The Intangible Economy

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April 28, 2005

Energy Technology or Energy Innovation

This morning's LA Times focused in like a laser beam on the key points of President Bush most recent speech on energy: Technology Is Key to Bush's Long-Term Energy Plan:

President Bush, under pressure to do something about high energy prices, called Wednesday for new efforts to harness the "transformational power of technology" to wean the United States from its dependence on oil and gas.

In his second major energy policy address in a week, Bush proposed several initiatives he said would help address long-term problems contributing to price increases and constraining energy production.

They include government-provided risk insurance for new nuclear power plants, expanded federal authority to approve liquefied natural gas terminals, possible construction of oil refineries on closed military bases and a new tax break for people who buy diesel-powered cars.

But for the most part, the president expressed a bedrock belief in the ability of the private sector to expand energy supplies and promote conservation, with modest government involvement to start.

"In the years ahead, technology will allow us to create entirely new sources of energy in ways earlier generations could never dream," Bush said. "Technology ... is this nation's ticket to greater energy independence."

I've read the President's remarks and the LA Time got the focus exactly right: technology will save us.

I beg to differ. Innovation is our hope - technology is only one part of that mix.

The speech (and the Administration's policies) are focused mainly on technology for new sources of energy. Missing from the President's speech were the words "information" or "knowledge." There is a lot more that can be done in the area of energy that makes better use of information and knowledge (often through new technology) on both the supply and the demand side. Smart roads that help reduce conjestion (and reduce gasoline waste); new forms of urban design to build places where people can live and works in close proximity with out the long commute; better energy conservation standards (a key form of information). These are just of few of the energy innovations we could pursue.

However,that is not where the Administration is headed. As Business Week puts it, Bush Is Blowing Smoke on Energy

Plenty of evidence indicates that the White House's sudden interest in energy policy is driven far more by politics than substantive policymaking.
. . .
But while the speech's rhetoric was lofty and inspiring, the President's proposals don't match up with the problems they purport to solve. They carefully avoid the politically difficult steps that actually would take America farther down the path of energy independence.
. . .
But the goals of energy efficiency and independence won't be spurred by anything this Administration is currently proposing.

Let's see if the Congress, especially the Senate, can do any better.

Posted by Ken Jarboe at 9:53 AM | Comments (0) | TrackBack

April 27, 2005

TV makes you smarter and computers make you dumber

Contrasting stories about the effect of information on our cognitive powers.

In last Sunday's New York Times Magazine, Watching TV Makes You Smarter, Steven Johnson argues that the complexities of TV shows has greatly increased, using the example of the Jan. 24, episode of the Fox hit "24":

For decades, we've worked under the assumption that mass culture follows a path declining steadily toward lowest-common-denominator standards, presumably because the "masses" want dumb, simple pleasures and big media companies try to give the masses what they want. But as that "24" episode suggests, the exact opposite is happening: the culture is getting more cognitively demanding, not less. To make sense of an episode of "24," you have to integrate far more information than you would have a few decades ago watching a comparable show. Beneath the violence and the ethnic stereotypes, another trend appears: to keep up with entertainment like "24," you have to pay attention, make inferences, track shifting social relationships. This is what I call the Sleeper Curve: the most debased forms of mass diversion -- video games and violent television dramas and juvenile sitcoms -- turn out to be nutritional after all.

I believe that the Sleeper Curve is the single most important new force altering the mental development of young people today, and I believe it is largely a force for good: enhancing our cognitive faculties, not dumbing them down.

(Note: he calls it the Sleeper effect as a rif on the scene from the Woody Allen movie Sleeper where Allen, as a modern-day Rip Van Winkle, walks up to find that everything he was told was bad for him [i.e. cream pies] are now good for you and vis-versus)

He goes on to explain how this works:

With "Dallas," the modern viewer doesn't have to think to make sense of what's going on, and not having to think is boring. Many recent hit shows -- "24," "Survivor," "The Sopranos," "Alias," "Lost," "The Simpsons," "E.R." -- take the opposite approach, layering each scene with a thick network of affiliations. You have to focus to follow the plot, and in focusing you're exercising the parts of your brain that map social networks, that fill in missing information, that connect multiple narrative threads.

Of course, the entertainment industry isn't increasing the cognitive complexity of its products for charitable reasons. The Sleeper Curve exists because there's money to be made by making culture smarter. The economics of television syndication and DVD sales mean that there's a tremendous financial pressure to make programs that can be watched multiple times, revealing new nuances and shadings on the third viewing. Meanwhile, the Web has created a forum for annotation and commentary that allows more complicated shows to prosper, thanks to the fan sites where each episode of shows like "Lost" or "Alias" is dissected with an intensity usually reserved for Talmud scholars. Finally, interactive games have trained a new generation of media consumers to probe complex environments and to think on their feet, and that gamer audience has now come to expect the same challenges from their television shows.

In contrast, there is this from yesterday's Wall Street Journal Evening Wrap:

Feeling Stupid? Blame Your Computer
Talk about unintended consequences: the emails, text messages and instant messages that supposedly make people better-connected can also make them more stupid, according to a new study. In a project sponsored by Hewlett-Packard, Glenn Wilson , a professor at King's College London, tested the impact on workers of a steady bombardment of electronic messages and found that workers temporarily lost 10 points of IQ as a result of trying to handle all the incoming information -- more than double the four-point effect of smoking marijuana and roughly matching the effect of missing a full night's sleep.

I'm not sure I competely buy either of these arguments. Granted I often feel stupid after a long day at the computer, I'm not sure I feel smarter after watching a TV show. Then again, I don't watch a lot of TV and am probably watching all the wrong (i.e. dumb) shows.

These findings surely give us something to think about.

Posted by Ken Jarboe at 9:37 AM | Comments (1) | TrackBack

April 26, 2005

Wasting talent - and contibuting to decline

From this morning's Wall Street Journal - Illegal Immigrants' New Lament: Have Degree, No Job:

Suffering from a severe shortage of nurses, U.S. hospitals have recruited thousands of workers from countries such as the Philippines, Jamaica and Mexico. Meanwhile, Julieta Garibay's nursing degree from a prestigious Texas university isn't helping her land a job with any hospital. The most she can do is volunteer.

Ms. Garibay, 24 years old, who came to the U.S. as a child, is an illegal immigrant. She is part of an emerging class of young immigrants facing a new quandary: They are educated, but unable to get work because of their immigration status.

Their dilemma promises to be an increasing problem as more illegal immigrants attend U.S. colleges. The U.S. Supreme Court ruled in 1982 that all children, regardless of immigration status, are entitled to attend elementary and secondary school for free. But higher education is largely a state matter.

In 2001, Texas became the first state to pass a law allowing undocumented immigrant students who graduated from a state high school to pay resident tuition at public universities. Since then, eight more states have passed similar laws, and bills are before legislators in several other states. In a few states, financial aid is available. For Ms. Garibay, whose single mother is a cleaning lady, the in-state tuition legislation opened up an otherwise unaffordable opportunity.

However, as the first crop of students -- about several hundred -- who benefited from the Texas bill prepare to graduate in coming months, they find themselves unemployable. Their legal limbo is turning Texas into the test case for what happens to the new class of educated but illegal graduates.

...

Lawmakers say they anticipated that this problem could arise but hoped Congress would pass a bill to legalize these students. Such a bill is expected to be introduced in the Senate in coming months.

...

Congress recessed last year without taking action on the Development, Relief and Education for Alien Minors Act. The bill, which has bipartisan support, is expected to be re-introduced by Sen. Orrin Hatch (R., Utah). "The federal government needs to pass the Dream Act so these students can get on with their lives," says Mr. Bernstein of the immigration advocacy center.

Amid the national furor over illegal immigration, the fate of the bill remains unclear. "Current politics are making this radioactive right now," says Travis Reindl, director of state policy analysis at the American Association of State Colleges and Universities, a nonpartisan group.

Opponents say they are determined to stall it and still are angry about giving illegal immigrants in-state tuition. "We can't hold taxpayers accountable to providing discounted education to people in this country illegally," says Congressman Steve King (R., Iowa). Mr. King acknowledges that the students are likely to pay more taxes as professionals than as blue-collar workers if they remain in the U.S. But, he says, "we can't make economic arguments" in favor of illegal immigration.

We can't make economic arguments !?!?!?!?! We can afford to throw away talent? Ok, then how about the moral argument as engraved in on the Statue of Liberty:
"Give me your tired, your poor,
your huddled masses yearning to breathe free,
Your wretched refuse of your teeming shore;
Send these, the homeless, tempest-tost to me,
I lift my lamp beside the golden door!"

How we face this test will determine whether America will remain an economic superpower in this new information age. If the radical, anti-immigrant right prevails, then it is clear that they are not serious about maintaining our economy -- and we can say goodbye to the American Century. It will be ironic indeed if those on the right who like to trumpet American exceptionalism are the cause of our decline.

Posted by Ken Jarboe at 9:41 AM | Comments (0) | TrackBack

Peer-to-peer - not just music

In an earlier posting, "Closing the Barn Door", I argued that the Supreme Court case on Grokster was a case of locking the barn door after the horse has already run away. Music sharing has moved from peer-to-peer systems to email and iPods. The solution of limiting peer-to-peer technology, therefore, will not address the issue.

If fact, limiting peer-to-peer technology may do more harm than good. The opponents of this lawsuit argue, as was the case with video recorders, there are multiple legitimate uses of the technology and therefore it is not primarily a technology for the sole purpose of infringing on copyrights (that is the legal argument).

In a story on Reuters, Peer-To-Peer Users Share More Than Stolen Songs, reporter Andy Sullivan gives us a great over view of what those other uses are:

Peer-to-peer, or P2P, software allows users to connect directly to each others' computers, bypassing the powerful servers that underpin much of the Internet. Web pages, spreadsheets, PowerPoint presentations and other material usually stored on servers can thus be made public directly from a user's hard drive.

That makes online communication much simpler, said Steve Crocker, who helped develop an early version of the Internet as a graduate student in the 1960s.

"When you think about the amount of hardware and bandwidth and storage that we all have available on the most common of machines and then you think about how hard it is to actually work together, there's a huge disparity," said Crocker, whose Shinkuro software (http://www.shinkuro.com) allows people in different locations to work on the same document. Encrypted communication keeps snoops and hackers at bay.

High-school teachers in Washington have turned to Shinkuro to develop lesson plans, and researchers on a polar icebreaker have used it to send back photos of unusual ice formations, Crocker said.

Two online standards-setting bodies, the Internet Engineering Task Force and the Internet Corporation for Assigned Names and Numbers, have developed agendas and other material with Shinkuro, he said.

The story goes on to discuss numerous other applications of the technology, including getting around the censors in China.

Clearly, peer-to-peer is emerging as a key innovation-enabling technology.

Let us hope that the Supreme Court Justices have heard of these examples. In an economic era where innovation should be our top priority, we would be pennywise and pound-foolish if we tried to shut down this enabling technology. It would be akin to making the automobile illegal because sometimes bank robbers use cars to make their getaway.

Posted by Ken Jarboe at 8:37 AM | Comments (0) | TrackBack

April 25, 2005

Teens and information

One of the most important skills that everyone should have in the intangible economy is the ability to find information. Those of us who spend our days on the Internet take this skill for granted. We also view young people as the most Web-savvy. But this may not be the case. As a story in today's Wall Street Journal Teens Don't Know Everything relates:

According to a recent study by Nielsen Norman Group, a Fremont, Calif., consulting firm, teenagers are able to complete "perfectly feasible" tasks on a Web site only 55% of the time. The rest of the time, teens either give up or incorrectly complete basic tasks, such as locating free copies of documents that a site provides for downloading.

The researchers lay part of the blame on poorly designed website. The story goes on to talk about the do's and don't of designing websites for teens. However, bad websites are a fact of life and people need to develop skills find information. Developing such skills has to be a positive activity - simply "playing around" with the Web isn't enough. Many colleges require mandatory training on Web-based information retrieval - I know the business school at Georgetown University, where I occasionally teach, does.

But by college it might be already too late. This is a skill that needs to be learned early. Otherwise, we run the risk of perpetuating not just a digital-divide but an information-divide.

Posted by Ken Jarboe at 3:32 PM | Comments (0) | TrackBack

April 22, 2005

Our Industrial Age mentality

Liz Ryan at Business Week asks the right question in her most recent column Face Time: The New Assembly Line:

Back in the day, Henry Ford put out some fine automobiles and, while he was at it, revolutionized the workplace: He perfected the assembly line, which required workers to arrive at a designated time and work together in a complex, multitask operation. Good going, Henry!

A century later, sophisticated information technologies have given rise to the "knowledge worker" -- a person whose chief contribution to a company is intellectual. In Ford's time, a great day on the assembly line occurred when employees worked sans mistakes and accidents. In 2005, a good day is when a brilliant idea comes to mind that will help an organization leap ahead.

It's wonderful, slippery stuff, this knowledge work. Its tools are facile minds that think and brainstorm nonstop -- morning, evening, and suppertime, on the job or off. So, why do we so often manage knowledge workers as though they were assembly line folk?

The reason, she goes on to explain is rather clear. Face time -- as she puts it, the time we spend in the office visible to management -- is easy to managers to see.

It is also easy to count. We can measure the number of hours put it (and the cost of those hours). In fact, that is how we measure productivity. But we have a hard time measuring creativity and innovation on a day-to-day basis. As the old saying goes, we manage to what we measure. So we manage the input of time (face time) in some hope that it translates into output. Someday, I'm sure we will all look back and say, "what a quaint and silly idea."

Posted by Ken Jarboe at 9:59 AM | Comments (0) | TrackBack

Fostering bottom up innovation

I go to lots of meetings in Washington on innovation. Most of the time we are bemoaning the lack of an innovation policy in this country and wondering what it will take to get the US back on track.

My major complaint is that invertible, when it comes time to propose possible solutions, we fall back on the stand answers: more funding of R&D, train more scientists and engineers, and create an infrastructure that allows them to collaborate better (both social and hardware infrastructure).

That's fine for top-down innovation -- innovation that comes out of the research lab. But as a 2002 RAND study pointed out, the innovation system is much broader and deeper than that:

we immediately think of scientists and engineers working sometimes on their own but most often in laboratories or R&D facilities operated by private industry, by universities, and to some extent by the government. Yet, much innovative activity occurs outside the formal precincts of R&D labs. R&D departments tend to be an artifact of large firm organization. But in all company settings much "fixing" that amounts to innovation is done on the line by employees not principally charged with the innovation task. This type of informal activity too is an element of the national innovation system.

Another major source of innovation is users. Virginia Postrel's column yesterday in the New York Times, "Innovation Moves From the Laboratory to the Bike Trail and the Kitchen" reviews Eric Von Hippel's leading edge work in this area:

When most people think about where new or improved products come from, they imagine two kinds of innovators: either engineers and marketers in big companies trying to "find a need and fill it" or garage entrepreneurs hoping to strike it rich by inventing the next big thing.

But a lot of significant innovations do not come from people trying to figure out what customers may want. They come from the users themselves, who know exactly what they want but cannot get it in existing products.

"A growing body of empirical work shows that users are the first to develop many, and perhaps most, new industrial and consumer products," Eric von Hippel, head of the Innovation and Entrepreneurship Group at the Sloan School of Management at the Massachusetts Institute of Technology, wrote in "Democratizing Innovation," recently published by MIT Press.

Unfortunately, we don't really understand the policies that could foster bottom-up innovation. In his book, Von Hippel outlines the public policy problem:

An important first step would be to collect better data. Currently, much innovation by users-which may in aggregate turn out to be a very large fraction of total economic investment in innovation-goes uncounted or undercounted. Thus, innovation effort that is volunteered by users, as is the case with many contributions to open source software, is currently not recorded by governmental statistical offices. This is also the case for user innovation that is integrated with product and service production. For example, much process innovation by manufacturers occurs on the factory floor as they produce goods and simultaneously learn how to improve their production processes. Similarly, many important innovations developed by surgeons are woven into learning by doing as they deliver services to patients.

Next, it will be important to review innovation-related public policies to identify and correct biases with respect to sources of innovation. On a level playing field, users will become a steadily more important source of innovation, and will increasingly substitute for or complement manufacturers' innovation-related activities.

Von Hippel makes suggestions in four areas:

1) Intellectual Property Rights, where he raises the concern that the current IPR regime is too restrictive.

2) Constraints on Product Modification:

Current efforts by manufacturers to build technologies into the products they sell that restrict the way these products are used can undercut users' traditional freedom to modify what they purchase. This in turn can raise the costs of innovation development by users and so lessen the amount of user innovation that is done.

3) Control over Distribution Channels:

Users that innovate and wish to freely diffuse innovation-related information are able to do so cheaply in large part because of steady advances in Internet distribution capabilities. Controls placed on such infrastructural factors can threaten and maybe even totally disable distributed innovation systems such as the user innovation systems documented in this book.

4) R&D Subsidies and Tax Credits, were the bias is toward manufacturers-innovation rather than user-innovation:

important innovative activities carried out by users are often not similarly rewarded, because they tend to not be documentable as formal R&D activities.

While this is an interesting list of issue, I think it probably only begins to scratch the surface of our policy bias toward top-down innovation.

One end note: Von Hippel also warns of the challenges to National Competitive Advantage:

Nations may be able to create comparative advantages for domestic manufacturers with respect to profiting from innovation by lead users; however, they cannot assume that such advantages will continue to exist simply because of propinquity.

In other words, in an era of global manufacturing, just because something was invented here, doesn't mean that it will be produced here. That is another dimension that we take into consideration as we development a comprehensive innovation policy.

Posted by Ken Jarboe at 7:48 AM | Comments (0) | TrackBack

April 21, 2005

Eminent Domain and Intellectual Property - update

In a posting last month, I mentioned a bill in the DC City Council to use eminent domain to control the cost of drugs. Apparently, the bill's sponsor, David Catania has backed off of the eminent domain argument - see Washington Examiner: News:

Catania, I-at large, on Tuesday circulated a substitute bill that eliminated the eminent domain provision.

He replaced it with language that makes it an "illegal trade practice" to overprice medications.

The substitute authorizes the city to use its "broad police powers" to regulate commerce, Catania said. If a medication's price is determined to be excessive under the District's Consumer Protection and Procedure Act, the mayor could request a compulsory license as a "remedy," Catania said.

A hearing would then determine whether the drug maker loses its patent.

Ross Weber, Catania's spokesman, said the substitute was introduced to "avoid the stickiness of eminent domain" - the practice of taking private property, in this case intellectual property, for public use.

The question still remains -- is a patent "property" that can be seized (with fair compensation) by a local government. Or is a patent a Federally granted monopoly right.

Posted by Ken Jarboe at 11:36 AM | Comments (0) | TrackBack

Google and the irrelevance of GAAP

Yesterday's Wall Street Journal Heard on the Street column contained a very interesting quote in its story on Google's pre-IPO accounting for stock options (as background GAAP is Generally Accepted Accounting Practices -- the set of accounting rules that US companies must use in their financial statements):

"On the surface, it makes the numbers look more favorable on a GAAP basis," said Youssef Squali, an analyst at Jefferies & Co. in New York. But, he said, when comparing Google's core financial performance to its rivals, "GAAP is the last thing you'd use," because of the diverse factors, such as options expenses, it takes into account.

If GAAP is the last thing that analysts use for comparing companies, then what is it good for? As the Financial Accounting Standards Board (FASB) puts it:

Accounting standards are essential to the efficient functioning of the economy because decisions about the allocation of resources rely heavily on credible, concise, transparent and understandable financial information. Financial information about the operations and financial position of individual entities also is used by the public in making various other kinds of decisions.

In other words, investors need a clear set of standards with which to judge investment opportunities. The whole purpose of GAAP is to provide a consistent set of financial measures across companies.

When analysts start saying that GAAP is irrelevant to judging a company like Google, then we know our accounting system is clearly broken.

(More later when I publish my paper on Reporting Intangibles.)

Posted by Ken Jarboe at 8:57 AM | Comments (0) | TrackBack

April 20, 2005

Financial risk and lack of an innovation policy

Recently, the question has arisen whether the US laws promote or discourage risk taking. There are a number of ways to approach this question and a number of laws that could be scrutinized. It is interesting to look at two areas that affect financial risk to see how the debate has approached the issue of innovation: one where innovation is at the forefront of concern and the other where innovation was almost completely ignored. Where innovation has been discussed is the issue of new corporate accounting rules under Sarbanes-Oxley. Where it has been almost ignored is the recently passed changes to the bankruptcy laws.

The contrast is striking and points to the lack of an innovation policy in this country. If we had a functioning innovation policy, we might be able to look at all these areas -- rather than the hit or miss approach where the issue is raise in one circumstance, but ignored in another.

The first issue is the growing concern about the new corporate accounting regulations under the Sarbanes-Oxley Act. There is a rising tide of rhetoric that the regulations are too burdensome, specifically Section 404 that requires companies to document and certify their internal financial reporting procedures and controls. Even before, there was concern about another section of the Act, Section 302 which required the CEO and CFO to sign a certification that the report was not untrue or misleading under penalty of criminal prosecution. This, we were told, was putting a chilling effect on innovation. An example of this argument is Peter Wallison of AEI, "Blame Sarbanes-Oxley":

An array of stimulus factors has failed to generate strong growth in the U.S. economy. That may largely be a consequence of the Sarbanes-Oxley Act and the stock exchange regulations it has spawned, which have altered the composition and dynamics of corporate boards in ways that discourage risk-taking.

The concern over innovation was acknowledged by SEC Chairman William Donaldson (in a 2003 speech) when he said:

I also hope that America's corporate leaders will not use Sarbanes-Oxley as an excuse for putting off innovation and investment.

Some argue that the concern over Sarbanes-Oxley is overblown. According to Ben Worthen, writing in CIO Magazine, A Funny Thing Happened on the Way to Compliance (It Got Easier):

Everyone thought the Sarbanes-Oxley financial disclosure act would require CIOs to perform heroic feats of integration, spend fortunes on software and invest enormous amounts of sweat equity. Now, with the law reinterpreted, only the last appears to be true.

Others argue that the requirements under Sarbanes-Oxley present an opportunity. As John Parkinson and Stewart Bloom writing in Optimize Magazine, "Surviving Sarbanes-Oxley"

From Enron to MCI, extreme accounting practices and poor management judgment have shattered investor confidence. That's why Congress passed the Sarbanes-Oxley Act of 2002, "to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws." To survive, publicly traded companies now must re-establish investor confidence. And their CIOs have a new role to play in building and selling technology strategies to support that mandate.

Regardless of where you come down on the issue of Sarbanes-Oxley (and I personally believe that the negative impact is overstated), the issues of innovation and risk-taking are front and center.

The debate over the bankruptcy laws stands in stark contrast. As the The Economist puts it, the cure may be worse than the disease. They note that

while Europeans might be bemused at all the moral outrage in America over the latest reforms, they might also wonder why Americans are so eager to move their bankruptcy law closer to Europe's-especially since Europe is busily trying to emulate America. Until around 20 years ago, consumer bankruptcy didn’t even exist in many European countries, and corporate bankruptcy was a draconian process too dreadful for all but the most desperate managers to contemplate. Since then, these nations have relaxed their laws precisely because they see the economic benefits this has brought America.

The Economist goes on to look at the pros and cons of tighter bankruptcy laws:

Making bankruptcy harder tends to make borrowers more willing to lend, but consumers less willing to take on debt. The result is that interest rates-the price of credit-fall. At first blush, this would make it seem that Europe had the right idea in the first place; the vast majority of people and companies that never declare bankruptcy get better terms on their loans, while the few profligates are forced to watch their step.

But making bankruptcy more difficult has other, less attractive economic effects. Forced repayment plans can discourage people from working harder (or at all), since extra income simply goes to pay creditors. Making bankruptcy more unpleasant can also deter entrepreneurship; people starting businesses are often required to personally guarantee loans to their firm-and those without assets are often forced to rely on MasterCard and Visa for their seed capital (see article). Tougher corporate-bankruptcy rules seem to make companies more risk-averse. America's current permissive system does let many (possibly undeserving) managers keep their jobs, but it also saves workers and suppliers from a sudden loss of income.

The article they refer to cites recent academic work, including Wei Fan and Michelle J. White's Personal Bankruptcy and the Level of Entrepreneurial Activity. That study used the differences in state bankruptcy laws, specifically the "homestead exemption," to test the relationship between the bankruptcy laws and entrepreneurship. To the surprise of no-one who has studied entrepreneurship, they found that more tolerant laws promote entrepreneurship:

The U.S. personal bankruptcy system functions as a bankruptcy system for small businesses as well as consumers, because debts of non-corporate firms are personal liabilities of the firms' owners. If the firm fails, the owner has an incentive to file for bankruptcy, since both business debts and the owner's personal debts will be discharged. In bankruptcy, the owner must give up assets above a fixed exemption level. Because exemption levels are set by the states, they vary widely. We show that higher bankruptcy exemption levels benefit potential entrepreneurs who are risk averse by providing partial wealth insurance and therefore the probability of owning a business increases as the exemption level rises. We test this prediction and find that the probability of households owning businesses is 35% higher if they live in states with unlimited rather than low exemptions. We also find that the probability of starting a business and the probability of owning a corporate rather than non-corporate business are higher for households that live in high exemption states.

As I said, this finding comes as no surprise to those of us who have been following entrepreneurship. The international comparison study of entrepreneurship, the Global Entrepreneurship Monitor (GEMI) has routinely stated the same thing. In fact, their 2001 National Entrepreneurship Assessment of the Untied States raised the warning:

In early 2001, versions of the Bankruptcy Reform Bill passed through the House and Senate. The bill is designed to reduce the number of personal bankruptcy filings submitted each year in the United States by requiring the payment of some portion of debt determined under court supervision. Proponents feel reform will protect small businesses from debtors while opponents argue that large credit card companies will reap the benefits of such legislation.

The current movement to reform bankruptcy laws could seriously affect entrepreneurship in the United States. As one of our experts stated, "bankruptcy reform is sending entrepreneurship in the wrong direction" because it is discouraging risk.

I remember very clearly listening to a well-known entrepreneur explain to a luncheon of Congressional staff how he built his business my maxing out multiple credit cards. That was a few years ago - and apparently none of that staff is still working for Congress, because those issues were not at the forefront of the debate.

Now, not everyone agrees that these changes will be bad for entrepreneurship. For example, Professor Jeff Cornwall, Director of the Center for Entrepreneurship at Belmont University, is not all that concerned. As he writes, when he teaches entrepreneurship,

I want them a little afraid at their start-up. I want them a little nervous. I want them a little worried about what happens if they fail. Entrepreneurs who rush in blindly like marauding pirates have not learned the lessons we try to teach them in our classes.

. . .

If Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 causes folks to think twice about their business idea, that to me is a good thing. If one of their main exit strategies is a quick and easy bankruptcy, then I want them to either rethink their plan or start over. Or if they are one of my students, plan to take the class again next semester.

He may be right - I disagree.

But the fact is that these issues were not at the center of the debate. The House Judiciary Committee report on the bill (House Report 109-031 - Part 1) does not include the word "innovation" and only has one paragraph on entrepreneurship, in the minority (dissenting) report. This just shows how far we are from having a functioning innovation policy.

Posted by Ken Jarboe at 11:51 AM | Comments (0) | TrackBack

April 19, 2005

Patents and innovation research

This morning, the National Bureau of Economic Research (NBER) is holding a conclave of economists who study innovation. (For those of you who don't know it, NBER is the premier economic research organization -- it is an NBER committee that determines when recessions officially began and ended).

While the conclave is by-invitation-only, unlike the Papal conclave we don't have to watch the color of the smoke to know what is happening. The papers are posted on the NBER website at NATIONAL BUREAU OF ECONOMIC RESEARCH, INC

One of the most interesting papers is by Adam Jaffe of Brandeis University and Josh Lerner of Harvard University. The paper "Innovation and its Discontents" is an extension of the 2004 book by the same title: Innovation and Its Discontents: How Our Broken Patent System is Endangering Innovation and Progress, and What To Do About It.

Their thesis is simple:

In the last two decades, however, the role of patents in the U.S. innovation system has changed from fuel for the engine to sand in the gears. Two apparently mundane changes in patent law and policy have subtly but inexorably transformed the patent system from a shield that innovators could use to protect themselves, to a grenade that firms lob indiscriminately at their competitors, thereby increasing the cost and risk of innovation rather than decreasing it.

Some of their recommendation, especially concerning business methods, software and biotechnology patents, will likely generate debate. Others, such as pre-grant opposition and re-examinations of granted patents, seem to be part of the building consensus on patent reform.

This paper/book is just the latest in a series of reports on the need for patent reform. Last year, the National Academy of Science published its set of recommendations: A Patent System for the 21st Century (Report of the Committee on Intellectual Property Rights in the Knowledge-Based Economy). The year before the Federal Trade Commission came out with To Promote Innovation, The Proper Balance of Competition and Patent Law and Policy.

And interestingly enough, at the same time as the NBER meeting was taking place, a few blocks away the Trans Atlantic Consumer Dialogue was holding its own day-long session on patent reform "Patents for Poets and Policy Wonks."

Let us hope that Congress is paying attention.

Posted by Ken Jarboe at 10:55 AM | Comments (0) | TrackBack

April 18, 2005

From technology to information

Last Friday, the stock market took a nose dive on the news that IBM will miss its expected quarterly profits. The report forced down the price of shares of other tech companies, as analysts took this to mean tough times ahead in the computer industry. But, as analyst Mark Stahlman noted in an interview in Business Week (The Old IT Is Dead. Long Live the New), the real problem isn't macroeconomics:

Q: Why are IBM and so many other companies missing their earnings numbers? Is it macroeconomic factors or a structural shift in information technology?
A: The macroeconomics are really only important when there's nothing important happening in the technology. When the technology is lively and there's some significant product or architectural transitions coming, that always trumps the economy. We're in a period of really intense technology change -- probably the most concentrated period of technology change yet.

In other words, there is still a lot of disruptive innovation yet to come. Companies who are hoping to sit back and cruise along based on their current technological capabilities are in for a rough ride.

IBM seems to be one of the companies that understanding the need to change and remake itself. It is trying to transform from a technology company to an information company (see the cover story of a recent Business Week: Beyond Blue):

Over the past two years, Palmisano has built these concepts into a strategy that would be laughable -- if it weren't so serious. His goal is to free IBM from the confines of the $1.2 trillion computer industry, which is growing at just 6% a year. Instead of merely selling and servicing technology, IBM is putting to use the immense resources it has in-house, from its software programmers to its 3,300 research scientists, to help companies like P&G rethink, remake, and even run their businesses -- everything from accounting and customer service to human resources and procurement.

Why remake the company? Because, as Michael Dell preaches and practices, information technology is be coming a commodity. It is the application of information where value-added now lies.

IBM, with its legions of PhDs and closets full of patents, is not built to duke it out with the likes of Dell. Palmisano's strategy promises a neat escape. Instead of battling in cutthroat markets, he takes advantage of all the low-cost technology by packaging it, augmenting it with sophisticated hardware and software, and selling it to customers in a slew of what he calls business transformation services. That way IBM rides atop the commodity wave -- and avoids drowning in it.

What does it take to re-orient from technology to information? Working with the client in a high-tech, high-touch relationship. For example, as the BW story relates:

In its pursuit of vital industry experience, IBM -- much like an eager college intern -- is sometimes willing to work for free. IBM's unpaid partnership with the Mayo Clinic dates back to a cocktail party in 2000 in Mayo's hometown of Rochester, Minn., where IBM has a computer factory. A Mayo employee and an IBMer realized that scientists at both companies were working on genomics research. This soon led to joint projects on gene profiling of leukemia cells, and a published paper in a scientific journal in 2003. This is not the kind of connection that Dell, Accenture, or Wipro is likely to make.

IBM and Mayo quickly moved on to a more ambitious project: changing the way medical research is done. They set out to gather data on 4.5 million patients and to make it easily searchable by researchers -- but without compromising patients' privacy. A research task that used to take five people a year can now be done by one person in 15 seconds. Eventually, Mayo and IBM believe, physicians will tap into a vast storehouse of data, real-time, when they're diagnosing patients. "This is the way to transform the way we practice medicine," says Dr. Nina M. Schwenk, chairperson of Mayo's Information Technology Committee. And for IBM, it's a foot in the door of the $1.4 trillion health-care business.

While IBM had plenty of skilled engineers in Rochester, they practically needed brain transplants if they were to do breakthrough work for Mayo. So the company sent some of its brightest engineers back to school. Working with the University of Minnesota, the company arranged in 2003 for a series of three-day crash courses in everything from molecular biology to protein sequence analysis. So far, 50 people have taken the classes. Nothing illustrates more starkly the gyrations at IBM: Engineers who once worked on a fading family of mainframe-style computers are now helping to chart the future of medicine.

. . .

A lot of these newfangled service deals haven't been around long enough to show results -- but a few have. At Nextel, for instance, IBM's takeover of the company's customer-service operations helped improve its customer satisfaction ratings from also-ran to top of the heap. P&G is another success story. In January, 2004, IBM took over part of P&G's human resources in a 10-year deal valued at $400 million. P&G has so far outsourced 3,500 jobs, including some in computing and customer relations. In HR, it had set 21 standards for speed and accuracy in such categories as payroll and expense management. The IBM-run operations met them all. In the month before IBM took over, P&G had met only nine of the goals, according to market researcher Gartner Inc.

With those victories under its belt, IBM is scrounging for new markets. In addition to its four original businesses -- accounting, HR, customer service, and procurement -- it is now plowing into six others. They include after-sales service for consumer electronics, insurance-claims processing, and supply-chain optimization.

Will this work? That remains to be seen. Both the service side and the technology side were responsible for IBM's missed quarterly performance. As Chief Financial Officer Mark Loughridge was quoted in the Wall Street Journal ("IBM Results Fall Short of Targets As Companies Slow Tech Spending"):

at least some of the weakness in mainframes was expected, in part because the machines sold very well in the prior year.

Mr. Loughridge also placed blame for the shortfall at the feet of the giant services organization, which accounts for about half the company's revenue. Those services encompass everything from handling a company's payroll operation and designing computer networks to basic consulting.

Mr. Loughridge said IBM had "execution issues" in services, and that the company was beginning restructuring efforts, largely targeted to Europe, that would try to clean those up.

Clearly, IBM has ways to go in its transformation. We will see if Wall Street has the patience to see it through.

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China faces a labor shortage?

Companies moving operation's to China are running into a familiar problem: lack of qualified workers. According to The Economist:

Though China has a vast pool of unskilled labour, firms in the south now complain that they cannot recruit enough cheap factory and manual workers. The market is even tighter for skilled labour. As the economy grows and moves into higher value-added work, the challenge of attracting and retaining staff is rising with the skill level, as demand outstrips supply. The result is escalating costs for firms operating in China. "If you think that China is a cheap place for labour, think again," says Vincent Gauthier of Hewitt Associates, a human-resources consultancy.

The particular shortages mentioned most often are of creativity, of an aptitude for risk-taking and, above all, of an ability to manage-in everything from human resources and accounting to sales, distribution, branding and project-management.

The solutions that companies are turning to sound very familiar:

Bonuses, longer-term incentives, free housing and meals, a mobile phone and a set of wheels are becoming standard perks. More than one-third of 1,600 multinational firms surveyed by Hewitt now offer a company car. More holidays, maternity and paternity leave, more frequent job rotation and share options also now feature. Add in the big contributions that employers must make to China's national security fund system and the total cost of an employee can be double his basic pay.

Above all, Chinese employees want good training, as they are acutely aware of the limitations of their educational system and keen to acquire marketable skills. Ping-on Mak, senior human resources manager for GE Consumer Finance in Asia, says that the attitude of many young Chinese managers is "if I want training, I'll go work for a multinational and then after three years I'll leave." But GE, with an in-house "university", and L'Orèal, which provides mentoring, say that training produces employees who tend to stay longer.

Two points jump out from this story:

1) modern production systems are no longer (if they ever were) simply a case of putting done a factory in the middle of a low cost labor pool. There are numerous other skills that are needed to run a modern system. I've talked to companies doing business in China for a number of years - and the technical and managerial problems are immense.

2) China is clearly moving up the value-added chain as evidences by their concern over having more "creative" workers. For the US to build a lasting advantage on the engineering and creative side will be an ongoing challenge. If a product can be traded, the Chinese will be in the market.

One other point from the Economist story about company responses to the problem is also interesting:

Some foreign firms hope to persuade the expatriates they send out to stay longer than first planned-despite their higher cost. Some are relocating operations from the coast to smaller, cheaper cities to tap new markets for talent. Some are even considering outsourcing from China itself, by moving parts of their operations to, say, Vietnam and Cambodia, where the workforce is even cheaper and younger.

Vietnam and Cambodia? Last I heard at least Vietnam was worried about Chinese textiles overrunning their own nascent textile industry. I had always heard of Vietnam as moving further up the value-chain - not becoming China's maquiladora. More on this later.

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April 12, 2005

Feb trade in intangibles

Today's trade figures show that balance of trade in intangibles is holding steady with an insignificant decline to $6.58 billion monthly in February from $6.61 billion in January. Continuing the past trend, both exports and imports increased slightly.

Unfortunately, the BEA figures for February show the overall trade deficit contining its deterioration, climbing to the highest on record. As the Wall Street Journal (U.S. Trade Deficit Expanded To $61.04 Billion in February) relates:

The U.S. trade gap reached a monthly record high in February amid a sharp pickup in the cost of oil, gasoline and other imported industrial supplies and growing imports of consumer goods such as pharmaceuticals and apparel.

The Commerce Department said the U.S. deficit in international trade of goods and services grew 4.3% to $61.04 billion in February from a revised $58.50 billion in January. The January trade gap was previously reported at $58.27 billion. The February deficit was 2.7% higher than the previous all-time high of $59.42 billion posted in November.

The report indicates that trade continued to be a drag on U.S. economic growth for most of the first quarter this year. Some economists have said a weaker dollar and economic growth overseas should help stabilize the trade deficit this year.

Exports and imports both reached record highs in February, but imports grew faster. In February, overall imports rose 1.6% to a record $161.52 billion, as both businesses and consumers bought
more foreign-made goods.

Interestingly, our overall deficit with China declined, even though imports of textiles and apparel increased significantly. The continued surge in textile imports will likely spark continued interest in some form of trade restriction under the "escape clause." This provision is specifically crafted to deal with trade surges (a short-run solution). The lower overall deficit will, however, likely give the Chinese an argument for not revaluing their currency (a long run solution).

The trade numbers are also likely fuel the debate on the dollar. According to the Washington Post (Trade Deficit Hits All-Time High):

The Bush administration argues that the deficit primarily reflects the fact that the U.S. economy has been growing at a much faster pace than the economies of its major trading partners, pushing up imports while dampening demand for U.S. exports. Treasury Secretary John Snow was expected to use a Saturday meeting of finance officials from the Group of Seven major industrial countries to once again lobby for Europe and Japan to pursue more growth-oriented policies.

The U.S. dollar has been declining for three years, a fact that should help narrow the trade deficit by making imports more expensive to American consumers while making U.S. exports cheaper. However, economists say the dollar needs to fall further to deal with the widening trade deficit, and they are predicting a further increase in the trade gap this year.

I'm not sure we can deflate our way out of this problem. We need to compete instead. As I've said before (and will likely say again): intangibles, in and of themselves can not offset our huge and growing deficit in goods. The power of intangibles is how they re-invigorate all sectors of the economy. Utilizing that power to transform manufacturing is the only way we will get our dangerous trade deficit under control.

Note: we define trade in intangibles as the sum of "royalties and license fees" and "other private services". The BEA/Census Bureau definitions of those categories are as follows:

Royalties and License Fees - Transactions with foreign residents involving intangible assets and proprietary rights, such as the use of patents, techniques, processes, formulas, designs, know-how, trademarks, copyrights, franchises, and manufacturing rights. The term "royalties" generally refers to payments for the utilization of copyrights or trademarks, and the term "license fees" generally refers to payments for the use of patents or industrial processes.

Other Private Services - Transactions with affiliated foreigners, for which no identification by type is available, and of transactions with unaffiliated foreigners. (The term "affiliated" refers to a direct investment relationship, which exists when a U.S. person has ownership or control, directly or indirectly, of 10 percent or more of a foreign business enterprise's voting securities or the equivalent, or when a foreign person has a similar interest in a U.S. enterprise.) Transactions with unaffiliated foreigners consist of education services; financial services (includes commissions and other transactions fees associated with the purchase and sale of securities and noninterest income of banks, and excludes investment income); insurance services; telecommunications services (includes transmission services and value-added services); and business, professional, and technical services. Included in the last group are advertising services; computer and data processing services; database and other information services; research, development, and testing services; management, consulting, and public relations services; legal services; construction, engineering, architectural, and mining services; industrial engineering services; installation, maintenance, and repair of equipment; and other services, including medical services and film and tape rentals.

Posted by Ken Jarboe at 9:08 AM | Comments (0) | TrackBack

April 11, 2005

The Overwired World

From today's Washington Post:

Pardon the Interruption

Fourteen percent of the world's cell-phone users say they have interrupted a sexual encounter to answer their wireless phone, AdAge reported today. The finding came from a survey of 3,000 wireless product users titled "Wireless Works: Exploring New Brand Connections," that was conducted by Omnicom Group's BBDO Worldwide and Proximity Worldwide.

Fifteen percent of American respondents said they practice what AdAge and others are calling "Cellus Interruptus." The good news is that we Yanks are not quite as tethered to the wireless world as our German and Spanish counterparts. Those two nations clocked in at 22 percent, the survey found. Italy, the homeland of Casanova, clocked in at just 7 percent of cellularly-interrupted encounters.

Why would such findings excite the advertising industry? Besides the rising trend of using the mobile phone as an, uh, accessory in intimate relations, it seems that some of use believe it might be more appropriate to interrupt an intimate moment than, say, dinnertime. More from AdAge: "'People can't bear to miss a call,' said Christine Hannis, head of communications for BBDO Europe. 'Everybody thinks the next call can be something really exciting. And getting so many calls proves social success,' she said. 'It fulfills a fundamental insecurity.'"

Doesn't she realize that we're usually worried about other fundamental insecurities at those times?

No comment.

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French teach creativity with US design school

Are the French moving ahead in the creative economy? According to a new Business Week story (Where MBAs Learn The Art Of Blue-Skying):

If you are looking for a business school that teaches you how to think creatively, design new products and services, manage your innovations through a corporate bureaucracy, or present them to outside angel investors, Fontaine-bleau, France-based Insead, the leading European B-school, just outside Paris, may be just the place. Insead has joined with the Art Center College of Design in Pasadena, Calif., to offer a joint program that teaches the role of creativity in business decisions, how innovation really works, and why design may be as important to corporate management today as Six Sigma was in the '90s.

. . .

Art Center President Richard Koshalek believes design schools can help business schools in teaching a new generation of managers about innovation. "The business community is just now discovering the importance of creativity," he says.

First the British (see my earlier posting Britain Get It), now the French. How soon before US companies and B-schools catch up?

Posted by Ken Jarboe at 11:58 AM | Comments (1) | TrackBack

April 8, 2005

Sanity or insanity in the patent process

This just in: WSJ.com - Appeals Court Rejects Patent For Smucker's 'Uncrustables'

On Friday, the U.S. Court of Appeals for the Federal Circuit rejected an effort by J.M. Smucker Co. to patent its process for making pocket-size peanut butter and jelly pastries called "Uncrustables."

Smucker says the sealed edge of Uncrustables is unique, keeping the bread slices 'separately visible about the periphery of the sandwich.'

Smucker's peanut butter and jelly pockets are enclosed without a crust using a crimping method that the Orrville, Ohio, company says is one of a kind and should be protected from duplication by federal law. Patent examiners at the U.S. Patent and Trademark Office disagreed, saying the crimped edges are similar to making ravioli or a pie crust.

Smucker already owns a general patent, which it purchased from Len Kretchman and David Geske, two Fargo, N.D., men who came up with the idea in 1995 and had been baking the products for school children. The two cases before the appeals court involved two additional patents that Smucker was seeking to expand its original patent by protecting its method.

I'm not even going to comment . . .

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New business model for music

In a number of postings on the Grosker case, I have repeated the standard stock phrase: the music industry needs a new business model. Other than pointing to Apple's somewhat success in getting people to pay for downloads, there has been limited descriptions of what that model might look like.

Now comes an answer in the form of a new paper by two Indiana University professors, Nancy Bogucki Duncan and Mark A. Fox (Computer-aided music distribution: The future of selection, retrieval and transmission), just published on First Monday (for those of you who don't know it, First Monday is the premier on-line peer-reviewed journal of Internet studies). Duncan and Fox argue that:

Even today the industry largely sees the product it sells as a physical item, typically a compact disc. Until relatively recently, viewing music as a physical item has been convenient, and profitable, for the music industry. Historically, music labels have used the introduction of new music formats to grow revenues - with many consumers replacing their existing catalog of music with a new format that provides increased fidelity, convenience, and flexibility. As music companies continue to control their product through its physical production and subsequent distribution their chief use of emerging information technology has been Digital Rights Management (DRM). Their emphasis is on finding ever more effective ways to make recorded music less accessible. The longer the industry clings to a model of limiting access and flexibility, the longer it leaves an unexploited market to create new delivery models that - for better or for worse - redefine the industry.

This inertia is, perhaps, understandable given that viewing music as a service to be delivered via the Internet would necessitate a dramatic change in thinking and infrastructure. However, the potential for music as a service appears significant, if developed with well-conceived business models that provide value to consumers over and above that offered by free downloads. The challenge for the music industry is to ensure that it provides this value.

It is fair to say that current business models are poor at meeting consumers' emotional needs (a key reason for listening to music in the first place). Some technologies, e.g., iPods allowing users to create playlists (which could include playlists for different "moods"); however, for the delivery business to be successful in this regard it needs to be more interactive and to have a memory. By more interactive, we mean that users should be able to indicate what songs the like/dislike (and in what circumstances). By having a memory, we mean that users should be able to indicate their state of mind - or have devices play music based on factors such as time-of-day and previous likes/dislikes. In essence, as well as giving users the ability to choose music song-by-song, technology should be able to create customized play lists based upon our previous listening experiences, the activity we are engaged in, the time of day, and our emotional state (or our desired emotional state).

In other words, the recording industry needs to be come less of an information-owner and more of an information-intermediary. The value added is in providing the selection service, rather than owning the final product.

As Duncan and Fox note, the recording and radio industries have always played a role as information brokers. They determined which musicians were recorded and which of those recording were given top billing.

Similarly, the publishing industry played the same role for the written word. Even today, in the age of ultimate individual publishing via the computer, the publishers play a key role as an information intermediary and screening device. So, I think the recording industry can adapt to this new model.

But what about the other parts of the music industry -- specifically the artists? Duncan and Fox don't address that issue -- in all fairness this question is well outside of the scope of their analysis. Do we see recorded music become nothing more than a promotional device for the live concert? And what about extending the problem from music to video? Musicians can still go on tour. Movie actors are expected to make a living through their movies -- not necessarily by touring the country doing stage versions of their movies (and as anyone who has thought much about it issue will realize, movies and stage productions are two very different things).

The Duncan and Fox paper point toward an interesting direction the recording industry might take. However, there are still a number of other basic issues still to be addressed.

Posted by Ken Jarboe at 4:26 PM | Comments (1) | TrackBack

Innovation in textiles

Right from the horse's mouth -- textiles can be an innovative industry. According to Gary Heiman, CEO of Standard Textile Co., see Innovation, Not Quotas (washingtonpost.com), better business models that are based on innovation can save the textile industry:

Why have hundreds of thousands of American textile and garment workers lost their jobs in the past decade, with 12,000 becoming unemployed just in January, the first month after the agreement to end quotas went into effect? The conventional answer is that their companies couldn't compete with cheap imports made with cheap labor from the developing world. Undervalued Chinese currency and government subsidies also gave price advantages to companies from China. But I never hear anyone mention another key reason: American textile companies didn't discard failed business models and evolve when they had the chance.

My 65-year-old company produces and distributes textile products and apparel to hotels, hospitals and manufacturers. We are a small blip on the economic radar screen, with about 3,000 employees. But I have seen firsthand the mistakes made by the larger industry, especially during the past three years, when we bought two defunct mills in Georgia, refurbished them, and then reopened them to manufacture sheets, pillowcases, blankets and other products.

The companies that had owned these mills bet that they could meet the threat of imports by borrowing heavily, investing in larger and faster machines, laying off workers, and boosting productivity. Most of their competitors made the same bet. The problem was that these companies were content to churn out the same old products more quickly, rather than investing in research and development and coming up with innovative new products. They took essentially the same approach to weaving fabric as the ancient Egyptians. What my industry needed was senior managers and researchers with the frontier mentality found at Apple or Intel or biotech start-ups. What it got was too many 19th-century-style industrialists just trying to replace people with machines.

Companies that make garments in the United States have been hit hardest by the flood of Asian imports. But they have known about the coming end to quotas for more than a decade; if they couldn't compete with mass-produced clothes made in China and elsewhere, they had plenty of time to shift production to more specialized products that the world wants to buy.

Moreover, instead of looking for new markets overseas, too many companies kept vying for diminishing shelf space in the Wal-Marts and other large retailers close to home, which used their leverage to ratchet down wholesale prices and cut into their suppliers' profits. And so, overcapitalized and in debt, making products that were both generic and too expensive, not geared up for the global marketplace, the companies that we bought and others like them collapsed in the past two decades.

A small minority of U.S. textile companies, including ours, took a different approach. These companies chose to pour resources into R&D to come up with new manufacturing technologies, giving themselves the ability to create the kinds of specialized products that were not being developed elsewhere. These include synthetic towels and sheets made with new weaving technologies, surgical gowns, fabrics used in agriculture, high-fashion apparel, and fire-resistant workwear.

Now, it is true that such products generally don't require as many workers as, say, mass-produced sneakers, underwear and the other commodities that are being churned out mainly in developing countries. But they do require a highly educated, or easily educable, workforce and the kinds of skill sets that, in my experience, are still easier to find in the United States and other developed countries.

Mr. Heiman's critic of his fellow businessmen's mind set is devastating and all too widespread: too may 19th Century industrialists. Trying to match low-wage countries with low cost production is usually a losing strategy. It can work in a few cases where you can massively increase your productivity. But that is rare. It is a 19th Century approach to a 21st Century challenge.

There is a 21st Century solution. And it is not just turn everyone into computer programmers or bio-tech researchers. One of the most disturbing myths of the intangible economy is the view that there are loser industries ("sunset"). We are told that we should get out of these industries and concentrate on the new high-tech knowledge-intensive industries. Mr. Heiman's experience shows that every industry can be a knowledge-intensive industry if someone is willing to look for and apply that knowledge.

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April 7, 2005

Banning disruptive technology - Grokster con't

In his New York Times column today "File-Sharing Is the Latest Battleground in the Clash of Technology and Copyright", Hal Varian makes a very good point about the Grokster case. While the details of the case turn on the Sony ruling on Betamax, there is a better model for dealing with disruptive technologies.

In the early 1900's, the disruptive technology was player pianos. Manufacturers of player piano rolls purchased a single copy of the sheet music of a song, hired someone to record the music and then sold these mechanical reproductions to consumers. The songwriters held that this was copyright infringement, while the piano roll manufacturers pointed out that they had paid the appropriate copyright fees when they purchased the sheet music.

In 1908, the Supreme Court found in favor of the piano roll manufacturers, but practically invited Congress to consider new legislation on the issue. Congress responded with the Copyright Act of 1909, which created a new form of intellectual property, mechanical reproduction rights.

The new law required piano roll manufacturers to pay songwriters a fee for each song. Subsequently, mechanical reproduction fees have been extended to new technologies like phonographs, audio tapes, CD's and online streaming digital music.

In the 1908 case, songwriters did not try to ban player piano technology. They clearly recognized that the additional distribution of their songs was potentially advantageous. Their goal was simply to get a fair share of the proceeds from the piano roll sales.

Varian also points out how the entertainment industry's loss in the Sony case was a blessing as it forced them to re-price their product downward and thereby create a whole new market. As others have stated, the movie industry gets a large percentage of its profits from sales of videos -- a market that would now have even existed if they had won the Sony case.

As I argued in my earlier posting "Closing the Barn Door," we need a new business model. The issue shouldn't be how to stop the technology -- as the Grokster case is. The problem is creating a solution similar to the piano roll issue where everyone gets their fair share. And I don't think the Supreme Court is going to get us to that solution. In the Grokster case, not only are we closing the barn door after the horse has left, we don't even have the right horse or the right barn.

Posted by Ken Jarboe at 2:35 PM | Comments (1) | TrackBack

April 6, 2005

Bad data is ok according to DOE

According to the Department of Energy, falsification of data is ok -- if other events prevent you from using it. That is what DOE is telling
Congress. As a story in The New York Times - "Importance of False Data Is in Dispute" relates:

Energy Department officials testified Tuesday that admissions by government scientists that they had falsified information about a Nevada site being readied for nuclear waste storage were not important, because other delays had prevented them from submitting the bad information in a license application.

In more than two hours of testimony before a House subcommittee, Energy Department officials made their first substantive remarks about the department's disclosure last month of internal e-mail messages in which Interior Department scientists discussed how they had made up scientific entries or deleted material they did not understand about how water would flow through the storage site. They said they were only beginning to evaluate whether the information made a difference in the conclusions reached in studies about the safety of the site, Yucca Mountain, about 100 miles northwest of Las Vegas.

Falsified data is falsified data. You don't need to "evaluate" its impact; you need to retract and redo any studies that might have tainted by the falsification. This isn't about an errata sheet where there is a typo or a missing citation.

In the information economy, the information has to be valid if the system is going to work. Or maybe folks at DOE think we should change the concept to "the falsified data economy."

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April 5, 2005

Inadequate statistics - example of education

We may live in an information age, but getting accurate information is still a problem. Take for example the issue of student graduation rates. According to a story in today's Washington Post,
"Education Statistics Difficult to Interpret", the National Center for Higher Education Management Systems has collected the following data:

For every 100 students who enter ninth grade:
&bull 67 will graduate from high school.
&bull 38 will enter college.
&bull 26 will remain in college beyond freshman year.
&bull 18 will earn an associate's or bachelor's degree.

That is rather grim. But, as the Post story points out,

the U.S. Department of Education responded with a different, and somewhat more optimistic, set of numbers based on a longitudinal study in which 12,000 students were followed from the time they were in eighth grade, in 1988, until December 2000.

For every 100 students in the eighth grade in 1988, their statistics showed:

&bull 78 graduated from high school on time in 1992 with a regular diploma.

&bull 53 entered a postsecondary institution within seven months of graduation.

&bull 47 remained in the postsecondary system beyond the first year.

&bull 34 earned an associate or bachelor's degree by age 26.

What is going on? Well, it turns out that we really don't know. The Post story does on to explain:

U.S. Education Secretary Margaret Spellings has complained about the lack of good information on college graduation and other issues. "We can tell you almost anything you want to know about first-time, full-time degree-seeking students who have never transferred," she said in a recent speech. "The trouble is, today, that's less than half of the total student population."

In other words, we have good data on the prototypical industrial age student - "first-time, full-time degree-seeking students who have never transferred" - but little about the information-age student who maybe in and out of "the educational system."

This is a problem that comes up over and over and over again. Our statistical system continues to be geared to our industrial age past. We can track with great precision the number of box cars unloaded each month, but have no idea as to the value-added of a creative worker.

In fairness to the statisticians, they are not to blame. They are working diligently to come up with better measures (see my January posting on savings and the National Accounts). Our mindset is what has not changed.

Take for example the above educational statistics. Are graduation rates the best measure of a successful outcome? That may sound heretical - and it is meant to be. These statistics track students like so many widgets coming down the assembly line. Graduation means certification -- the end of a process. Yet, we all give lip service to the concept of lifelong learning -- where supposedly the process never ends. Under the current system, one needs the certification to go one to the next step. But does one need a college degree in order to proceed with lifelong learning? A high-school degree?

My answer is that one probably needs a high-school education in order to prepare for a life of learning. Kids who drop out of high school are probably not infused with a love of learning. So we use graduation as a proxy. We also use it as a short-hand proxy for some type of skill attainment - just as we use patents as a proxy for innovation.

Both are inadequate. If we are to make policy for in the information economy, we need much better information. But we first need to better understand what type of information we need. When we know what questions to ask, we will get better data.

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April 4, 2005

Deficits and globalization

Does globalization help or hurt? And do current account deficits matter? In recently released paper looking specifically at the link between multinational corporations and the current account deficit, the McKinsey Global Institute clearly coming down on the "help" side. And their analysis is that the deficit is nothing to worry about. As reported in WSJ.com - U.S. Multinationals Reap Overseas Bounty:

In a recent paper on the subject, analysts at McKinsey & Co. conclude record U.S. trade deficits aren't as threatening as they appear, because they are being driven in part by increasingly profitable U.S. companies, producing in places like China, Mexico and India, and shipping their goods and services back to the U.S. It concluded overseas profits account for $2.7 trillion in stock-market capitalization and those profits are helping to promote investments in new technologies and jobs abroad and back home.

"Far from reflecting the weakness of the U.S. economy, at least a third of the current-account deficit is actually evidence of its strength," the report says. "The U.S. acts as the world's financial intermediary, gathering up and allocating global savings to companies that then invest them around the world," it later concludes.

McKinsey argues the important role of U.S. multinationals means today's record trade deficits -- a source of so much uncertainty about the economic outlook -- could last much longer than many economists expect.

The U.S. current-account deficit hit 6.3% of gross domestic product in 2004, a level that has triggered financial crises in other countries in the past. Classic economic theory holds the trade gap should make foreigners less willing to hold U.S. assets. That, in turn, should push down the value of the dollar, making U.S. products more competitive abroad and making foreign products more expensive at home. Theory holds this would ultimately correct the trade imbalance.

But McKinsey argues that labor is so much cheaper in countries like China and India that U.S. multinationals are unlikely to alter their international strategy anytime soon, meaning the old corrective mechanisms won't work the way they used to. "For at least the next decade, we would expect foreign investment by U.S. multinationals to go on adding to the current account deficit as it is currently measured," McKinsey says.

Last week, Goldman Sachs fired back at McKinsey's conclusions about the U.S. economy's place on the global stage. Edward McKelvey, a senior economist at Goldman, argues that it doesn't matter who is driving the deficit wider. The end result is still that the world is awash in dollars and because of that the currency is still prone to sharp -- and potentially destabilizing -- depreciation.

For now at least, McKinsey's rosy view of the world is holding up. The current-account deficit was 25% wider in 2004 than it was in 2003 and shows no sign of letup. And while the dollar has weakened, it hasn't touched off a much-feared financial crisis.

But Diana Farrell, director of the McKinsey Global Institute and co-author of the study on multinationals, says that doesn't mean there aren't pockets of truly vulnerable Americans in this process. The $2.7 trillion in stock-market capitalization created by multinational profits overseas doesn't reach individuals who don't own shares in these companies. These are often the same low-skilled workers most vulnerable to lose their jobs to inexpensive low-skilled workers overseas. The real worry in today's economy, Ms. Farrell says, isn't the current-account deficit. It is finding ways to equip and enrich those workers least prepared for the globalization of profits.

There are two comments in the above story I agree with and one that raises a concern. The comment that concerns me whether we need to worry. The WSJ story quotes the paper's author as saying 1/3 of the current account deficit is really strength because it represents funds of US based multinational - and therefore productive investment that really isn't from foreigners. That may well be true -- I don't know. But even if it is, it is no source of comfort. There is still the other 2/3 of our huge current account deficit to worry about. If the deficit was only one-third the size of what it is now, I would sleep easier and might be inclined to buy the argument about the US being the "financial intermediately to the world."

The two points I agree with are: 1) that traditional macroeconomic measures will not self-correct the problem and 2) that many people are not benefiting from the increased corporate profitability.

On the first point - see my earlier posting on dueling on the dollar. Macroeconomic models assume instantaneous and seamless adjustments. It can not account for the phenomena that McKinsey report describes: labor so cheap that an extraordinarily large change would be required to alter behavior and the increasing need for companies to locate production closer to emerging new consumer markets, such as China.

On the second point, let's first leave aside the link between profitability and stock prices, and the fact that companies rarely share their profits with their stockholders, i.e. pay dividends, any more. Most American's -- even high-earning people like sports figures, CEOs and movie stars -- still get their money through earned income (wages and salaries). The Trust-Fund Society (aka Ownership Society) is still some political operative's dream. Thus, the link between corporate profits and the economic wellbeing of most Americans is indirect at best (i.e. profitable companies stay in business and hire more workers).

And now we have the Bush Administration apparently attempting to downplay this link in order to rationalize their projections for Social Security that assume slow economic growth (and therefore lower contributions to Social Security) but high rates of return for private accounts. According to a story in The New York Times, "Social Security, Growth and Stock Returns"

In barnstorming the country over Social Security, administration officials predict that American economic growth will slow to an anemic rate of 1.9 percent as baby boomers reach retirement.

Yet as they extol the rewards of letting people invest some of their payroll taxes in personal retirement accounts, President Bush and his allies assume that stock returns will be almost as high as ever, about 6.5 percent a year after inflation.

"For the life of me, I can't imagine why anybody would argue against young workers having the ability to invest and build a better retirement for their future," Treasury Secretary John W. Snow said Wednesday in a speech in Bozeman, Mont.

A growing number of economists, however, including many who favor personal accounts, say Mr. Bush's assumptions are optimistic.

Many believe that stock returns will be lower than they have been in the past, closer to 5 percent than 6.5 percent, and that returns on a balanced mix of stocks and bonds will be much lower than that.

"Most economists would argue that, over a long period of time, there is a linkage between what the stock market will return and how well the economy does," said David Blitzer, chairman of the Standard & Poor's index committee, which oversees the S.&P. 500 stock index.

I firmly believe that stock prices are tied to how well the overall economy does. I'm not so convinced that these factors are that strongly linked to the economic prosperity of the average American any more. A robust stock market, corporate profitability and a healthy GDP growth rate may turn out to be necessary but not sufficient conditions for economic prosperity. We have seen repeated job-less recoveries and periods of robust GDP growth with anemic income growth. As the intangible economy continues to globalize, the WSJ story highlighted the challenge: to equip and enrich those workers least prepared. Unfortunately, I worry that this category is including more and more of us.

Posted by Ken Jarboe at 3:06 PM | Comments (0) | TrackBack

April 1, 2005

March employment

March's employment numbers came out this morning. BLS reported a drop in the unemployment rate to 5.2%, but an increase in total employment of only 110,000.

Here is the breakdown by occupation:

Management, business, and financial operations occupations:
continues to have a below average unemployment rate (2.4%); down slightly from March 2004. Employment up (21,00) from last year; total number of people in this occupation (working or looking for a job) down by 44,000.

Professional and related occupations:
below average unemployment rate (2.2%); down significantly from March 2004. Employment down (66,000) from last year; total number of people in this occupation (working or looking for a job) down by 210,000.

Service occupations:
above average unemployment rate (6.9%); down from March 2004. Employment up significantly (475,000) from last year; total number of people in this occupation (working or looking for a job) up by 391,000.

Sales and related occupations:
average unemployment rate (4.8%); down from March 2004. Employment up significantly (671,000) from last year; total number of people in this occupation (working or looking for a job) up by 460,000.

Office and administrative support occupations:
average unemployment rate (4.9%); down from March 2004. Employment down (186,000) from last year; total number of people in this occupation (working or looking for a job) significantly down by 379,000.

Farming, fishing, and forestry occupations:
significantly above average unemployment rate (13.7 %); down significantly from March 2004. Employment up (23,000) from last year; total number of people in this occupation (working or looking for a job) down by 25,000.

Construction and extraction occupations:
significantly above average unemployment rate (10.1%); down slightly from March 2004. Employment up significantly (711,000) from last year; total number of people in this occupation (working or looking for a job) up by 683,000.

Installation, maintenance, and repair occupations:
slightly below average unemployment rate (4.3 %); down from March 2004. Employment up (222,000) from last year; total number of people in this occupation (working or looking for a job) up by 182,000.

Production occupations:
above average unemployment rate (7.3 %); same as March 2004. Employment down (20,000) from last year; total number of people in this occupation (working or looking for a job) down by 23,000.

Transportation and material moving occupations:
above average unemployment rate (6.6 %); down from March 2004. Employment up (226,000) from last year; total number of people in this occupation (working or looking for a job) up by 117,000.

Bottom line: Managers and professions continue to have the lowest unemployment rates and construction and production workers the highest. But, the US economy has more service, sales, construction, repair and transportation workers and fewer managers, professionals, office workers and production workers than this time last year.

Very interesting, if we are supposedly becoming an information economy. Now, these are one month's numbers. I don't know if this is the larger trend or not. I hope to do some more detailed work and will report back.

Posted by Ken Jarboe at 9:06 AM | Comments (0) | TrackBack