June employment in tangible and intangible industries

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Continued good economic news this morning on June's employment data from BLS. Payrolls rose by 223,000 net new job and the unemployment rate dropped to 5.3%. However, economists had forecast an increase of 233,000 jobs.

Employment in tangible producing industries grew by 96,600 in May. Trade, Transportation & Utilities and Accommodation & Food Service were the biggest gainers. Intangible producing industries added 126,300 jobs with most of that gain in Professional & Business Services and Educational & Health Services had the overall largest gain. In a reversal from last month, Arts, Entertainment & Recreation employment actually declined slightly. The overall increases in both tangible producing and intangible producing industries were not quite as large in June as in May.

As the charts below shows, U.S. employment in tangible producing industries and intangible producing industries is just about equal. Up until March, employment in tangible producing industries had been growing slightly faster than in intangible producing industries.

For more background on this data, see my earlier posting. Note that later this month I will be publishing a more refined version of this analysis based on more detailed industry level data. This may change the analysis somewhat.

June 2015 tangible & intangible employment.png

Final estimate of 1Q 2015 GDP and continued R&D concerns

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In keeping with economist's expectations, the third (final) estimate of the 1st quarter GDP showed the economy shrank by only 0.2%. The earlier estimate has shown a decline of 0.7%.

A look at the details reveal a more worrisome fact. Investment in Intellectually Property Products (IPP) slowed down to only 4.9% compared with 10.3% in the 4th quarter of 2014. The reason was that investment in R&D grew by only 2.7% compared to 17.2% in the 4th Q. Investments entertainment, literary, and artistic original were up by 2.4% compared to 5%. On the other hand, investment in software grew by 7.8% compared to 5.1% previously.

The history of revisions to the R&D numbers is also worrisome. The first estimate was of a 12.3% growth rate. The second was almost flat at 1.1%. Now the third estimate is of 2.7%. Such large revisions highlight the danger of relying on preliminary estimates.

IPP parts 1Q15 - 3rd.png

Tech policy primer for Presidential candidates (2)

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As I noted in my earlier posting, ITIF has published a version of what it would like to hear from the Presidential candidates. Here is the campaign speech I would like to hear:

America has suffered a devastating economic recession. For too many the economy recovery has yet to take hold. We must do all we can to hasten that recovery. But that recovery must be followed by sustained growth and improved economic competitiveness if we are to expect that rising tide to lift all boats.

Our first task is to make sure the tide continues to rise. Our second is to make sure that the tide does in fact lift all boats. Both of these will require understanding the fundamental changes that are occurring in our economy -- and crafting tools that fit this new environment in which we find ourselves.

Let us look more closely one part of that change: the current manufacturing renaissance. More and more, companies are finding it to their benefit to open production facilities in the U.S. as opposed to abroad. But, while manufacturing is coming back to the United States, it is different from the manufacturing that left our shores. It is leaner and smarter -- requiring higher levels of workers skills. To keep our competitive edge requires fostering an educational enterprise that can provide the constantly changing skills required in a knowledge- and information-intensive economy.

We now see the fusion of manufacturing and services where companies provide solutions not just products. Customization, speed, and responsiveness to customer needs are the keys to success in this new environment. And as the linkage between goods and services grows, we are seeing international competition in services once thought immune to such challenges.

In confronting these new challenges, we cannot rely on simply repeating the policies of the past. We need a combination both new and old solutions.

For example, basic research helped sustain America's economy growth in the 20th Century. But basic research is not enough. It is one part of a larger mix that fuels the economy. We moving to a post-scientific economy where, to quote Dr. Christopher Hill, former Vice Provost for Research at George Mason University, "the creation of wealth and jobs based on innovation and new ideas will tend to draw less on the natural sciences and engineering and more on the organizational and social sciences, on the arts, on new business processes, and on meeting consumer needs based on niche production of specialized products and services in which interesting design and appeal to individual tastes matter more than low cost or radical new technologies."

Education needs to move from the classroom to the living room. Life-long learning should not be a slogan but an ingrained part of everyday activity. And as important as STEM is, our economic future is not solely in the hands of our scientists and engineers. Our future prosperity rest on raising the skills and knowledge level of everyone. Productivity no longer comes just from new machines, but from new ways of organizing work.

So let us be clear. The manufacturing jobs of our father and grandfather are not coming back. But we can create the manufacturing jobs for our children and grandchildren. We cannot -- we will not -- compete on the basis of a race to the bottom where wages and living standards are lowered to keep jobs from moving elsewhere. We can - and will -- compete based on raising the knowledge content of our products -- both goods and services. By doing so, we can also raise the living standards for all.

Government can play a major role in raising living standards through increased economic competitiveness via innovation and the development and diffusion of new products. But, innovation policy needs to catch up to the innovation process.

In crafting a new policy, we must recognize three points:
 • the innovation model has changed,
 • it's all about people and organizations, and
 • technology plays multiple roles.

First, we all need to recognize that the innovation model has changed. It is not the linear process of flowing from basic research to final product that sticks in everyone mind. It is a network process. There are many points on the network where innovation can come from. We have used a number of terms to try to describe parts of the new model: "open innovation," "user-driven innovation," and even "design thinking."

It is also not solely about technology. Technology remains an important component. But, as noted earlier, social innovations, marketing, finance, design and business models are also key sources of innovation as well.

Suffice it to say that innovation policy needs embraced this broader concept.

Second, innovation is about people and organizations. Skills, not just education, are critical. To both improve our competitiveness and provide for a more shared economic prosperity, we need to continually upgrade the skills of our worker and our workforce. Highly skills workers contribution more to, and benefit more from increased productivity and economic growth.

To create more highly skilled workers, we need to fundamentally upgrade our workforce training programs. Too many of these programs are focused on helping worker upgrade their skills only after they lose their jobs. Don't get me wrong, job re-training for the unemployed is very important. But we need to also focus more on upgrading work skills (and thereby company competitiveness) so they don't lose their jobs in the first place. Continual training on-the-jobs training need to become the backbone of our worker training programs - not an afterthought.

That said, we need to recognize that there will be times of slower demand where even the most competitive of companies may need to cut back on production. Rather than using these slowdowns as time of cut backs on training, we should embrace them as an opportunity. One way we can do this is by tying the concept of "job sharing" with worker training. Under a job sharing program, workers cut back on their hours (meaning that the company does not have to lay off workers completely) and the government picks up the cost of those lost hours through a program similar to unemployment insurance. This concept has been credited as one of the reasons Germany was able to weather the Great Recession. But we need to take the idea one step further. Rather than simply reduce workers hours, we should use those hours for training. In other words, when companies need to cut back on production, let's pay workers to spend that slack time in the classroom or on-the-job training.

Besides continually upgrading workers skills, we need to continually upgrade the workforce itself. America has long been the destination of choice for the brightest and most ambitious. We need to make sure that America remains open and welcoming to those who would seek to improve their lives - and thereby enrich and improve ours. Immigrants have fueled the U.S. economy for generations - from the brightest Ph.D.s to the hard working entrepreneur and employee. We need comprehensive immigration reform to make sure that we can continue to rely on this source of economic growth and vitality.

But upgrading skills in not enough. Both tacit and experiential knowledge, not just codified and science-based knowledge, are also important. In order to put those skills and knowledge to proper use, organizational structure comes into play. The old hierarchical systems of the industrial age are no longer adequate or appropriate. New adaptive organizations which encourage innovation are needed. What we use to be called "High Performance Work Organizations" are needed to effectively utilize worker skills and knowledge.

Such organizations also play a large role in ensuring that the benefits of increased competitiveness are widely shared.

Finally, any innovation policy needs to understand that there are multiple roles for technology. Technology can be a driver of innovation, a tool of innovation, and even sometimes not all that that relevant to innovation. As a driver, the creation of new technology is a major source of innovation - the kind we normally think of when we use the word "innovation."

But technology is also a tool in the innovation process. Technology as innovation tool works in two ways. One is innovation as the absorption and utilization of technology. For example, the iPod contained little new technology. It utilized the technology in a new way. The other is technology as an enabler. This is especially true in the information technology (IT) area, where IT allows for a myriad of new applications and innovations.

Take the analogy of the railroad. The marrying of the steam engine to a carriage on iron rails brought about far reaching changes in many difference areas. The railroads spurred on development of a number of other industries, most notably the steel industry. They changed opened up vast new markets and changed the retail and wholesale industries. They even gave rise to new management practices and the shift from ownership capitalism to managerial capitalism.

And sometimes technology plays a very minor role in innovation, if at all. Which was more important in creating the American suburbs: the automobile, Levittown or the 30 year mortgage? One was technological; one was design; one was financial. All were important. As a nation we need to recognize and promote multiple forms of innovation.

So here are some policies I plan to put forward. The new demand driven model innovation shows that government procurement and regulations can drive innovation. Government as a demanding customer can create the "thin opening wedge" -- new products and services that have a specialized use. Once that specialized use is established, the product or service can be refined and adopted to a broader customer base. The demanding customer in fact becomes a co-creator. Smart regulations can serve the same function by creating demanding customers.

Here is another example of how we can expand our thinking on innovation. We have a program to create and fund Engineering Research Centers (ERCs) in a number of areas. We should create one for design thinking. We should expanding the ERC model to funding research on and demonstration of new business methods and organizational mechanisms as part of our "Catalyze Breakthroughs for National Priorities" element of the innovation strategy. And we should fund more organizationally-focused challenges, such as the famous DARPA "Red Balloon" challenge.

These are but few of the types of new policies we will pursue -- beyond the status quo and conventional thinking that government should confine itself to basic research, education and infrastructure. That might be uncomfortable for some to hear. But it is where we need to go if we are to restore long term economic prosperity in this highly competitive global economy.

Tech policy primer for Presidential candidates (1)

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Yesterday, my friends over at the Information Technology and Innovation Foundation (ITIF) released a new report on Tech Policy 2016: What Presidential Candidates Should Be Talking About. The report is written as a memo for a draft speech (a device I've use as well - see companion posting) and lays out a number of specific policy proposals. Not surprising the proposals focus on economic growth, productivity, innovation and the role of information technology. A summary of the proposals is provided at the beginning of the report:

1. Foster innovation.
• Increase federal funding for science and engineering research by $30 billion a year.
• Expand the R&D tax credit so it is more competitive with other countries, and tax income from innovation at a lower rate.
• Establish a National Innovation Foundation akin to the National Science Foundation (NSF).
• Increase federal support for STEM education while rewarding universities for graduating more STEM students.
• Create a national system of "manufacturing universities."
• Expand H-1B visas, green cards, and citizenship for foreign-born scientists and engineers.
• Charge every federal agency with crafting and implementing an innovation strategy.
• Pass the Startup Act to promote entrepreneurship.
• Create a White House Office of Innovation Review.
• Ensure laws and regulations enable disruption rather than protect the status quo.
• Create an interagency taskforce to combat corporate short-termism.
• Revise the 1996 Telecommunications Act to enable broadband innovation.
• Establish a "flexicurity"system to help workers acquire skills for new jobs.

2. Boost productivity.
• Bring back the investment tax credit for new machinery and equipment and worker training.
• Accelerate IT adoption throughout the public and private sectors.
• Raise the minimum wage to $10, and index it to per-capita GDP growth.
• Close the digital divide by helping people pay for computers and broadband.
• Expand funding for surface transportation by at least $30 billion per year.

3. Compete globally.
• Lower the corporate tax rate to no more than 25 percent, and adopt a territorial system.
• Strengthen the innovative capacity of U.S. firms that do business internationally, in part by expanding financing for scaling innovations.
• Put trade enforcement at the center of U.S. foreign policy, and increase resources for it.
• Confront China by raising the cost of unfairly distorting trade investments.
• Create a National Industrial Intelligence Council to assess competitive challenges.
• Restructure the World Trade Organization (WTO) to be more effective in fighting mercantilism.
• Fight currency manipulation

Many of these I agree strongly with and have advocated for a number of years. For example, I strong support an investment tax credit for worker training (especially on-the-job training for incumbent workers). Some I don't think go far enough. For example I would like to see funding for design ("d-schools") in addition to "manufacturing universities." On some, such as revising the 1996 Telecommunications Act, I have no opinion.

Some of the proposals I am skeptical of, such as a White House Office of Innovation Review with the power to review regulations. A number of years ago I worked on legislation to require Competitiveness Impact Statements as part of regulations. This became law as part of the Omnibus Trade and Competitiveness Act of 1988 (Section 5421). Back then we were very concerned that this would quickly become just a means of cutting regulations. For that reason, the provision was limited to legislative proposals, conferred no right of private action and sunsetted after 6 years. I have the same worry about this new proposed office, which seems based on a bias that regulation only "hinder innovation" (to use the ITIF report's wording). As I have noted before, regulation can have a positive and well as negative effect on innovation.

I also think that the list leaves out important policy recommendations, such as using intangible assets to finance innovation. For this reason I am posting a companion piece laying out my version of the speech (based on previous postings).

Having said that, I believe the ITIF is a good list for the next President (and the next Congress) to consider. Enactment of even part of this agenda would push us in the right direction.

PS: as a proud alumnus of the University of Michigan I cannot support or endorse the proposed second sentence of the opening of the proposed ITIF speech.

The patent registry problem

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Over the years we have published a number of reports on the monetization of intangibles assets, especially patents. (See "Commercialization of University Research - Using Intangible Asset Financing", "Intangible Assets in Capital Markets", "Intangible Assets: Innovative Financing for Innovation", Intangible Asset Monetization: The Promise and the Reality and Maximizing Intellectual Property and Intangible Assets: Case Studies in Intangible Asset Finance.) One of the barriers identified in those reports has been the difficulty in determining exactly who owns the asset.

A new paper Who Owns the World's Patents? takes a fresh look at the problem. And the finding are not good:

The most basic information about this emerging asset class [patents], information as to ownership, is deeply
uncertain and inaccurate.
Various estimates from very well informed sources - including an assessment made by Yo Takagi, an Assistant Director-General at WIPO, on the basis of WIPO's technical assistance projects, and David Kappos, former Undersecretary of Commerce for Intellectual Property and Director of the US Patent and Trademark Office - suggest that as much as 25% of the world's patent ownership data may be inaccurate.
. . .
These inaccuracies in the global patent record have significant and far-reaching consequences. The resulting inefficiencies, elevated costs and risk uncertainties create huge cost barriers to innovation, barring meaningful entry to all but the richest, most powerful corporates, depress the market for licensing transactions and increase the risk of litigation.

To address that problem ORoPO (Open Register of Patent Ownership) is creating a open, voluntary global patent database.

As we pointed out, the inability to verify who exactly owns a patent and who has a lien against that patent are barriers to fully using patents as debt collateral. ORoPO seems to be going after the first half of the problem. It does not seem to recognize the second. But the issue of prior liens is a serious as ownership. Imaging trying to get a loan when the bank can't tell whether someone else has first call on the collateral.

Thus, I wish ORoPO the best in setting up their system. I also hope they will extend it to not just who controls the title to the asset but to any encumbrances on that title as well. Both are needed for a functioning market.

    Note: the views expressed here are solely those of the author and do not necessarily represent those of Athena Alliance.

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