Increasing (and redefining) business spending

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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.


About "Part Time America"

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I'm a little chagrined at all the recent attention to the issue of part time workers -- specifically part time for economic reasons. The issue started getting attention earlier this year as economists, journalists and pundits discovered the involuntary underemployed (as I call them). The most recent punch-counterpunch on the issue is Mort Zuckerman's "The Full-Time Scandal of Part-Time America" (WSJ - subscription required) and Derek Thompson's "Here's What Obama's 'Part-Time America' Really Looks Like" (The Atlantic).

I first raised the issue back in November 2008 and started tracking the data on the involuntary underemployed back in mid-2009. As the chart below (published in July 2009) shows, involuntary underemployment started rising in the end of 2007 and peaked out in the spring of 2009. Involuntaryunderemployed.gif

Since then, the number of involuntary underemployed has remained high but gradually declined. The latest data for June 2014 shows a decline of 1.6 million part-timers to 7.4 million from a high of over 9 million in March 2009.

Involuntary underemployed June 2014.png

So, while I'm glad that others have finally started paying attention I wish they would get the story straight. The story is not about Obamacare and new incentives on employers to only offer part time work as some would claim. The number of involuntary underemployed peaked well before the time Obamacare was enacted by the Congress, let alone implemented.

The story is about the Great Recession and the slow recovery. It is about a waste of human capital and policymakers not paying attention. The number of involuntary underemployed is part and parcel of the entire employment picture. The involuntary underemployed are in the same labor market situation as the unemployed: not able to find a full time job. But while we have policies in place that supposedly help the unemployed find work (such as training programs and unemployment insurance), the underemployed are generally left to fend for themselves. As I said back in November 2008, "Few of the proposals in the stimulus package will help the worker whose hours have been reduced."

Maybe now policymakers will start looking at the underemployment problem more seriously -- and start treating it as a part of the total "wasted human capital" (aka unemployment) problem. Unfortunately, some seem to be drawing the wrong conclusions about the situation that will lead to the wrong policy prescriptions. We can do better.

Skills or Capabilities

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A recent posting on my friend Jon Low's blog The Low-Down triggered something in my thinking about the skills gap. The posting ("The Skills Gap Is Not a Supply Problem, It's a Management Challenge") talked about the question of acquiring skills from outside the company versus developing within. At the same time, I read an article in the Washington Post Capital Business arguing that high-tech companies acquisitions are motivated by gaining people not necessarily new products ("Yahoo's acquisition strategy is actually a talent strategy").

The question that these two articles prompted is simple: what are companies actually after? Is it skills or capabilities? Too often we confuse and conflate the two. But they are not the same. Skills implies an already mastered set of knowledge and abilities. Capabilities seems to me to be broader to encompass the ability to acquire new skills. The difference is key.

A quick look at any job posting website will confirm that these posting are for specific sets of skills. In fact, many automated job application sites contain very specific question about very specific skills. There are very few questions about the ability to learn new (and most likely firm-specific) skills.

Yet, we hear over and over that companies really hire on behavioral aspects. As one article ("Moneyball at Work: They've Discovered What Really Makes A Great Employee") put it "Using new tracking and analytic tools, researchers have learned to value things like adaptability, social and emotional intelligence, resilience, and friendliness, as well as raw intelligence."

So what is it that companies really want? As noted in an earlier posting, companies seem to be chasing the purple squirrel - the unique, unusual, and perfect candidate. Unfortunately for both the hiring companies and the applicants, unique means unique and perfect means perfect. And, I am afraid, too often that definition of perfect means exact skills rather than capabilities. So positions go unfilled waiting for the perfect skill set rather than hire the close-but-can-learn-quickly candidate.

But for those brought in during an acquisition (or "acqui-hires" as they are sometimes called), it seems that specific skills are only a part of the equation. Integrating the larger set of employee capabilities into to the new organization is the key to success.

Maybe we need to re-think the skills gap as a capabilities challenge.


May trade in intangibles

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In more economic good news, BEA's trade data for May released this morning shows the trade deficit shrinking by $2.6 billion to $44.4 billion. Exports were up by roughly $2 billion to a record level of $195.5 billion while imports were down by $0.7 billion. Economists had expected a deficit of $45 billion. However, hidden in the good news is the fact that the improvement is due to a drop in petroleum imports. The trade deficit in non-petroleum goods actually increased.

The trade surplus in pure intangibles ticked upward ever so slightly as both imports and exports grew. As the chart below shows, the biggest surplus is in charges for the use of intellectual property, followed by financial services and other business services. The largest deficit is in insurance services. Maintenance and repair services have a slight surplus while trade in telecommunications, computer, and information services is basically balanced.

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. Our Advanced Technology deficit declined somewhat in May to $7.6 billion, down from almost $8.4 billion in April. The improvement was mainly due to an increase in aerospace technology exports. Adding the pure and embedded intangibles shows an overall surplus of approximately $5.8 billion in May, up from $5.0 billion in April.

Note that this is the first month I am 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. 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. Other business services is a renaming of Other Private Services with those components removed.

The reclassification is not a perfect renaming, however. For some reason, the new classifications result in a total intangibles surplus that is significantly lower (17% to 30% depending on the year) than the surplus calculated under the old classification system. The difference is mostly in the export data, with difference in the import data fluctuating within a percent or two. I will try to have more of this later. [Update: a closer reading of the BEA article cited below reveals that 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. While I can only find quarterly data on these categories, their size is roughly sufficient to explain the difference I found between the old and the new categorizations. As I agree with the shift of these categories from private service to travel, I will continue to use the new categories]

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."

Intangibles trade-May14.png

Intangibles trade parts-May14.png

Intangibles and goods-May14.png

Oil goods intangibles-May14.png


June employment

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Good news from this morning's employment numbers. According to the BLS, the U.S. economy added 288,000 job and the unemployment rate dropped to 6.1% in June. Economists had expected only 215,000 new jobs.

The not-so-good news is that the number of involuntary underemployed (part time for economic reasons) ticked upward slightly in June. Both the number of those who could only find part time work and number of workers part time because of slack work rose. The total involuntary underemployment remains well above pre-Great Recession levels. This constitutes a continued waste of human capital.

Involuntary underemployed June 2014.png


    Note: the views expressed here are solely those of the author and do not necessarily represent those of Athena Alliance.


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