1Q 2014 GDP – and intangibles investments revised up, again

Well, it is even worse than previous reported. GDP shrank by 2.9% in the first quarter of 2014, according to data released by the BEA this morning. The second estimate had shown a drop of 1.0% while the first estimate had the economy growing by a scant 0.1%. GDP had increased by 2.6% in the last quarter of 2013 and 1.9% for the entire year. Economists had forecast a drop of around 1.8%. But economists are forecasting the GDP will rise by 3.5% in the second quarter.
Once again investments in Intellectual Property Products (IPP – i.e. research and development; entertainment, literary, and artistic originals; and software) were revised upwards to an increase of 6.3% compared with a 5.1% growth rate in the second estimate and 1.5% in the first estimate. All other categories of gross private domestic investment declined – with equipment down 2.8%, non-residential building down 7.7% and investment down by 11.7% in total.
IPP percent 1Q14 - 3rd.png

Perception versus action on entrepreneurial activity

My posting yesterday described the Thumbtack.com Small Business Friendliness Survey. That survey describe how some small business owners perceived their local and state government’s attitude toward small business. Specifically, were government policies and actions friendly to small business?
One question I have always had is whether impressions of business owners matter in terms of actions. The lesson that such survey’s seek to impart is that “business-friendly” states generate more economic activity. In this case, a reasonable extension of that argument would be that a more small business friendly location should generate more start-up, entrepreneurial activity. To test that question I looked at the Small Business Friendliness Survey versus the Kauffman Foundation’s Index of Entrepreneurial Activity.
And the answer is, yes, sort of. As the chart below shows, there is a general correlation between a state’s business friendly ranking and the amount of new entrepreneurial activity (as measured as the percentage of the adult, non-business-owner population that starts a business each month). But the relationship is not all that strong. States, as the chart shows, are all over the place.
Friendly v activity.png(Spreadsheet available here).
Of course, there are lots of disclaimers with this data. The measurement of entrepreneurial activity is start-up, which says nothing about the success rate of those businesses. Policies may be relatively easy/friendly with respect to starting a business but unfriendly when it comes to sustaining/operating the business. The discussion yesterday about the complexity of tax laws usually hits a business after it have been running for awhile. On the other hand licensing and regulatory policies can have an impact in the creation phase as well as during ongoing operations. Also, the Kauffman Index of Entrepreneurial Activity does not say anything about expansion of existing small business activity. Government policies and actions can have an impact on the growth of decline of existing businesses without affecting the rate of start-ups — and vice versa. And today’s existing policies may have a greater affect on entrepreneurship in the future than the present as policies often have a lag effect.
Still, the comparison of the two data sets revels some interesting points. Of particular interest are the outliers. California has high entrepreneurial activity but ranks low in small business friendly (with an overall grade of F and, more importantly a grade of F on the ease of starting a business). Iowa and Virginia have a much lower level of entrepreneurial activity than their small business friendly ranking (grades of A- and A+ respectively) would predict.
Clearly there is more going on than just the governmental environment. In California, a strong entrepreneurial culture seems to be driving its economic activities (the highest rate of per capita start-ups in the nation). In Iowa’s case, its grade of A on ease of creating a business has not seemed to translate into more start-ups.
The small business and entrepreneurial ecosystems are complex environments (and not necessarily the same). While there are many other elements to the ecosystem, perceptions are an important part of those environments. Perception are also part of the ecosystem within reach of policymakers so it would behoove them to pay attention. But policymakers need to keep in mind that perceptions are not reality and are just one element. As the weak correlation indicates, policymakers should focus on actions as well as perception – and understand the sometimes tortuous relationship between the two.

New state rankings and economic indices

I’m often skeptical of surveys that purport to rank states on some economic indices. These can be ways of simply touting a particular agenda (e.g. low taxes). However two recent rankings have come out that are likely to be useful for state and local policymakers.
The first, which I will touch upon very briefly, is the ITIF 2014 State New Economy Index. This is the 7th iteration of the report, which began in 1999. It continues to provide a solid look at state economies. I can quibble with the indices used and how the questions are phrased. For example, does state location of a patent really say anything about the innovation occurring in that location (or more about the location of the administrative units). And I have always had a problem with the use of number of patents granted as a measure of innovation. I would reiterate what I said about the 2008 report (and what the report itself noted) that we need new and better data on the “New” economy. Given the budget pressures that the government statistical agencies are under, I fear it is up to the academic community and the private sector to generate better economic indicators.
The second report is the Thumbtack.com Small Business Friendliness Survey done in partnership with the Kauffman Foundation. Thumbtack.com is a web-based services where consumers can go to find professional services. Now in its 3rd year, the report is based on the responses to a survey of businesses that use Thumbtack.com to reach customers. In a refreshing move, they readily admit the issues with their sample and the limitations of the answers — specifically bias toward the professional and nonprofessional services sectors. As they point out, “good quality infrastructure and friendly environmental regulations might be more important to a small manufacturer than to a web designer or a wedding planner.”
Still, the survey is generally representative (although not all states are included) and the answers are enlightening. For example, one of the findings is that the complexities of laws is of more concern than the amount of taxes or regulation (see a Christian Science Monitor story on this point as well). Awareness of state training and networking programs was also a significant factor in a positive rating.

The strongest factor correlating with self-reported perceptions of small business friendliness was the friendliness of licensing forms, requirements, and fees, followed by the friendliness of the tax code and tax-related regulations.
Interestingly, while those two factors had the strongest correlations to overall perceptions of small business friendliness, the factor with the weakest correlation coefficient was whether or not a license is required – this suggests that it isn’t the presence of a licensing regime but how easy it is to comply with such a regime that matters most to businesses. The level of taxation as measured by self-reported perceptions of the “fair share” of taxes also matters less than then friendliness of complying with a tax regime. Both of these may suggest that it is more important for business friendliness that a municipality make compliance simple and easy rather than eliminate a regulatory regime altogether.
. . .
Business owners who said their state or local governments offered training and networking programs reported significantly higher overall state friendliness scores than business owners who were not aware of such training programs, and these business owners who were aware of training programs were much more likely to rate their local government as friendly.

These finding should be important guideposts for state and local policymakers.
Both the 2014 State New Economy Index and the Small Business Friendliness Survey have a lot more information. Both should be read carefully by policymakers and business leaders alike.

Law, technology development and learning – the case of Silicon Valley

All too often we view innovation and technology development as Athena-like — springing from the head of Zeus (in this case the inventor/engineer/entrepreneur). However, scholars (such as Nobel-laureate Douglas North) remind us that economic activity (and invention/innovation is economic activity) takes place in the context of institutions. One of those important institutions is the law. That case is made forcefully in Anupam Chander’s piece in the Emory Law Review, “How Law Made Silicon Valley”:

The story of Silicon Valley is not only a story of brilliant programmers in their garages, but also a legal environment specifically shaped to accommodate their creations.

Chander argues that free speech and the First Amendment, not IP protection, is what makes up that accommodating legal environment:

Law played a far more significant role in Silicon Valley’s rise and its global success than has been previously understood. It enabled the rise of
Silicon Valley while simultaneously disabling the rise of competitors across the world. In this Article, I will argue that Silicon Valley’s success in the
Internet era has been due to key substantive reforms to American copyright and tort law that dramatically reduced the risks faced by Silicon Valley’s new
breed of global traders. Specifically, legal innovations in the 1990s that reduced liability concerns for Internet intermediaries, coupled with low privacy
protections, created a legal ecosystem that proved fertile for the new enterprises of what came to be known as Web 2.0. I will argue that this
solicitude was not accidental–but rather a kind of cobbled industrial policy favoring Internet entrepreneurs. In a companion paper, Uyên Lê and I show
that these aspects of copyright and tort law were not driven by commercial considerations alone, but were undergirded in large part by a constitutional
commitment to free speech. As we argue there, a First Amendment-infused legal culture that prizes speech offered an ideal environment in which to build
the speech platforms that make up Web 2.0.
[Note: Companion paper is “Free Speech”]
. . .
This Article upends the conventional wisdom, which sees strong intellectual property protections as the key to innovation–what the World Intellectual Property Organization calls a “power tool” for growth. Understanding the reasons for Silicon Valley’s global success is of more than historical interest. Governments across the world, from Chile to Kenya to Russia, seek to incubate the next Silicon Valley. My review suggests that overly rigid intellectual property laws can prove a major hurdle to Internet innovations, which rely fundamentally on empowering individuals to share with each other. This study helps make clear what is at stake in debates over new laws such as the Stop Online Piracy Act (SOPA) and its relatives, highlighting the effect of these laws on Silicon Valley’s capacity for innovation.

It is important to note that this argument builds upon the work of Ronald Gilson and Annalee Saxenian in the 1990’s on the differences between Silicon Valley and Route 128 (Boston) concerning non-compete agreements: they are illegal in California but legal and utilized in Massachusetts. The argument is that such agreements stifle to flow of information among companies (via the interchange of workers) and inhibit entrepreneurship (new start-ups). The argument also grows out of analysis of copyright cases (such as those of Pam Samuelson), especially of the landmark 1984 Sony v. Universal VCR case.
It should also be noted that article is a comparison of the legal environment in the U.S. versus Europe and Asia, including on privacy. Given the recent EU ruling on “the right to be forgotten,” it will be interesting to see how these national differences play out with respect to the future development of the technology.
This legal argument fits with the economic argument I discussed in a previous posting on the learning economy. As I pointed out, there is a strong case to be made (as Nobel-laureate Joseph Stiglitz does) that the key factor for prosperity is the ability of an economy/society to continually learn. Thus, the most important question to ask of any proposed policy is “does this facilitate or inhibit broad economic and societal learning?”
Chander’s argument makes the case for asking the same question in the courts.

Redefining "tech transfer"

Last month, the Commerce Department released its Annual Report on Technology Transfer: Approach and Plans, Fiscal Year 2013 Activities and Achievements. As the press release noted, the report highlighted activities of three federal laboratories: the National Institute of Science and Technology (NIST), the National Oceanic and Atmospheric Administration (NOAA), and the Institute for Telecommunication Sciences (ITS) of the National Telecommunications and Information Administration (NTIA). Featured in the press release was the new NIST test for firefighter breathing equipment.
What is especially interesting in the report, however, is NIST’s adoption of a broad definition of “technology transfer.” Traditionally tech transfer has meant the sale or licensing of patents and, for government labs, Cooperative Research and Development Agreements (CRADAs) with the private sector (i.e. joint research projects). In the case of government labs, scientific publications are also considered technology transfer. Under the broader definition NIST recognizes two parts to tech transfer:

1) knowledge transfer, the act of transferring knowledge from one individual to another by means of mentoring, training, documentation, or other collaboration; and 2) commercialization, the adoption of a technology into the private sector through a business or other organization.

As a result, NIST will be revamping how it measures technology transfer:

NIST will expand how it considers collaborations beyond the number of CRADAs into a comprehensive metric that encompasses the broad range of NIST formal and informal collaborations. NIST will implement this by (i) developing a definition of a credited “collaboration,” (ii) developing processes and procedures to capture credited collaborations, and (iii) conducting a feasibility study on whether impact data can be generated.

It will be very interesting to see what they can come up with for measuring the inform collaborations. The report indicates some direction – with sections on postdoctoral researchers, guest researchers, start-up companies, education outreach programs and partnerships, and conferences, seminars, and workshops.
Given that NIST is the nation’s premier standard setting organization, one might assume that other tech transfer organizations — such as in other government labs and in universities — might adopt the same metrics. Such a broad set of metrics might help universities better understand and integrate their tech transfer activities into the university’s tradition three-fold role of education, research and community service.

Some findings on patent investing from the UK – and a lesson for the US

Earlier this year, the IP Wales project at Swansea University released a report on Patent Prospecting on the Alternative Investment Market (AIM) that indirectly points out a problem with the U.S. financial system.
First a note of explanation. The Alternative Investment Market (AIM) is, as its website points out, “the London Stock Exchange’s international market for smaller growing companies.” Companies listed on the AIM face lower listing and regulatory requirements than those on the main exchange and they tend to be seen by some as more speculative investments. While technology companies are listed on the AIM, so are a number of companies from other occasionally speculative sectors such as oil & gas and mining.
The study looked at patenting activity of 79 selected companies on the AIM. What is especially interesting to me is their finding on use of patents for collateral.

Licensing is not the only way to address investor demands to extract added value from a companies’ patent portfolio and we found interesting evidence to demonstrate that patents can and have been used in the raising of capital. Whilst the number might be comparatively small it is worthy of note that over 10% of the patent investment prospects we identified related to patents in which a security interest had been taken. Although the majority of the companies holding these patents were not based in the US, all related to US patents and the vast majority related to US State security agreements. This finding needs to be read in conjunction with a recent report commissioned by the UK Intellectual Property Office Banking on IP? The role of intellectual property and intangible assets in facilitating business finance (2013). Whilst this Report does not advocate changes to the current UK legislative framework it does recommend changes in practice when it comes to the registration and tracking of security interests in intangible assets. Our Report provides evidence to suggest that the US practice of ‘perfecting’ security interests in patents demonstrates a good understanding of these issues.
[Note: for more on the UK IPO study Banking on IP?, see this earlier posting.]

Unfortunately, the study does not give any detail. It is unclear exactly what type of security interest was involved. Was this part of an all-asset lien? Was the patent specifically used as collateral? At what loan to value ratio?
I also have to take exception with the last statement that the U.S. system of perfecting security interests “demonstrates a good understanding of these issues.” The study unwittingly highlights a problem with the U.S. system. As we pointed out in our report Intangible Asset Monetization: The Promise and the Reality, recording of a security interest in a piece of property is handled at the state level under the terms of Article 9 of the Uniform Commercial Code (UCC). This requires the filing of a UCC-1 financing statement in the state. The footnotes to the UK study give us an example of how recording of security interests are spread among various states, including the need to record the security interest in multiple states. For example: “Environ. Recycle (ENRT) Oklahoma & Illinois security agreements in patent records US5277758A, US5268074A, US5285973A, US5351895A, US5213021A & Georgia security agreements in patent records US5540244A, US6149012A & Ohio security agreement in patent record US6387175B1.”
The security interest may also be recorded at the US Patent and Trademark Office (USPTO), but is not required. However, since there is some continued confusion about federal preemption over the UCC in the case of patents, it is considered best practice to record the security interest at both the state-level and with the USPTO.
Because of this system, it is not always clear that an investor can find all the security interests that lay claim to a particular patent. Those claims may be recorded at the USPTO, or may not be. The only way to be sure is to search the records in every state.
Whether this has created a disincentive for banks to lend on patents is unclear. After all, banks have been dealing with the state-level recordation of liens for a long time. But there is a difference between recording a security interest on a house or a car where the physical location of the owner (and hence the state in which the security interest is recorded) and a patent (which could be “located” anywhere). At a minimum we should think about ways to link state UCC filings on IP to a centralized databank at the USPTO. Such a database would remove at lest one small bit of uncertainty in the process of utilizing intangibles in the financial system.
Tip of the hat to the IAM blog for highlighting this report.

Virtual worlds and the altered reality of physics

A couple of years ago, we published a report on Virtual Worlds and the Transformation of Business: Impacts on the U.S. Economy, Jobs, and Industrial Competitiveness. The report described how virtual worlds could streamline and shorten design and testing of new products, improve training and learning, and provide important new ways to involve consumers in product design, performance, and after-sales support (see earlier posting). Virtual worlds are already being used in the collaborative design process (see for example our earlier posting).
For the most part, virtual worlds simulate the real world. For example, the laws of physics generally apply. In part, this is what makes virtual worlds such a powerful tool for innovation as we described in the report. Parts of an engine being assembled in a virtual world have to fit together the way they would in the real world. Virtual patients have to react to injuries and treatment as real people would. Others wise the simulation loses its value.
However, as a new article in MIT’s Technology Review explains, those laws of physics can be re-written in virtual worlds. The article (“Experiments in Second Life Reveal Alternative Laws of Physics”) describes how the ability to change the laws of physics in virtual worlds can be a powerful research and education tool. Alternative theories can be tested. Students can gain a greater understanding of the laws of physics by making modifications. Besides, it is just plain cool.
The tool is not without issues. As the full paper (upon which the article is based) explains, “implementation of simulations in SL [Second Life] is not without drawbacks like the lack of experience many teachers have with programming and the differences found between SL Physics and Newtonian Physics. Despite of that, findings suggest it may possible for teachers to overcome these obstacles.” Specifically the paper recommends a more user-friendly interface for builders of simulations.
As we noted in our Virtual Worlds report, government policies can encourage the development of innovative training programs that educate businesses and employees about how to use these technologies and integrate them into traditional disciplines. Research and teaching of physics is clearly one of the areas that could benefit from such programs.

May employment

The economy grew by 217,000 job in May while the unemployment rate remained at 6.3%, according to data released this morning from BLS. This was slightly better than economists’ expectation of between 210,000 and 215,000 new jobs.
The other good news is that the number of involuntary underemployed (part time for economic reasons) declined in May. Both the number of those who could only find part time work and number of workers part time because of slack work declined. Slack work has been generally declining since its peak in March 2009 – which signals continued economic demand. (Note: that this refers to worker who can only find part-time work because of slack demand — not the same as Fed Chair Yellen’s comments about slack in the labor market which includes unemployed, underemployed and currently out of the workforce). The total involuntary underemployment remains well above pre-Great Recession levels. This constitutes a continued waste of human capital.
Involuntary underemployed May 2014.png
Slack work May 2014.png

April trade in intangibles

In a reversal from last month’s good news, this morning’s trade data from BEA shows the deficit widening by $3 billion to $47.2 billion from the revised figure of $44.2 billion for March. Imports were up and exports down. And the bad news could not be blamed on oil imports as the deficit in petroleum good declined slightly. Economists had expected a much smaller deficit. (Note the data contains revised figures going back to 1999.)
The somewhat good news is that our trade surplus in pure intangibles continued to improve, slightly. The April surplus increased by $215 million to $16.2 billion. (Note that this revised data shows the March improvement was not as large as previously reported). Royalty receipts (exports),royalty payments (imports), business service exports and business service imports all increased – with exports growing faster than imports.
The really bad news is the huge jump in our Advanced Technology deficit – which grew from $3.9 billion in March to almost $8.4 billion in April. The increase was due to an increase in imports and a drop in exports in information and communications technology and life sciences combined with a drop in aerospace technology exports.
Advanced Technology goods also represent trade in intangibles. These goods are competitive because their value is based on knowledge and other intangibles. While not a perfect measure, Advanced Technology goods serve as an approximation of our trade in embedded intangibles. Adding the pure and embedded intangibles shows an overall surplus of approximately $7.8 billion in April, down from $12.2 billion in March.
Note that the BEA has revised its categories of services trade. I will begin reporting trade in intangibles using the new categories next month.
Intangibles trade-Apr14.png
Intangibles and goods-Apr14.png
Oil goods intangibles-Apr14.png

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.

A look at a new book on Creating a Learning Society

It is hard to tell whether “Pikettymania” (including the little dust up over data) has peaked now that he has been on the Colbert Report (see my earlier post on the best reviews of his work). But the real debate over what to do about inequality is just heating up. Most believe that Piketty’s proposal for a global wealth tax is a non-starter. There is little agreement as to what, if anything, should be done.
In part, the “if anything” view still remains strong. Inequality is still seen by many as the price of growth. Earlier I noted this argument that inequality is necessary for economic growth falls by the wayside when considered from an intangible capital perspective. If you believe, as I do, that intangibles are the drivers of economic growth, then anything that undercuts and destroys the value of those assets undermines economic growth. Inequality undermines human capital development by reducing access to education for all. Inequality undercuts strategic capital by reducing entrepreneurship and risk taking. It destroys relationship capital by undermining the trust necessary for a market economy to work. Finally, inequality undercuts social capital by increasing political instability and uncertainly.
If this is true, then can growth and equality be pursued simultaneously? The growth side of this topic is explored in more depth in a new book by Joe Stiglitz and Bruce Greenwald called Creating a Learning Society: A New Approach to Growth, Development, and Social Progress (Amazon or Columbia University Press). The book is an extension of the Kenneth J. Arrow Lecture Series at Columbia University and builds upon the growth theory of Kenneth Arrow and Robert Solow. Note that the subtitle of the book includes both “growth” and “social progress.” In an earlier book (The Price of Inequality: How Today’s Divided Society Endangers Our Future), Stiglitz clearly states his belief that inequality hurts economic growth.
Creating a Learning Society lays out the case that economic growth is no longer a question of efficient allocation of resources, specifically labor and capital (aka static efficiency) but the creation, dissemination and utilization of knowledge (aka innovation).

In the first few chapter of this book, we lay out our basic theses: that most of the increases in standards of living are, as Solow suggests, a result of increases in productivity–learning how to do things better. And if it is true that productivity is the result of learning and that productivity increases (learning) are endogenous, then a focal point of policy ought to be increasing learning within the economy; that is, increasing the ability and the incentives to learn, and learning how to learn, and then closing the knowledge gaps that separate the most productive firms in the economy from the rest. Therefore, creating a learning society should be one of the major objectives of economic policy. If a learning society is created , a more productive economy will emerge and standards of living will increase. By contrast, we show that many of the policies focusing on static (allocative) efficiency may in fact impede learning and that alternative policies may lead to higher long-term living standards. Thus, the theory we develop provides one of the most compelling and fully articulated critiques of the Washington consensus policies that dominated development thinking in the quarter century before the Great Recession.

As Stiglitz and Greenwald stress:

All of this highlights that one of the objectives of economic policy should be to create economic policies and structures that enhance both learning and learning spillovers; creating a learning society is more likely to increase standards of living than is making small one time improvements in economic efficiency or sacrificing consumption today to deepen capital.

The generic policy prescriptions that flow from their conclusions concern the role of government.

If learning, and R&D more generally, is at the center of the success of an economy, and if there is no presumption that markets are efficient in making decision which affect the pace of learning (or R&D), then the longstanding presumptions against government intervention are simply wrong.
. . .
our concern is that some of these classical policy prescriptions, thought well-intentioned, may actually lead to a reduction in the rate of progress of societies and a deterioration in ling-run societal well-being. In the attempt to improve the static efficiency of the economy, learning may be impeded.

Using a twist on the market failure argument, they argue that the case for government intervention rests on the need to promote positive outcome rather than simply prevent negative ones.

The production of knowledge entails positive externalities . . .
the private sector typically produces too little goods that give rise to positive externalities. To correct this market distortion requires some form of government intervention.

But the government interventions to create positive externalities are more complex.

If there are market failures in learning, then the market failures are pervasive in the economy. They are diffuse. More pervasive governmental interventions are required to correct them.

Much of the book subjects a variety of areas (trade policy, intellectual property, competition policy/anti-trust, financial policy and investment) to this lens of “does this policy promote learning? As an example, the authors reconfigure the infant industry case for limited trade protection. The traditional argument states that an industry need limited projection in order to grow strong enough, with economics of scale, to compete on the world market. The new argument calls for policies that protect where there are knowledge spillovers to the entire economy.
While I’m not convinced about all the policy prescription in this book, I heartily agree with the notion of subjecting economic policies to the test of whether they promote broad economic learning (and not just narrow knowledge creation). Such a test would greatly improve the changes of a positive outcome of our policy proposals.