Using tax policy the right way to spur investment in intangibles

The on-line journal Economists’ Voice has published a new article on Should the Government Invest, or Try to Spur Private Investment?:

The U.S. economy clearly needs stimulation, but the Obama administration’s plan for accelerated depreciation is an ‘old economy’ approach to stimulating aggregate investment and unlikely to ease the Great Recession, according to Michael Cragg of Brattle Group and Joseph Stiglitz of Columbia University. The authors suggest alternative policies consisting of carefully designed carrots and sticks.

Drs. Cragg and Stigliz are exactly correct when they point out that accelerated depreciation is a limited tool — as they put it “an ‘old economy’ approach to stimulating investment.” However, they only touch upon the reason. Accelerated depreciation applies to tangible plant and equipment. Yet, as numerous studies have shown, the composition of investment and capital formation has shifted from tangible plant and equipment to intangibles. Since investments intangibles are generally expensed rather than depreciated, any accelerated depreciation schedule completely misses the mark.
Investment tax credits are the more appropriate tool. But our policy toward tax credits for intangibles is weak at best. The Research and Experimentation Tax Credit (commonly referred to as the R&D tax credit) fights off near-death experiences on a route basis. It is also more limited in scope and scale than what is available in other developed nations. Investment incentives for other intangibles, most notably worker training, are completely absent. If we are to move beyond “old economy,” we need to focus on policy ways to provide incentives for investment in intangibles.
As I have argued too many times to recount, one policy change would be to turn the R&D tax credit into a broader knowledge tax credit. A knowledge tax credit would apply to company expenditures on worker training and education — just like the R&D tax credit applies to expenditures on research activities. In only make sense that boosting worker skill levels is a necessary compliment to any activities to raise innovation and productivity. After all, innovation doesn’t come solely from the lab any more.
It also makes sense to pair the knowledge tax credit with any efforts to incentivize increased investment in plant and equipment. If we give companies incentives to conduct research or invest in new equipment we should also give companies incentives to invest in their most valuable asset: their workers.
Likewise, the knowledge tax credit could be paired with any job sharing programs that compensate workers for lost wages due to working fewer hours. Rather than reduce their hours, a tax credit could be given for workers spending those hours for training, either on-the-job training or in the classroom. This would have a dual effect. It would increase our human capital — a major input to productivity and economic growth. And it would immediately increase consumer demand as companies would use the funds to pay workers to take classes (thereby creating more employments slots for others to fill the working hours of those in the classes).
In summary, the authors are correct. Use of accelerated depreciation as a tool of economic stimulus is increasingly less effective “old economy” policy. But we need to think more creatively about what tax policy would work in this new situation. Key to that effort is focusing on incentives for increased investment in intangible assets.

Why your data is valuable

From the LA Times: TomTom sells traffic data to Dutch government:

TomTom, maker of popular GPS navigation devices, apologized Wednesday after news that Dutch police used data gathered from drivers who use the company’s products to set traps sparked an uproar among customers.
Algemeen Dagblad, a newspaper in the Netherlands, reported that Dutch police had obtained traffic information from the government and were setting up speed traps based on the information.
. . .
TomTom users weren’t too happy. In response, the company issued a statement that assured customers it would investigate how the data sold was used. TomTom Chief Executive Harold Goddijn also posted a YouTube video Wednesday promising that TomTom would “prevent that kind of usage” of from here on out.
The Dutch police use the information obtained “to put up speed cameras and speed traps. We don’t like that because our customers don’t like it,” he said. “We will prevent that type of usage of our data in the future.”
The data is anonymous and not linked to particular drivers, he added. Only information from drivers who had opted in was collected and sold, and the company believed that the information would be used to improve traffic safety.

Maybe the company didn’t make the connection between “improving traffic safety” and speed traps. So the issue for TomTom is not whether the data can be sold, but whether they like the use of the data. Interesting.

1Q 2011 GDP – not good news

The advanced GDP estimate from BEA for the 1st quarter of 2011 released this morning was disappointing: a growth rate of just 1.8% annually. Everyone thought it would be low, around 2% (see estimates in the Wall Street Journal and New York Times). This compares to a rate of 3.1% in the 4th quarter of 2010. Here is how BEA describes the slowdown:

The deceleration in real GDP in the first quarter primarily reflected a sharp upturn in imports, a deceleration in PCE [personal consumption expenditures], a larger decrease in federal government spending, and decelerations in nonresidential fixed investment and in exports that were partly offset by a sharp upturn in private inventory investment.

In other words, more imports and less exports at the same time as slower consumer spending (probably due higher energy and food prices) and big cut backs on government stimulus. The good news was an increase in investment. Gross private domestic investment rose by 8.5% after falling 18.7% last quarter. The increase was powered by higher investment in software and equipment (up 11.6%). Investment in buildings – both commercial and residential — dropped.
One can hope that some of the increased investment was in intangible assets. But, of course, we don’t measure that in GDP. Yet.
UPDATE: At the same time that BEA released the GDP numbers, Census released the advanced data on durable goods that shows a 2.5% increase in new orders for March following only a 0.7% increase in February.

Short takes

I’ve not had a chance to post in the recent week or so — been busy with the conference I mentioned yesterday. But here are a number of items in the news that caught my eye — just proof that we already live in an intangible economy.
Location Data From Phones Is Valuable for Ads: It took the New York Times to tell you that?
Blockbuster: A video relic or Dish Networks’ new secret weapon against Netflix?. Why, according to The Washington Post, the Dish Networks CEO betting big on buying the failing Blockbuster? Because Blockbuster owns a very valuable intangible asset: licensing right to stream movies over the Internet.
Value Added: The future of manufacturing might just be in Ashburn: It’s called Prototype Productions, Inc — a company that specializes in rapid prototyping and moving into 3-D printing. The future is already here (see earlier posting).
Ohio is spending $1.4 billion to attract jobs. Will it work?. Good question, USA Today. The problem is the plan is to build “industrial parks” on the theory that if you build it they will come. Why is this a problem? Because we have trying this strategy for decades and it doesn’t work. I remember in the 70’s when my home town built an “industrial park” — which remained empty . So rather than move to the future, we are stuck in the past.
Japan’s Disaster and the Manufacturing Meltdown. a Foreign Affairs article that should convince you that supply chain resilience is an important intangible asset.
Getting From the Internet What It Knows About You. New York Times article on why you should have at least access to your own data.

Event Announcement: New Building Blocks for Jobs and Economic Growth

I am pleased to announce that Federal Reserve Chairman Ben Bernanke will be giving the opening keynote address at an exciting event on May 16 that Athena Alliance is co-organizing. The event — “New Building Blocks for Jobs and Economic Growth: Intangible Assets as Sources of Increased Productivity and Enterprise Value” — will take place from 8:45-11:30am in the Lohrfink Auditorium, Rafik B. Hariri Building, 2nd floor, Georgetown University.
As we all know, intangible assets – information, workforce skills and know-how, effective management and marketing, business models, relations with suppliers and customers, software and databases as well as traditional intellectual property (patents, copyrights and trademarks) – are building blocks of future economic growth. According to the available evidence, business investment in intangible assets is increasing in most advanced economies and, in a number of countries, intangible investment matches or exceeds investment in tangible assets such as buildings, equipment and machinery. These investments in intangibles account for a significant fraction of labor productivity growth in many countries. The discussion will explore how investments in innovation, intangible assets and intellectual capital can be harnessed to generate sustainable growth, high-wage employment and improved living standards.
Chairman Bernanke’s remarks will follow opening remarks from myself and Richard Boucher, Deputy Secretary-General of the OECD. Following the keynote will be a panel discussion with the following:
Moderator: Jon Spector, CEO, The Conference Board
Manuel Trajtenberg – Professor and former head of the Israeli National Economic Council
Otaviano Canuto, VP, Poverty Reduction and Economic Management Network, World Bank
Carl Shapiro, White House Council of Economic Advisors (invited)
Lisa Lynch, Dean, Heller School for Social Policy and Management, Brandeis University
Edward Jung, Chief Technology Officer and Co-Founder of Intellectual Ventures
David Stafford, COO of Michelin Americas Research Company
Allen Howell, CEO of Corporate Flight Management
The introduction and welcome to the conference will take place from 8:45-9:00 a.m.
The key-note speech will take place from 9:00-9:45 a.m.
The plenary panel discussion will take place from 9:45-11:30 am
This conference is organized by Athena Alliance, the Organization for Economic Cooperation and Development (OECD), the Conference Board, the Kauffman Foundation, the National Academies-STEP Board and hosted by the Georgetown University Center for Business and Public Policy.
To register online please go to

February trade in intangibles

On the surface, this morning’s trade data for February was good news. The deficit dropped by $1.2 billion to $45.8 billion. The bad news, however, was that improvement was due to slower economic activity. Exports were down by $2.4 billion and imports were down by $3.6 billion. And the improvement was due mostly to a better trade flow in petroleum products. The non-petroleum goods trade deficit actually worsened slightly (see Chart 3). But even with petroleum products, both exports and imports dropped. Economist surveyed by the DowJones Newswires had expected an even smaller $44.3 billion deficit.
However, our intangible trade increased in February as both imports and exports grew. With exports growing faster than imports, our surplus increased slightly (as Chart 1 shows). All categories (royalty income and expenses and business services exports and imports) increased. However, the royalty balance did decline slighly. The trade surplus in intangibles is still overwhelmed by the goods trade deficit (Chart 2).
Our Advanced Technology Products deficit also improved dramatically in February, declining $1.2 billion to $5.9 billion in January. But one again, the reason was a decline in both imports and exports. An exception to that trend was in life sciences technology where imports and exports grew — and the deficit increased. The last monthly surplus in Advanced Technology Products was in June 2002 and the last sustained series of monthly surpluses were in the first half of 2001.
Chart 1Intangibles trade-Feb11.gif
Chart 2Intangibles and goods-Feb11.gif
Chart 3Oil good intangibles-Feb11.gif

Note: we define trade in intangibles as the sum of “royalties and license fees” and “other private services”. The BEA/Census Bureau definitions of those categories are as follows:

Royalties and License Fees – Transactions with foreign residents involving intangible assets and proprietary rights, such as the use of patents, techniques, processes, formulas, designs, know-how, trademarks, copyrights, franchises, and manufacturing rights. The term “royalties” generally refers to payments for the utilization of copyrights or trademarks, and the term “license fees” generally refers to payments for the use of patents or industrial processes.

Other Private Services – Transactions with affiliated foreigners, for which no identification by type is available, and of transactions with unaffiliated foreigners. (The term “affiliated” refers to a direct investment relationship, which exists when a U.S. person has ownership or control, directly or indirectly, of 10 percent or more of a foreign business enterprise’s voting securities or the equivalent, or when a foreign person has a similar interest in a U.S. enterprise.) Transactions with unaffiliated foreigners consist of education services; financial services (includes commissions and other transactions fees associated with the purchase and sale of securities and noninterest income of banks, and excludes investment income); insurance services; telecommunications services (includes transmission services and value-added services); and business, professional, and technical services. Included in the last group are advertising services; computer and data processing services; database and other information services; research, development, and testing services; management, consulting, and public relations services; legal services; construction, engineering, architectural, and mining services; industrial engineering services; installation, maintenance, and repair of equipment; and other services, including medical services and film and tape rentals.

Ranking company reputations

The Reputation Institute’s latest list of company reputations is out. According to the story on the list in Forbes — “America’s Most And Least Reputable Big Companies” — Amazon is at the top and Freddie Mac at the bottom. What is also interesting it the changes in the scores assigned. Amazon took the top spot because its ranking jumped by 5.76 points to 82.7 (on a 0 to 100 scale). Big positive movers were Time Warner, GM and Citigroup. Big losers were Rite-Aid, McDonald’s and Goldman Sachs.

Using the intangible asset — data

As readers of the blog know, I have a tendency to harp on the fact that our policies and action fail to meet the three tests of management as outlined in Hayes and Abernathy Managing Our Way to Economic Decline:

Short term–using existing assets as efficiently as possible.
Medium Term–replacing labor and other scarce resources with capital equipment.
Long term–developing new products and processes that open new markets or restructure old ones.

Mostly I complain about the failure to meet the last point – by both companies and countries (see recent posting).

But the first point is equally important and also not well understood. In the industrial age, efficiency meant cutting. It also meant standardization. Economies of scope and scale ruled. If you reduced variability you could increase production at lower cost.

In the I-Cubed Economy, efficiency can come from reallocation of resources, using those resources in a different way, and customizing. A story in Slate on the reducing health care costs outlines the difference. Case in point is Heritage Provider Network of California:

Heritage identified patients with complex, chronic medical conditions–such as obesity-related diabetes–as the most “high-risk.” It assigned them to physicians with relatively few patients. The individuals received their doctors’ cell numbers, and got encouragement to call. They also got frequent checkups.
The changes proved preventive, reducing costs.

In other words, Heritage redirected resources to a customized solution that reduced overall cost. Not standardization; not cutting back. But identifying the specifics of the situation and actually devoting the resources needed up front to prevent higher costs later.

But Heritage is going beyond simply analyzing their own data. They have created the Heritage Health Prize. The prize seeks to develop a predictive model of which patents will need hospitalization within a year and for how many days. But the positive use for the data is to improve health care:

Once known, health care providers can develop new care plans and strategies to reach patients before emergencies occur, thereby reducing the number of unnecessary hospitalizations. This will result in increasing the health of patients while decreasing the cost of care. In short, a winning solution will change health care delivery as we know it – from an emphasis on caring for the individual after they get sick to a true health care system.

Of course, the data could be used the other way — to weed out those with the most need and deny service ahead of time. Safeguards will need to be put in place to prevent abuse.

So, as it turns out this is also an example of tapping into another intangible asset — that wealth of knowledge and expertise resident out it the rest of the world. A form of open innovation, this opens up another set of questions – such as who has the IP rights to the various submissions and what about the patent rights to their data. But all that is another conversation.

Suffice it to say that customization of health care – rather than standardization – is where the most gains in efficiency are likely to be found. Now, what about other area — such as education and manufacturing? Isn’t a “just-for-me” strategy generally more efficient than a “one-size-fits-all whether-it-works- well-or-not” strategy?

Cutting our way to decline

In case you haven’t been following the news, budget issues are at the top of the political and policy agenda in Washington — with a likely government shut down this weekend (better think about cancelling that trip to the Smithsonian) and the release of the GOP alternative budget by Congressman Paul Ryan. In his column today in the Wall Street Journal New Proposal Hits Old Hurdles of Budget Math?, David Wessel makes an interesting point about that alternative:

In sketching out that plan, Mr. Ryan may inadvertently be making the case for tax increases.
Reason one: Even with the spending cuts he proposes, Mr. Ryan wouldn’t balance the budget until 2030 or so. Republicans, reluctant to raise the debt ceiling to cover past spending, would be asked to increase it every year until then because debt, measured in dollars, keeps climbing.

I think this just illustrates the depth of the budget issue. And the unwillingness to really confront it.
As I listen to the budget debates, I can help think back to the famous HBR piece by Robert Hayes and William Abernathy Managing Our Way to Economic Decline. They argued there are three tasks of a manager:
  Short term–using existing assets as efficiently as possible.
  Medium Term–replacing labor and other scarce resources with capital equipment
  Long term–developing new products and processes that open new markets or restructure old ones.
And that companies fail when they concentrate on the first two tasks and ignore the third.
Amid all the talk of budget cuts and government shut downs in Washington, we seem to be doing the public sector equivalent. We have lost sight of the fact that we need to invest to grow — especially invest in intangibles. That includes both public and private sectors investments. An economy policy of cutting investment in intangible assets like education to save money is as stupid a response as a company firing in best workers (remember Circuit City). I hope we can do better.

Return of exotic secutization?

From the WSJ Real Time Economics blog Appetite Grows for Exotic Asset-Backed Securities. The article mentions that securities backed by assets such as timber harvests, timeshare revenue and cellphone-tower leases are offering higher yields that auto or student loan backed securities. It does not mention IP backed securities however. But if the market is now interested in timber harvests, it might be receptive to IP as well.