Obama’s get it – the importance of the arts

About a year and a half ago, I praised then-Presidential candidate Mike Huckabee for making the case that arts and music instruction was just as important for creativity and economic competitiveness as math and science. While I did not support his candidacy, I thought he was on the right track on this one.
Now comes a comment regarding my candidate in that race, who, by the way, won. First Lady Michelle Obama was in New York yesterday to promote the arts. According to today’s New York Times, she made the following remark:

“My husband and I believe strongly that arts education is essential for building innovative thinkers who will be our nation’s leaders of tomorrow,” said Mrs. Obama, who introduced a performance by a multiracial cast of young dancers.

For me, that emphasis on the link between innovation/creativity and the arts is one of the most important – and most overlooked – factors. Yes, art for art’s sake is good. Arts help define what it means to be human — and raise the level of our collective humanity.
But there is also a hard nosed economic bottom line to the arts. In most cases, arts advocates try to make this case in terms of the economic contribution of the arts. The arts are big business – as study after study have shown. As a report from the National Governors Association (NGA) Arts & the Economy: Using Arts and Culture to Stimulate State Economic Development explains:

Arts and culture-related industries, also known as “creative industries,” provide direct economic benefits to states and communities: They create jobs, attract investments, generate tax revenues, and stimulate local economies through tourism and consumer purchases.

But that is an incomplete case. As the very next sentence in that NGA report states:

These industries also provide an array of other benefits, such as infusing other industries with creative insight for their products and services and preparing workers to participate in the contemporary workforce.

Just as math is a foundational skill, so are the arts. As Huckabee was quoted as saying in my earlier posting, “If you don’t stimulate both sides of a human’s brain, you’re simply generating half the capacity.”
Last November, the British Arts and Humanities Research Council and their National Endowment for Science, Technology and the Arts (NESTA) put out a report on Arts and Humanities Research and Innovation. That report took a unique (and somewhat radical) view of innovation:

Traditional understandings of innovation emphasise the importance of science and technology research. In contrast, this paper investigates the role that arts and humanities research plays in the innovation system.

Just as research is the keystone to science and technology, so should it be for arts and humanities. We often label this activity “scholarship” rather than “research.” Yet, as the NESTA report points out, it should be viewed in the same light:

As shown in this paper, the arts and humanities make vital contributions to the innovation system, even though some arts and humanities researchers may not perceive themselves as part of this system, and may resent attempts to assess the relevance of their work in this way.
. . .
Arts and humanities researchers have often taken a robustly independent line in this area, and there is generally less of a tradition of societal problem-orientation than found in other disciplines. Yet we have seen how the arts and humanities already offer new and innovative approaches that can have profound effects on society. The arts and humanities have the critical and analytical capacity to challenge assumptions
and ways of working, while providing a sense of the historical context, traditions and cultural setting in which society and the economy function.

This is a line of think we need to pursue in this country as well. Maybe the First Lady’s comments will help lead us in that direction.

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BEA budget includes innovation measures

The Administration’s FY 2010 budget proposal includes funding for work on including innovation data in the GDP. For more on this see the Athena Alliance report Frameworks for Measuring Innovation: Initial Approaches, the STPI background paper Measuring Innovation and Intangibles: A Business Perspective and the BEA article “Toward Better Measurement of Innovation and Intangibles.”
From the BEA’s Congressional Justification briefing:

GDP Innovation Account
Background: All countries acknowledge that business investment in tangible assets as a major contributor to economic activity. In the U.S., they are thought by experts to be fully equal to investment in intangible assets. No country has yet included a comprehensive estimate of business investment in intangible assets in the GDP, yet such investments are increasingly the drivers of economic growth. BEA will expand its 2009 R&D initiative with this broader innovation account, resulting from the Secretary’s Advisory Committee on Measuring Innovation in the 21st Century. Building on its work with the National Science Foundation (NSF) measuring R&D, BEA will develop estimates of investments in innovative activities. Working with NSF, BEA produced the first U.S. R&D account in 2006 and is prepared to develop that further with this initiative.
As BEA confronts the challenges of measuring a dynamic and ever-changing economy, there are gaps in the economic statistics BEA produces that must be filled. To more effectively and comprehensively measure the 21st century economy, BEA must build on its development of the R&D satellite account and significantly improve its measures of broader innovative economic activities. Investments in innovation, or knowledge-based activities, are thought to be important engines of economic growth. Yet very little is understood about their role in the economy. Much of the growth that the U.S. economy has experienced in the last ten years is not captured by traditional economic measures–many economists believe that as much as 40 percent of that unexplained growth can be accounted for by knowledge-based activities. Understanding the role of these activities in the economy is critical to accurately measuring and encouraging a strong U.S. economy.
Proposal: Early results from BEA’s work on R&D suggest that investments in R&D account for roughly 1/5 of the contribution of knowledge-based activities to economic growth. This new initiative will expand on the R&D statistics BEA has been developing, and will fully research, identify, and quantify the other components of innovation and their contribution to growth. BEA will develop an innovation account that estimates investments in human capital, the design and development of new goods and services, and improved business processes. BEA proposes the following specific products:

• Work with NSF to develop a framework and prototype estimates of investments in innovative activities by the end of FY 2010. BEA will work with the NSF to develop measures of innovation activities that reach beyond the scientific R&D statistics that are currently provided by NSF and have been incorporated into BEA’s R&D satellite account. These innovative activities–including important intangibles like new product development and firm-specific training–are thought to be important contributors to economic growth.
• Work with NSF and Census to develop detailed estimates of innovation-related intermediate inputs in FY 2011. In understanding the contributions of R&D to economic growth, it is important to not only measure the uses of R&D by industry, but to understand the inputs into R&D. These inputs, ranging from IT equipment to scientists and engineers, are critical to understanding the sources of R&D’s own contributions to growth and in designing public policies to encourage innovation and growth.
• Work with BLS to develop aggregate and industry-level measures of the contributions of investments in innovation total factor productivity. BEA’s work on R&D has demonstrated that there are important differences across industries with respect to investment in R&D and the contribution of those investments to overall total factor productivity. Because these differences are also likely to exist for the broader classes of innovative activity, BEA will develop industry-level estimates of innovative investments that will facilitate measurement of individual industries’ contributions to economic growth.
• Work with NSF and Census to publish innovation statistics on firm and establishment-level data. BEA will publish innovation statistics based on data on firms as well as establishments to provide more comprehensive estimates of employment in innovation occupations.

This work is part of a $4.5 million new Navigating the 21st Century Economy statistically initiative that also includes better data on energy usage and retirement incomes.

Intangible tax proposal – further thoughts

Having had a few days to ruminate, I have some further thoughts on the President’s tax proposal on transfer of intangible assets (see earlier posting). Looking over the proposals in more detail, it became clear that it contain three separate proposals: an expansion of the definition of intangibles; dealing with the issue of transfer of multiple intangible properties; and, a valuation issue.
Let me deal with them in reverse order. The last proposal calls for the valuation of the intangible “at its highest and best use, as it would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.” In other words, a market transaction. Generally, there are three accepted methods of valuation: the market approach, the cost approach, and the income approach. Under current law, the income approach is used — specifically Section 367(d)(2)(A) of the Internal Revenue Code requires the treating the transaction as “receiving amounts which reasonably reflect the amounts which would have been received annually in the form of such payments over the useful life of such property.”
If this provision becomes law, it will be interesting to see how it is implemented. It will have to be based on the use of comparable sales – which will make it interesting to define the comps.
On this, let me propose a slightly different idea. In Medieval Denmark, the King levied tolls on ships passing through the Øresund (the channel connecting the Baltic and the North Sea between the modern border of Denmark and Sweden). Tolls were collected at Elsinore (better known in literature as Hamlet’s castle). The method of valuation was a simple self-declaration. But the King reserved the right to purchase any and all of the cargo at the stated valuation. Such methods of market checks on self-valuation are rare, but not unheard of. (For a discussion of this method of self-valuation see Sound taxation? On the use of self-declared value). Such a method may not be practical when assessing the valuation of intangible for international transfer pricing tax purposes — but it is worth further exploration.
The second proposal goes to the power of the IRS Commissioner under Section 482 to place his/her own value on a transfer whenever “necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses.” The proposal would allow the Commissioner to value the intangible on an aggregate basis. This appears to go after the well-know issue that portfolios on intangibles are more valuable than the individual items taken separately. This issue is also tied to the market valuation issue — as the current rules of using income appear to require tying the income to each specific intangible.
The last proposal is the most interesting. It would expand the definition of intangibles include workforce in place, goodwill and going concern value. It is also, at least to me, attacking a very different issue than the other two. Those three intangibles are essentially “whole-enterprise” assets. They can not be split off from the enterprise. As such, they are generally not transferred from entity to another as individual components like a patent or a trademark could be.
Thus, the issue of international transfer pricing is different in this case. It is about transferring control of the enterprise to a foreign owner. This is a slightly different “loophole” the IRS has been going after. Beginning 2007, the IRS has defined workforce in place as an intangible asset for purposes of what is called Section 936 Exit Strategies (see Industry Director Directive on Section 936 Exit Strategies # 1 and Industry Director Directive on Section 936 Exit Strategies # 2). These are specific transactions having to do with the restructuring of companies who had gained tax credits for operating in Puerto Rico as those credits have been phased out. The classification of workforce in place as an intangible asset made such a transfer a taxable event. Not surprisingly, this is view as a very controversial move. (For more information see the KPMG write up The Transfer of Workforce in Place to a Foreign Corporation.) It appears that this latest proposal is an extension of that same principle — that all asset transfers should be subject to taxation — to all transactions.
As such, this may the politically most difficult – but the least directly tied to the issue of the transfer of intangibles to tax havens. We will see how the politics of the various proposals plays out.

Liar loans and bank assets

Benjamin Friedman recent piece in the New York Review of Books (The Failure of the Economy & the Economists) had this wonderful comment on “mark-to-myth”:

In the same effort, the Financial Accounting Standards Board–the independent organization designated by the SEC to set accounting standards–acting at the strong urging of Congress, recently changed its rules to allow banks more latitude to claim that assets on their balance sheets are worth more than what anyone is willing to pay for them. (Next time you apply for a loan, try mentioning FAS 157-4 and telling your banker that you should be allowed to calculate your net worth with your house priced not at what comparable houses are selling for now but at what you paid for it and what you hope you’ll get for it if you hold on to it for some years. The banker will laugh, even while the bank applies just such standards to its own balance sheet.)

Good point, since it was “mark-to-myth” with the original loans – aka “liar loans” – that caused the problem in the first place.

Airport landing slots and intangibles

Last year, I posted an item about a GAO ruling on FAA’s proposed “Congestion Management Rules” for New York City area airports. GAO ruled that the FAA had no legal authority to conduct an auction of airport landing slot. FAA argued that these landing slots were intangible property and therefore fell under their existing statutory authority to dispose of property. GAO disagreed, saying that the context of that statutory authority make clear that landing slots are not “property” under that authority. The GAO ruling also cites cases where courts have ruled that license held by the government do not create a property right. GAO also raised concerns that the auctions were a backdoor funding mechanism not authorized by statute
Notwithstanding the GAO opinion, the Bush Administration published the final rules.
Today, the FAA has published two Federal Register notices (for JFK and Newark and for LaGuardia) of a proposed rescission of the rules. As those notices state, “The rulemaking was highly controversial.” In fact, last December the United States Court of Appeals for the District of Columbia Circuit issued an order staying the rule. And the Omnibus Appropriations Act, 2009 contained a provision denying any funds to implement the auctions. So today’s action is basically a recognition by the FAA of the inevitable.
Left unresolved, however, is issue of whether government licenses are property. Today’s Federal Register notices clear continue to assert that the FAA has the authority for these actions. The Appeals Court order simply recognized that the “Petitioners have satisfied the stringent standards required for a stay pending court review.”
This is an issue that will need to be clarified further as topic of government management of intangible assets is explored. The GAO ruling raises a number of red flags, including the value of existing government intangible assets. As they point out with the landing slots, “FAA’s argument that slots are property proves too much–it suggests that the agency has been improperly giving away potentially millions of dollars of federal property, for no compensation, since it created the slot system in 1968.”
That is a very good question indeed.

New twist to the patent wars

Here is a new development in the patent wars, from today’s New York Times — Cancer Patients Challenge the Patenting of a Gene:

Ms. [Genae] Girard took a genetic test to see if her genes also put her at increased risk for ovarian cancer, which might require the removal of her ovaries. The test came back positive, so she wanted a second opinion from another test. But there can be no second opinion. A decision by the government more than 10 years ago allowed a single company, Myriad Genetics, to own the patent on two genes that are closely associated with increased risk for breast cancer and ovarian cancer, and on the testing that measures that risk.
On Tuesday, Ms. Girard, 39, who lives in the Austin, Tex., area, filed a lawsuit against Myriad and the Patent Office, challenging the decision to grant a patent on a gene to Myriad and companies like it. She was joined by four other cancer patients, by professional organizations of pathologists with more than 100,000 members and by several individual pathologists and genetic researchers.
The lawsuit, believed to be the first of its kind, was organized by the American Civil Liberties Union and filed in federal court in New York. It blends patent law, medical science, breast cancer activism and an unusual civil liberties argument in ways that could make it a landmark case.

That last sentence may be an understatement. This looks like one of the most interesting patent cases ever. So stay tuned.
By the way, the Times story has a video link to a Today show segment on the issue.

Notes from the copyright wars

From Intellectual Property Watch – The World Is Going Flat(-Rate)

A landmark study by the Institute of European Media Law (EML) found that a levy on internet usage legalising non-commercial online exchanges of creative works conforms with German and European copyright law, even though it requires changes in both. The German and European factions of the Green Party who had commissioned the study will make the “culture flat-rate,” as the model is being called in Germany, an issue in their policies. The global debate on a new social contract between creatives and society is getting more pronounced by the day. Two models are emerging: a free-market approach based on private blanket licences and voluntary subscriptions, and a legal licence approach based on exceptions in copyright law and mandatory levies, that now has been proven legally feasible and appropriate by the EML study.

Over that the Wall Street Journal author and commentator Mark Helprin has a piece Copyright Critics Rationalize Theft:

But copyright, the rampart of the mythical city, is besieged by a widespread movement antagonistic to authorial right and the legitimacy of intellectual property. So-called public interest groups serve the new information super powers, the Standard Oils of our age, whose interests would be advanced if they did not have to bother with permissions and payments for what they call “content.” The Creative Commons organization, for example, is richly financed by Google, Microsoft, Yahoo, Mozilla, Sun, the Hewlett Foundation, and others of type.

And the Economist has started an on-line debate forum (Copyright and wrongs) to discuss the following motion: “This house believes that existing copyright laws do more harm than good.” Note that the debate closes tomorrow.
Let the debate continue!