February 2006 Archives

Shifting jobs in high-tech

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Today's Wall Street Journal reports: "Market Is Hot For High-Skilled In Silicon Valley". But, as the story explains, the news is not so good for lower-skilled tech jobs:

Past tech recoveries tended to bring new lower-skilled jobs as well as high-skill jobs. This time, tech firms -- from big companies like Hewlett-Packard Co. to mid- and small-size firms such as Netflix, Adobe Systems Inc., and SanDisk Corp. -- have moved lower-skill jobs out of the Silicon Valley area to cheaper locations, or outsourced them to foreign countries. The new jobs they are creating locally often require specialized skills in engineering and design. Young companies like Google Inc. are simply starting out hiring at the high end, further shifting the overall balance.

A study last month by Joint Venture Silicon Valley, a nonprofit group representing businesses and government agencies in the area, found the nation's tech capital had a net increase in jobs in 2005 for the first time in four years. Most of the growth came in the category of creative and innovation services, including firms in research and development, scientific and technical consulting and industrial design. In total, the number of Silicon Valley jobs in these areas grew 4% from 2002 to 2005, reaching 72,734. At the same time, the number of jobs in electronic-component manufacturing -- which tend to involve assembly and other repetitive tasks -- dropped 28% to 23,772, while jobs in semiconductor-equipment manufacturing fell 23% to 58,133.

Overall, 14% of all the jobs in Silicon Valley today belong to a sector called core design, engineering and science. That exceeds the comparable 9.3% slice of the work force in Austin, Texas; 8.7% in Seattle; and 8.3% in San Diego, according to the study.

Doug Henton, an economist and co-author of the report, says with the growth in these creative engineering jobs, a new face of Silicon Valley is emerging. "Ten years ago, this was an engineering Valley that pumped out chips and computers," he says. "Now it's all about creative tech and staying on the cutting edge."

It is true that Silicon Valley is famous for re-inventing itself with each new technological wave. But, as the story points out, there is a downside:

What's more, as operations and lower-skill tech jobs leave the region, Silicon Valley has a narrower base of industries. That makes the area more vulnerable should another downturn occur, says Steve Levy, an economist at the Center for the Continuing Study of the California Economy in Palo Alto, Calif. "Los Angeles has a far more diverse economic base, with Hollywood, biotechnology, plastics and toys," says Mr. Levy. "But high-skill tech is all we're left with."

(FYI - the full study is available at the Joint Venture website).

The so-called "creative/innovation sectors" are key to economic prosperity in the I-Cubed Economy. But so are operations - which can also be innovative and creative.

And, as operations moves elsewhere, so will the "creative/innovative" sectors. This is exactly what is happening as China and India ramp up their design capabilities.

So -- good news that jobs are growing again in Silicon Valley. Bad news that they are growing in such a narrow base.

GDP revisions - and intangibles trade

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BEA released its preliminary GDP numbers for 2005 and the 4th quarter of 2005. [Note: BEA releases an "advanced estimate" at the end of a quarter, then a revised "preliminary" figure a month later, and then a "final" number a month after that.]

The GDP growth rate for the 4th quarter was 1.6% -- slightly better than last month's estimated 1.1%. According to BEA the reason for the revisions are as follows:

The preliminary estimate of the fourth-quarter increase in real GDP is 0.5 percentage point, or $14.1 billion, higher than the advance estimate issued last month. The upward revision to the percentage change in real GDP primarily reflected upward revisions to exports, to federal government spending, to equipment and software, and to change in private inventories that were partly offset by an upward revision to imports.

The preliminary real GDP increased 3.5% 2005 (the same as last month's advance estimate.) Real GDP grew by 4.2% in 2004.

As I discussed in my earlier concerns about what happened to growth, the advanced estimates showed a slow down in services trade. The revision show a continued weakness in services trade. The same is partly true for trade in intangibles. My analysis of the intangibles trade surplus shows an increase in our intangibles surplus in October of $57 million, a decline of $1 million in November, and an increase of only $22 million in December.

Thus, the weakness in our trade in intangibles continues.


Blocking . . . - an update

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An update on the previous posting on the controversy over the refusal to grant a visa to an Indian scientist - Washington Post - U.S. Approves Visa for Indian Scientist:

State Department officials said yesterday that the U.S. Embassy in New Delhi has granted a visa to a prominent Indian scientist who said he was accused of deception and potential links to chemical weapons production when he applied to a U.S. consulate. Goverdhan Mehta said he was told two weeks ago that his visa had been "refused" and that his expertise in chemistry could be a threat to U.S. national security. The case caused a furor in India just days before a visit by President Bush next week that is aimed at building warmer ties between the world's two largest democracies.

Goverdhan Mehta said he was told two weeks ago that his visa had been "refused" and that his expertise in chemistry could be a threat to U.S. national security. The case caused a furor in India just days before a visit by President Bush next week that is aimed at building warmer ties between the world's two largest democracies.

Reached at his home, however, Mehta said that he had already canceled his travel plans and declined a visiting professorship at the University of Florida in Gainesville. He said the issuance of a visa will not change his decision.

A reversal of the visa decision is all well and good. But the real issue is a revamping of the process that led to that decision. Where is the State Department announcement that it is reviewing procedures?

Without that, it is like a driver who hits your car, apologizes, pays for the damage and speeds off at 100 mph. Nothing has changed.


Falling incomes

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Breaking news from the Wall Street Journal - Fed Study Finds Drop In Household Incomes:

Average U.S. household incomes fell in the 2001-04 period after adjusting for inflation, and growth in household wealth slowed sharply from the previous three years, according to Federal Reserve data released Thursday.

The Fed's most recent Survey of Consumer Finances shows real average household income shrank in the latest three-year period covered after growing by more than 10% in both the 1998-2001 and 1995-98 periods.

Average household net worth still rose 6.3% on an inflation-adjusted basis, "however, the measured gains in wealth in the 2001-04 period pale in comparison with the much larger increase of the preceding three years," according to a summary of the Fed survey results.

Like, duh, this is news? Tell me something I didn't already know.

Ok, please forgive the sarcasm. But can we now stop the "everything is just fine" rhetoric and get on with the task of crafting solutions?

Blocking the flow of information in the information age

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Study after study after study tells us that one of the most important channels of information flow is face to face contact. That is why contact among scientists is so important. And, as many (including the critics of the current push for more research funding) have pointed out, the ability to absorb scientific knowledge is key to our economic prosperity -- knowledge from everywhere and anywhere.

But somehow that message hasn't filtered down through the bureaucracy - where foreign scientists are seen as "threats." For example, as related in today's Washington Post - Scientist's Visa Denial Sparks Outrage in India:

A decision two weeks ago by a U.S. consulate in India to refuse a visa to a prominent Indian scientist has triggered heated protests in that country and set off a major diplomatic flap on the eve of President Bush's first visit to India.

The incident has also caused embarrassment at the highest reaches of the American scientific establishment, which has worked to get the State Department to issue a visa to Goverdhan Mehta, who said the U.S. consulate in the south Indian city of Chennai told him that his expertise in chemistry was deemed a threat.

. . .

The scientist told Indian newspapers that his dealing with the U.S. consulate was "the most degrading experience of my life." Mehta is president of the International Council for Science, a Paris-based organization comprising the national scientific academies of a number of countries. The council advocates that scientists should have free access to one another.
. . .

State Department spokesman Justin Higgins denied yesterday that the United States had rejected Mehta's visa and said the consulate had merely followed standard procedure in dealing with applicants with certain kinds of scientific expertise.

I can understand that our security officials are concerned that terrorists with a high degree of technical knowledge might try to enter the US to direct an attack. But surely our procedures should be able to differentiate between those individuals and a distinguished scientist. More in the grey area are all of the foreign graduate students who are finding it more and more difficult to enter the US.

In the information age, the US needs to keep its borders open to the flow of information through all channels - including people to people. Just as I have argued before about patents (which have the potential to restrict the flow of information and innovation), our future economic prosperity demands that we need to get our border security procedures right. This is another reason why our current push for competitiveness legislation needs to encompass the broad issues -- not just the narrow issue of R&D funding. There are too many important parts to this puzzle to take the narrow view.


The good, the bad and . . .

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The good news is that the competitiveness debate has been re-ignited in Washington. After years of neglect, the issue is back on the table and politicians are vying with one another to be associated with the latest round of competitiveness proposals. Likewise, the interest groups are gearing up for a big push. For example, the Council on Competitiveness is running a major ad campaign: "Where in the World Will the Next Big Idea Come From?"

The bad news is that the debate is in danger of becoming a narrow science funding issue - limited to additional funding for physical science and math and science education. Already the perspectives are being drawn in and some of the more interesting parts of the proposals - such as the creation of a Presidential "National Innovation Council" that would keep the agenda alive and a re-orientation of the Manufacturing Extension Partnership (MEP) program toward innovation - are in danger of being completely ignored.

Such a further narrowing of the debate is regrettable. As I've mentioned before, the current competitiveness proposals are already more narrow than they should be - focused on technological innovation rather than a broader view of innovation. For example, the issue of product design and new product development is almost completely missing from discussions. As the field of mechanical engineering is doing through a revival as a key part of design, there are no proposals being offered to help that process.

Likewise, the entire linkage between math/science and the arts is missing. Not even a nod of the head to the importance of the "creative class" outside of scientists and engineers. All this ignorance comes at time when educational institutions, from top to bottom, are leaping into the convergence between arts and science. As a recent story in Inside Higher Ed - "A Call to Arts" relates:

Sean Buffington, associate provost for arts and culture at Harvard University, says that "some of the hungriest consumers of the arts happen to be scientists and mathematicians." The university, he says, is currently in the planning stages for a range of arts and cultural facilities in Allston, the site where Harvard plans a major expansion of science facilities and programs. The Allston plans, says Buffington, reflect the convergence of arts with other disciplines.

Even that bastion of technology down the street from Harvard has discovered the synergy with
"Discover Arts at MIT":

I came to MIT for engineering...and found art.
"Discover Arts at MIT" is a lively introduction to the people, programs and passions that make the arts at MIT a vital and thriving force. In this 9-minute video presentation, you'll meet some of the students, faculty and alumni who make up MIT's fascinating arts community. You'll also get an inside look at some of the ways--from ballroom dancing to "beat bugs", from gamelan to glass-blowing--that the arts are widely practiced and celebrated here.

According to Inside Higher Ed:

MIT, in fact, now offers what some in the field have deemed a "model public art program." This week, for instance, students organized a runway fashion show titled "Seamless: Computational Couture," which highlighted an array of "technologically experimental" clothing created by students from MIT and several other universities. The project, according to student organizers, was intended to "interpret the conceptual goal of a seamless relationship between technology and fashion." One creation by Diana Eng, a student at the Rhode Island School of Design, called a "blogger hoodie," stylistically incorporates a heart rate monitor and camera. The camera takes pictures when one’s heart rate reaches a certain level, and is intended as a fashionable way to capture "involuntary blogging."

And, of course, the Stanford d-school is a collaboration of engineering, art and business.

Out in the real world - if you can call academia the real world - people at the cutting edge understand the linkage between S&T, the arts and innovation. It is time for Washington to understand this as well -- and push for a broad competitiveness policy. If we narrow the agenda to just S&T, we miss an important opportunity to address our real economic challenges.

- - -

And there is also an ugly side to the debate in that some are still stuck in a "what, me worry?" mode. There are many folks in Washington who either don't believe that there is competitiveness problem or that the government has any role to play in the solution. Luckily, they seem to be in the minority right now. But they still have power to block new proposals. So this latest skirmish in the competitiveness battle is far from over.

Attracting talent in DC

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As I discussed yesterday, talent and skills -- often referred to as human capital -- is an obvious key intangible asset. Given a boost by Richard Florida's Creative Class, the idea of attracting talent to an area as part an economic development strategy has been slowly growing. Going beyond technology-based economic development (a narrower version based on attacking S&T resources), this concept is best articulated by my friend Joseph Cortright in his paper, The Young and Restless in a Knowledge Economy. Cortright argue that:


Nationally and locally, we've taken a ready supply of workers for granted. In the future, companies and regions will do so only at their peril. Already, signs of shortage are emerging in industries and occupations that depend on highly-skilled, long-tenured employees: nursing shortages are widespread, skilled manufacturing workers are in tight supply and the entire utility industry faces a huge brain drain in the years ahead.

The college-educated 25 to 34 year-olds we call the Young and Restless are a critically important factor in the response to this change. Because they are well-educated, adaptable, mobile and relatively inexpensive, they represent a critical resource for companies looking to expand. They are the part of the so-called creative class that is up for grabs.

And talented young adults are not simply workers. They are also more likely to be entrepreneurs, forming the next generation of growth companies that power metropolitan and national growth.

Now he has turn this analysis on an area I have personal familiarity with - Washington DC. In a recent op-ed in the Washington Post, Wanted: The Young and Restless, he and his co-author state:

data from the 2000 Census show that this city's [Washington] close-in neighborhoods have a higher level of college attainment than in most other close-in neighborhoods in large U.S. metropolitan areas -- higher than Atlanta and much higher than fast-growing Phoenix or Las Vegas.

More than 65 percent of the 25- to 34-year-olds living within three miles of the center of the region (measured from the White House) have a four-year degree or higher level of education, a rate only slightly lower than for close-in San Francisco (67 percent) and significantly higher than hip Seattle (56 percent).

City planners in the District clearly appreciate the significance of vibrant neighborhoods, showcased by the new theaters and shops downtown as well as the city's marketing campaign "City Living, D.C. Style." Walkable destinations, lively commercial districts and interesting streets are attractive to the Young and Restless. Good public services, including transit and parks, can also make close-in neighborhoods more appealing.

The ability to capture these young people is already playing an integral role in some cities' economic success. Booming metro economies such as Charlotte, Austin, Atlanta and Portland, Ore., have increased the number of college-educated adults about five times faster than the nation as a whole. Cities that are losing young college graduates, such as Hartford, Conn., and Rochester and Buffalo, N.Y., are struggling.

So whether the census numbers are right or wrong may not be as important to cities as it used to be. What's clear is that cities will succeed or fail depending on how much they appeal to this talent-rich pool. And if the number of cranes dotting the D.C. skyline and the still-hot housing market are any indicator, the city continues to position itself well in the race for talent.

I understand and agree with Cortright's point of view -- up to a point. In addition to running this think-tank - Athena Alliance - I am a local DC politician. In fact, I currently serve as chair of the campaign of a friend of mine who is running for City Council using the slogan of a "livable, walkable community." However, where I disagree with Cortright and others is about outside versus inside talent. Right now the problem with DC is not its ability to attract outside talent. As he points out, we are doing well on that score. Where we are falling down is in our task of developing the talent of those already here. In the same issue of the Post that his op-ed appeared, the front page had the second in a two part series of stories on the failure of the District's unemployment and training system (see part 1 and part 2).

A few years ago, Brookings economist Alice Rivlin took a careful look at DC economic future. Ms. Rivlin knows DC intimately, having served as chair of the congressionally mandated Control Board, which took over the bankrupt city in the 1990's. In a 2001 paper, Envisioning a Future Washington she argues that there are two ways to increase the population and income base of the city. The first is "The Adult Strategy: More Middle- and Upper-Income Singles and Couples." In this strategy, city attracts young talent ("the young and the restless") and wealthy retirees (who enjoy the city amenities and don't want the work of the large suburb house anymore). This strategy has numerous benefits for the city: an extremely positive impact on the city's tax base and revenue, bring new residential property onto the tax rolls, increase the value of existing real estate, improve profitability of new and existing neighborhood businesses create new jobs in the retail, entertainment, and personal services sectors, decrease unemployment rates and make the city more livable and attractive for both current and new residents by increasing the potential clientele for restaurants, shops, and entertainment venues.

This strategy has a downside as well:

However, by itself, the adult strategy poses a serious risk of exacerbating racial and class tensions and widening the gulf between rich and poor in the city. Some lower-income residents would benefit from additional employment and more profitable neighborhood businesses, and find themselves owners of more valuable houses. But higher property taxes on those more valuable houses and rising rents might drive low-income people, particularly those without subsidized housing, out of the city unless strenuous efforts were made to enable them to stay. While some ethnically diverse neighborhoods would prosper, gentrification of lower-income neighborhoods could increase tension and resentment. Long-time residents might fear that newcomers lacked lasting commitment to Washington and would not be likely to fight for better schools or help for low-income families.

The other scenario is "The Family Strategy: More Middle-Income Families with Children." In this scenario, the city rebuilds its middle class - especially families with school-age children. Rivlin warns that the family strategy will be more difficult for the city:

The family strategy puts more stress on the city's budget than the adult strategy. These families may not have earnings as high as the families without children, and they require more public services. The District would have to put substantially more resources into improving the schools, subsidizing housing, and providing recreation and other services important to families with children. Indeed, these costs would add up to considerably more than the additional revenue brought in by increased income, sales, and property taxes attributable to middle-income families.

But the benefits may be greater:

A successful family strategy would boost the demand for neighborhood services and the payrolls and profitability of the businesses (such as grocery stores and family restaurants) providing them. Rebuilding the population of middle-income families and improving the effectiveness of education holds the promise of creating neighborhoods with a strong sense of community, whose residents are committed to remaining in the District, participating in its political processes, and working to improve the city and its institutions.
A family strategy might not widen the gulf between affluent and lower-income groups in the city as much as the adult strategy, because it would fill in the middle.

Of course, these are not either/or choices. As Rivlin points out:

These extremes--either an "adult only" or a "families with kids only" policy--are worth discussing merely to make the point that Washington needs to pursue both strategies at once. The primary objective should be making the city an attractive place for a diverse population to live and work. That requires policies designed to attract and retain a mix of residents, including adults and families with children.

But this discussion is an important reminder that fostering economic prosperity in DC, as elsewhere, will require paying attention to all segments of the population. In yesterday's post, I referenced Richard Florida's recent Newsweek article where he states:

Leaders must understand that economic competitiveness hinges on developing the full creative capabilities of the store clerk and landscape laborer as well as the computer scientist.

In DC, we need to do as good a job developing the creativity of our store clerk and landscape laborer - and unemployed - as we are doing in attracting the young and restless. The two go together, with each wing powering our economic flight.


Expanding the Creative Class

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One of the often cited dangers of our economic trajectory to the I-Cubed Economy is the creation of a society of have and have-nots. Those with the skills/talent/knowledge to succeed will prosper in this "brainwork" economy while those involved in less intellectually challenging (and more physical types) of activities will not. The great middle class, created by well paying manufacturing jobs, will disappear.

But that scenario need not occur. As I have often argued, all jobs require some creativity and level of tacit knowledge. It all depends on how we structure the activity. If we "dumb-down" jobs, we will loss the creative potential of the workers engaged in that activity; if we "smart-up" jobs, we open the door for greater innovation and productivity.

As Richard Florida has said, the next big challenge for the Creative Society is to bring in those millions of workers who are struggling in this economy. Now Florida has written a more extensive discussion of that idea in Newsweek - "The Secret to Future Growth":

Equally important [to the creative sector] will be the continued expansion of the service economy, where more than 5 million new jobs will be added, including retail salespeople, customer-service representatives, janitors, waiters and landscapers. Because these jobs pay a third of those in the creative economy, and half of those in the declining manufacturing sector, this trend is generally seen as a danger sign, a signal that the labor market is cleaving into two classes: high-skilled, high-paying creative work and much-lower-paying service work. The general consensus is that the only way to raise wages for these jobs would be with massive government intervention.

But a new generation of service companies is discovering that increasing pay and improving working conditions can add significantly to the bottom line. A good example is Best Buy, which employs 90,000 people and is the largest specialty retailer of consumer electronics in the world, with annual sales of some $25 billion. Taking a page from Toyota's much-lauded management system, employees are encouraged to improve upon the company's work processes. Small changes suggested on the salesroom floor—a teenage sales rep's reconception of an Internet phone-calling display, or an immigrant salesperson's proposal for ways to target advertising and service to non-English-speaking communities—have been implemented across the company, generating millions in added revenue. Best Buy likes to grow from within so motivated employees are able to move quickly from in-store sales to retail management, where pay increases substantially
.
This retail revolution provides a model for turning service work into stable middle-class jobs. Thriving companies such as Best Buy, Starbucks, Whole Foods, REI, and the Container Store dominate lists of the best places to work. Many of them are increasing pay and benefits and making their work environments more stimulating. At the Container Store, for example, the typical hourly worker earns $29,277 a year, or 50 percent more than the U.S. retail industry average. They're doing this not out of altruism, but to increase productivity and profit.

Of course there is more to do. The service economy, particularly fast-growing personal-service fields like haircutting and landscaping, is dominated by small and medium-size companies who are unable or unwilling to upgrade pay and working conditions. The "on-ramps" that better-paying service jobs can provide remain too few and far between. The leaders in Davos must understand that economic competitiveness hinges on developing the full creative capabilities of the store clerk and the landscape laborer, as well as the computer scientist and the architect. And they should look beyond the tech sector for models.

Many of these are what I call "tangible service" jobs -- jobs that primarily involve the physical manipulation of matter rather than "intangible service" jobs which primarily involve the manipulation of information. There is no reason, however, that physical manipulation of matter needs to be separated from use of information and knowledge, especially tacit knowledge. The Taylorist model of physical production is not necessarily the best.

Already we can see that a number of these jobs are part of the creative economy -- depending on how you structure them. For example, a barber might be seen as a traditional service job; a high-priced hair stylist is certainly part of the creative economy. So expanding the creative economy is a much a mindset problem as an economic one. People must realize that the phrase "our employees are our most important asset" is more than a nice slogan -- and that it applies to everyone, from the CEO to the janitorial services. Once that mind shift occurs, the creative economy will expand rapidly.

Focus on innovation, rather than invention

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John Hagel and John Seely Brown have written a telling critique of our current innovation plans in Business Week - Funding Invention Vs. Managing Innovation

George W. Bush's proposal to increase federal government R&D spending is revealing on two levels. It suggests a growing sense of urgency about the need for the U.S. to strengthen its innovation capability. At the same time, it provides insight into the mindsets that are making the U.S. more vulnerable to global competition.

While executives of large Western companies and policy-makers of Western governments continue to view innovation through 20th century lenses, entrepreneurial companies in Asia are harnessing the opportunities of the flat world to pursue broader forms of innovation appropriate for the 21st century.

In the West, we still confuse invention with innovation. Even worse, we tend to focus narrowly on breakthrough technology or product invention -- that's what really gets the adrenaline going. Anything else is marginal and uninteresting.

They go on to say:

In the 20th century, scale and efficiency became key sources of economic value. Companies spent a lot on R&D and standardized and automated the rest of their operations, constraining opportunities for creativity outside the lab. As competition intensified, companies squeezed their R&D budgets in the quest for cost savings, while still looking for the "silver bullet" that would insulate them from competitive pressures. Given that mindset, it's understandable that CEOs hammer on the government to spend more to help them find the next breakthrough.

But if we shift our attention from invention to innovation, we begin to see a much broader horizon. Innovation -- the ability to create and capture economic value from invention -- is what really drives both the economic prosperity of nations and the shareholder value of corporations.

Innovation isn't just confined to commercialization of new products. It can also build upon creative new practices, processes, relationships, or business models, and even institutional innovations such as open-source computing -- invention occurs in all these domains. And while breakthrough innovations can generate significant economic value, sustaining that value requires a capacity for continual incremental innovations.

Agreed, but unfortunately Hagel and Brown offer us only generalizations as solutions:

There's now an opportunity to connect with creative talent wherever it resides and build relationships that enable all parties to innovate more rapidly and to get better faster by working with each other. Fully exploiting this opportunity will require a fundamental re-think of our approach to mobilizing resources, creating much more scalable pull platforms to support large numbers of participants, in place of the push approaches that constrain our innovation opportunities.

Of course, this is a very different vision from the one embedded in the proposal to increase federal spending on R&D programs. Rather than centralizing spending on a national level, this vision sees the potential created by more distributed approaches to innovation management on a global level. If Western executives don't embrace this vision more aggressively, they will become increasingly vulnerable to competition from companies that do. No amount of spending on R&D by Washington will save them from this fate. Only a shift in mindset will.

Far be it for me to downplay the need for a mindset shift; I have been calling for a shift in mindset for years. But such a shift also requires a shift in practical actions. This is where the vision falls short. For example, are Hagel and Brown calling for increased offshoring of R&D? Or better mechanisms for small and medium size companies to tap into the knowledge crated in other nations? What would a "distributed approaches to innovation management on a global level" look like? And how does it produce incomes and jobs in the United States?

I realize that these are not questions that they may have the answer to immediately. But they are the type of questions that need to be answered before we buy to much more into "the vision." It is time to move from generalities to specifics. I hope that is their next article.


Patents and innovative evolution

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The normal argument for patents is that the exclusive rights granted by patents are needed to provide the financial incentives required by the innovators. That argument is often juxtaposed with the concern that these exclusive rights are a monopoly power that may impede future innovation.

The latter argument is hinted at in a remark by MIT Finance Professor Andrew W. Lo, a true Wall Street "rocket scientist." Dr. Lo is the director of the MIT Laboratory for Financial Engineering. Business Week describes his research:

One of his projects is an attempt to incorporate evolutionary psychology and evolutionary dynamics into modern finance with his Adaptive Market Hypothesis (AMH). In essence, AMH argues that investors use trial and error to establish rules of thumb in the markets. Their skills improve as they climb a learning curve, and then, inevitably, they confront changes in the market that render some strategies obsolete. The survivors innovate, and come up with new ways of making money.

In a recent interview with Business Week - Online Extra: "Economists Suffer from Physics Envy", Dr. Lo made an interesting side comment about patents:

Q: You think Charles Darwin's ideas about evolution, natural selection, and the like apply to the financial markets?
A: Yes. For instance, the hedge-fund industry is the Galapagos Islands -- where Darwin [developed the idea of] evolution -- of finance. Because of the lack of patents, speed of innovation, and the ruthlessness of competition, we can see evolution in the hedge-fund industry. It looks nothing like it did five years ago.

In other words, the lack of patent is a factor in the industry's ability to evolve, i.e. innovate. If Dr. Lo's Adaptive Market Hypothesis is a specialize version of a "general theory of innovation" (which I think it may be), then we need to think very carefully about how the patent system stands as a barrier to (rather than a facilitator of) innovation.

December - and 2005 - trade in intangibles

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The US ran a record trade deficit of $725.8 billion in 2005, $108.2 billion more than the 2004 deficit of $617.6 billion. News on intangibles trade was more mixed. The good news is that the intangibles surplus for the year increased to $92.4 billion - the highest it has been. However, revisions in this morning's BEA trade data show that our balance of trade in intangibles actually declined in November, while increasing by only $22 million in December -- essential flat at a surplus of $6.9 billion monthly. The monthly intangibles surplus is still below the peak surplus of almost $7.5 billion in December 2004.

And while our annual intangibles surplus has almost doubled since 1992, the current rate of growth in export is slightly lower than the growth rate in imports. This means that we can not count on a rapidly growing surplus in intangibles to offset the rest of our trade deficit.

The deficit in Advanced Technology Products narrowed in December to $3.2 billion, as exports grew while imports were basically unchanged. However, the total deficit grew from $36.9 billion in 2004 to $44.4 billion in 2005. The last monthly surplus in Advanced Technology Products was in June 2002 and the last sustained series of monthly surpluses were in the first half of 2001.


Intangibles trade-Dec05.gif

Intangibles trade-2005.gif



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.


The evolving music industry

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As recording technology has changed, the 45 record single was replaced by the LP album, which was replace by the CD. Which is now being replaced by -- you guess it, the single. As the Washington Post reports, Downloads Make Singles a Hit Again:

As iPods and other MP3 players outsell CD players, sales of downloaded singles are booming accordingly: Though sales of full-length albums were down 7.2 percent last year, the digital singles market grew by 150 percent, with 352.7 million individual songs sold online, according to Nielsen SoundScan. It was by far the highest figure for singles sales in any format since 1973, the first year for which Recording Industry Association of America shipment data are available for singles. In late December 2005, weekly singles sales topped CD sales for the first time, as American consumers -- many of them flush with holiday gift cards and loading new MP3 players -- purchased 19.9 million digital tracks but just 16.8 million albums, according to Nielsen SoundScan.

And that's to say nothing of the $600 million (and growing) ring tone business in the United States.

Ironically, not to long ago, as the story relates, the single was seen as a dinasour:

By 2002, so few individual hits were being released commercially that the National Association of Recording Merchandisers launched a "Save the Single" campaign. But it didn't help -- at least not that year: In 2002, singles accounted for less than 7 percent of music sales, with only 12.2 million singles sold, according to Nielsen SoundScan. Billboard reported that it was "believed to be the lowest number since the single was in its infancy in the early 1950s."

Some are not happy with this revolution (in both the current and original sense of that word). The Post sotry quotes Charles Goldstuck, president of BMG North America,

"The challenge for the industry is to find some balance between singles sales and album sales. We want to create an artist experience, not a singles experience."

Others agree:

Says artist manager Jim Guerinot, whose clients include pop singer Gwen Stefani and the rock bands Nine Inch Nails and Hot Hot Heat: "While somebody might view a scene from a play as being really well done, well performed and well written, most artists would prefer to have you watch the entire play. Musicians put their music out in a long-form format, complete with artwork, and their preference would be for you to experience their work that way."

But there is an alternative way savor the artistic experience. It is called "the concert." Maybe that is way people still go to hear live music performances. And why they will continue to be a big part of the business model in the music industry.

Budget and investment in creativity

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There are a number of areas that are not included the OMB analysis of Federal investments (see earlier posting) which need to be addressed if we are to have a complete picture of our investments in intangible assets. One of those is funding for the arts and humanities (others include standard setting activities, organizational capacity building & technical assistance such as USDA extension service and the Manufacturing Extension Partnership, export promotion activities and government information creation, such as the statistical agencies, the weather service, etc.).

For arts and humanities, the funding picture is mixed. According to the Washington Post, Small Gains for Cultural Programs in Bush Budget Plan:

The small increases for cultural institutions and federal agencies presented yesterday in President Bush's 2007 budget request to Congress will curtail any expansion in new programs.

The modest boost will most likely offset inflation but not give enough cushion to try new things. On the other hand, none of the agencies received sizable cuts.

In a tight budget, this is understandable. But, placed against the need face up to our new competitiveness challenges, the funding level takes on a different light. Americans for the Arts President and CEO Robert L. Lynch got it exactly right in his comments:

Rather than zeroing out the Department of Education's arts education programs, President Bush should ask for an increase. His State of the Union address recognized that we need to prepare a 21st-century workforce by fostering talent and creativity. While his American Competitiveness Initiative would substantially increase investments in math and science education, we also believe that one of the best ways to nurture creativity is to have children learn and actively participate in the arts. Studies show that students who participate in the arts are not only more likely to participate in a math and science fair but also out-perform their peers on the SATs by 87 points.

Amen!

As I have long argued, we need to expand our vision of competitiveness to embrace creativity and a broader view of innovation. That is the next wave of competition -- and our policy makers still don't see it coming.

Quick take on the budget

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The President's budget, released this morning, is an "on the one hand and on the other hand" affair. The President has vowed to cut discretionary spending and make the tax cuts permanent. But he also has proposed a new science and education initiative (American Competitiveness Initiative).

A broad view of these areas can be found in Chapter 6 of the Analytical Perspectives where OMB publishes special budget "crosscuts", including an analysis of Federal investments. That category includes not only physical investments, but also the conduct of research and development and the conduct of education and training. Here is what budget has to say about these latter two categories:

Conduct of research and development. Outlays for the conduct of research and development are estimated to be $130.7 billion in 2007. These outlays are devoted to increasing basic scientific knowledge and promoting research and development. They increase the Nation's security, improve the productivity of capital and labor for both public and private purposes, and enhance the quality of life. More than half of these outlays, an estimated $76.8 billion, are for national defense. Physical investment for research and development facilities and equipment is included in the physical investment category. Nondefense outlays for the conduct of research and development are estimated to be $53.9 billion in 2007. These are largely for the National Aeronautics and Space Administration, the National Science Foundation, the National Institutes of Health, and research for nuclear and non-nuclear energy programs. A more complete and detailed discussion of research and development funding appears in Chapter 5, "Research and Development," in this volume.

Conduct of education and training. Outlays for the conduct of education and training are estimated to be $85.5 billion in 2007. These outlays add to the stock of human capital by developing a more skilled and productive labor force. Grants to State and local governments for this category are estimated to be $52.6 billion in 2007, more than three-fifths of the total. They include education programs for the disadvantaged and individuals with disabilities, other education programs, training programs in the Department of Labor, and Head Start. Direct Federal education and training outlays are estimated to be $32.9 billion in 2007. Programs in this category are primarily aid or higher education through student financial assistance, loan subsidies, the veterans GI bill, and health training rograms. The decline from 2006 to 2007 results in part from upward reestimates of $11.4 billion in 2006 in loan subsidies for loans made in earlier years.

This category does not include outlays for education and training of Federal civilian and military employees. Outlays for education and training that are for physical investment and for research and development are in the categories for physical investment and the conduct of research and development.

The numbers are as follows (in billions):

Conduct of research and development: $119.8 (FY 2005) - - - $127.4 (FY2006) - - - $130.7 (FY 2007)
National defense: $70.6 (FY 2005) - - - $75.6 (FY2006) - - - $76.8 (FY 2007)
Nondefense: $49.2 (FY 2005) - - - $51.8 (FY2006) - - - $53.9 (FY 2007)

Conduct of education and training: $94.7(FY 2005) - - - $104.2 (FY2006) - - - $85.5 (FY2007)
Grants to State and local governments: $51.6(FY 2005) - - - $53.7 (FY2006) - - - $52.6 (FY2007)
Direct Federal: $43.2(FY 2005) - - - $50.5 (FY2006) - - - $32.9 (FY2007)

So education and training is below the FY 2005 level while research and development is up.

But, like every thing else, the Devil is in details. In the Education Department's budget, the following new programs get funded as part of the American Competitiveness Initiative:
Math Now for Elementary Schools Students: $125 million
Math Now for Secondary School Students: $125 million
Advanced Placement: $122 million (up from $32 million last year)
National Mathematics Panel: $10 million
Evaluation of Mathematics and Science Education Programs: $5 million
Adjunct Teacher Corps: $25 million

At the same time, the budget cuts almost $1.2 billion from vocational education and the overall department budget declines by $2 billion.

Likewise on the science and technology side, the National Science Foundation's budget goes up by almost $500 million in budget authority (around a $100 million in actual outlays in FY 2007). But the budget calls for the elimination of the Advanced Technology Program and a 2/3 cut in funding for the Manufacturing Extension Partnership.

In sum, add little on this side and take a little from over here.


P.S. - just a cautionary note. This is the opening of the complicated budget dance. This can, and most likely will, change before we are through.

Fighting the wrong fight

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In this morning's Washington Post, Sebastian Mallaby takes on the "science lobby" by declaiming The Fake Science Threat:

The U.S. science establishment, led by the big research universities and high-tech companies, has just persuaded President Bush to ramp up math and science spending. Part of the rationale for this new "American Competitiveness Initiative" is that it's needed to defend U.S. economic leadership. But while generous math and science funding should be a government priority, the invocation of the threat from China is mostly spurious.

Unfortunately, his article misses the point about the revived competitiveness debate. Boosting math and science education is not just about creating Noble-laureates, as he implies. The real goal is creating an economy where innovation, including technological innovation, can thrive. Yes, many factors, including the skills of the workforce play a role in our economy prosperity. And yes, basic research conducted in other countries, including China, can benefit the US and the entire world. But the US must have the capacity to absorb and utilize that knowledge. As Mallaby points out "what matters is the way science is diffused through an economy." This is where math and science education plays such a key role. Math and science are foundations for critical thinking and problem solving skills - which are linchpins of education in this information economy. Without such an educated workforce, how does Mallaby think that the diffusion of science throughout the US economy will occur?

He also dismisses previous competitiveness concerns with an airy wave of the pen by describing the strengths of the economy:

The United States scores well in nearly all these areas, which is why it's defied alarmist predictions for a quarter of a century and will continue to do so.

As someone who was deeply involved in the competitiveness debates in the 1980's, I can tell you that the predictions were "defied" not by forces of nature, but by hard work. Governments and companies alike took those "alarmist" predictions to heart and turned the situation around. What happened was that we got complacent in the late 1990's and early 2000's and forgot what got us to where we were.

In one sense, however, Mallaby is correct. I have argued that the various competitiveness packages are overly focused on science and technology and are incomplete. They lack attention to other important areas, such as shoring up our capabilities in design and creativity. I wish Mallaby had concentrated is firepower on that subject - rather than an attack on "the science lobby." The fact that the packages are incomplete does not mean these proposals are wrong. They are an important step toward facing our economic challenges. And they are preferable to the "what-me-worry" approach that Mallaby seems to be advocating.

As a side note, the Post op-ed page has an interesting juxtaposition. Next to Mallaby's piece is an op-ed by two distinguished medical researchers warning of Cancer Research in Danger.


Jan employment

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Quick take on this morning's employment numbers:

Good news: unemployment rate drops in January, payrolls up by 193,000

Not so good news: 55% of those jobs in just three industries: construction - up 46 million jobs; health care - up 29 million jobs; food and drinking establishments - up 31 million jobs.

None of those are export earning. Nor are they necessarily high-wage (health care has both high and low wage jobs).

Design in India

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While the cover story of Business Week was taking the optimistic view of our economy because of our strength in intangibles (see previous posting), another story was pointing out the challenges we face. Specifically, the story described how India is racing ahead in auto design - "Detroit Wheels Designed in India?":

Tata Technologies has assembled nearly all the elements it needs to offer U.S. carmakers complete services, from concept to finished design
. . .
Tata Technologies differs from most independent U.S. engineering firms, which tend to be small and specialized. Tata Technologies' workers handle most design for Tata Motors, so they have experience in everything from conceptual design to financial production. "If you map out the entire vehicle design process, we have the capability to supply every piece of it," says [Tata COO Jeffrey] Sage.

Tata is still hiring anywhere from 100 to 150 additional engineers each month. "If you want engineers out of college, the supply is unlimited," Sage says. When Tata Technologies advertised for 200 experienced engineers last year, recruiters interviewed 1,000 qualified applicants in each of the three Indian cities they visited

The story on autos ends with a positive note:

What does this mean for the U.S. engineering work force? Both Sage and [Incat President Warren] Harris [a US company recently acquired by Tata] believe demand will remain strong at home. Even though Indian engineers earn a quarter of what U.S. counterparts with equal skills make, Indian wages are rising 15% to 20% a year, compared with 5% or less in the U.S., Sage says. So it's only a matter of time before the salary gap closes.

And it means U.S. engineers need to be redeployed to higher-value jobs. "The talent here is overpriced for what it's doing," Harris says. "We can play a big role in freeing up those individuals" to spend more time on innovation.

I hate to interject a sour note, but what does he think all those India engineers will be doing next? Does anyone think that they are not capable of "innovation" and those "higher value jobs"?

Try telling that to the Indian National Knowledge Commission. More on that organization next week.


Missing intangibles - Business Week

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The cover story of the latest Business Week is all about intangible asset: Why The Economy Is A Lot Stronger Than You Think. It's a great story for highlighting the intangibles issue. But I disagree with their optimistic conclusion:

In a knowledge-based world, the traditional measures don't tell the story. Intangibles like R&D are tracked poorly, if at all. Factor them in and everything changes

As my monthly tracking of the intangibles trade balance shows, I'm not optimistic that intangibles will save us. And then there is the fact that policymakers are oblivious to some of the key intangibles, such as design, while our competitors are gaining ground in new product development. More on that next.

One of the points that the story makes concerns the classification of government spending. R&D and education is classified as consumption rather than investment. I agree. I have long thought we need an intangibles assets budget as part of our Federal budget. This would include not just R&D and education, but also all the other intangibles assets of the Federal government: workforce training, arts & humanities funding, government information creation (like statistical agencies and the weather service), training of government personnel, organizational capacity building, technical assistance such as MEP) and export promotion activities (brand building).

I was also surprise that the article didn't mention the earlier work by Leonard Nakamura, such as Investing in Intangibles:
Is a Trillion Dollars Missing from GDP?

Nor did the article explore the huge finagle factor present in the measurement of intangibles.

Still - it is good to see a publication with the prestige and wide-spread readership as Business Week take on the issue. I hope there are more articles to come.


Manufacturing in trouble

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Does manufacturing matter? The answer is yes, according to a report released today by the National Association of Manufacturers' Manufacturing Institute, "U.S. Manufacturing Innovation Leadership at Risk". As the title suggests, it matters because manufacturing's innovation process leads to a higher standard of living. But, the report warns that manufacturing is in trouble:

* Manufacturing output since the last recession lags that of earlier economic recoveries - its 15% growth is only half the pace averaged in recoveries of the past half-century.

* Manufacturing capacity remains underutilized, slowing investment in new plants and equipment. Since the last recession, total plant and equipment investment has risen at half the pace averaged in recoveries of the past half-century. Manufacturing capacity has grown at less than 1 percent annually (compared with 5% in the 1990s).

* The U.S. share of global trade in manufactured products has shrunk, falling from 13 percent in the 1990s to 10 percent in 2004. The U.S. now runs a trade deficit in Advanced Technology Products, and the U.S. share of global trade in some of the highest value-added export industries such as machinery and equipment is falling.

* U.S. manufacturing offers rewarding and desirable careers for highly skilled workers. Yet the widespread perception that manufacturing employment is unstable and lacks job opportunities discourages new worker entry. While manufacturing continues to pay better than other industries, the sector is experiencing a broadening shortage of skilled workers.

* America's long-standing leadership in R&D is being challenged. While the U.S. continues to spend more than any other country on R&D investment, U.S. growth in R&D has averaged only about 1% per year in real terms since 2000.

The report outlines the following ways that manufacturing R&D benefits the economy:

R&D promotes economic prosperity through a multifaceted and complex process:

* The first avenue is through direct benefits to firms from their R&D investments. Those direct benefits, or the need to balance the potential benefits a rival might gain from R&D, are the primary driver of firm financed R&D.

* The second is through "spillovers" whereby innovations flowing from R&D performed by one organization benefit other organizations without direct compensation for the innovation.

* The third is through the widely discussed multiplier -- the effect of one industry’s investment on other industries and the U.S. economy as a whole.

* The fourth is the feedback from R&D and its spillovers to improve manufacturing products, processes and distribution networks.

* Together these benefits produce productivity gains that lead to competitive prices and better paying jobs.

The report calls for pro-production policies, under the banner of "US production":

* U.S. manufacturers' productivity growth is enviable. It must remain so. But productivity growth depends on investment in knowledge and investment in equipment that embodies new innovations.

* Along with increasing efforts to improve K-12 education, a special emphasis should be placed on improving the quality and rigor of math and science offerings at all levels. The problem-solving and critical-thinking skills those subjects teach will be vital for the U.S. workforce to compete in a global economy.

* Support continued R&D investment by industry by renewing the R&D tax credit. Increase Federal spending on basic research with a focus on specific areas where social and private returns look most promising. Encourage and continue to fund basic research by colleges and universities and the spillovers that come from such research. But the "D" in R&D -- largely product and process development -- should be emphasized as well. Promote innovation clusters needed to spur such developments, to encourage thick markets for R&D inputs and to increase the productivity of each dollar of R&D spending.

* "U.S. Production" should encourage workers to continuously pursue education and lifetime training so that they are more adaptable to improvements from innovation and to potential structural changes. New labor force entrants should be encouraged to take up the skilled jobs in which shortages are emerging and top engineering and scientific talent should be nurtured.

* Focus on elimination of those workforce, investment and policy obstacles to domestic production and competitiveness that would provide the greatest economic return.

* Encourage the improvement of the efficiency and speed of the U.S. transportation and communication infrastructures.

* Improve tax and intellectual property laws and infrastructure needed to leverage investment in research and development by enhancing the environment for spillovers without needlessly facilitating technology transfers.

The report does a good job, in my opinion, in discussing some of the key issues. One phrase will sound familiar to regular readers of my analysis of the trade statistics: "the United States cannot depend solely on trade in services to offset a serious decline in goods exports."

Unfortunately, the report misses the point in others areas. There is nothing about the new product development process (other than a very brief mention in the policy recommendations). Nothing about design and creativity. Only a little about the fusion of manufacturing and services.

At least the policy recommendations begin to move away from the same-old, same-old. These go beyond standard answers of more funding of basic R&D and of math and science education. For example, the report points out the importance of math and science as the foundation for critical thinking and problem solving skills. And they pick up on the point I made earlier today about the need for continual training.

In sum, a good addition to the mass of competitiveness reports and studies. But not yet the final word on the subject.


Fed as leader

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While all the attention is focused on the President, a new economic leader is quietly slipping into his new seat. Yesterday morning, Ben Bernanke was sworn in as the Chairman of the Board of Governors of the Federal Reserve System. The New York Times' David Leonhardt has outlined How Bernanke Could Outshine Greenspan:

[Greenspan] rose above his job because he became a symbol of a remade American economy. He promoted a new flexibility, led by entrepreneurs and technological change, that is the envy of Japan and Europe.

To put it another way, he was a singular force in telling us that the unsettling changes of the last couple of decades -- especially globalization -- really were making us better off. In his office hung an 1819 treatise by David Ricardo, the British economist who came up with the classic argument in favor of trade: When England specializes in cloth and Portugal in wine, they end up better off than if each tries to make everything.

Mr. Greenspan made a similar case, again and again, and his prestige helped create a bipartisan consensus for opening American borders. The North American Free Trade Agreement passed in 1993 with support from both parties and was signed by a Democrat, Bill Clinton. Your shoes, your sofa, your cellphone and your car are all less expensive because of global trade.

But as Mr. Greenspan exits, these benefits are not the main thing on people's minds. The costs of the changes are. When we start buying lower-priced goods from abroad, it often means American jobs are lost. When we embrace new technology, these productivity gains also often come at the expense of someone's job.

If Mr. Greenspan had one blind spot, it was that he never really figured out how to talk about those costs. Instead, like most economists, he called for a better-educated work force and repeated the idea that the long-term gains from trade easily outweigh the short-term costs. While that is undoubtedly true, it is not exactly a persuasive argument to unemployed workers for whom the "short term" encompasses the rest of their lives.

In recent years, even the elite consensus in favor of freer trade has begun to break down. Around the world, trade talks are largely stalled. Few Democrats in Congress are willing to vote for trade deals these days. After N. Gregory Mankiw, an adviser to President Bush, suggested in 2004 that outsourcing of jobs was good for the economy, some Republicans called for his head.

Many of us are torn. By a wide margin, Americans still say trade is good for the economy, but a solid and growing majority also wants restrictions to protect domestic industries.

This is where Mr. Bernanke comes in. What the country is missing right now is a public figure who can bridge this gap, somebody who can point out that no nation has lifted living standards by shutting its borders but who can also talk eloquently about the downsides of open trade. And who might even help come up with some solutions.

Almost two years ago, as a member of the Fed's board, Mr. Bernanke traveled to North Carolina, home to many people whose jobs had moved overseas. There, he gave a speech that began with the standard argument for trade, complete with a mention of Ricardo. He finished, though, with words that are hard to imagine coming from Mr. Greenspan. Laid-off workers need help, Mr. Bernanke said.

"Reducing the burdens borne by displaced workers is the right and fair thing to do," Mr. Bernanke said. "If workers are less fearful of change, less pressure will be exerted on politicians to erect trade barriers or to take other actions that would reduce the flexibility and dynamism of the U.S. economy."

He did not take a position on specific ideas, but he mentioned a few possibilities. Laws could be changed so that pensions and health care did not disappear when a job did. Wage insurance could make up some of the difference between a lost job and a new one. The insurance benefits would be low enough that people still had incentive to find new work, but high enough to soften the blow.

In the weeks leading to today's handover, some experts — including, quietly, some inside the Fed — have urged Mr. Bernanke to have smaller ambitions than Mr. Greenspan did. Don't talk about big ideas, they say; stay focused on interest rates.

So I put the question to Mr. Mankiw, the last high-profile economist to get himself in trouble by talking about trade. I began the conversation by pointing out the obvious, that selling people on trade is hard. Mr. Mankiw laughed.

"I learned that the hard way," he said.

So should Mr. Bernanke stick to platitudes?

Absolutely not, Mr. Mankiw said. "Having a smart economist like Greenspan or Bernanke in a position where people will listen to him is too valuable," he said. "Bernanke comes from a background of being a teacher and a textbook writer. He may prove to be very good at boiling things down to their essence. He may prove to be a fantastic communicator."

So speak up, Mr. Chairman.

I agree that the Chairman should speak up. But he needs to come up with better answers than what we have before us. Here is the conclusion of Mr. Bernanke's speech, on Trade and Jobs--March 30, 2004:

What can be done to help workers who lose their jobs because of competition from imports? Attempts to restrict trade through the imposition of tariffs, quotas, or other trade barriers are not a good solution. Such actions may temporarily slow job loss in affected industries. But they do so by imposing on the overall economy costs that typically are many times greater than the benefits. In the short run, the costs of trade barriers include higher prices for consumers and higher costs (and thus reduced competitiveness) for U.S. firms. Trade barriers typically provoke retaliation from trading partners as well, with potentially large costs for exporters. And history shows that in the longer run, economic isolationism and retreat from international competition lead to bloated, inefficient industries, lower productivity, and lower living standards.

The better policy approach is two-pronged. First, at the macro level, policy should be directed at helping to ensure that jobs become available for those who have been displaced. In particular, over time, appropriate monetary policies can help the economy achieve maximum employment with low inflation, irrespective of the trade situation. The nation's trade policies, rather than attempting to restrict trade, should be used to push for even more trade. By opening markets abroad, trade policy provides greater opportunities for U.S. firms and workers.

The second piece of a constructive policy toward trade is to help displaced workers train for and find new work. Some steps in this direction have been taken. Currently, the government's principal program for helping workers displaced by trade is the Trade Adjustment Assistance program, or TAA. The Congress has recently extended the TAA through 2007, while adding a special TAA program for older workers and a separate TAA program for farmers. The TAA program offers up to two and a half years of job training, allowances for job search and relocation, and income support for eligible workers, the latter for up to 104 weeks after the initial 26 weeks of conventional unemployment insurance benefits have been exhausted. The recently passed legislation also provides for health insurance assistance for some eligible workers. The U.S. Department of Labor certified about 208,000 workers for trade adjustment assistance during fiscal year 2003, spending $551 million on the program. Finally, although current TAA legislation is generally interpreted to apply only to jobs displaced in manufacturing, bills to extend TAA to service-sector workers were introduced this month in both the House and Senate.

TAA is certainly not a perfect program. A recent report by the General Accounting Office (2001) described the challenges of effectively retraining older, less-educated workers. It noted also that TAA does not address all the problems of communities that have suffered from plant closings and the like. More general criticisms can be raised about the program: First, in a complex and interdependent economy, identifying workers affected by trade is not always a straightforward matter. Second, one may well wonder why workers displaced by trade should be assisted but not workers displaced by other factors, such as restructuring or automation.

Lately, a number of proposals have been advanced to help displaced workers more generally, including changes in law that increase the portability of pension and health benefits. Other proposals include a program of "wage insurance," which would help to cushion the wage loss that often occurs when job losers take new jobs (Kletzer and Litan, 2001) and tax credits for firms that invest in worker training (Mann, 2003, 2004). Time does not permit me to evaluate these and other alternative proposals today. Instead I will conclude by noting that helping displaced workers is good policy for at least three reasons. First, reducing the burdens borne by displaced workers is the right and fair thing to do. Second, helping workers who have lost jobs find new productive work is good for the economy as well as for the affected workers and their families. Finally, if workers are less fearful of change, less pressure will be exerted on politicians to erect trade barriers or to take other actions that would reduce the flexibility and dynamism of the U.S. economy. In the long run, avoiding economic isolationism and maintaining economic dynamism will pay big dividends for everybody.

I agree - don't restrict the flexibility and dynamism of the US economy. But we also need to take steps to foster that dynamism and deal with its consequences. The suggestions of maintain open markets and increase re-training come across as just more of the same-old same-old.

In an era where the competitive advantage in manufacturing costs has already shifted against the US and where competitive advantage in innovation and technology is slowly draining away, where are the jobs that these workers are to be trained for? Health care? How many more health care workers can we absorb? Computer programmers? How may laid-off autoworkers are going to become Java programmers, especially when bright young engineers in India and China can do the same work for a fraction of the cost?

Unfortunately, there is a real danger that the job profile in the I-Cubed Economy is beginning to look like a dumb-bell: growth in high-level, higher paying jobs and growth of lower-level, lower paying jobs. The middle is what is in danger of getting squeezed. For those workers, re-training is no answer. Few will be re-trained for the higher level jobs; most will be re-trained for the lower level jobs. Some will drop out of the workforce altogether.

That is why there is a higher level of anxiety.

What is needed is a clear discussion of how the dynamism of the American economy is going to create middle-class jobs in the future. Some of the programs need to foster dynamism and job creation were mentioned in the State of the Union (see earlier posting). But a lot was left out.

What about a simple program that was in the PACE-Finance legislation (which the President apparently didn't pick up on): a tax credit for training incumbent workers. It is much better to help workers stay competitive and keep their current jobs than to train them for something else. Yes, we will have to continue to help workers switch jobs. But the current system only kicks in once you are out on the street. This is akin to our health-care system for the poor -- wait until you are really, really sick and go to the emergency room. Not a way to lower anxiety.

To his credit, Mr. Bernanke did mention some of the additional ideas on job training. But until he starts taking about the rest of the competitiveness agenda, it will still come across as nothing more than platitudes - unfortunately.

So, Mr. Chairman - do speak up. But speak up with some new ideas. We've heard all the old ones too many times before.


Information overload in dealing with information overload

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My Foxfire browser update came with the following information on search engines and their Mycroft project:

The Mycroft project provides a collection of search plugins (5983 at the last count) for browsers using Apple's Sherlock standard including Mozilla Firefox and Mozilla Suite. The name Mycroft refers to Mycroft Holmes, the brother of Sherlock Holmes in the novels of Arthur Conan Doyle - Mycroft plugins are based on the Sherlock standard.

Almost 6000 search engine plugins!!!!!

Talk about information overload. Where is my search engine to search the search engines?

If the information revolution come to a halt it will be because we still haven't figured out how to cope with all that information.

Or, we might just give up and default to the old stand-bys. This is the classic reason why those with the reputation / brand / first-mover advantage do so well. The information transaction costs are just too high to do anything else. As Herbert Simon recognized, we can't evaluate all options. Rather we use "bounded rationality" where we satisfice (stop our search at a good-enough solution) rather than optimize (find the best solution). And in this case, in the face of picking among 5983, the satisficing alternative obviously is Google. Any competitor who seeks to de-throne them will have to come up with a better satisficing answer -- or be lost among the 5982 other alternatives.

Competitiveness in the State of the Union

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As expected, the President's State of the Union address hit the topics of competitiveness and energy policy. Early leaks highlighted a focus on energy alternatives and Bush strategist Karl Rove held a pre-speech meeting yesterday with Washington science and technology leaders to outline the American Competitiveness Initiative. That initiative promises funding for research and education - similar to the NII and PACE legislation.

The speech, however, highlighted a number of other areas. The President began the competitiveness portion of his speech at the macro economic level with the call to make his tax cuts permanent and to give him the line-item veto. He then went on to talk about reigning in entitlement programs and launched a new initiative calling for commission to examine the full impact of baby boom retirements on Social Security, Medicare, and Medicaid.

He then turned to trade negotiations and immigration. Next was health care, including a reiteration of his proposals on modernizing health care records. Then came the American Energy Initiative - 22-percent increase in clean-energy research, and increased funding for electric, hydrogen and ethanol for automobiles.

Then came the American Competitiveness Initiative: "to encourage innovation throughout our economy, and to give our nation's children a firm grounding in math and science."

While I was pleased that the Administration is responding to the calls to confront our competitiveness challenges, the steps outline in the State of the Union appear to be baby steps. As the Wall Street Journal characterized it:

He has been hobbled by low approval ratings and has been confronted by increasingly aggressive Democrats, while the Republican Party has been rocked by scandal and questioning of its ideological course. The president sought to navigate those cross-currents by pressing broadly appealing themes, especially sharpening American "competitiveness," while keeping his initiatives small and tailored to traditional conservative solutions.

The Journal also pointed out the problems that the Administration will have in funding its initiative:

While the president's proposed "American Competitiveness Initiative" aims to train 70,000 teachers of top-level math and science courses, the government's financial pinch remains evident: A senior administration official said the president's budget next week will propose spending less on job training while seeking cost cuts.

The boldest statements had to do with energy and lowering our dependency on Mid-Eastern oil. As this morning's headline in The New York Times screamed: President, Resetting Agenda, Says U.S. Must Reduce Its Reliance on Foreign Oil

Whether or not the steps outline in the Advanced Energy Initiative will lead to a decrease in oil usage remains to be seen. But the President's focus on that issue is sure to give a large boost to the PACE-Energy legislation already introduced and sitting in the Senate Energy Committee. As I stated before, the energy portion of the competitiveness package may be the engine that drives the process.

Two key items to watch as this process unfolds: the President's budget and the action of the Senate Committees. What is in the budget, due out later this month, will reveal the President's priorities - all rhetoric aside. Which programs get how much funding is the key indicator if anything will get done?

Likewise, watch two key committees. Will the Senate Budget Committee include "competitiveness" or "innovation" in its set of background hearings? And how quickly with the Senate Energy Committee move on PACE legislation?

The State of the Union speech was, as usual, the opening of the curtain. The rest of the drama is about to begin. Stay tuned.


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


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