[OPE-L:5845] [OPE -L] Re: BEA and Depreciation

John R. Ernst (ernst@PIPELINE.COM)
Tue, 16 Dec 1997 21:15:33 -0500 (EST)

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Both Jerry and Andrew had questions about my 12/16/97
post on the Depreciation and the BEA.

Jerry wrote:

John wrote on Tue, 16 Dec:

> a. Different depreciation rates are assumed for different
> types of fixed capital.

A few questions:

1) What is the basis for the assumptions regarding the differing
depreciation rates of different types of fixed capital? E.g. are
previous depreciation rates on a given type of fixed capital assumed
to continue into the future?

John comments:

>From what I have seen in a few articles in the _Survey_, once a rate
is assigned a given type of fixed asset it is never changed for that
asset. When changes are made, the already functioning fixed assets
continue to depreciate under the already assigned rate.

Jerry continues:

2) When there is a qualitatively new type of fixed capital how does
the BEA impute a depreciation rate on that equipment?

John writes:

Good question. The categories used are so broad that new types of
fixed capital should be able to fall within one of them. Again, if
there is a market for one-year old "whatevers", the price of the
used fixed capital would be used whenever possible.

Jerry continues:

> 2. There is a bit of debate concerning how obsolescence is taken into
> account.

3) What are the different sides and who are the major players in this

Barbara M. Fraumeni, a consultant to the BEA, wrote a piece in which she
expressed disagreement with the idea that obsolescence should be viewed
as part of depreciation. In the article she does not suggest a way
to isolate the quantities of "depreciation" due to obsolescence. Other
than her work, I've not seen more on this. Note again, the stats the
BEA puts out include obsolescence as part of depreciation. Her article
"The Measurement of Depreciation in the U.S. National Income and Product
Account" is
in the July 1997 issue of the _Survey of Current Business_. You
can download this article as well as the one mentioned below
from the BEA web site.


Andrew wrote:

John: "Different depreciation rates are assumed for different types of fixed
capital. Let's say the rate is 1.65 ...."

What is the meaning of this 1.65?

John responds:

Another good question. The 1.65 is "the rate of declining-balance
depreciation" and is "the multiple of the comparable straight-line rate
used to calculate the geometric rate of depreciation. For example, a
1.65 declining-balance depreciation rate refers to a geometric rate
of depreciation of 1.65/L, where L is the service life of the asset
in years and 1/L is the straight-line rate." (Katz and Herman in
"Improved Estimates of Fixed Reproducible Tangible Wealth, May 1997 in
Survey of Current Business.)


Much of my search on the BEA web site was motivated by Duncan's reference
to "Winfrey Schedules." By using those schedules with straight-line
depreciation, the depreciation of, say, machines of type x installed in
year y was never straight-line in the usual sense. But now Winfrey is
no longer used and we have geometric rates of depreciation. Using
such rates is problematic from a Marxian standpoint. (No doubt the
old method presented problems as well.)

If the price of the output is constant, then it would seem that more
of the value in that output would appear as the product of living labor
as we move from one year to the next. We could "cover this" with a
changing value of money and say that the $/hour is growing.
Or, should we abstract from the price of the output and simply look at
its value. If so, how do we view the variables, c and v+s, in general
for a typical capital investment? If a machine expected to last 10 years
takes 1000 hours to produce and with 100 hours of living labor, how are we
to keep track of the matter over time? Indeed, what is the depreciation
charge in the 1st year? I had always assumed Marx had straight-line
depreciation in mind when he wrote CAPITAL. After looking back at
Engels notes to Marx, I'm not sure. If all we see is a depreciation
charge of 100 hours in the first year, who is to say what it will be
in the second year? That is, what prevents the second year charge for
becoming 90 hours or 100f 900 hours, the value of the machine at
the beginning of the 2nd year? For me, these are real questions
concerning Marx's own view of the matter despite their rather
fundamental nature.