OECD data

Washington — or Its Accountants — Finally Accept the Idea-Based Economy

Today, the Bureau of Economic Analysis (BEA) will put in place a set of critical changes in how it measures America’s gross domestic product (GDP). The most important change reclassifies what businesses spend on research and development, which now will be counted as an economic investment rather than an ordinary business expense. By so doing, the country’s official national accounts finally recognize that ideas play the same role in prosperity and income growth as new factories and equipment. More important, the change signals that Washington — or at least its accountants — accept that the country has an idea-based economy.

I was present at the creation of these changes. In the late 1990s, while overseeing the BEA as Under Secretary of Commerce for Economic Affairs, I helped them set up the first tests of how to approach R&D as an investment. Then as now, this shift was a no-brainer. Those of us who study what makes economies grow learned as students that innovations drive growth even more than new capital investments. Based on the strict patent protections which the United States has embraced since the time of the Constitution, Americans always have known this intuitively. So for more than 200 years, the world’s most market-based economy has granted temporary monopoly rights to anyone who comes up with a new invention.

Investors clearly believe in the value of patents and the inventions they animate. A new study covering more than eight decades of patents (1926-2010) has found that when a company receives a new patent, its stock market value increases on average by $19.2 million (in 2013 dollars). Even setting aside such blockbuster patents as the core inventions from Apple or Google, the researchers found that the median bump in a firm’s stock market valuation after receiving a patent was $5.9 million.

In fact, intellectual property and, more broadly, intangible assets now virtually dominate American business. Since the mid-1990s, American firms have invested more in new, intangible assets — databases, brands, worker training and competencies, as well as R&D and patents — than they have in new physical assets. That tells us that businesses now expect to earn more from ideas in their various forms than from their plant and equipment.

Here, too, investors agree. In 1984, the “book value” of the 150 largest U.S. corporations — what their physical assets would bring on the open market — was equal to about three-quarters of their stock market value. So, nearly 30 years ago, large American businesses were worth about one-quarter more than the plant, equipment and real estate that generated their profits. By 2005, the book value of America’s 150 largest companies equaled just 35 percent of their stock market value. By that time, about two-thirds of their value came from their intangible assets, because those assets had become the main source of the value and profits which large companies generate.

This shift to intangible assets is not confined to popularly-recognized “idea-based” industries such as information technologies and biotechnology. A 2011 analysis by Kevin Hassett and myself found that by 2009, intellectual property, strictly defined, accounted for at least half of the market value of not only the software, telecom and pharmaceutical sectors, but also such disparate industries as food, beverages and tobacco, media, healthcare, professional services, household and personal products, consumer services, and autos. And when we expand the category to all intangible assets, broadly defined, those idea-based assets accounted for at least 80 percent of the market value of all of the industries just mentioned, plus capital goods, materials, transportation, and consumer durables and apparel. That covers every major industry except retail, real estate, banking, energy, and utilities.

Now that the official accounts for the American economy finally treat the R&D that leads to most patents and innovations as economic investments, we can also better track and compare their value. For instance, we now know that U.S. businesses have spent less on R&D in recent years than they did in the 1990s — and that nevertheless, the United States spends more on R&D than all of Asia and Europe combined.

U.S. companies and individuals hold about 25 percent of the world’s patents, a share close to America’s 22 percent share of worldwide GDP. America’s real advantage in this area, however, probably lies in its outsized willingness to fund the young enterprises that often develop new, patented advances. So, while the United States claims 25 percent of all patents, the Organization for Economic Cooperation and Development (OECD) reports that we also account for roughly half of all worldwide venture capital investment.

America’s shift to an idea-based economy inevitably will shape much of our economic future. The information and Internet technologies so integral to creating and managing ideas have spread across every economic sector. Within each industry, those firms most adept at applying those technologies to their operations will, on balance, be the ones most likely to succeed. That has already become gauge for investors to use and watch. More important, a widening gap has opened between the incomes of most Americans and the incomes of the top 20 percent of workers who are already adept at creating and managing ideas or at least operating in workplaces dense with information and Internet technologies. Finding new ways to enable most Americans to prosper in an idea-based economy is now the most pressing economic challenge facing Washington policymakers.

This post was originally published in Dr. Shapiro's blog

Is America Still a Top Destination for Immigrants?

American exceptionalism has become a theme of our immigration debate.  From both sides, we hear that America is a uniquely desirable place that, for good or ill, draws an outsized share of the world’s immigrants.  The truth of this matter is that large-scale immigration is a worldwide phenomenon tied to contemporary globalization.  Porous borders and rising education levels have allowed tens of millions of people in developing societies to become more mobile, and new communications and transportation technologies give everyone access to information about other countries and ways to get there.  Perhaps most important, rising global demand has created vast new opportunities for foreign labor – whether it’s to bolster shrinking labor pools across much of Europe, provide services in thinly-populated, oil-rich countries in the Middle East, or cater to wealthy global elites in dozens of tax havens.

So, despite dire warnings that U.S. immigration reform will set off another invasion of America by new immigrants, the data show that many other countries are stronger magnets for foreign workers than the United States.  In fact, when it comes to foreign-born residents, America looks fairly average.

It is true that more foreign-born people live in America today than anywhere else.  But that’s mainly because we are a very large country, with more native-born people as well than anywhere except China and India.  And most of our immigrants came here with our permission: Two-thirds of all foreign-born people living in the United States are naturalized citizens or legal permanent resident aliens, and another 4 percent have legal status as temporary migrants.  That leaves about 30 percent who are undocumented.   

Consider the percentages of foreign-born residents living today in various nations:  America with just under 13 percent of its population foreign-born, according to U.N. data, ranks 40th in the world for immigrants as a share of the population.  By contrast, across the 10 most immigrant-intensive countries, foreign-born people account for between 77 percent and 42 percent of their total populations. 

These unusually high proportions of immigrants appear to be generally linked to global trade and finance.  In the top 10, for example, we first set aside the special cases of Macau and Hong Kong, whose Chinese populations are counted as foreign-born, and Vatican City.  Of the remaining seven nations, four are in the Middle-East – Qatar, the United Arab Emirates, Kuwait, and Bahrain – where tens of thousands of foreign workers are needed to help meet global demand for oil and provide services for native populations grown wealthy off of their oil.  The other three countries in the top 10 are global tax havens and financial centers – Andorra, Monaco, and Singapore -- that draw thousands of global elites followed by foreign workers to provide their services.  

The next 10 most immigrant-heavy countries, where foreign-born persons comprise between 42 percent and 22 percent of their populations, include five more tax havens (Nauru in Micronesia, Luxembourg, Lichtenstein, San Marino, and Switzerland) and three more oil rich, Middle Eastern countries (Saudi Arabia, Oman, and Brunei).  The two others in this group are the special cases of Israel, where Jewish national identity is the draw, and Jordan, home to tens of thousands of people displaced by the Iraqi and Israel-Arab conflicts.

Beyond the top 20 countries for foreign-born residents, numerous other nations that more closely resemble the United States, in economic opportunities and social benefits, also draw immigrants in greater relative numbers than America.  For example, some 19 percent to 20 percent of the populations of Australia and Canada are foreign-born, compared to our 13 percent.  Austria, Ireland, New Zealand and Norway also lead the United States in immigrants as a share of their populations, as do the smaller and less-advanced nations of Estonia, Latvia, Belize, Ukraine, Croatia, and Cyprus.   A similar pattern emerges from OECD data covering 25 industrialized countries from 2001 to 2010.  Over that decade, the share of the American population born somewhere else has averaged 12.1 percent.  By this measure, the United States trails not only such countries as Australia, Austria, Canada, Luxembourg, Switzerland and Israel, as noted above, but also Sweden, Germany, and Belgium. 

This pattern also does not change much when we look at the most recent, annual “net migration rates” of various countries (2012).  That’s a standard demographic measure calculated by taking the number of people coming into a country, less the number of people who leave, and divide by 1,000.   Using that measure, the United States ranked 26th in the world.   At 3.6 net immigrants per-1,000 in 2012, we trail far behind three oil-rich countries averaging 24.1 net immigrants per-1,000 (Qatar, UAE, and Bahrain), 13 tax havens averaging 10.8 per-1,000 (from the British Virgin Islands and the Isle of Man, to the Cayman Islands and Luxembourg), and two countries that have become sanctuaries for refugees (Botswana and Djibouti at 14.9 per 1,000).  In addition, at least four other advanced countries also had much higher net migration rates last year -- Australia, Canada, Spain and Italy, averaging 5.3 net immigrants per-1,000 or a rate nearly 50 percent higher than for the United States.

Given the role of labor demand in migration flows and the particular demand in the United States for skilled workers, it is also unsurprising that, according to the Census Bureau, almost 70 percent of foreign-born people residing here, by age 25 or older, are high school graduates.  In fact, nearly 30 percent hold college degrees, the same share as native-born Americans.  On the less-skilled part of the distribution, of course, we find many undocumented male immigrants.  But as we showed in a 2011 analysis for NDN and the New Politics Institute,  undocumented male immigrants also have the highest labor participation rates in the country:  Among men age 18 to 64 years, 94 percent of undocumented immigrants work or actively seek work, compared to 83 percent of native-born Americans, and 85 percent of immigrants with legal status.

On balance, the data show that the United States is not home to an unusually large share of immigrants, legal and otherwise.  As globalization has increased the demand for labor in dozens of countries while lowering the barriers to people moving to other places for work, America has become fairly average as a worldwide destination.   

This post was originally published in Dr. Shapiro's blog

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