A Massive Writedown of U.S. Knowledge Capital

In his column this morning, Paul Krugman gets it half-right:

America’s economy isn’t a stalled car, nor is it an invalid who will soon return to health if he gets a bit more rest. Our problems are longer-term than either metaphor implies….The idea that the economic engine is going to catch or the patient rise from his sickbed any day now encourages policy makers to settle for sloppy, short-term measures when the economy really needs well-designed, sustained support.

So far, so good.  But then Krugman goes off the rails:

The root of our current troubles lies in the debt American families ran up during the Bush-era housing bubble…What we’ve been dealing with ever since is a painful process of “deleveraging”: highly indebted Americans not only can’t spend the way they used to, they’re having to pay down the debts they ran up in the bubble years.

No, no, no. The build-up of debt was a symptom of  the real underlying problem:  A massive write-down of U.S. knowledge capital over the past 10-15 years, combined with anti-innovation policies on the part of the government.

U.S. prosperity has always depended far more on our accumulated store of knowledge capital than on our physical investments. Knowledge capital includes accumulated education, research and development, and business-knowhow–all the intangibles that underly a modern economy.

The value of knowledge capital depends, in part, on how rare it is. The more companies or countries that possess the same knowledge (say, about how to make a commercial airliner), the less valuable that knowledge is.  This is just Economics 101, applied to intangibles.

Over the past 10-15 years, the strengthening of information flows into developing countries meant that knowledge capital was being distributed much more quickly around the world.  As a result, the normal process of knowledge capital depreciation greatly accelerated in the U.S. and Europe–beneath the radar screen, because no statistical agency constructs a set of knowledge capital accounts.

What we should have been doing is boosting our investment in knowledge capital creation–education, R&D, business innovation.   Instead, we borrowed to support consumption.  Instead, we got Republican and Democratics administrations that  were more concerned with punishing innovative industries and ladling on additional security and economic regulations.

We still have some major knowledge capital advantages–in communications, in the biosciences, in the rapidly growing area of digital education–that we can build on for the future.   But this is the moment where we should be focusing on rebuilding our knowledge capital base rather than supporting debt-led consumption.

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