The Intangible Economy

This morning's BEA trade data for January had some welcome news that the deficit declined slightly to $37.3 billion, down from the revised December level of $39.9 billion. Both imports and exports declined. That does not speak well for the health of the recovery. The largest decreases in import were in automotive vehicles, capital goods, and consumer goods. Oil imports also dropped dramatically. According to the Wall Street Journal, economists had expected the deficit to rise to $41 billion.

Our trade surplus in intangibles also improved in January, growing slightly to $12.3 billion. Unlike the overall trade flows, both exports and imports of intangibles increased, with exports rising slightly faster than imports.

Our deficit in Advanced Technology Products also decreased in January, down to $3.3 billion from December's $4.9 billion. The details reveal, however, that this is not necessarily due to good news. The improvement was due to $2.7 billion drop in imports of information and communications technologies. Exports of aerospace technologies and information and communications technologies declined substantially. And BEA and the Census Bureau note that exports were over stated by $558 million because of non-disclosure requirements. The last monthly surplus in Advanced Technology Products was in June 2002 and the last sustained series of monthly surpluses were in the first half of 2001.


The other news is that the 2009 data has been revised. The new data shows higher levels of exports and lower levels of imports in the second half of the year. As a result, the intangibles trade surplus for 2009 is $4 billion higher than previously reported.
Note: we define trade in intangibles as the sum of "royalties and license fees" and "other private services". The BEA/Census Bureau definitions of those categories are as follows: Royalties and License Fees - 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. The term "royalties" generally refers to payments for the utilization of copyrights or trademarks, and the term "license fees" generally refers to payments for the use of patents or industrial processes. Other Private Services - Transactions with affiliated foreigners, for which no identification by type is available, and of transactions with unaffiliated foreigners. (The term "affiliated" refers to a direct investment relationship, which exists when a U.S. person has ownership or control, directly or indirectly, of 10 percent or more of a foreign business enterprise's voting securities or the equivalent, or when a foreign person has a similar interest in a U.S. enterprise.) Transactions with unaffiliated foreigners consist of education services; financial services (includes commissions and other transactions fees associated with the purchase and sale of securities and noninterest income of banks, and excludes investment income); insurance services; telecommunications services (includes transmission services and value-added services); and business, professional, and technical services. Included in the last group are advertising services; computer and data processing services; database and other information services; research, development, and testing services; management, consulting, and public relations services; legal services; construction, engineering, architectural, and mining services; industrial engineering services; installation, maintenance, and repair of equipment; and other services, including medical services and film and tape rentals.

This morning the National Governors Association Center for Best Practices and Council of Chief State School Officers released their draft K-12 Common Core State Standards for comment. The standards are the latest attempt to set some form of national standards, in this case in English-language arts and mathematics. According to the groups announcement:

These standards define the knowledge and skills students should have within their K-12 education careers so that they will graduate high school able to succeed in entry-level, credit-bearing academic college courses and in workforce training programs. The standards are:

• Aligned with college and work expectations;
• Clear, understandable and consistent;
• Include rigorous content and application of knowledge through high-order skills;
• Build upon strengths and lessons of current state standards;
• Informed by other top performing countries, so that all students are prepared to succeed in our global economy and society; and
• Evidence-based.

These common standards seem to me to be a step forward in boosting effective investments in one of our most important intangible assets: education. I have somewhat wary of the standardized test approach to education. It seem that approach is more suited to the old industrial era than the current information age. People have different learning styles and different forms of "intelligence" that can be hard to capture in standardized test. However, a common core of expectations of the foundational skills that children should have seems to me to be an important starting point.

For example, I support efforts to improve STEM (science, technology, engineering, math) education -- not because I think we should try to make everyone into a techie (that would be a disaster on so many levels). I support STEM because math and science are foundational skills needed for many activities -- including critical thinking and deductive reasoning.

In my quick look at the materials, I did find one slightly amusing note. The reading standards for kindergartners includes the following:

1. Demonstrate understanding of the organization and basic features of print.

a. Identify the front cover, back cover, and title page of a book.
b. Follow words from left to right, top to bottom, and page by page.
c. Understand that words are separated by spaces in print.
d. Recognize and name all upper- and lowercase letters of the alphabet.

I wonder in a future electronic print world if the ability to recognize the front cover of a book will be a foundational skill.

The draft standards are out for comment until April 2.

As noted in my previous posting, productivity growth is the key to sustainable long term economic growth. But the productivity data needs to be looked at with a careful eye. And not all productivity growth in the short run helps with other economic issues, such as employment. The Wall Street Journal's Real Time Economics blog raised this point yesterday in a posting "Productivity Surge May Hurt Job Growth, Fed Paper Says". The posting describes a study by two San Francisco Fed economists Mary Daly and Bart Hobijn on Okun's Law and the Unemployment Surprise of 2009. The study found that:

In 2009, strong growth in productivity allowed firms to lay off large numbers of workers while holding output relatively steady. This behavior threw a wrench into the long-standing relationship between changes in GDP and changes in the unemployment rate, known as Okun's law. If Okun's law had held in 2009, the unemployment rate would have risen by about half as much as it did over the course of the year.

So, productivity is bad for employment - right? Not necessarily. It is not uncommon for productivity to rise in a downturn. Remember that productivity is a measure of output per unit input. In times of growth, productivity measures how much additional output is generated per input. In a recession, companies frequently shed the least productive inputs first while trying to at least hold output steady. If inputs shrink faster than outputs, productivity rises. As the paper notes:

Some of the surge in productivity growth in 2009 was likely due to such cyclical factors as layoffs of least productive workers, greater intensity of work effort, and shifts away from producing intangible capital, which is not measured in output statistics.

Thus, the short term productivity increase may have little to do with increased investments in knowledge, technology, business processes, and other intangibles. Those investments still need to be made if, from a long run perspective, will want to see productivity increases creating growth and employment.

But, as the paper warns, "Anecdotal evidence suggests that efforts to contain costs and remain nimble in the face of uncertainty have become a fixture in business strategy." As a result, the link between GDP growth and employment is not as strong as it was. This result is also evident in the decade long stagnation of wages and the pattern of "jobless" recoveries. In every recession in the past few decades has resulted in structural adjustments, not just cyclical changes. Workers are not on temporary layoff subject to recall--jobs are permanently eliminated.

Such a shift in economic structure and business strategy is part-and-parcel of the shift to the I-Cubed Economy. It is one that we need to build new labor policy mechanisms to address.

Over at Forbes, Bruce Bartlett has an cogent discussion of the federal deficit and debt (How Much Does The National Debt Matter?). In the piece, he talks about whether we can grow our away out of deficit. He is rather pessimistic about that idea--arguing that productivity growth cannot be large enough. He is especially hard on those who argue we need to cut taxes to spur growth:

it's highly unlikely that further tax cuts will do much to increase growth when they will add to the deficit and taxes are already at their lowest level as a share of GDP in almost 60 years--more than 3% of GDP below the postwar average. In any case, the biggest problem businesses have today is a lack of customers, not high taxes.

He goes on to note:

Recently some foolish bloggers have suggested that it would be better to default on the debt than raise taxes. That would, of course, cause tremendous hardship for millions of Americans because some $800 billion in Treasury securities are owned by private investors, almost $700 billion are owned by mutual funds, more than $500 billion are owned by state and local governments and more than $300 billion are owned by pension funds, among others. I tend to think that they won't take too kindly to the idea that raising taxes would be worse than paying them the money they are owed. In the end the debt must be paid, and we will have to raise taxes and cut spending to make sure it is.

I don't often agree with Bartlett, but I think he is probably right about how we are going to get ourselves out of this situation. The fact that some folks are actually talking about default shows the depth of the lack of understanding--and frankly scares me silly.

I would argue, however, that he may be too pessimistic about productivity. As the recent Economic Report of the President notes we have had strong growth in productivity--with some recent problems:

From 1996:Q1 to the last available observation (2009:Q3), it averaged 2.7 percent per year, almost equal to its rate over the immediate postwar period. But that rapid growth was concentrated in the first part of the period. In the first eight years (1996:Q1 to 2003:Q4), productivity growth averaged 3.3 percent; in the four years before the business cycle peak (2004:Q1 to 2007:Q4), it averaged only 1.7 percent.

We need to get back to the 3.3% (or even the 2.7%) rate. I do agree that across the board tax cuts are not the solution to the productivity question. Investment in intangibles is.

Unfortunately, such investments often take a long time to pay off. And it is easier to take the short run fix. An example of this is illustrated in a recent story in the Wall Street Journal Schools' New Math: the Four-Day Week. The story notes that kids still have the same number of classroom hours, in a compressed week. And it is unclear whether a four day week has any impact on learning, especially if the fifth day is supplemented by additional tutoring. But the mere idea of cutting back on investments in education runs counter to the direction we need to go to restore productivity growth.

As we confront the deficit issue, let us how we are not "penny-wise and pound-foolish." But if that was not the normal human response, we wouldn't have such clichés in the first place. Not a comforting thought.

This morning's BLS employment data was much better than feared. The unemployment rate stayed steady at 9.7% and the economy lost "only" 36,000 jobs. According to Wall Street Journal estimates, economist "were expecting payrolls to fall by 75,000 mainly because of the severe weather."

However, number of involuntary underemployed (part time for economic reasons) and those part time because of slack work both increased dramatically in February. Not a good sign. But, as I've said before, let's not read too much into one month's data -- especially a month with two major snow storms.

Involuntary Underemployed