Going Beyond the System of National Accounts

Adoption of major features of the international SNA's government sector is increasing both the international comparability and the analytic utility of the U.S. national accounts. The nature and significance of these accounting changes have been discussed in the previous two sections. In this section, we discuss ways in which the accounts might be supplemented by additional information going beyond that presently called for by the SNA, pertaining to the definition and measurement of public investment and estimating productivity in government.

Expanded Measures Of Public Investment

Four possible ways of broadening the measure of public investment were discussed at the workshop: (1) introduction of an estimated net rate of return on public investment; (2) inclusion of all military investment in the capital account; (3) measurement of the investment value of government-supported research and development (R&D); and (4) measurement of government investment in human capital. We believe that, while the United States should conform to the SNA in order to gain the benefits of international comparability, supplementary information should be provided, perhaps in the form of satellite accounts. Particularly needed is the development of measures of the rate of return on public investment.

Net Return to Public Investment

The SNA provides for inclusion in government purchases of the costs of consumption of fixed capital. It does not provide for inclusion of a net return to



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--> Going Beyond the System of National Accounts Adoption of major features of the international SNA's government sector is increasing both the international comparability and the analytic utility of the U.S. national accounts. The nature and significance of these accounting changes have been discussed in the previous two sections. In this section, we discuss ways in which the accounts might be supplemented by additional information going beyond that presently called for by the SNA, pertaining to the definition and measurement of public investment and estimating productivity in government. Expanded Measures Of Public Investment Four possible ways of broadening the measure of public investment were discussed at the workshop: (1) introduction of an estimated net rate of return on public investment; (2) inclusion of all military investment in the capital account; (3) measurement of the investment value of government-supported research and development (R&D); and (4) measurement of government investment in human capital. We believe that, while the United States should conform to the SNA in order to gain the benefits of international comparability, supplementary information should be provided, perhaps in the form of satellite accounts. Particularly needed is the development of measures of the rate of return on public investment. Net Return to Public Investment The SNA provides for inclusion in government purchases of the costs of consumption of fixed capital. It does not provide for inclusion of a net return to

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--> government investment. In other words, it implicitly assumes that the net return (or "profit") on government investment is zero. The assumption of zero net return is implausible. If net return were really zero, it would imply substantial overinvestment in public capital. In fact, however, serious shortages of many types of public infrastructure, ranging from schools to transportation systems, are widely perceived to exist. If this perception is correct, it follows that the net return to many existing public investments and to properly directed additions to that capital stock is a positive return. Some recent studies suggest that the return is, in fact, quite high (for a review and an extensive bibliography, see Gramlich, 1994). The lack of a net return measure in the national accounts is not due to a belief that the net return is actually zero, but to the difficulties of estimating the return. Returns to private investment can be measured by the costs of obtaining capital to finance this investment. Expressed another way, market prices for business output must (in equilibrium) cover the costs of interest on funds borrowed to finance investment plus a return to business owners equal to what could be obtained on alternative uses of their capital. Since most government output is not sold at market prices, equivalent measures of the net return to government investment are not directly available. However, a substantial body of research on alternative ways to measure the return on public investment is available (Gramlich, 1994). Several possible measures of net return have been suggested, including: the discount rate established by OMB for evaluating costs and benefits of proposed federal capital projects; the municipal bond rate; the rate of return on comparable private business activities; and the development of valuation measures of public output independent of the costs of inputs, thus permitting application of techniques used to compute private rates of return. The first of these alternatives, the OMB discount rate, offers the advantages of simplicity, reasonable stability, and consistency with the federal government's conclusions as to what the minimum expected rate of return ought to be in order for a federal investment to be undertaken. It is not, however, based on any independent information as to what the average rate of return to the existing government capital stock may actually be. If, as some research indicates, the average return to government investment is quite high, then use of the OMB discount rate as a measure would represent an understatement of the true rate of return, although less of an understatement than the current zero assumption. Adoption of the OMB discount rate as an interim measure would introduce the concept of rate of return into the accounts while research proceeded on more sophisticated measures. For those government functions that have a private counterpart, it is extremely important that research be conducted on rates of return to government investment related to the rate of return on the comparable private activity. A longer term research agenda should include work on developing government

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--> output valuation measures independent of the cost of inputs. With such valuation measures, methods comparable to those used for the private sector could be used to estimate rates of return to government investment. Investment in Military Structure and Equipment The SNA divides purchases of military structures and equipment into two types: (1) destructive weapons, such as missiles, tanks, warships, and military aircraft, and (2) structures such as roads, docks, airfields, and hospitals that can be used continuously, have civilian counterparts, and often have potential for civilian use (Dobbs, 1993). The SNA includes only the latter in the government capital account, arguing that weapons such as missiles and bombs—and by extension the ships and planes used to launch them—are single-use goods rather than durable assets. In general, this distinction is arbitrary and not conceptually consistent. Whatever one's personal feeling about the wisdom or morality of investment in weapons of destruction, the weaponry should be viewed technically as providing a service of national defense. All military investment in structures and durable equipment should he treated as investment, and this is the treatment adopted in the 1996 revision of the NIPAs. However, we believe that U.S. accounts should conform to the SNA distinctions in order to achieve international comparability, while supplementary information can be provided to create a capital account that includes all military purchases of structures and equipment. Investment in R&D and in Human Capital Conceptually, expenditures for R&D and for education can be regarded as investments since these expenditures lead to technological advance and to a more productive work force. At present, such expenditures are not treated as investment in either the public or private sectors of the accounts, nor does the SNA call for them to be so treated. The treatment of R&D and education expenditures was discussed only briefly at the workshop. We do not support including them in the official national account measures of investment at this time, but BEA should move forward with the development of supplementary measures. The SNA provides for the development of "satellite accounts"—supplementary presentations of information in a framework consistent with the national accounts. BEA has been working on an R&D satellite account and has published some results of this research (see Bureau of Economic Analysis, 1994c).

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--> Valuing Natural Resources Natural resource valuation was not discussed at the workshop because it was outside the scope of the government sector. However, natural resource valuation is a closely related issue since the government owns large stocks of renewable resources (such as forests) and nonrenewable resources (such as oil and other subsoil minerals). Inclusion of estimates of the values of these resources in the government capital account would affect the size of government wealth holdings and the rates of return on these assets. The existing BEA annual measures of tangible wealth do not include the value of either renewable or nonrenewable natural resources, whether privately or publicly owned (Bureau of Economic Analysis, 1993b, 1994b). However, BEA has recently published the first results of new work on valuing nonrenewable resources and has also detailed its plans for a broad program of continuing research in the area of environmental accounts (Bureau of Economic Analysis, 1994a, 1994b). Measuring Productivity Because most government output is not sold at market prices, constant-dollar output currently is measured, in large part, not by deflating an output valued by the prices it commands in the market, but by measuring the quantity of inputs, excluding the consumption of fixed capital. Tiffs approach incorporates an implicit assumption that there is no change in the volume of output per unit of input, that is, that productivity in government does not change over time. This assumption is based not on a belief that this is a correct assumption but on the difficulty of accurately measuring changes. The SNA, while it recognizes the difficulty of measuring non-market output independent of the inputs, also recognizes the need for independent measures of output and the desirability of developing such measures (Inter-Secretariat Working Group on National Accounts, 1993:paragraph 16.133): The fact that [non-market] output is valued on the basis of the value of the inputs ... does not mean that it cannot be physically distinguished from the inputs ... nor ... that changes in such output over time cannot be distinguished from changes in the inputs. Changes in productivity may occur in all fields of production, including the production of non-market services. The SNA goes on to acknowledge the difficulties of directly measuring some output categories, especially collective services of a preventive nature, such as police protection. In such cases, it may be possible as a second-best approach to incorporate explicit assumptions about changes in labor productivity (Inter-Secretariat Working Group on National Accounts, 1993:paragraph 16.141): A possible alternative method when input measures are used as proxies for outputs is to use a volume measure for labour alone combined with an explicit assumption about changes in labour productivity: for example, that labour pro-

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--> ductivity grows at 1 per cent per year in the production of the non-market service in question. An assumption of zero productivity growth is the most common one in practice because it is felt to be more neutral, even though it is inevitably somewhat arbitrary. The attention of users should always be drawn to any built-in assumption about the rate of growth of labour productivity which should be stated explicitly, even when it is zero. A paper presented at the workshop described ongoing efforts by the Bureau of Labor Statistics to measure government productivity (Dean, 1993). Possibilities for incorporating the results of this research into the national accounts should be explored; more generally, research on incorporating market information into measures of government output and on alternative approaches to measuring government productivity should be vigorously pursued. Recommendation The United States played a leadership role in the recent revision of the SNA, accompanied by an internationally agreed upon research agenda covering most of the areas discussed above. The United States should continue to play a leadership role in maintaining the momentum of ongoing efforts to move forward in describing the nation's economic accounts. RECOMMENDATION 3. The move toward the SNA should be accompanied by work on supplemental presentations that go beyond the SNA. This effort should include active U.S. participation in international activities that further the SNA research agenda. Areas for which supplementation of the SNA is desirable include: estimates of net return to government capital; estimates of the investment value of government-supported research and development; capital account estimates which include all purchases of military structures and equipment; and work on alternative ways of measuring government output and measuring productivity in government.