Beyond broadband access

In his recent address to a Joint Session of Congress, President Biden called for expanding access to the internet and put Vice-President Harris in charge of the effort. As he noted, his Americans Jobs Plan includes $100 billion for expanding broadband. This is a needed step forward to closing the digital divide. However necessary, it is not sufficient. As I have pointed out before, the issue is not about technology diffusion but about inclusion. That will require steps to improve digital literacy and changes in work organization so that everyone has the skills and opportunities to make use of the technology.

That was the theme of a 2001 conference report I wrote on Inclusion in the Information Age: Reframing the Debate. The insights from that report are still valid today:

Point one: Focus on the transformation, not the technology.  

 At its heart, the issue of the “digital divide” is not simply a question of technological deployment. The broader issue concerns the transformation to what, for lack of a better term, we call the Information Age. The end purpose is not to narrow some gap, but to ensure that everyone has access to the expanded opportunities. Our framework should be one of inclusion for all in the broader activities that make up society and the economy. Our goal should be to facilitate the transformation to help everyone participate in civic and economic activities, however those activities are carried out in this new information age.  

 Point two: Review and coordinate efforts.

The problem has aspects of telecommunications policy, such as infrastructure and standards, and elements of technology policy, such as research and development and technology deployment. It also draws from information policy in the areas of content. But it also has aspects of policies on training and workforce development, education, economic development, housing and community development, human services and trade.  

 Reaching our goal requires a coordinated approach – in the private, public and non-governmental sectors – that combines the various elements of providing opportunity and inclusion in the information age.  

 In terms of governmental policy, this means that the focus of digital opportunity efforts should be the White House, not any one department or agency. Since the issue spans agency boundaries, the point for coordination of efforts must be the National Economic Council (or whatever structure the President chooses to coordinate policy at the White House). The bully pulpit of the Presidency should be used to highlight local community initiatives and promote government and private sector programs.  

 It is also time to take a new look at some policy areas. For example, a comprehensive approach is needed toward all parts of managing the information commons: privacy, intellectual property rights, “right-to-know” policies and other related areas.  

 Point three: Work to ensure that everyone has access to the technological infrastructure.  

 As discussed throughout this report, barriers to access to the infrastructure are many. Ways of overcoming those barriers are also varied, including public access facilities that can combine access with training and other activities, as well as home access.  

 With respect to access in the home, we must return to the question of universal access. The concept of universal access is built on the notion of a necessary public utility that requires government action to ensure that it is available to all. As the convergence of telecommunications and media takes place, is IT and the Internet more or less a public utility? And if so, what is the role for the government in guaranteeing universal access? We need to re-look at the concept of universal access in light of the coming convergence.  

 The development of broadband capabilities around the country is rapidly becoming a predicate for access – both at home and at work. Some worry about an over-built broadband system.57 Tell that to the millions of people in rural America and the inner cities who don’t have access to broadband – and to those who struggle to get POTS (plain old telephone service).  

 Since the conference, a number of competing proposals have come forward to facilitate the development of broadband. It is beyond the scope of this report to examine those proposals. However, as part of our discussion of universal service, we should examine our goals for broadband deployment. For example, Canada has committed to having broadband reach every community by 2004. The goal is to utilize the technology for on-line education and health care, especially in rural areas – and to help Canadian small- and medium-size businesses compete.58 Whether or not the Canadian model is applicable here is an open question. It is, however, a question that should be discussed.  

 It is important to recognize that there is no single model for the places where the public may gain access to the new IT infrastructure. Both home use and public access points are important. Multiple access public points are needed, such as existing public facilities, training centers, libraries, and after-school centers. For such public access sites, maintenance and on-going operational support is a must. This includes mundane issues, such as security, janitorial support, utilities as well as the more IT specific, such as network administrators and other technical support personnel. We need to bolster and expand programs, such as those at the Commerce and Education Departments, which support these activities.  

 Beyond support for on-going operations, there is the issue of funding for organizational development. There are many community efforts throughout the country to promote access, all of which struggle with organizational problems. Sustainability is the key. A grant here and there from the government and foundations is not enough.  

 The bottom line is not just access to information technology, but the utilization of that technology by organizations and individuals to better peoples’ lives. We must work to weave information technology into the operations of community groups in a way that will both help individuals use the technology and will make those groups more efficient and effective in their core mission.  

 Some of the barriers to digital inclusion are physical: the usability of the technology. This is not, as commonly thought of, an issue only for those with disabilities. The problems of usability and human-machine interfaces affect all of us. Surveys show that one major reason people do not use computers and the Internet is that it is too difficult. Research on ways to increase access for those with disabilities will pay off in increased usability for all. Recent Federal rules require that government web sites be accessible to the disabled. We need to build upon these efforts to make usability and accessibility part of all web sites, and a regular part of a good web design training program.  

 Point four: Encourage and facilitate participation and involvement by all in the digital economy and information society.  

 Participation and involvement begins with the usability of the technology. Technology must meet people’s needs – not define those needs. Information technology can help people in their day-to-day lives if it is designed and structured in such a way that it helps answer their questions and solve their problems. Otherwise it becomes a barrier and a source of frustration. This is the danger of what some refer to as the “over-wired” world.  

 It is important to understand that individuals have different needs. A one size- fits-all may help some – and increase their participation and involvement – but will block others. By focusing on “demand-pull,” rather than “technology-push,” we can better tailor the technology to meet individual needs.  

 Development of meaningful content is one of the ways to increase the level of participation. Involvement will increase as compelling content is available. For example, information on health care is a major draw for many. Increased educational content and help for parents and teachers in using that content is another way of promoting utilization. The other way to increase participation is through support for the development of locally-based content. Not only does locally-based content give individuals a reason to participate, the process of creating community-relevant content itself stimulates involvement. Some foundations have stepped up to this task. But more can and should be done by both the public and the private sectors.  

 In the area of e-government and political participation, the question of involvement and access takes on a special significance. We need to make sure that egovernment is available to all. If a government (Federal, state or local) is going to deliver services or make information available through electronic means, then it is incumbent that the government promote access for the purpose of allowing these services to be widely delivered to everybody in the community. No services or information should be removed or dramatically cut back from traditional means of dissemination in favor of electronic dissemination until and unless all members of the community have access to that electronic means as easily as they have to the traditional means.  

 Point five: Focus economic development on the Information Economy, not the Internet Economy.  

 The information age will require a new approach to economic development. It is not about replicating Silicon Valley. It is about helping existing businesses and existing (and potential) entrepreneurs become more competitive by using technology. Key to the process is using and developing assets: financial, social, skill-based, and information assets. We must focus on building the local economy’s vitality and ability to compete in the age of globalization and help people make the switch to the new economy. One of our first tasks should be the development of processes for identifying and assessing local assets.  

 Revitalized programs for training the existing workforce should also be a top priority. Training programs should not be only for those who are laid off or are looking for a job. The new information age requires constant updating of skills. On-the-job training and incumbent worker training must be a large part of our workforce development activities. We must also expand our focus on all the various levels and forms of literacy and basic skills, including critical thinking skills.  

 We need special emphasis on how SMEs are making use of information technologies. It’s relatively easier for large firms, compared to small businesses, to incorporate new technologies into their operations. One idea that surfaced at the conference was to support mechanisms for collaborative learning amongst companies looking at the comprehensive use of information technology in small business.  

 We also need to foster entrepreneurship at all levels. New technology-creating (“high-tech”) businesses are important – but so are new businesses that use the technology. New entrepreneurial opportunities arise from the economic assets and the market demands of an area. Those may be high-tech based or not. The important point is not to replicate someone else’s strategy, but to grow the economy from the local assets, whatever they may be.  

 New innovative financial mechanisms are needed, both for dealing with “intangible” assets and to reach out to those communities left behind. Individual Development Accounts, micro-loans, and the New Markets Initiative in the FY2001 budget deal are cases in point. The New Markets Initiative is an example of a true bipartisan effort, which the Bush Administration and Congress would do well to emulate and build upon.  

 Collaborative learning and sharing of information is also important in the larger process of economic development. There are a number of examples of information assets being applied within businesses and local economies: the example given at the conference of ACEnet is a case in point. Economic development is an information intensive activity. We need to utilize new knowledge management techniques and old-fashioned communications techniques to collect, disseminate and better utilize that information.  

 Point six: We need a better understanding of what is going on.  

 One of the frustrations many people felt during the conference was based on their inability to describe what was happening in the economy. Since the date of the conference, the debate about the “old” and “new” economy has only sharpened. The concern is especially heightened in local economies. As one conference participant put it, “we’ve been gathering the same old data about the state of local economies in the same old way for 30 to 40 years and we haven’t caught up with the real trends and the underlying issues in local economies.” We need to re-look at the data needed for economic development in the information economy.  

 The problem of data extends beyond the scope of local economic data. We need both better data and expanded analysis of the socioeconomic aspects of the information technology. To quote the National Academy of Sciences:

Despite the significance of these impacts [of information technologies] for society, there has been relatively little investment in research to help understand, predict and shape them.60 We need to make those investments.  

 Expanding social science research is not enough. That research must be translated into policy relevant terms. In a cost-cutting effort in the 1990s, Congress eliminated the Office of Technology Assessment (OTA). This may turn out to be an example of false economy. OTA was widely praised as an authoritative and nonpartisan source of information on a variety of technology related issues. Congress should seriously consider re-establishing this agency.  

 Point seven: The decision-making process must be open.  

 True inclusion and opportunity can only occur in if the process of decision making is open and transparent. Information technology has a tremendous potential for opening and maintaining channels for general input and advocacy. However, decisions made about the technology can have the effect of closing off the process rather than opening it up. We must insure that all parties are at the table when decisions, including issues such as standard setting, are made. As noted earlier, having people with grass roots experience in on the discussions would greatly enrich the process. Everyone – the innovators and social entrepreneurs as well as “everyday people” – should be included.  

 The decision-making process will also affect the future development and utilization of information technology. Issues of trust, such as privacy and security, are key factors in that development. An open and transparent decision-making process will help foster trust and thereby foster technology utilization. A closed process will retard future development.  

 The need for an open process extends beyond the actions of the government. In America, we value and respect the rights of private citizens (individual and corporate) to conduct their business in private. However, the freedoms which are associated with the marketplace also need to be accompanied by responsibility. Issues of corporate responsibility are moving higher up on the agenda in connection with the issue of globalization. Some conference participants suggested that we need to start a national dialogue about corporate responsibility in the information age.  

 Point eight: Innovate and experiment.  

 We are in a time of transformation and change. The speed of that change and the pace of economic activity will vary. Yet the change is real and will continue.  

 In such a time, we must often invent new ways of coping with our problems and new policies for guiding our economy and society. This does not mean that we should throw out the old models and values. On the contrary, we should build upon what we cherish and what has worked in the past. But we cannot be bound by the constraints of “that is the way we always did it.”  

 In the area of public policy, we need to view our activities and programs as a series of experiments. As June Holley noted:  

Policy needs to be much more rapid – prototyping, we call it. So you get some innovations happening out there, and then you set up an environment when you can learn from those innovations…and begin to build sort of this moving wave of policy in that fashion.

 Such experimentation will require great policy discipline, however. It will require the ability to drop a policy or program when it is not working – regardless of how hard we fought for it in the first place. It also requires accepting and expanding a policy or program that work – no matter how much we opposed it originally. It also requires a strong, unbiased means of evaluating programs and policies. We must support and strengthen those organizations and institutions that undertake such evaluation.  

 We must also find means to ensure that the evaluations are timely for the fast-moving policy arena. The goal in evaluation is not simply proving the effectiveness of an action – it is to facilitate learning. Learning is the hallmark of the Information Age. Our public policy process must embrace that concept as tightly as the rest of our economy and society already have.

GDP data show growth in knowledge-related investment

Obviously the big story with today’s GDP numbers is the rebound in consumer spending. But the more important story for long run economic growth is what is happening in business investment. And there the picture looks bright.

Overall, private fixed non-residential investment grew at a health rate in the first quarter of 2021 (1Q21). The one exception was investment in non-residential structures (i.e., factories and commercial buildings) which declined ever so slightly.

More importantly, business (non-residential fixed) investment in knowledge-related areas is leading the way in the recovery. I define knowledge-related investment as the combination of investment in Information Processing Equipment, R&D, and Software. The first of these three categories is reported in the GDP data as a subcategory of Non-residential Fixed Investment: Equipment. The latter two are reported as subcategories of Non-residential Fixed Investment: Intellectual Property Products.

Knowledge related business investments did not suffer as great a cutback as other business investments in the COVID-19 slowdown and have been growing steadily since 2Q20 (see charts below). The now account for 57% of total business investment (up from 50% in 3Q19). Looking at only the two digital-related investments of ICT equipment and software, this subcategory makes up 40% of business investments.

[Note that the third subcategory of Intellectual Property Products category is Entertainment, Literary & Artistic Originals. Investment in this category was just barely up. Interestingly, this sluggishness comes despite the rise of non-fungible tokens (NFT) as an investment. I’m not sure how NFTs are incorporated into the GDP.]

Being productive is not necessarily the same as productivity

I keep hearing commentators tout the benefits of work at home for productivity by eliminating commutes. Less time commuting will not per se raise productivity (not accounting for the impact of less stress when reaching the office on productivity). It simply adds working hours to the day. More hours producing (i.e., “being productive”) does not increase the amount produced per hour (productivity). It does however increase GDP by working harder rather than working smarter. We need more working smarter.

More on measuring intangibles using SG&A

In earlier postings I described the work of Michael J. Mauboussin & Dan Callahan of Morgan Stanley (One Job: Expectations and the Role of Intangible Investments) and Luminita Enache & Anup Srivastava (“Should Intangible Investments Be Reported Separately or Commingled with Operating Expenses? New Evidence”) in using a reframing of companies’ reported operating expenses and SG&A (sales, general, and administrative costs) to measure investments in intangibles. That reframing divides operating expenses into R&D, advertising, Maintenance SG&A (expenditures needed to continue normal operations such as office and warehouse rents, customer delivery costs, and sales commissions) and Investment SG&A (spending that seeks to build organizational assets including employee training and customer acquisition costs).

Mauboussin & Callahan’s latest paper (“Market-Expected Return on Investment”) extends their discussion. Most of the paper involves a somewhat technical discussion of the use of the measure of return on investment known as MEROI (market-expected return on investment). For my purposes, I am interested their updates of their earlier calculations on intangible investments to 2020 and the breakdown they provide of intangible intensity by industry.

The updated chart (see below) clearly shows the massive increase in intangible investments over the past 20 years, along with the relatively minor impact of the COVID-19 slowdown. The financial meltdown of Great Recession appears to have had a much larger impact but was followed by a strong recovery.

Note that the data presented here is not exactly comparable with the data presented in the earlier article. Mauboussin & Callahan’s most recent calculations show intangible investment as the sum of Investment SG&A, R&D expenditures and advertising. The chart in the earlier paper showed each of these as separate. Also the chart in the earlier paper showed expenses as a percent of total assets. The newer chart shows total dollar amounts of expenditures.

The data provided on intangible intensity are also of interest – but in keeping with what I, at least, would expect. One concern, however. The intangible intensity calculations are from Duger & Pozharny’s paper (“Equity Investing in the Age of Intangibles”) which uses aggregate SG&A as their measure of intangible assets. I think this is somewhat problematic. As Enache & Srivastava pointed out, some industries, such as consumer goods, apparel, and retail, have higher maintenance costs than others. Thus, industries differ in the amount of SG&A that should be considered an investment in intangibles – which is not done in this case. Dugar & Pozharny argue that since they are presenting a relative ranking and not a value, this omission does not affect the findings.

The Mauboussin & Callahan article also provides some interesting references. One referenced paper that caught my eye is by Michael Ewens, Ryan H. Peters & Sean Wang, “Measuring Intangible Capital with Market Prices.” Ewens, Peters & Wang also use a modified version of SG&A. They estimate that only 27% of SG&A should be considered Investment SG&A (aka organizational capital). But they found a great variation by industry with a high of 40% for healthcare and a low of 19% for consumer goods. They also calculated industry intangible intensity as measured by the stock of intangible assets. Healthcare was again the highest with manufacturing being the lowest. [Not that for all the concern I raised about Duger & Pozhany’s findings, they are in keeping with Ewens, Peters & Wang’s analysis.] [Note also that Duger & Pozhany reference others’ estimates that 30% of SG&A is organizational capital.]

Source: Michael Ewens, Ryan H. Peters, and Sean Wang, “Measuring Intangible Capital with Market Prices,” NBER Working Paper 25960, January 2020

The papers cited above are just a few of the most recent studies using SG&A as a measure of investment in intangibles. There are a number of other papers referenced in the above cited papers. Clearly, academic interest in the topic and technique has been picking up.

Given all this new research, let me repeat what I said in an earlier posting: the SEC should create a “safe-harbor” provision to allow for an alternative reporting of companies’ sales, general, and administrative costs (SG&A). This alternative would refine the current reporting of SG&A to breakout spending on intangibles from more routine spending. Such a “safe-harbor” provision would not replace the current reporting requirements but simply allow companies to report additional information. This could serve as a pilot to determine if mandatory reporting of alternative SG&A data should be required.

As the articles and studies cited above (and many others) show, investments in intangibles are a major part of companies’ financial activities. Reporting on such investments is is long overdue. The tools for such reporting are available. SEC should facilitate their use.

First look at Biden’s budget

This morning the White House released a letter to Congress outlining President Biden’s budget request for FY 2022. While this is not the full budget documentation, it is similar to what previous incoming Administrations have done to weigh-in on the Congressional appropriate process. The full budget documentation will be released later this spring. As this budget request does not include enough detail (especially what would normally be found in the Analytics section), it is not possible for me to provide a description of federal investments in intangible assets. Once the forthcoming full budget is available, I will provide a detailed analysis.

However, here are some of the highlights contained in this request:

  • Funding to create a new Directorate in NSF to “help translate research into practical applications” with a focus on emerging technologies.
  • Funding to launch the Advanced Research Projects Agency for Health (ARPA-H)
  • Establishment of two more Manufacturing Innovation Institutes (under the Manufacturing USA program)
  • Nearly doubling the budget for the Manufacturing Extension Program (MEP)
  • Increased funding for federal R&D in general with additional funding for various clean energy programs
  • Increased funding for education and worker training programs
  • Funding for the Justice Department to protect government funded R&D from foreign government interference and exploitation
  • Increased funding for Growth Accelerators, Regional Innovation Clusters, and the Federal and the State Technology Partnership Program.
  • Increased funding for SBA’s capacity to expand the SBIR and STTR programs.

Needless to say, the budget request contains a lot more even if it is not as detailed as the full budget. As such it gives an outline of the direction the President’s policy is going. The request is consistent with everything we have been hearing about what is being called “Bidenomics.” As commentator David Brooks noted, “Bidenomics is a massive bid to promote economic dynamism.” And the mechanism I would summarize as investment, investment, investment.  

More to come when the full budget is released.

Tangible and intangible employment up in March

Good news in this morning’s employment data from BLS: employment increased by 916,000 in March (much higher than expected) and the unemployment rate dropped to 6%. As the BLS notes, the improvements reflect the continued resumption of economic activity that had been curtailed due to the pandemic – especially in industries with direct public contact. Employment in Accommodation & Food Services was up by 215,900 (1.8%) and Arts, Entertainment & Recreation employment was up 64,400 (3.7%). Importantly, in the tangible producing industries, Construction and Mining was up 130,000 (1.6%), Manufacturing was up 53,000 (0.4%), and Trade, Transportation & Utilities was up 94,000 (0.3%). For the intangible producing industries, employment in Professional & Business Services was up 60,500 (0.3%), Education & Health Services was up 102,100 (0.5%), and Government was up 136,400 (0.7%).  

As a result, the employment split between tangible-producing and intangible-producing industries remained the same.

For more on the categories, see my explanation of the methodology in an earlier posting

Past analysis of intangible investments in federal budgets

When I converted this blog from Athena Alliance (when we shut down the think tank), many of the links to earlier posting and papers were broken. Given the recent interest in federal government budgeting and investments, below are the correct links to the two papers:

Federal investments in intangibles – President’s proposed FY 2014 budget

Federal investments in intangibles – President’s proposed FY 2016 budget

You can also find all of the links to the old papers and presentations here.