GDP as if R&D was an investment

In my earlier posting on GDP, I noted that BEA is working on including intangibles in the data (see also the BEA article “Toward Better Measurement of Innovation and Intangibles“). As part of that effort, BEA has a GDP “satellite account” that treats R&D as an investment rather than an expense. This morning, BEA released its latest calculations for GDP in the past few decades as if R&D was counted as an investment (see previous posting for their earlier calculations):

Gross Domestic Product (GDP) would have been, on average, 2.7 percent, or $301.5 billion higher between 1998 and 2007 if research and development (R&D) spending was treated as investment in the U.S. national income and product accounts, the Bureau of Economic Analysis (BEA) announced today. The 2010 R&D Satellite Account updates and extends BEA’s estimates of the effect of R&D on economic growth through 2007, and now includes coverage of the most recent business cycle expansion.
R&D accounted for about 6.3 percent of average annual growth in real GDP–that is, GDP adjusted for inflation–between 1998 and 2007, and 6.6 percent between 2002 and 2007. To put the contribution of R&D in perspective, the business sector’s investment in commercial and other types of structures accounted for just over 1.3 percent of average annual growth in real GDP between 1998 and 2007.

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The meaning of Bilski

Comments and analysis are coming in on the Supreme Court ruling in Bilski. Generally folks agree that the ruling was less expansive than many expected. The Court did not rule that business processes could not be patented, even though it threw out the specific Bilski business process patent. The majority opinion seemed punt the issue back to the Court of Appeals for the Federal Circuit — saying that the “machine or transformation” test was not the only criteria but also saying that the law does not necessarily support broad patentability and that the Appeals judges are free to come up with “other limiting criteria.”
The ruling was an outcome of a strong internal debate. Four Justices signed on to a concurring opinion that argued for a broader ruling against business process patents. As the New York Times notes “Court analysts suggested that Justice Stevens wrote his 47-page opinion in anticipation of its serving as the majority view, but lost to those who favored a narrower result.”
Since the result was not the bright line guidance hoped for, it is likely that the issue of business process patents will continue to be fought on a case by case basis.
For more comments, see the IAM Blog posting — – Mixed reactions to the Supreme Court’s Bilski decision and Steve Lohr’s NTY column Bilski Ruling: The Patent Wars Untouched

SOX case decision — also finally

It was a busy morning for SCOTUS. In addition to the Bilski decision (see previous posting), the Court ruled on a number of other cases. One of those was the constitutionality of Sarbanes-Oxley. A lawsuit filed about two years ago (see earlier posting) challenged whether the way the Public Company Accounting Oversight Board was created was constitutional. The specifics of the issue was whether member of the Board, who are appointed by the SEC, have tenure or can be removed at will. Opponents of the law hoped to use this issue to have the law completely thrown out. However, the Court ruled that only the tenure part of the Board is unconstitutional and “the unconstitutional tenure provisions are severable from the remainder of the statute.” In other words, all the rest of the law remains valid.
The ruling, as the Wall Street Journal notes, “makes it unlikely that Congress will re-examine the full Sarbanes-Oxley legislation, as some opponents of the law had hoped. That reduces uncertainty for investors already grappling with looming changes in the financial-rules overhaul making its way through Congress.”
As I said before, gutting SOX would have a major negative effect on any attempt to create a financial market in intangibles. It would be a signal that the US is not serious in protecting investors from misleading claims and shaky accounting — and therefore investments in new assets such as intangible are extraordinarily risky. So, from my perspective, we dodged a bullet.
However, the case may have other ramifications. By ruling that the members of the Board can be removed at will by the SEC, the Court may have ruled that Commissioners and Directors all such “independent” agencies may not be independent but can be removed at will by the appointing authority, such as the President. That could make life for the regulatory agencies in Washington very interesting. And uncertain.
UPDATE:
Here is the comment on the case from the Economist’s Schumpeter columnist:

But it is probably a good verdict from business’s point of view. Companies have spent millions on SOX compliance, and had just about got used to the legislation. Moreover, there is no guarantee that a broad reconsideration of SOX, in the current business climate, would produce better legislation. Far from it.

I couldn’t agree more — although maybe for a different reason. Our Schumpeter friend may fear a further tightening of accounting regulations. I fear that if SOX was opened up, the pressure would be for more loosing of accounting standards in the name of promoting growth (a la the market-to-myth controversy).
But the idea of every “independent” agency head or commissioner serving at the pleasure of the President still gives me pause.

SCOTUS on Bilski – finally

As expected, the Supreme Court ruled against Bilski, upholding the Appeals court that a patent must be tied to a particular machine or be transformative — see the Court’s “Slip Opinion” on the case and the Wall Street Journal story Supreme Court Rules Against Inventors in Patent Case. Expect a flood of ink over the next few days as everyone weights in on what this means. I will try to summarize later.

Robert C. Byrd

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Many of the stories published today about Senator Byrd will highlight his mastery of the Senate rules. I was a small part of one such example. As a staffer to Senator Jeff Bingaman in the late 1980’s I helped draft part of what became the Omnibus Trade and Competitiveness Act of 1988. Part of the bill created the Competitiveness Policy Council — an institution that help formulate policy recommendations during the 1990s and is sadly no longer with us. During the Senate floor debate, opponents of this provision moved to eliminate it from the bill. Senator Byrd, in his role as Majority Leader, pointed out that the provision had already been subject to an amendment (in order to amend some other part of the bill, the provision was deleted and reinserted) — and therefore was not subject to further amendment. When the Senator who offered the motion to delete complained, Senator Byrd told him that you need to understand the rules and suggested that he go work out the issue with my boss, Senator Bingaman, who was the sponsor of the provision in question. “I’m just trying to help you out” was Senator Byrd’s words to his colleague. Needless to say, we worked out the issue, the provision stayed in the bill (even through it was named in President Reagan’s original veto of the bill) and the CPC went on to produce some important reports.
Senator Byrd understood the Senate and its ways better than anyone. And he used that knowledge to his advantage. He understood the use of both knowledge and power. He also understood the need to work things out. The Senate is a very different place than when Robert Byrd entered it. One can argue whether the changes have been good or bad (probably some of both). But no one can argue that an era has ended.

Other ways to protect your intangibles – and is it an asset?

Here is an interesting story in today’s Wall Street Journal — IBM Sues To Block Oracle Management Hire. According to the story IBM claim that Joanne Olsen violated a one year noncompetition agreement when she took a senior position with Oracle. The suit was filed in New York.
As we noted in our report, Intangible Asset Monetization: The Promise and the Reality, FASB recognizes noncompete agreements as a marketing-related intangible asset. However, noncompete agreements are considered illegal in California under Business and Professions Code Section 16600. Agreements made in other states are also generally found to be unenforceable in California. Nevada, Arkansas, Washington, Montana, North Dakota, Minnesota, Wisconsin, Connecticut, West Virginia, and Oklahoma are also seen as jurisdictions that do not enforce these agreements. Other states usually apply a reasonableness test. I don’t know about New York.
So this case could be an interesting case example of when is an intangible an asset. Is it still an asset if some courts say it is and other say it isn’t?
And should IBM be required to book the value of the noncompete agreement? Under existing FASB rules, since it was an internally generated intangible, no. But what about the other way around. Does Oracle also have noncompete agreements — especially with former Sun executives? Since Oracle’s purchase of Sun presumably included those intangibles, are these supposed to be on Oracle’s books?
More questions than answers.

IP professional now talking about intangible

In Joff Wild’s summary of the the recent IP Business Congress, he made the following point:

There is more to IP than patents. And there is more to intangible value than IP. At previous IPBCs, almost all the talk has been about patents. This year it was very noticeable how many more people were speaking about brands, intellectual assets and capital, and intangibles in general. Patents are just one part of one part of the equation. What is the point in owning potentially great patents if no-one wants to buy into the brands that you build around them and/or you do not have the distribution know-how to get branded products in front of potential buyers? And who is going to buy anything from you if your reputation stinks? For IP professionals the next big challenge could be about contextualising their roles and expanding them into areas that are not necessarily obvious fits right now. Expect to see a lot more about all of this over the coming years.

That is good news. While IP is important, intangibles are more important.
Joff also made another interesting point:

The debate about IP needs to be less about processes and procedures, and a lot more focused on what IP enables – jobs, health, a cleaner environment and so on. It’s when you start talking about these t[h]ings and demonstrating the facilitative role IP plays that you get the attention of the top policy makers. David Kappos and Gary Locke in the US are teaching the IP world a lot of lessons at the moment. They need to be learned.

I would broaden that to cover all intangibles. The value of intangibles is how they affect outcomes in terms of productivity and innovation leading to economic prosperity and higher standards of living. Thus, it is not simply how well the US produces intangible assets — but how well we use them. For policymaker, and everyone, that should be the bottom line.