Increasing (and redefining) business spending

Neil Irwin over at the New York Times has a good piece on “Businesses Need to Spend More. The Future of the Economy Depends on It“. The gist, as the title suggests, is that the low level of business investment is holding back the economy:

Capital spending improves worker productivity. And worker productivity improves living standards. Less capital spending by businesses means less investment in the kinds of equipment, software and intellectual property that will make the economy more competitive over the long haul.
The logic is simple. If you have a ditch-digging business and employ one guy with a shovel, you can significantly increase the number of ditches he can dig by spending $30,000 on a Bobcat T190 earth mover — with the trencher attachment. The same could be said of an expensive new software package that makes your sales force log more calls to the right people, or research and development lab equipment that lead to new patents and better products down the road.

Note that I picked that quote very deliberately. As readers of this blog know, estimates are that roughly 80% of company value is in its intangible/knowledge assets. Irwin’s analysis does include a mention of some intangible assets, specifically R&D and software. He also points out that intellectual property (IP) is included in government statistics on “nonresidential fixed investment”. [For the latest data on this element of investment, see my last posting on the GDP data and on the BEA explanation of data].
But, there are two nuances in the above. First, Irwin phrases in terms of spending more on equipment for R&D, not R&D itself. As I’ve noted before, we still have trouble treating R&D spending as an investment. Yes, the GDP numbers capitalize R&D costs as an investment and the include the number in the category of nonresidential fixed investment under intellectual property products. But Irwin’s comment referring to lab equipment and not all R&D costs is instructive on how people think.
Second, intangible assets are much more than IP. As the work of Corrado and other have shown, intangibles span a range of investments:
• computerised information: software and databases;
• innovative property: R&D; design; product development in financial services; mineral exploration and spending on the production of artistic originals; and,
• economic competencies: market research; advertising: training: organizational capital.
Unfortunately, we don’t collect good official data on those types of investment (data we have is based on estimates from various sources). We count how much a company spends on a new machines but not how much it spend on worker on-the-job training. Until we recognize and count intangibles as “business spending” we will get a distorted picture of the economy. And we will continue to get policy proposals that only target what we currently count.
Those policy proposals are reflected in the Irwin piece: buy more equipment. The most recent example of this is the recent vote in Congress to make permanent the so-called bonus depreciation that allows companies to immediately write off equipment investments as expenses (thereby lowering their pre-tax income and their overall tax bill). [In fairness it should be pointed out that the House also made permanent the R&D tax credit.]
Irwin makes an important point: companies need to spend more on investments that increase productivity and raise standards of living. But, as I have argued many time before, maybe companies should be spending more on investments in intangibles (especially people) rather than machinery.
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.
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).
So, how about some incentives for companies to investment more in people as well as machines? After all, everyone (including business leaders & policy makers) keep saying that people are our most important resource. Let’s start acting that way.

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