. For example, instead of falling 13 percent, real hourly wages actually rose by 13 percent from 1973 to 1995.
With about one-third of federal budget overlays indexed to the cost of living, as are income-tax brackets, the distortion between the numbers reported and the real world is huge.
Many analysts also look at a nation's savings rate to predict how its economy will unfold. For Example, a low savings rate may foretell a scarcity of capital that could cramp the growth of the economy, whereas a larger rate portends ample money capital for expansion.
Many commentators have deplored the fact that Americans don't save enough money and that our savings rate is said to be low compared with that of other nations. And although the official numbers seem to confirm this story, it is the way these numbers are put together that assures this result.
Press reports on these numbers often run in juxtaposition to stories reporting that the inflow of money to mutual funds has just hit an all-time high, that the purchase of new homes (many people's principal asset) continues apace, that IRAs and 401Ks are bulging with cash, and that many corporate pension funds are overfunded. All of these events, plus the purchase of consumer durables, represent savings by Americans and constitute a direct disconnect from the official savings number that is derived by computing savings as the proportion of disposable income individuals set aside.
Measurement in the private sector is hardly any better. The industrial age that spawned our accounting rules had hard assets-things that you can touch and count, such as buildings, factories, and inventory. In the new economy, intellectual capital is far more important that money capital, but so far it goes mostly uncounted in the balance sheets of our corporations because it is largely ignored by the writers of accounting standards. Examples abound, but to cite just one, the value of patents is nowhere to be seen on our corporate balance sheets. This is not a trivial number.
The American accounting profession has now produced 5,000 pages of accounting rules, but Robert Elliott, a partner of KPMG, pointed out, "At best, today's financial statements are an obsolete product. Relatively unchanged over the last 100 years, financial statements were designed to describe industrial-era assets: inventory, machinery, buildings, and land. Post-industrial enterprises run on intangible assets, capacity for innovation, and human resources... Yet non of these appear on the balance sheet."
Today there is a debate among the various accounting authorities of the world about how to handle "goodwill." One school of thought holds that it should be written off against the earnings, which is another way of saying intellectual capital or the worth of a brand name like Citibank or Coca-Cola has no value. On the other side of the debate is the marketplace, and the verdict of the market is loud and clear. Microsoft, for example, which has trivial fixed assets, has a cap exceeding that of the three big automobile companies put together. This being slow, it becomes increasingly hard to argue that intellectual capital has no value.
The old guard will say that this view is just a way of measuring hot air and not real assets, even though many of the so-called real assets are rusted hulks in the scrap heaps of history while the films based on intellectual capital, such as AOL, are propelling companies into the new economy.
As bad data produces bad results, both the public and the private sectors are in need of new metrics for a new economy. So far, there has been little progress in this direction, as there is a huge vested interest in the familiar and the known. But reality is beginning to sink in, and there are scattered efforts to come to grips with the need for new metrics.
There is no doubt that an essential factor in the Industrial Revolution was the use of accounting to permit the management of huge corporations, but the old rules measure yesterday and usually only a point in time.
Today, investors and credit grantors want, need and can get an almost constant stream of useful information. Audited financial statements have their place in the stream of data, but the current accounting rules now prevent a company from publishing a cash-flow-per-share number, data that many managers believe is vital in running a business. As Elliot observes, "Financial statements are assembly-line Model T's when it is needed are instruments designed to client-specific management criteria and performance indicators, such as measures of customer satisfaction, product and process quality, innovation, new technology skills, and global business know-how."
The pace of change is so swift that no bureaucracy, public or private, can keep up. Only now are efforts in both public and private sectors beginning to attack the problem of metrics to measure the economy.
Walter B. Wriston was a banker and former chairman of Citicorp. An expert on commercial banking, Mr. Wriston wrote and spoke widely on topics relating to finance, banking, technology, and international business. He was a Director of ICOS Corporation, Cygnus, Inc. and Vion Pharmaceuticals, Inc. He was Chairman of President Reagan's Economic Policy Advisory Board, a member and former Chairman of The Business Council, and a former co-Chairman and Policy committee member of the Business Roundtable. He was a Trustee of the Manhattan Institute for Policy Research, a Life Governor of New York Presbyterian Hospital and a Fellow of the American Academy of Arts and Sciences.
For more about the foundation for this article, visit: http://www.walterwriston.com
Article Source: http://EzineArticles.com/?expert=Walter_Wriston
สมัครสมาชิก:
ส่งความคิดเห็น (Atom)
ไม่มีความคิดเห็น:
แสดงความคิดเห็น