1. Updated Capital Asset Service Lives
Susan Powers (BLS), Michael D. Giandrea (BLS), Robert Kornfeld (BEA), Peter B. Meyer (BLS), Steve Rosenthal (BLS), Randy Kinoshita (BLS), Michael Cusick (BEA)
World KLEMS meetings
June 4, 2018

2. Need for service life estimates
Productive capital = structures, equipment, software
Direct measures of capital stocks are not available
Perpetual Inventory Method (PIM) makes estimates of capital stock by industry from past investment
Service lives assumed to be distributed symmetrically around reported average age (haystack distribution)
Adjust past investment for deterioration using an age-efficiency function (BLS-hyperbolic and BEA-geometric)
Aggregate efficiency-adjusted investments over time into a productive capital stock in each period
BEA measures of net investment and BLS measures of MFP growth and capital services
Often cited – recently in relation to productivity slowdown and productivity / wage gap
Measures are sensitive to estimates of service lives and depreciation
Measurement of MFP requires information on output and multiple inputs:
Capital Services
Labor
Energy
Materials
Purchased Business Services

3. Sources of current asset service lives
Bureau of Economic Analysis provides BLS with depreciation rates for asset categories.
Sources:
Hulten and Wykoff (1979, 1981a, 1981b)
U.S. Treasury Bulletin F (1942)
IRS/Treasury Office of Industrial Economics (1970s)
Treasury Office of Tax Analysis (1980s and 1990s)

4. Establishment survey by Statistics Canada
Annual Capital and Repair Expenditures Survey
Ongoing survey since 1980s
Data includes
Expenditures on 155 asset types
Expected service lives of new assets
Selling prices and ages of disposed assets / discards
Used asset sales and discards
Large sample of service lives and depreciation rates
1985-current
Two sets of analyses, and 2002 – 2010
No real change in structures
Overall slightly larger depreciation rates in equipment but largely a compositional change moving towards more computerized equipment with higher depreciation rates.
Asset compared to asset is similar.
155 asset types is more than in data from Italy or Netherlands
We reviewed more recent data from other countries
Italy’s Istat, Statistics Netherlands, Japan’s Economic and Social Research Institute, and Statistics Canada
Italy and Netherlands have relatively few asset types
Japan has over 600 asset classes
Differences are primarily shorter, but they are in both directions depending on asset
Goods incorporating semiconductors tend to have shorter lives in newer data

5. Canada’s Annual Capital and Repair Expenditures Survey

6. Canadian service lives and depreciation rates for construction
Canadian categories include Industry building construction, commercial building construction, Institutional building construction, Marine engineering construction, Transportation engineering construction, Waterworks engineering construction, Sewage engineering construction, Electric power engineering construction, Communication engineering construction, Oil and gas engineering construction, Mining engineering construction, Other engineering construction.

7. Canadian service lives and depreciation rates for equipment

8. US – Canada concordance
Needed a concordance between US and Canadian asset categories to map Canadian service lives to US asset categories
BLS and BEA worked together to construct a concordance
BEA documentation on the definitions of fixed investment expenditure categories used in developing concordance

9. US – Canada concordance

10. US – Canada concordance
Statistics Canada asset categories more detailed than US typically.
In some cases, multiple Canadian categories are combined into one U.S. category
BEA nominal fixed investment data used to weight depreciation rates and develop single rate
In one case, Nuclear Fuel (31), no comparable asset exits in the Canadian scheme so we continue to use the current BEA/BLS rate, provided by an expert

11. Comparison of US and Canadian lives
Higher depreciation rate and shorter service life for computers: 3 years in Canada and 5 in US.
Service lives could be reduced if there is rapid ongoing quality improvement or changes in technical standards. These kinds of changes would make it optimal to upgrade to the latest stuff more quickly. Devices with semiconductors such as computers and smartphone have these properties. We did not investigate whether such quality changes were correlated to the assets whose measured service lives were shorter than before.

12. US and Canadian lives - structures

13. Testing new service lives
BLS re-computes depreciation through hyperbolic; BEA through geometric
Challenging to compute stocks from an existing asset base whose lives changed
2 possible models of changing service life:
Service lives change for all assets because new substitutes available or standards to be met
Service lives changed for newly created assets
Can lead off with: “Having applied the concordance to map service lives from the Canadian categories to the US ones “
DMSP “recomputes depreciation” with ASUM program

14. Effects of revised service lives
BEA and BLS evaluated capital stocks scenarios with the revised SC depreciation rates:
The first adopted the new rates from the start of the investment time series – 1901
The second implemented the new rates beginning in 1985, assuming services lives had changed
Steve points out that BEA has already updated some figures SINCE There are 1992 updates. How did we handle these?
In conversation Steve had an interest in switching to the SC figures earlier
Steve would like to see growth rates on the graph of “comparison of existing and revised capital stocks” and a year-by-year table of growth rates in the paper. The growth rates change with the adoption of the SC lives, right? That’s relevant for all the later computations. Levels are less relevant.

15. Comparison of existing and revised capital stocks – BEA

16. Comparison of existing and revised capital stocks – BLS

17. Comparison of existing and revised growth rates of the capital stock

18. Effects of revised service lives on MFP

19. Conclusions
The revised depreciation rates have a substantial downward impact on capital stock levels and growth rate trends
For most assets, the updated service life data has little impact on estimated capital services and MFP growth rates

20. BLS and BEA Future Plans
Use Canadian depreciation rates as guidance for revising current US depreciation rates and related BEA and BLS service lives
Develop and jointly propose a set of new U.S depreciation rates in the near future

21. Internal and External Rates of Return
BLS
Michael D. Giandrea Peter Meyer
Susan Powers Steve Rosenthal
Brian Chansky Randy Kinoshita
June 4, 2018

22. Rate of return
The rate of return, rit , represents how many dollars of income are generated per $100 of physical capital assets
Effort underway to standardize methodology across major sector and industry studies divisions
IRR = Internal Rate of Return
ERR = External Rate of Return

23. Rate of return – Industry Division
Uses a simplified version of the IRR formula
𝑟 𝑖,𝑡 = 𝐶𝐶 𝑖,𝑡 − 𝑘 𝑖,𝑡 𝑝 𝑡 𝑇 𝑡 𝑑 𝑡 − 𝑘 𝑖,𝑡 ∆ 𝑝 𝑡 𝑇 𝑡 𝑘 𝑖,𝑡 𝑝 𝑡 𝑇 𝑡
Capital compensation CCit
Capital stock kit
Asset price deflator pt
Tax parameter 𝑇 𝑡 = 1− 𝑢 𝑡 𝑧 𝑡 1− 𝑢 𝑡
Asset depreciation dt
Industry output is sectoral output
ut corporate income tax rate
zt p.v. of tax depreciation allowances

24. Rate of return – Industry Division
Calculates IRR for 88 industries (primarily 4-digit)
Must first generate estimates of capital income by detailed industry
Capital income is industry output less value of labor and intermediate purchases

25. Major Sector and Industry Divisions
Both calculate IRR at the industry level
Major Sector: at the NIPA industry level
Industry Division: 4-digit NAICS industry level
Different measures of capital income
Major Sector: uses BEA corporate capital income and proprietors’ income data
Industry Division: estimates capital income as an industry residual

26. Industry Division – External rate of return
Focus is not on whether IRR is negative
Instead, look for negative detailed asset rental prices which can occur for many reasons
Low capital income levels
Negative IRRs
High capital gains

27. Industry Division – Use of ERR
If the rental price for an industry is negative, substitute an ERR of 3.5%
If rental price for ANY asset calculated with an IRR is negative, the ERR is used for ALL assets in that industry in that year
Industry Division also omits the capital gains term for the rental price calculation when using the ERR
This change is only for the single year

28. Upcoming changes – Industry Division
Calculate and use an ERR based on the Industry Division’s manufacturing sector IRR
Requires evaluation of change to assess effect on rental prices and capital measures compared to current approach
Adjust the new ERRs such that industry sectoral output equals value of capital, labor and intermediate inputs, by industry
ERR for Air Transportation and Line-Haul Railroads will not be changed

29. Questions