Comments on DATA WATCH: Implementation of a New Architecture for the U.S. National Accounts

1. www.conference-board.org Comments on DATA WATCH: Implementation of a New Architecture for the U.S. National Accounts Bart van Ark The Conference Board January 4th, 2009

2. The link between theory and practice in national accounting is the key to its relevance • As economic policy priorities change, (national) accounting needs to find a balance between a sound theoretical basis and flexibility in applications • In other words: the house needs to be build so that it can serve many different dwellers • The foundations of SNA (production, income and expenditure) are strong, and Jorgenson/Landefeld proposal adds and in line with SNA • But some key elements are still missing in SNA – at least in terms of implementation: • A complete production account • A complete wealth account • Without those elements the “real” and “financial” sources of growth, as well as their relationship, cannot be adequately analyzed

3. Main concerns when balancing different interests in national accounting applications • Seek balance in NA system to serve interests in : • Short run and long run • Real and monetary • Public and private • Observables vs. imputations • Expenditure, income and production • National and international • What to do in the rest of the world, which : • does not have that strong a statistical base • has statistical framework which is more strongly anchored in administrative and regulatory framework • The ultimate test is not the concept but its implementation

4. Jorgenson/Landefeld proposal of new architecture is particularly supportive of better measuring productivity • In building a complete production account for growth analysis we need to accept some basic principles from economic (growth) theory • neoclassical growth principles are default • growth account can be derived from production account • Reach out to bring intangibles into the accounts • “Any outlay than is intended to increase future rather than current consumption is treated as a capital investment” • Innovation theory will push concept much further than current accounts • “Link growth account to national accounting system by way of complete production account • Improve measurement of services output: is current theory and practice adequate to capture it? • price * quantity * quality • non-market vs. market services

5. KLEMS Growth and Productivity Accounts complements National Accounts • EU KLEMS is analytical research database, based on national accounts and complementary official sources (LFS and production statistics) • Long time coverage 1970-2005, with greatest detail for post-1995 • Harmonized industry classification, capital and labour input, deflation and industry aggregations (e.g. market economy, market services) • Decomposition of capital and labour input: • Capital assets in 7 asset types • Labour input in 18 categories (3 x skill; 3 x age; gender) • Broad coverage of EU countries and comparisons with U.S. and Japan • Public database: www.euklems.net (latest update March 08) • In recent work complement with intangibles capital input measures

6. The theoretical issues in measurement of intangible investment in national accounts framework • Inherent measurement difficulties of intangible capital going beyond those of tangible capital as follows: • The knowledge-input problem • The knowledge-investment problem • The quality improvement problem • The obsolescence problem (Howell, 1996) • No clearcut distinction between tangibles and intangibles that justify a distinction between capitalizing and expensing • “Any outlay than is intended to increase future rather than current consumption is treated as a capital investment” (Hulten, Corrado, Sichel, 2005)

7. Sources for growth accounts Data Sources of Growth Accounting 1. Value-added: EU KLEMS based on national accounts 2. Labor Input: EU KLEMS based on national accounts and LFS Compensation and hours worked by 3 skill levels. 3. Tangible assets (Investment & Stock): EU KLEMS based on national accounts 4. Intangible assets (Investment & Stock): our estimation. 5. Deflators and Depreciation rates. * Tangible assets: EU KLEMS. * Intangible assets: EU KLEMS for software and databases, and CHS (2006) for all the other intangible assets.

8. Intangible capital classification by Corrado, Hulten and Sichel Source: Corrado, Hulten and Sichel (2005)

9. Annual Change in Labor Productivity in the Market Sector, 1995-2003 Ʃ Sources: EU KLEMS (March 2008), CHS (2006), MHW (2007) and The Conference Board (2008).

10. Joint role for academic and statistical community to effectively build and use new architecture • Growth accounts can be linked to national accounts through development of full-fledged growth account • Intangible accounting is in early days, but statistical description of knowledge economy is too far removed from reality to ignore • Academia and national accountants need to cooperate to: • develop concepts of intangibles • set (international) standards for measurement • provide value metrics of intangibles, e.g., survey metrics on innovation with quantitative magnitudes. • Transfer experimental and research based measures into national accounts satellites or analytical modules that can help to move the measurement agenda forward

11. The building stones for the bridge between theory and practice in national accounting • Make the System of National Accounts fit the needs of policy makers, business and academic users … • … and let them communicate • Official statistics need to be as precise as possible • … but it is sometimes better to be “imprecisely right than precisely wrong” (Keynes) • … requiring a balance between research and official statistics • Distinction between official or administrative national accounts vs. analytical or research accounts may be useful • Strengthen international comparability • Transparency is key !! (also in national accounting)