3Q GDP shows continued growth in intangible investments

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This morning's advanced estimate of U.S. 3rd quarter GDP from the BEA shows a healthy growth rate of 3.5%. Economists had forecast an overall growth rate of 3%. Personal consumption, exports, nonresidential fixed investment, and spending, and state were all major contributors to the growth. Part of that growth in nonresidential fixed investment was a 4.2% growth in business investments in intellectual property products (IPP), i.e. research and development; entertainment, literary, and artistic originals; and software. IPP investments had increased by 5.5% in the 2nd quarter.

Note that the measurement of intellectual property products by the BEA does not encompass all types of intangible assets. While the inclusion of R&D and entertainment, literary, & artistic originals in the GDP as an investment is a major step forward, more work on measuring intangibles still needs to be done.

IPP percent 3Q14 - 1st.png



Gap gets it

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As readers of this blog will know, I have occasionally posted stories about companies who don't seem to understand the meaning behind the phrase "our employees are our most valuable asset." The most recent of these was a month ago when I nominate IBM for the Circuit City award for how to destroy your human capital. The award commemorates 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). IBM won the award for mandating additional training for some workers (a good thing) but cutting their pay while they were in training (a very bad thing).

But there is good news as well. Today I am inaugurating the anti-Circuit City award. [I know, not a great name, but it will serve until I come up with something better.] And today's awardee is Gap. They seem to understand the role of human capital. According to a recent story in the Washington Post ("At Gap, selling a place to work, not just khakis"), Gap has been increases their wages and focusing on gender parity. Two reasons. One is to raise the company's appeal to customers. Second, to retain a higher skilled workforce.

Technology is increasingly making the job of a front-line retail worker more complex than folding T-shirts or using a cash register. For instance, the prevalence of "reserve-in-store" programs means there's a focus on finding workers who can convince shoppers to buy more than just what they reserved online."What we're asking our sales associates to do today versus what we asked for in the past is much more," [Gap HR Executive Dan] Henkle says.

Gap gets it.


Last fall OECD (the Organization for Economic Cooperation and Development) published Supporting Investment in Knowledge Capital, Growth and Innovation. This book-length report is the culmination of the first phase of its flagship project on New Sources of Growth: Knowledge-Based Capital. In a new Athena Alliance working paper, Knowledge about Knowledge: The OECD Project on Knowledge-Based Capital, Dr. Brian Kahin describes the report and explores the difficulties facing the U.S. government in addressing the issues raise in the report.

As Kahin notes:

The report exemplifies what makes OECD unique: the ability to cast a wide net and marshal diverse intellectual insights, across the OECD and within a large community of experts in government and academia. For national governments, OECD's analysis can be useful for overcoming path dependent, stovepiped, or politically constrained thinking. But in many cases, including the U.S. government, there is no logical port of entry for a report of this scope--for particular chapters, yes, but not the report as a whole.
. . .
OECD's vision of knowledge-based capital (KBC) covers investments in categories with diverse economic characteristics, some of which are difficult to measure. The kind of knowledge represented varies, as does the degree and nature of ownership and control. This diversity enables interaction with a wide range of policies that may ultimately enable or constrain investment in intangibles, but the linkages are less straightforward, more tangled, and decidedly less tangible than the familiar terrain of commodities, real property, and currency. The report is ambitious, connecting what can be quantified with what is emerging or unknown, gathering and developing insights that governments might not make on their own, and providing reference points and benchmarks for sophisticated policymaking.

The task is one of governance:

In a compartmentalized crisis-driven government, how do policymakers engage with subject matter this complex, heterogeneous, and, indeed, intangible? Issues that sprawl across multiple departments, jurisdictions, and policy domains are easier to ignore than those firmly within the remit of an established bureaucracy and chain of command.

He goes on to points out (and explore in some detail) four underlying factors that make it difficult for policymakers (and analysts) to get a handle on the issues:
   • the changing nature of assets and the relationship between sharing and control;
   • the increasing diversity, complexity, and context-dependence of knowledge;
   • accelerated change and growing tension between innovation and the cycles and timeframes of established institutions; and,
   • the latent differences within knowledge-based capital and the effects of availability bias on public policy.
Each of these discussions should be read in full.

In the end, Kahin is both hopeful and skeptical about the report's impact:

In many respects, Supporting Investment in Knowledge Capital, Growth and Innovation is OECD at its top of its form, probing economic frontiers for the benefit of its members and, increasingly, the global public. While it contains few new conclusions, it leaves governments better informed to develop their own in very murky territory. It invites further interaction with the secretariat and OECD peers.

Yet there are many in the U.S. who are skeptical of anything out of Paris and are convinced that the U.S. has little to learn from the rest of the world, let alone others in the OECD. While it has a small, ably staffed office in Washington, OECD lacks an enduring intellectual presence in the U.S. This is unfortunate in that the U.S. experience with new knowledge, innovation, economic competencies, and intellectual property often informs the experience and reactions of other countries--and the shaping of global consensus where that may be possible. It means that venturesome reports like this one do not get the traction they deserve.

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Note that the OECD project kicked off at a 2011 conference organized by Athena Alliance. As the result of that conference, we produced two reports. The first, Intangibles Conference Report September 2011 is our official report on the conference to OECD. The second, New Building Blocks for Jobs and Economic Growth: Intangible Assets as Sources of Increased Productivity and Enterprise Value -- Conference Observations, is my observations and synthesis. For more on the conference, including background papers and reports from the sessions is available at the conference archives.

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Brian Kahin is a Fellow at the MIT Sloan School Center for Digital Business/Initiative on the Digital Economy. He is also a Senior Fellow at the Computer & Communications Industry Association. He was Innovation Policy Fellow in residence at OECD's Science, Technology and Industry Directorate in 2012. The views expressed here are his own.


August trade in intangibles

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Good news as well about the August trade deficit. The deficit continued its downward trend by dropping in August to $40.1 billion from $40.3 billion in July (revised). August exports were up by $0.4 billion while imports were up by only $0.2 billion. Economists had expected an increase to $40.8 billion. While exports reached a record level, the improvement in the overall deficit was due to a decline in our petroleum goods imports. The deficit in non-petroleum goods actually grew slightly (see last chart below).

The surplus in pure intangibles also grew in August to $14.1 billion from $13.9 billion in July. Exports rose and imports fell. Net revenues from the use of intellectual property increased as revenues from foreign sources (exports) grew while charges for the use of intellectual property paid out to foreign sources (imports) declined. The other area of major improvement was maintenance & repair services where exports jumped and imports declined. The surplus in financial services improved only a small amount as exports of grew slightly more than imports. Business services exports also rose but imports of those services grew even faster resulting in a lower surplus in this category -- the surplus in business services has declined now for 7 months in a row. In telecommunications, computer, and information services, exports fell and imports rose leaving us with a slightly higher trade deficit in this area. In insurance services, exports were down but imports fell more causing a decline in this deficit.

Our Advanced Technology deficit also improved significantly in August, dropping to $4.5 billion from $6.9 billion in July. Exports of aerospace technology and information and communications technology increased while imports of information and communications technology dropped. These two factors accounted from most of 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 $9.5 billion in August, up from $7.0 billion in July.

Intangibles trade-Aug14.png

Intangibles trade parts-Aug14.png

Intangibles and goods-Aug14.png

Oil goods intangibles-Aug14.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."


September employment

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Good employment news from the BLS this morning. They report 248,000 net new jobs in September with the unemployment rate ticking down to 5.9%. Economists had expected a gain of 215,000 jobs. The number of involuntary underemployed (part time for economic reasons) also declined in September, largely due to a decline in slack work. The number of those who could only find part time work declined only slightly

As I've noted before, the high level of involuntary underemployed constitutes a waste of human capital. It also masks what is happening in the labor force. Jared Bernstein has pointed out in a recent NY Times article that there are two ways using just the unemployment rate gives a distorted view of the labor market. One is the changes in the participation rate affecting the unemployment rate. The second is the underemployed:

[T]here are over seven million involuntary part-time workers, almost 5 percent of the labor force, who want, but can't find, full-time jobs. That's still up two percentage points from its pre-recession trough. Importantly, the unemployment rate doesn't capture this dimension of slack at all -- as far as it's concerned, you're either working or not. Hours of work don't come into it.

As Bloomberg reports, this makes a difference for policy makers.

The labor-market recovery that Federal Reserve Chair Janet Yellen seeks is proving incomplete as many U.S. workers languish in part-time jobs.

Forty-nine percent of people working less than 35 hours a week in 2012 and desiring full-time work were able to find such a position within a year, according to research by the Federal Reserve Bank of Atlanta. That's down from 61 percent in 2006.

In addition, the almost 3 million Americans unemployed for at least 27 weeks are more likely to accept part-time jobs than counterparts out of work for shorter periods, according to a Chicago Fed paper. That means underemployment, a hallmark of the slow and uneven recovery from the recession, won't quickly dissipate, backing policy makers such as New York Fed President William C. Dudley who counsel patience in removing stimulus.

Involuntary underemployed Sept 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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