Treating government intangibles as investments

As I’ve noted for a number of months when commenting on the GDP data (see most recent posting), the official statistics of the United States treats spending R&D and on the creation of artistic works as an investment. The Bureau of Economic Analysis (BEA) has done a careful and conservative job of including this spending as a investment, as explained in this BEA report “Measuring R&D in the National Economic Accounting System”.
Of special note is the fact that R&D spending by governments (federal and state & local) is treated as an investment. This is unfortunately not the case in budgeting — in either the public or private sector. Company accounting rules (GAAP – Generally Accepted Accounting Principles) treat spending on intangibles as a immediate expense not as an investment. The Federal budget contains a Special Analysis of some intangible spending such as R&D (see my previous report Federal Investments in Intangibles: A Look at the President’s FY 2014 Budget). But Congressional budgeting rules do not consider intangibles an investment nor do they attempt to calculate the economic return to the federal government of that spending (even though all most all analysis shows a huge return on investment in R&D).
There might be an opportunity to change this based on possible modifications to Congressional budget rules. According to this story in Politico (“Fuzzy Math? Congress’ big fight over budget math”), the GOP controlled Congress next year might change the budgeting rules to require what is called dynamic scoring. Dynamic scoring attempts to measure the overall economic impact of a policy change (usually a tax change) and the revenue that change would produce for the federal government. As the story points out, dynamic scoring is controversial (“cook the books”) and does not always come up with an answer that is significantly different from current conventional analytical methodologies.
I am not a big fan of dynamic scoring. As a recent report from The Center for Budget and Policy Priorities points out, “the estimates are highly uncertain and subject to manipulation.”
However I see a possible opening to increase our understanding of investments in intangibles. I would argue that if dynamic scoring is to be used on the revenue (tax) side, it must also be used on the expenditure side. In April 2014, the House passed the Pro-Growth Budgeting Act (H.R. 1874) to require CBO to use dynamic scoring (which died in the Senate). This bill was fatally flawed in its mandatory requirement to use dynamic scoring for legislative budget rules and in the fact that it did not apply to appropriations. Current House rules already require a supplemental analysis by JCT using dynamic scoring. I suggest that a similar rule be put in place for the Congressional Budget Office’s analysis on the expenditure side — supplemental and explicitly covering appropriations.
Both points are important. The analysis should be supplemental as the methodology is still not fully developed. This would give experts the opportunity to improve the analysis over time. It must also explicitly include appropriations. Otherwise it misses the point. I understand the resource pressures this would place on CBO. Doing a dynamic scoring analysis of all items in the appropriations would be a daunting task. I would suggest that the analysis be phased in with a threshold level and starting with aggregate budget categories.
This would create at least a recognition that government spending on intangibles is an investment and the starting point for discussion. We could then have an intelligent debate about both the methodology and our economic policies. What would be the dynamic impact on government revenues of an additional dollar of investment in R&D? In education? In children’s food programs? In Head Start? In health care?
That would be a major step forward in understanding the government’s impact on the Intangible Economy.
[UPDATE: David Wessel’s piece in today’s Wall Street Journal (“Dynamic Scoring of Tax Bills: How Big a Deal?“) notes that Rep. Paul Ryan is pushing this approach. However he also notes that “The Ryan rule is also written so CBO won’t routinely gauge the macro benefits of major public investment spending, such as pre-K or infrastructure, which generally are thought to boost growth.” This, as I noted above is, in my opinion, a major flaw.]

3Q GDP final estimate

It turns out that the US economy is doing even better than we thought. The third estimate of U.S. 3rd quarter GDP from the BEA showed a healthy 5.0% growth rate. This is well above the advanced estimate 2 months ago of a 3.5% growth rate and the second estimate last month of a 3.9% growth rate. Economists had forecast a growth rate of 4.3%
One of the major contributors to the spurt in growth was increased business investment. Investment in equipment was up by 11.0%. Investment in intellectual property products (IPP), i.e. research and development; entertainment, literary, and artistic originals; and software grew by 8.8% in the 3rd quarter. IPP investments had increased by 5.5% in the 2nd quarter. Earlier reports had IPP investments growing by 4.2% in the advanced estimate and 6.4% in the second estimate. As the charts below show, the growth in IPP is volatile and does not track overall GDP growth.
These changes from earlier estimates highlight that there is room for improvement in the data collection. For example, the data on R&D expenditures is collected on an annual bases and then used to estimate the quarterly data (see the BEA report “Measuring R&D in the National Economic Accounting System”). Thus there is a need for an annual revision to the data that can be sometimes significant.
Note that the measurement of intellectual property products by the BEA does not encompass all types of intangible assets. Clearly, the inclusion of R&D and entertainment, literary, & artistic originals in the GDP as an investment was a major step forward. But more work on measuring other intangibles still needs to be done.
IPP percent 3Q14 - 3rd.png
GDP-IPP 3Q14 - 3rd.png

November employment

As no doubt you have already heard from numerous sources, the BLS reported this morning that employment rose by 321,000 in November with the unemployment rate staying at 5.8%. The increase was well over the 243,000 that economists had forecast. According to BLS, “Job gains were widespread, led by growth in professional and business services, retail trade, health care, and manufacturing.”
The number of involuntary underemployed (part time for economic reasons) continued to decline ever so slightly in November. The decline was due completely to a drop in those part time because of slack work. The number of those who could only find part time work remained the same as last month.
As I’ve noted before, the total involuntary underemployment remains well above pre-Great Recession levels. This high level of involuntary underemployed constitutes a waste of human capital. Last month, the WSJ looked more closely at the pat-time workers (Why Are So Many Workers Still Part Time? Seven Charts). The story points out that the improvement in involuntary underemployed is concentrated in manufacturing and construction. There has been little decline in involuntary underemployment in the retail/whole trade and leisure/hospitality sectors. While these sectors are traditionally heavily part-time, it appears that we may have reached a “new normal” in these industries. The Great Recession seems to have created a structural shift in part time work. The story dismisses one common explanation for this, “empirical data doesn’t yet show a big increase in part-time work that could be attributed to the health care law.” But the story give no other explanation. Clearly more work is needed to address this problem.

Involuntary underemployed Nov 2014.png

October trade in intangibles

News this morning from BEA is that the U.S. trade deficit dropped by a mere $0.2 billion in October to $43.4 billion. Exports grew slightly faster than imports: exports up by $2.3 billion with imports up $2.1 billion. However, the deficit in petroleum goods grew by $1.2 billion due to a drop in exports; petroleum goods imports actually declined. Economists had been expecting a drop in the overall deficit to $41.2 billion.
The surplus in pure intangibles grew by $183 million in October to a level of $14.2 billion as exports generally grew faster than imports. The surpluses in maintenance & repair services and financial services improved while the deficit in insurance services increased. The surplus in business services again declined, for the 9th month in a row. Exports of business services continue to grow but imports of those services grew even faster. Net revenues from the use of intellectual property increased as revenues from foreign sources (exports) grew faster than charges for the use of intellectual property paid out to foreign sources (imports).
Our Advanced Technology deficit also improved slightly in October, dropping to $9.2 billion from $10.5 billion in September. Exports of aerospace technology and information and communications technology were up but imports of information and communications technology also increased.
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 $5.1 billion – up from $3.6 billion in September.
Today’s BEA release also includes revised data for April through September. As a result, the intangibles surplus was increased by over $1 billion for those 6 months. This change was due to an upward revision of exports of intangibles of $2.7 billion and a upward revision of imports of $1.6 billion. 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-Oct14.png
Intangibles trade parts-Oct14.png
Intangibles and goods-Oct14.png
Oil goods intangibles-Oct14.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.”