Revised 2Q 2014 GDP again has higher intangible investments.

The latest (third) revised estimate of economic growth in the 2nd quarter of 2014 again shows a slight upward revision. BEA now estimates that GDP grew by 4.6% in the 2nd quarter rather than the 4.2% previously estimated. The revision was in line with economists’ expectations. The upward revision was due to a higher estimate in the growth of business investments in intellectual property products (IPP). Investments in IPP are now estimated to have grown by 5.5% rather than the previous estimate of 4.4% (and of 3.5% in the first estimate).
The growth in investments in IPP has been averaging 4.1% over the past year. This high level of investment underscores the importance of these investments to economic growth. And this progressively higher estimation of IPP investments as new data is received highlights the importance of understanding these investments for public policy making.
IPP percent 2Q14 -3rd.png

Strengthening Innovation Policy: updating the Strategy for American Innovation

Earlier this summer, the White House Office of Science and Technology Policy and the National Economic Council issued a Request for Comments as part of a review and update of the Administration’s Strategy for American Innovation. Yesterday, Athena Alliance submitted its comments — “Strengthening Innovation Policy” — written by myself and Stephen Merrill. In the document we propose policies and actions in five areas responding to specific questions raised in the Request for Comments:
  • Understanding How Intangible Assets Fuel Economic Growth
  • Enhancing Policy Development and Implementation
  • Evaluating Administration Initiatives
  • Foster Design Thinking
  • Financing Innovation Through Intellectual Property
Understanding How Intangible Assets Fuel Economic Growth
Question (2) of the request asks about the biggest challenges to, and opportunities for, innovation. The biggest opportunity is to build upon our intangible capital. Our biggest challenge is understanding how to carry out that task. Increased investment in intangibles is not enough. Investments must be effective in raising productivity. Cross national studies clearly show that increasing investments in intangible assets raises productivity. Those studies also show that other nations have larger productivity increases. We propose a research agenda to understand why the U.S. lags other nations in translating intangibles investment into productivity gains. (See also earlier posting.)
Enhancing Policy Development and Implementation
Question (4) asks about augmenting the government’s capacity for analysis. In response, we propose the creation of a new system for the review and implementation of U.S. economic competitiveness policy. That system would include a Quadrennial Competitiveness Assessment by an independent panel; a Biannual Presidential Competitiveness Strategy; an Interagency Competitiveness Task Force; and a Presidential Competitiveness Advisory Panel. (See also earlier posting.)
Evaluating Administration Initiatives
Also in response to question (4), we see the need to look at specific recent initiatives. In the past six years the Administration has instituted or expanded several measures to promote innovation and improve our understanding of it — such as the Science of Science and Innovation Policy (SciSIP) program at NSF, the Advanced Research Projects Agency-Energy (ARPA-E), the SBA Regional Innovation Cluster Initiative and the National Network for Manufacturing Innovation. We propose that the Administration strengthen its legacy by commissioning an independent interim assessment of good practices as well as the shortcomings of the most important measures.
Foster Design Thinking
Question (6) concerns itself with changes to the innovation process. Two of the major shifts in the innovation process have been the increasing importance of non-technological aspect especially the role of design and the emphasis on user input in an iterative process. These two have combined to create an innovation process know as design thinking. To foster design thinking, we propose funding 5 colleges or universities to create design schools (d.schools) similar to the Stanford (Hasso Plattner Institute of Design). The proposal builds upon the “manufacturing universities” proposal to grant 25 universities $5 million each per year for four years to revamp their engineering teaching and research activities toward manufacturing and engage in greater joint industry-university research projects. At $5 million per year for 5 schools, the total budget for creating new design schools would be $25 million. (See also earlier postings.)
Financing Innovation Through Intellectual Property
Question (15) and (17) concern, in part, the development of new mechanisms for financing innovation. Our proposal is for a first step in better utilizing intellectual property (IP) in the lending process. The Small Business Administration (SBA) and U.S. Patent and Trademark Office (USPTO) should convene a working group of lenders, regulators and other interested parties to develop a common template to be used when describing and valuing IP and intangible assets used implicitly or explicitly as collateral. The Intellectual Property Office in the United Kingdom (UK IPO) is already undertaking such an activity. Any U.S. effort should communicate, and to the extent possible coordinate, with that activity. (See also earlier postings).
For a more in-depth discussion of these recommendations, see the full document “Strengthening Innovation Policy”.

How to destroy human capital

I thereby nominate IBM for the Circuit City award for how to destroy your human capital. You may remember how Circuit City fired its most experienced workers as a cost cutting measure — only to see the company go into a death spiral as their human capital ebbed away (see earlier posting). In the Circuit City case, not only did they get rid of key human capital, they destroyed that organizational bonds that enhanced that human capital through structural and relational capital.
Well, now come word in a story last week in Computer World that IBM may top that. The story, “IBM cuts pay by 10% for workers picked for training”, describes a new IBM directive that certain employees in the Global Technology Services (GTS) division will be required to undertake mandatory training one day a week for 23 weeks. Sounds fine up to now. Here is the kick in the teeth: those employees will have their pay cut 10% during that time period.
They call it “co-investing”. It looks more like punishment. Remember – this is a mandatory pay cut. With apparently no guarantee that they won’t be fired at the end of the training.
Some have tried to defend the idea – saying it is better than firing the employees. So is the choice IBM is setting up is this: be fired or pay for your own training (and we will see if you measure up).
As Marie G. McIntyre wrote on CNBC blog: “Advice to IBM management: Don’t be jerks“:

IBM has every right to make such a decision, yet something about it feels wrong. For one thing, this action seems to violate an implicit pact between employers and employees regarding skill development.
Simply stated, companies are generally expected to provide the training required to keep basic competencies up-to-date. Nurses will be taught to use electronic records. Lawyers will attend annual seminars on legal changes. Auto repair techs will learn to service heavily computerized cars.
But not in the GTS division, where a technician making $60,000 a year will now be required to sacrifice about $3,000 for training “to address changing client needs, technology, and market requirements.” Since this helps IBM compete, shouldn’t the company foot the bill?

Of course, the standard argument companies use to justify not paying for training is that employees are mobile. Training helps the employee get a better job so they should pay. Why should we pay for something that will walk out the door? Well, such an attitude a self-fulfilling prophesy — exact the type of environment that encourages employees to walk.
An example of this attitude is illustrated by another point McIntyre raises that only a certain group have been singled out for this action:

The GTS group is being retrained in CAMSS — cloud, analytics, mobile, security, and social — IBM spokeswoman Trink Guarino is quoted as saying in the Computerworld article. Given that many IBMer’s have been with the company for decades, odds are that other folks have also lacked expertise in these areas.
For example, those technologies certainly weren’t around when CEO Ginni Rometty joined IBM 33 years ago. So, did she give up 10 percent of her salary while going through that learning curve? And how about the board? With an average age of 64, they surely required some technical updating – but did they pay for it with a cut to their $250,000 annual fee?

Companies routinely pay for “executive education” for the top of the hierarchy. But apparently those rules don’t apply to front line IBM workers (shades of Circuit City).
Peter Cappelli of Wharton’s Center for Human Resources is quoted in the New York Times as saying co-investing is “where we are going to end up going in retraining.” If that is where we are going, then the economy is in big trouble. First we saw cuts in employer investments in human capital. Now we see a mandatory requirement that employees pay for training. Apparently corporate America has forgotten about the glue of the relationship between organization and knowledge workers that creates intangible capital – and therefore competitive advantage.
Something is very very wrong when IBM has decided to take the Circuit City approach.

A look at why part-time employment is high

As I noted earlier this morning, involuntary underemployment remains well above pre-Great Recession levels. A research note from the Federal Reserve staff last spring (“Why is Involuntary Part-Time Work Elevated?”) tries to explain this situation:

Our analysis offers several clues on why involuntary part-time work has increased during the recession and why it has remained elevated even as other labor market measures have improved. Cyclical forces likely accounted for the bulk of its increase during the recession, but as the economy has improved, the number of persons working part-time due to slack business conditions has recovered. On the other hand, the share of workers who could only find part-time work remains high, and the continuing lack of available jobs weighs on the ability of unemployed and involuntary part-time workers to find full-time jobs.

They also note there is has been a net flow of workers from involuntary underemployed to full time employment for the past few years. During the Great Recession, more workers had switched from full time to part time. Importantly, the additions to the involuntary underemployed come from those who had previously been unemployed. So there seems to be a two stage progression evolving:
     1) from unemployed to part-time (underemployed); and,
     2) from part-time to full-time.
That might not be the best situation for workers, but it seems to be the labor force adjustment system at work. Our policy task is to speed up, and many create a short-cut, in that system. That means looking at policies that improve the transition from unemployment to part-time and part-time to full-time. One of those policies is job-sharing (see earlier posting). Rather than laying off workers, a job-sharing program would compensate workers for lost wages due to switching to fewer hours during slack time. In doing so, it would open up more part-time employment with a path toward full time work as demand increased.
However, job-sharing should be paired with a knowledge tax credit. 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 by creating more employment slots for others to fill the working hours of those in the classes.
Involuntary underemployment continues to be a problem with the U.S. labor market. Policy makers are beginning to pay attention (see early posting). But awareness alone doesn’t help. The authors of the Fed note cited above believed that “As hiring improves, this should further reduce the share of involuntary part-time work.” However, there has not been any great improvement in the situation of the involuntary underemployed since they wrote that back in April. Creative thought needs to be given to solutions – especially micro-economic, labor policy solutions. Just worrying about the macro-economy simply won’t be enough.

August employment

Somewhat disappointing employment news from the BLS this morning. They report only 142,000 net new jobs in August with the unemployment rate ticking down to 6.1% (where it was in June). Economists had expected a gain of 230,000 jobs.
The story for involuntary underemployed (part time for economic reasons) was mixed. The total number of involuntary underemployed declined in August. However, that improvement was due to a decline in number of workers part time because of slack work. The number of those who could only find part time work actually rose. The total involuntary underemployment remains well above pre-Great Recession levels. As many analysts are beginning to understand, this constitutes a continued waste of human capital (see early posting).
Involuntary underemployed Aug 2014.png

July trade in intangibles

Some interesting economic news this morning. July’s trade deficit dropped unexpectedly to $40.5 billion from $40.8 billion in June (revised), according to data released by the BEA. [Note: June’s deficit had been originally set at $41.5 billion – see discussion below.] Economists had been expecting an increase to $42.4 billion. Exports were up by $1.8 billion while imports climbed by only $1.6 billion. As was the case last month, our deficit in both petroleum and non-petroleum goods improved (see last chart below).
The surplus in pure intangibles also improved in July, although only very slightly. The surplus grew by $32 million to $13.9 billion as exports rose faster than imports. The improvement was due in part to increased revenues from the use of intellectual property by foreign sources (exports) growing while charges for the use of intellectual property paid out to foreign sources (imports) declined. Exports of financial services grew while imports rose only slightly. Business services exports also rose but imports of those services grew even faster resulting in a lower surplus in this category. In telecommunications, computer, and information services, exports fell and imports rose leaving us with a slightly higher trade deficit in this area. Both imports and exports of insurance services dropped with a slight improvement in this deficit.
Our Advanced Technology deficit also improved in July, dropping to $6.9 billion from $7.5 billion in May. Interestingly, aerospace technology exports dropped, which would have normally increased the overall deficit. But imports of information and communications technology dropped slightly more. A large decline in flexible manufacturing imports led to the overall improvement.
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 $7.0 billion in July, up from $6.4 billion in June.
As noted above, the June data was revised by almost $1 billion. This change was due to an upward revision of exports of services and intangibles of $0.4 billion and a downward revision of imports of $0.5 billion. Exports of government goods and services and business services and revenues for the use of intellectual property (exports) were revised upward. telecommunications, computer, and information services exports revised downward. Imports of financial services and business services and charges for the use of intellectual property (imports) were revised downward. These revisions remind us of how tenuous our measurements are of intangibles and the need to continue to improve both our data collection and measurement frameworks in this new intangible economy.
Intangibles trade-July14.png
Intangibles trade parts-July14.png
Intangibles and goods-July14.png
Oil goods intangibles-July14.png

Note: I am now reporting the trade data using the new BEA classifications for services trade, which breaks services into more categories. In the past, the intangible trade data was the sum of Royalties and License Fees and Other Private Services. Under the new classification system, intangibles trade data is the sum of the following items: maintenance and repair services n.i.e. (not included elsewhere); insurance services; financial services; charges for the use of intellectual property n.i.e.; telecommunications, computer, and information services; other business services.

Charges for the use of intellectual property n.i.e. is simply a renaming of Royalties and License Fees. This includes 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.

Maintenance and repair services n.i.e., financial services, and insurance services, were previously included in Other Private Services. Telecommunications, computer, and information services is a combination of those two items (telecommunications and computer & information services) that were also previously included in Other Private Services. Three categories previously in Other Private Services — education-related and health-related travel and the expenditures on goods and services by border, seasonal, and other short-term workers — were removed and reclassified to travel. The new category of other business services is a continuation of the older category Other Private Services with those components removed.

Thus, other business services includes categories such as advertising services; research, development, and testing services; management, consulting, and public relations services; legal services; construction, engineering, architectural, and mining services; and industrial engineering services. It also includes personal, cultural, and recreational services which includes fees related to the production of motion pictures, radio and television programs, and musical recordings; payments or receipts for renting audiovisual and related products, downloaded recordings and manuscripts; telemedicine; online education; and receipts or payments for cultural, sporting, and performing arts activities.

For more information on the changes, see the March 2014 Survey of Current Business article, “The Comprehensive Restructuring of the International Economic Accounts: Changes in Definitions, Classifications, and Presentations.”