Accounting for goodwill

Expenditures and investments

What is an expenditure and what is an investment in the future? It’s a hard question to answer in business, but it can be particularly vexing when the public purse is at stake. Politicians and the thoughtful citizenry are happy to deride expenditures, often under the populist rubric of “waste, fraud and abuse” (WFA). No doubt in any large enterprise, WFA exists. It’s the unavoidable agency cost of living in a complex society. The centralized economies I once studied were sometimes thought to be a way to avoid those problems. Turns out they produced vastly more WFA than our mostly free-market operations.

Accounting and finance rules provide at best a subjective answer as to the difference between a “bad” cost and a “good” investment. I had an opportunity to consider this conundrum while on a recent trip to Egypt. I found myself at the temple of Kom Ombo—age: 2,100 years—on the banks of the Nile River, where I encountered a sign stating that the US Agency for International Development (USAID) had financed a groundwater-lowering project to protect the monument from further deterioration. A quick web search informed me it cost $9 million and was completed in 2019.

As a country, we are currently faced with the immediate challenge of paring back our expenses without decimating our investments. But where does a project like Kom Ombo fall?

Soft power

The trouble arises, of course, when one encounters phenomena that yield no immediate gratification, no reliable cash flow, and yet somehow matter. Rarely is this uncertainty more evident than when the US government dispatched staff and funds to help preserve a pharaonic temple in Upper Egypt. Was this a simple cost or an investment in the future? While no one goes into temple drainage systems looking for a 15% internal rate of return, the USAID-funded groundwater lowering project at this ancient site may have offered a greater long-term return on investment—political, strategic, reputational—than many a Silicon Valley venture.

Beyond the temple’s actual preservation, that return took a simple form: Joseph Nye’s “soft power” of having “from the American people” prominently displayed on the grounds of an Egyptian national treasure. It’s a peculiar but instructive example of what one might call strategic noncommercial investment. And while it won't show up in the Congressional Budget Office’s calculations, it might just show up in the goodwill ledger of the Egyptian public.

Nye’s now-canonical notion of soft power—winning hearts and minds—has long made diplomats swoon and budget hawks groan. But if we follow the logic of a financial economist, the question becomes: can this soft power be modeled like any other asset? Does it have expected future benefits? Check. Discernible cash flows? Not directly—but let’s not forget that many corporate assets yield benefits only indirectly. Risk? Absolutely. Volatility? A low correlation with broader geopolitical turmoil makes it a great diversifier. In short, soft power can help secure trade deals, stall insurgencies, and keep military budgets from bursting. In helping Egypt preserve its temple, America is, in effect, financing a diplomatic dividend.

Time for a new accounting?

The dilemma for the financial economist is whether to treat such efforts as a form of charitable expense or an asset to be capitalized. In an era where trademarks and brand equity occupy pride of place on balance sheets, is it perhaps time to consider influence itself as a line item? By that logic, soft power might be the diplomatic cousin to corporate goodwill: an immaterial asset with very real influence.

If nations were corporations, soft power would be listed under intangible assets. It doesn’t generate revenue in the narrow sense, but it confers competitive advantage. It influences consumer (and ally) preferences, reduces customer acquisition costs (aka diplomacy), and increases resilience in the face of geopolitical shocks. This doesn’t mean all cultural aid is investment. Some projects are pure boondoggles. But where there is strategic foresight, multi-stakeholder benefit, and plausible economic spillover, yes, it qualifies.

One common argument against soft power spending is that it lacks accountability. But consider the alternative: letting political capital degrade because it’s not easily measured. Investment in reputation and in shared aspiration are not vague notions. They are the very underpinnings of global commerce. You don’t sign treaties with countries you mistrust. You don’t sell them semiconductors either. In this light, the USAID temple project was less about Egypt’s past than about America’s future.

The Kom Ombo temples of the 21^st century

Capital misallocation in investment can and does happen. Even if it’s not called WFA, the money is lost all the same. There are plenty of instances, often associated with new technology rollouts, such as the railroads in the 19^th century (most went bust), early automobile makers (ditto) and all that fiber put in the ground in the 1990s (much of which remained dark for a long time).

We are currently in the “all things AI/data-center” investment era, involving hundreds upon hundreds of billions of dollars. That may all prove to be sensible investment, but history suggests there could be some excesses. Within just a few years, the write-offs will begin. Ten billion here, twenty billion there. Soon it will be real money. At that point, some of the investment will have become, in effect, just a short-term expense. If we can happily write “off” tens of billions of cash spending on technology as inevitable capital waste, surely we can write “on” a small fraction of that amount as soft-power expenditure?