October 2003, Vol. 126, No. 10
Précis
Intra-regional differences in recession
Valuing the intangibles
Brains and the city
Intra-regional differences in recession
Business cycle analysis most often focuses on national economies. But, to borrow an aphorism from the political arena, all economics are local. Theodore M. Crone recognizes this as he discusses recent economic trends and business cycles in Delaware, New Jersey, and Pennsylvania in the Federal Reserve Bank of Philadelphia Business Review. After using a statistical filter to separate trend from cycle in economic activity indexes for the three States, Crone describes the often significant differences that occur even in contiguous locales.
The most obvious difference in trend is the slower growth in that component of Pennsylvania’s economy. This in part reflects the very slow growth of the labor force in the Commonwealth and an absolute decline in the trend component of economic activity during the early 1980s. That period was marked by severe recessions and widespread structural change that had a significant impact on a State economy so dominated by manufacturing industries as Pennsylvania’s.
As Crone examines the cyclical component of economic activity, it also appears that Pennsylvania’s cyclical downturns have been more severe than those of the Nation as a whole. On the other hand, New Jersey’s downturns were less severe than the Nation’s for the most part.
Delaware’s cyclical pattern was very different, according to Crone: "Delaware suffered one long cyclical downturn between August 1979 and August 1982—a period that spanned two downturns for the Nation and for the other two States in the region. Despite the length of the cyclical downturn in Delaware in the early 1980s, the cyclical decline in Delaware was less severe than the decline at the national level between 1981 and 1983." More recently, Delaware has had longer and larger cyclical losses than the Nation. As Crone points out, the duration of a cyclical downturn does not always correspond to its depth.
In remarks to a Federal Reserve Bank of New York conference on statistical needs in the 21st century, Baruch Lev suggests that between one-half and two-thirds of the total market value of publicly held corporations may reflect the value of intangible assets—the concepts, ideas, research results, development projects, knowledge bases, and working methods that drive results in an information-based economy. Unfortunately, says Lev, today’s accounting tools and standards do not themselves create very good information about investment in intangible assets. As a result, there is what he characterizes as a "significant deterioration" in the analytical value of important financial statements, a systematic undervaluation of firms that invest most heavily in creating intangible assets, and the misallocation of financial gains to persons with inside knowledge of the value of firms’ intangible investments.
As a professor of finance and accounting, Lev’s recommendations stress forming new standards for recognition of those aspects of intangible investment that should affect the main body of a firm’s financial statements or, perhaps as second best, for clearly disclosing intangible investments and their impacts.
In a more recent working paper at the National Bureau of Economic research, Jason G. Cummins seeks to extend the frontier of research possible with the accounting information currently available. In order to explore alternatives to realized market value as the metric from which to subtract tangible book value to create a measure of intangibles, Cummings also uses analysts’ profits forecasts, suitably discounted into the future, to create another measure of total valuation. This, in Cummings opinion, reduces the analytical problems introduced by the fluctuations of the stock market.
Cummins then constructs a sophisticated econometric model to estimate the separate impacts of tangible investment, information technology (IT) investment, and intellectual property investment on value. In his empirical approach, intangible capital is defined in terms of adjustment costs and is not a distinct input to production in the same sense as physical capital or labor. In Cummins’ words, "Rather intangible capital is the glue that creates value from the usual factor inputs." The results of his estimation suggest that there is little, if any, intangible value created by investments in intellectual property or non-IT physical capital, but that intangible "organizational capital" created by IT investment is rewarded with a 70-percent annual rate of return.
The impact of a bachelor’s degree on average individual economic outcomes has been quite well documented: Workers who have graduated from college are, on average, much less likely to be unemployed than are workers with less education and, when employed, have higher average earnings. Paul D. Gottlieb and Michael Fogarty, in a contribution to Economic Development Quarterly, ask if there are similar effects at the metropolitan area level of aggregation. They find that, at least at the extremes, there are.
In 1997, the most highly educated 10 metropolitan areas, as measured by the share of resident adults holding at least a bachelor’s degree had a per capita income level about 20 percent higher than the average while the 10 metropolitan areas with the lowest proportions of the adult population holding college degrees had per capita incomes about 12 percent lower than the average. And, as has been the case in many studies of individual income, the gap had widened over time: in 1980 the most educated cities, according to Gottlieb and Fogarty, received a premium of about 12 percent and the least educated cities a penalty of only 3 percent.
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