The Intangible Economy

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March 31, 2006

Dark matter - snippets

Just a couple of snippets from the "dark matter" debate.

From today's Wall Street Journal -- "Trading Shots":

We are still getting emails about our Feb. 10 article on the theory, proposed by two Harvard economists, that there is "dark matter" in global trade that more than erases the enormous U.S. trade deficit. The economists suggested that, since the U.S. isn't paying debt service to foreign nations and is in fact making more money on its foreign investments than foreigners are making by investing in and loaning money to the U.S., then the U.S. must not be a net debtor and instead must be earning investment income on some huge, invisible asset -- dark matter.

One reader called PGL, a regular contributor to the AngryBear blog -- which indicates PGL holds a PhD in finance -- wrote: "Interesting article that covered a lot but not quite my favorite explanation . . . transfer pricing manipulation." For those of us without PhDs, transfer pricing manipulation refers to the idea that U.S. companies are booking most of their profits in Ireland and other foreign countries where tax rates are super low. This was actually mentioned in the article, but not discussed at great length. "Though U.S. multinational companies seem to have an astonishingly persistent profitability advantage over their foreign counterparts," we wrote, "that could be partly due to foreign companies understating their returns in the U.S. for political or tax purposes. Otherwise, you have to believe that foreign firms are simply terrible at doing business and should be put to pasture."

And there is the new paper by Barry Eichengreen - "Global Imbalances: The New Economy, the Dark Matter, the Savvy Investor, and the Standard Analysis." One of the arguments he pokes a hole in is the claim that the US can continue to run deficits because our economy is so much more productive, thereby drawing in foreign capital. If this were true, then it would run counter to a fact that the "dark matter" folks like to point out: the US has a higher rate of return on investments abroad than foreigner gain on their investments here. If we are drawing capital to our more productive economy, the differential should run the other way (high gains on investments in the US - not abroad).

He also points out (as does the WSJ story above) that the real issue may be transfer pricing:

In fact there is ample room for misstating income by using transfer pricing to shift profits between national subsidiaries -- and considerable incentive for doing so to minimize tax liabilities

I won't say its all transfer pricing -- but that is a major issue, as I will discuss next week.

Posted by Ken Jarboe at 12:52 PM | Comments (0) | TrackBack

March 30, 2006

Real information technology innovation

Forget downloading the latest hot song or text messaging your friends 24/7 or even downloading the latest scores. Here is a new cell phone use that real people (i.e. anyone over about 25) can use - "Your Space Is Waiting: Reserving a Parking Spot":

Taking a cue from Web-based reservation systems used by restaurants, airlines and movie theaters, more companies and cities are offering services that let people reserve parking spaces online or by cellphone.

The services come as traffic is growing worse around the country and are meant to help ease the traffic tie-ups caused by drivers cruising for a parking spot on the street, where charges tend to be lower than garage rates. In downtown areas, based on studies from cities around the world, about 30% of traffic results from drivers searching for curbside parking spots, says Donald Shoup, a professor of urban planning at the University of California, Los Angeles.

According to this Wall Street Journal story, cities from Boston to Lincoln, Neb. are setting up systems to call and park -- or at least find out where spaces are available.

Now, that is innovation.

Posted by Ken Jarboe at 12:08 PM | Comments (0) | TrackBack

Patents and property rights - according to the Wall Street Journal

The editorial writers at the Wall Street Journal got it right yesterday in "The Problem With Patents":

When the patent system works, it rewards entrepreneurs and inventors, encourages innovation and serves as a bulwark of property rights. The Founding Fathers considered patents important enough to provide for them in the Constitution. But the Founders left the implementation of patent rights up to Congress, which in turn vested patent authority in the U.S. Patent and Trademark Office and the courts. And there's the free-market rub.

The Constitution grants Congress the power to protect the rights of patent and copyright holders, but only "for limited times" and to "promote the progress of science and useful arts." It does not, by contrast, grant Congress the power to confer the right to real or personal property "to promote the cultivation of land" or "the accumulation of wealth." This distinction is important because royal patents in Britain were often granted to provide the favorites of the crown with a legal monopoly, and the Founders did not want Congress in that business. Patent rights are good insofar as they are useful, and the analogy with real or personal property goes only so far.

A patent system, in turn, is only as good as the quality of patents that issue from it. If bad or dubious patents proliferate, they can have the opposite of their intended effect, which is to promote and reward innovation. Some of our free-market friends are so attached to patents as a vanguard of private property in theory that they ignore that the Patent Office is vulnerable to the usual failings and perverse incentives of any other government bureaucracy.

I have to note that the Journal's argument stands in sharp contrast to what the conservative wing of the Court seems to think - (as reported by the Journal's coverage of "High Court Hears eBay Patent Fight":

"You're talking about a property right here and a property right is the right to exclude," Justice Antonin Scalia said at oral arguments in eBay v. MercExchange. Justice Scalia wondered why the Supreme Court should rewrite patent laws. "Why can't we let the marketplace take care of the problem," he said.

But Journal editoria goes on to argue for real patent reform -- beyond what we hope the courts will do in the LabCorp v. Metabolite and the eBay v. MercExchange cases:

Neither case will fix what's broken with the U.S. patent system, however. Bruce Lehman, Patent Office commissioner through much of the 1990s, once summed up the problem when he said, "We are the patent office, not the rejection office."

The Patent Office itself gets paid when it grants a patent, creating pressure on the staff to keep the money coming in. Patent examiners' bonuses are also based in part on the number of files they close in a year. But the only way to close a file for good is to grant the patent because an application that's been denied can always be modified and resubmitted, and frequently is. So examiners have a direct financial stake in closing application files by green-lighting the patent.

Today the Patent Office grants so many patents that half of the fees it generates are given back to the Treasury to spend on other things. Next month, Congressman Lamar Smith (R., Texas) will hold hearings on a patent-reform bill that has many good qualities, such as allowing third parties to submit evidence of "prior art" to show that an alleged innovation is not in fact novel -- before the patent is granted. It would also allow administrative review of questionable patents after they've been granted but before an infringement lawsuit is filed.

If this Congress wants to claim credit for doing something to help the economy ahead of November's elections, addressing the patent system would be a good place to start.

Amen to that!

Posted by Ken Jarboe at 8:27 AM | Comments (0) | TrackBack

March 29, 2006

IP litigation

A sampling of today's business news:

Patent Trolls Lurk in Supreme Court Case

Trial Over TiVo Patent Begins in Texas

The Beatles and Apple face off in court

And what was that I heard recently about IP litigation not being out of control?

I have been told that 3,000 patent lawsuits filed each year and 75,000 letters are sent each year asserting patent infringement.

Seems like a lot of litigation going on. That certainly boosts our annual spending on intangibles (maybe we could count it all as the "dark matter" in our trade statistics -- at least that part that involves foreign companies). I'm not sure it adds much to our innovative capability or our standard of living, however.

Posted by Ken Jarboe at 11:14 AM | Comments (0) | TrackBack

Are newspapers dinosaurs?

As I noted yesterday, I believe that multiplicity of information channels is important in the I-Cubed economy. One of those channels is the newspaper. It has become conventional wisdom that newspapers are dead or dying. But, as James Surowiecki points out in his financial column in this week's New Yorker - "Printing Money", the newspaper business is actually profitable.

(s)ince 1980, the circulation of morning papers has actually risen by almost sixty per cent.

Meanwhile, newspapers have minimized the damage by getting better at making money off the readers they've kept. Some papers, such as the San Francisco Chronicle and the Des Moines Register, have deliberately reduced their circulation--usually by eliminating promotions and giveaways--in order to trim costs and improve their demographics.

. . .

Since lots of potential buyers read the classifieds, potential sellers are more likely to list there, which, in turn, makes potential buyers more likely to keep reading. That's why seventeen billion dollars was spent on newspaper classifieds last year. And, while the Net has eroded newspapers' advantage in disseminating news, it has expanded their reach and influence. The Washington Post, despite its drop in circulation, attracted more than eight million readers to its Web site in February, an increase of nearly three million over the same time last year. Papers may not have figured out how to maximize the monetary potential of this shift, but online advertising already earns them two billion dollars a year.

I agree that newspapers have yet to figure out how to deal with the internet -- and not just on the advertising end. The news end is still trying to understand. One local example is the Washington Examiner. The Examiner boosts about its local DC coverage. The front page is often a local story. Yet, on the website, local Washington DC stories get mixed in with national/international Washington DC stories -- apparently because the website can't distinguish between all the national/political news generated in Washington from the local Washington stories. As a result, if you want to get the Examiner's local coverage, you are almost forced to get a copy of the hard newsprint. And this is not a revenue generating strategy -- the newsprint version is free!

Rather than outside forces causing the demise of the newspaper, Surowiecki believes the real danger is a self-fulfilling prophesy:

the popular conviction that papers are doomed may cause owners and shareholders to prefer the cash-cow approach, accepting eventual oblivion while continuing to harvest billions of dollars in profits, largely through cost-cutting. Settling for a tolerable short-term future, newspapers could end up writing themselves out of the long-term one.

As he points out:

Established media--radio, the movies, television--haven't vanished when new forms have come along. They've adapted by playing to their distinctive strengths.

His solution:

For most newspapers, this will mean abandoning things that are ubiquitous on the Internet, like stock tables and wire stories, and investing in content they can own, like serious local coverage and in-depth reporting.

That is a good strategy - I think. Just as AM radio remade itself into the talk and sports outlet when FM took over music, newspapers will have to remake themselves into more in-depth sources of information.

But, what, does that mean for weeklies - such as Mr. Surowiecki's The New Yorker?

Hum ... This could get interesting.

Posted by Ken Jarboe at 8:52 AM | Comments (0) | TrackBack

March 28, 2006

Better data

This from the Dow Jones Newswires:
"BEA May Share Some Data On Trade, Flows With BLS":

The Commerce Department's Bureau of Economic Analysis is proposing to provide the Labor Department's Bureau of Labor Statistics with data collected from several surveys that it conducts on U.S. direct investment abroad, foreign direct investment in the U.S., and U.S. international trade in services.

In a notice published Monday in the Federal Register, the Bureau of Economic Analysis, or BEA, requested public comment on the proposed data-sharing by May 26. It said the data sharing would be "for statistical purposes exclusively."

BEA said it "will provide data collected in its surveys to link with data from BLS (Bureau of Labor Statistics) surveys, including the Quarterly Census of Employment and Wages, the Occupational Employment Statistics survey, and the Mass Layoff Statistics survey."

"The linked data will be used for several purposes by both agencies, such as to develop detailed industry-wide estimates of the employment, payroll, and occupational structure of foreign-owned U.S. companies or of U.S. companies that own foreign affiliates, and to assess the adequacy of current government data for understanding the international outsourcing activities of U.S. companies," the notice continued.

BEA said the confidentiality of the data will be protected, saying "access to the shared data will be restricted to specifically authorized personnel and will be provided for statistical purposes only."

(See Federal Register for the entire announcement)

This is a step forward in understanding the offshoring issue. No reason why the financial and employment data shouldn't be linked.

Now, if I can only get them to collect data on the transfer prices and volume of intangible assets.

Posted by Ken Jarboe at 1:18 PM | Comments (0) | TrackBack

Future of TV - and ICT

The IBM Institute for Business Value has released a new study on The end of TV as we know it: A future industry perspective. While technology is pushing the industry toward convergence (i.e. telephony, cable TV and Internet), this study see consumer behavior as the major differentiator:

The industry instead will be stamped by consumer bimodality, a coexistence of two types of users with disparate channel requirements. While one consumer segment remains passive in the living room, the other will force radical change in business models in a search for anytime, anywhere content through multiple channels.

The study labels this as:

the "Generational Chasm" between the passive mass audience ("Massive Passives") and leading-edge users (divided into two sub-groups: "Gadgetiers" and "Kool Kids").

As a result, the industry will have to invest in different strategies to reach the different consumer groups. That should make for an interesting scramble.

On the technology side, the World Economic Forum has also just released its Global Information Technology Report. The report ranks countries on their "Network Readiness" - with the US as regaining the top spot. [I wonder how that will play out in all the competitiveness discussion on the US lack of broadband.]

More importantly, the rest of the WEF report discusses how information and communications technology (ICT) is absolutely key for economic developments. For example, in one chapter "Information Technology and Productivity, or 'It Ain't What You Do, It's the Way that You Do I.T.'":

The authors show that the higher productivity of US multinationals located in Europe--as compared to other multinationals--appears to be linked to their better use of IT. They argue that this is likely to be due to the superior internal organization of the US firms, such as stronger worker incentives, smarter targets, leaner manufacturing, etc. This effect is particularly strong in the ICT-using sectors, where the United States experienced a productivity burst, whereas Europe did not. This difference in the use of IT may explain the absence of US-style productivity acceleration in Europe over the last decade.

Looking at the TV industry as part of the broader ICT sector gives us a different look at the IBM "Generational Chasm." Does this chasm describe not only consumers of information/content, but also producers. Are those in the massive passive category also workers who are not using ICT and not very engaged in the I-Cubed Economy? Or are they (as I can speak from my household experience) people who need an evening break from the interactive world (i.e. have TV news on while cooking dinner - or relaxing in the evening)?

The line between consumption and production of information is blurring with the rise of interactivity. But it is not completely gone. We need to take a closer look at how people respond at work and play. We also have to realize that people may shift categories during different parts of their day (and different times of life).

The IBM authors are absolutely right in their statement that the one-size-fits-all version of TV is gone forever. But, I'm not sure that it ever really existed. I remember the old fights over whose TV programs we are watching tonight -- which only lessened with the move to multiple sets in the household and still exists in the ongoing "war of the sexes" over who controls the remote.

My guess is that in the I-Cubed Economy, the concept of broadcast versus narrowcast will be lost. Both of those speak to the distribution technology -- not how the consumer wants the content. Getting "Desperate Housewives" on a PDA or mobile phone screen does not remove the desire by others to see it on Sunday night curled up in front of the TV. But that does not necessarily mean that everyone curled up on Sunday stays that way for the entire week. They maybe downloading TV talk shows to their iPod or using the Web almost exclusively for their news.

For me, multiplicity and fluidity of categories are real the concepts. All of which should make for a very interesting ride for all the ICT industries over the next few years.

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

March 24, 2006

IP amok

And on a lighter note to end the week, this from Mother Jones -Intellectual Property Run Amok: The Comedy of IP Overkill:

A FRENCH DIRECTOR had to pay $1,300 after a character in his film whistled the communist anthem, "The Internationale," without permission.

The communists enforcing their IPR???

Posted by Ken Jarboe at 9:05 AM | Comments (0) | TrackBack

March 23, 2006

Patent infringement

For a different take on the patent issue, I would recommend this AEI short report: Your Blackberry Is Safe Now...but Is Your Medicine? which argues that the current patent system does not do enough to protect patent holders in the pharmaceutical industry. The specific issue concerns the use of the "inequitable conduct"

Patent applicants are required to pursue applications "with candor, good faith, and honesty." The violation of this duty, along with intent to mislead the U.S. Patent and Trademark Office (PTO), may constitute inequitable conduct and may render a granted patent unenforceable.

. . .

The ongoing litigation regarding the painkiller OxyContin® illustrates the dangers of a too-liberal application of inequitable conduct. Purdue Pharma L.P., the patent holder, sued generic manufacturer Endo Pharmaceuticals Inc. for patent infringement. The U.S. District Court of the Southern District of New York ruled that, although Endo infringed Purdue's patent, the patent was unenforceable on the grounds of inequitable conduct. The ongoing litigation regarding the painkiller OxyContin® illustrates the dangers of a too-liberal application of inequitable conduct. Purdue Pharma L.P., the patent holder, sued generic manufacturer Endo Pharmaceuticals Inc. for patent infringement. The U.S. District Court of the Southern District of New York ruled that, although Endo infringed Purdue's patent, the patent was unenforceable on the grounds of inequitable conduct.

The AEI authors feel that the court has gone too far in ruling a patent invalid:

Above all, the ruling dangerously threatens the patents of numerous medical inventions and drugs, and thereby future medical innovation. Whether an invention is based on insight or clinical data "does not by itself affect patentability." Therefore, a precedent of patent unenforceability based on the Purdue litigation casts inventions based on experience and judgment in an unfavorable light.

The certainty of patentability for an invention based on insight has been shaken, and future biomedical innovation will suffer. The case highlights a system that offers exploitable loopholes to patent infringers and shows just how badly reform is needed. A legal system that is hard to understand and whose interpretations are unpredictable hinders productive endeavors.

The Patent Reform Act 2005 introduced by Representative Lamar Smith (R-Tex.), which is currently on hold in Congress, should be revived. This legislation incorporates several recommendations made in a 2004 report published by the National Academies of Science: "A Patent System for the 21st Century." The report concluded that "in view of its cost and limited deterrent value," inequitable conduct doctrine should be eliminated or radically reformed.

While others involved in patent reform may or may not agree with the specific proposal to eliminate the inequitable conduct doctrine, it is important the even the "more protection is better" side feels that the current process is flawed. When all sides agree to the need for change, may something will happen.

Posted by Ken Jarboe at 8:36 AM | Comments (0) | TrackBack

March 22, 2006

Copyright gone wrong

Read this story in today's New York Times -- and then tell me all about how our copyright laws do such a great job of protecting individual artists (as opposed to the record companies and the lawyers): In the Jungle, the Unjust Jungle, a Small Victory

As Solomon Linda first recorded it in 1939, it was a tender melody, almost childish in its simplicity - three chords, a couple of words and some baritones chanting in the background.
But the saga of the song now known worldwide as "The Lion Sleeps Tonight" is anything but a lullaby. It is fraught with racism and exploitation and, in the end, 40-plus years after his death, brings a measure of justice. Were he still alive, Solomon Linda might turn it into one heck of a ballad.

Posted by Ken Jarboe at 1:58 PM | Comments (0) | TrackBack

Supreme Court - take three (on patent trolls)

In addition to the Court's hearing of the case yesterday on what can be patented, next week the Court will hear arguments in the e-Bay case. That case involves the patent rights to the "Buy It Now" feature for on-line auctions. The case is generally thought of as a company versus a "patent troll." As the Financial Times - "Get it now from Ebay, hostage to the patent trolls" explains:

Is US patent law stifling innovation? Are low-quality patents compromising American competitiveness? What is the right balance of power between those who own intellectual property and those who want to produce goods in the digital marketplace without constantly being sued for trespassing on someone else's ideas?

"This case has profound implications for technological innovation," says Ted Olson, former US solicitor-general, in a brief filed on behalf of Intel, Microsoft, Oracle and other high-tech companies, one of a raft of high-profile submissions by industry groups to lobby the court with their different visions of the new economy.

"The patent system is the foundation for the United States' global leadership position in technological development," says Mr Olson, but he argues that over-broad patent rights are reducing incentives to invest in manufacturing, research and development. He says it is time to "restore the balance" between the rights of patent holders and the broader social good of encouraging innovation.

Patent trolls are become a standard business model. Take for example this profile of Forgent Networks, "Forgent Uses 'Trolling' As Business Model":

While most technology companies make money by developing software, building hardware or providing services, Forgent Networks Inc. has taken a different route: It produces threats and lawsuits that try to cash in on ideas.

Forgent and other companies with similar strategies - often called "patent trolling" by critics - amass intellectual property portfolios and file suits against other businesses, accusing them of infringement.

With a skeleton crew of 30 employees and the help of a law firm, Forgent has built a business out of suing - or threatening to sue - companies, even though it offers no related products and does no development of the technology itself.

Though critics say such tactics curb innovation and drive up costs for consumers, Forgent CEO Dick Snyder insists he's merely providing maximum value to shareholders.

The Wall Street Journal's Alan Murray has a good discussion of patent tolls and the basics of the problem in his column today - "War on 'Patent Trolls' May Be Wrong Battle":

There is a problem in the patent world, but it isn't companies that don't commercialize their own patents. Rather, it is bad patents. These days, too many are granted, too often for "inventions" that seem to the initiated to be as obvious as air -- such as one patent granted in 2002, and later rescinded, for an online restroom-reservation system

In part, that happens because the Patent and Trademark Office is understaffed and overwhelmed. A good first step would be to beef up the patent agency. This is one form of regulation that, if practiced properly, is clearly good for the economy, not bad for it. Second, change the patent laws to allow opponents of new patents to weigh in earlier. Right now, examiners often work in a vacuum. If patent applications were published prior to final approval and allowed to be contested -- a process that already occurs in many parts of the world -- fewer bad patents might be issued.

The end result may mean more work for lawyers -- the one group that unequivocally benefits from this patent mess. Nearly a third of the $612 million Research in Motion paid NTP ended up in the hands of NTP's law firm, Wiley Rein & Fielding LLP. Defining intellectual-property rights will always be a lot harder than defining real property rights. It is worth getting it right.

Worth getting it right - now where have you heard that before about patent reform?

I agree with that basic thrust of Murray's argument. Patents are important intangible assets. As we move more toward using these as investment vehicles, protection of the rights are important. However, I'm not sure that cleaning up the patenting process along the lines he suggests will necessary solve the problem. A direct approach to the problem of inadvertent infringement may also be needed.

Let's hope our lawmakers are listening.

Posted by Ken Jarboe at 9:24 AM | Comments (2) | TrackBack

March 21, 2006

Supreme Court - take two

Yesterday, I highlighted today's Supreme Court hearing on patents. I would like to draw your attention to an excellent essay on the broader issue of patent reform in today's Wall Street Journal by Adam Jaffe and Josh Lerner - "Innovation and Its Discontents":

The problems of the U.S. patent system are under discussion today with an urgency not seen in decades. The Supreme Court will soon hear oral arguments in eBay v. MercExchange LLC, which promises to be its most far-reaching examination of patent law in many years. Today the court will also consider LabCorp v. Metabolite Laboratories -- the contested matter is whether a patent can be issued for the correlation between a disease and a naturally occurring substance in the human body. That is: Can you actually patent the laws of nature? And shockingly, Research in Motion has been forced to pay $612 million to prevent all of our BlackBerry handhelds from going dark, even though the U.S. Patent and Trademark Office (USPTO) has indicated that it is likely to find all of the patents behind this ransom demand invalid. Congressional subcommittees, with good reason, have recently held hearings asking fundamental questions about developments like these in the patent system.

The importance of this long-overdue focus on patents cannot be overemphasized. The past decade has seen periodic uproars over particular patents, such as Amazon's "one click" patent for online shopping. The troubling patents have been well publicized, but the wrong lessons have typically been drawn. Commentators have tended to focus on the incompetence of the USPTO in allowing "bad patents." Others have concluded that the patent system is not working with respect to a particular area of technology. Concerns about software awards led, for instance, Jeff Bezos of Amazon to propose a new patent type for software; others have suggested that biotechnology be excluded in various ways from the patent regime.

We believe, instead, that the problems with the patent system are systemic and fundamental, the result of two congressional changes to the patent system. At the time they were described as administrative and procedural rather than substantive; but taken together they have resulted in the most profound changes in U.S. patent policy and practice since 1836. One set of changes has made it easier to enforce patents, easier to get large financial awards from such enforcement, and harder for those accused of infringing patents to challenge the patents' validity; another set of changes has made patents much easier to get. The combination has created a perfect storm: a complex and intensifying combination of factors that increasingly makes the patent system a hindrance rather than a spur to innovation.

Unfortunately, the patent reform legislation they allude to seem stuck in the process. As a result, it may be the Supreme Court who has to break the stalemate. With all the attention now being paid to "competitiveness" on Capitol Hill, one would hope that the lawmaker would take the hint and address the key issue of patent reform. Let us hope that the Court's actions will lead the way.

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

March 20, 2006

Supreme Court takes up patents

Tomorrow, the Supreme Court takes up the patent case I mentioned last November - a case that may change the US patent system. As the New York Times reports:

For the first time in a quarter-century, the Supreme Court will hear on Tuesday a case involving the basic question of what type of discoveries and inventions can be patented.

Both sides say the case, which involves a blood test for a vitamin deficiency, could have a wide-ranging impact on the development of diagnostics, perhaps threatening many of the underlying patents for genetic and other medical tests.

The Washington Post put it this way:

At stake, attorneys on both sides of the case say, are 25 years of patent law and literally tens of thousands of patents on drugs, medical devices, computer software and other inventions. If the court reins in what can be patented, they say, it could be among the most important patent law decisions ever made.

It would be easy to dismiss this as media hype. But in this case, the newspapers are right. Scott Weingaertner of the law firm White & Case LLP explains what is at stake:

Although Lab Corp. is a case about a patent on a medical diagnostic method, it has been seen by some as an opportunity to roll back patent protection of "business methods," and to do so through the courts, rather than through legislation. Lab Corp. has become a test case because the patent it involves is directed not at a device, but essentially to the act of observing a correlation - between a protein found in the human blood stream and a certain vitamin deficiency. So, the patent strikes some critics as involving a claim to an abstract idea or scientific principle that should be off-limits under the US patent laws. The Supreme Court can now be expected to probe, and possibly reduce, the boundaries of patentability in the US.
. . .
Whatever the Supreme Court decides - and, again, the outcome is far from clear - it will likely have a significant impact on technology and patent strategy for many industries and for US technology policy in general.
. . .
Certain financial services providers and industry groups, among others, have argued that if the Supreme Court affirms the federal appellate court's decision, and the diagnostic patent remains valid, it will undermine their competitive environment. While Lab Corp. is not a "business method" patent case per se, a ruling on the diagnostic method it involves is believed by some to have the potential either to bless or eliminate patents on what some patent critics call "abstract ideas."

Many other companies and industries have weighed in on the issue. For example, the Computer & Communications Industry Association stated:

"If you can patent an abstract idea, the patent system will encourage free-riders and opportunists, not innovators," said CCIA President and CEO Ed Black. "Patents won't incentivize invention if developers can be sued just for thinking about a patented process."

"The patent system was designed to protect technology," said CCIA Fellow Brian Kahin, who led the drafting of the brief, "but the Federal Circuit has turned it into a land grab for anybody who can show a practical application for any abstract idea." Kahin added: "Remarkably, the Federal Circuit offers no good reason for this, but it claims to have just discovered that Congress intended to open patents up to all areas of human activity when it last codified patent laws in 1952. So it has authorized monopolies o­n useful knowledge and basic business models that preempt technological innovation."

As author Michael Crichton put it his op-ed in the New York Times "This Essay Breaks the Law":

In addition, there is the rather bizarre question of whether simply thinking about a patented fact infringes the patent. The idea smacks of thought control, to say nothing of unenforceability. It seems like something out of a novel by Philip K. Dick - or Kafka. But it highlights the uncomfortable truth that the Patent Office and the courts have in recent decades ruled themselves into a corner from which they must somehow extricate themselves.

. . .

Companies have patented their method of hiring, and real estate agents have patented the way they sell houses. Lawyers now advise athletes to patent their sports moves, and screenwriters to patent their movie plots. (My screenplay for "Jurassic Park" was cited as a good candidate.)

Where does all this lead? It means that if a real estate agent lists a house for sale, he can be sued because an existing patent for selling houses includes item No. 7, "List the house." It means that Kobe Bryant may serve as an inspiration but not a model, because nobody can imitate him without fines. It means nobody can write a dinosaur story because my patent includes 257 items covering all aspects of behavior, like item No. 13, "Dinosaurs attack humans and other dinosaurs."

Such a situation is idiotic, of course. Yet elements of it already exist. And unless we begin to turn this around, there will be worse to come.

On the other side, the US Department of Justice argued that the Federal Circuit court was right in upholding the patent and the infringement case.

As I stated back in November, this would be a major case even if the Supreme Court ruled on the narrow issue of medical testing. It now looks like the case has turned into more than a major case. It looks like the Supreme Court is finally looking at the issue of how broad that government-granted monopoly we call a patent should be. One way or another, this will set the tone for all of our patent policy debates from now on.

FYI - while the courts will hear arguments tomorrow, a decision is not expected for some time.

Posted by Ken Jarboe at 11:53 AM | Comments (1) | TrackBack

March 16, 2006

"don't worry, be happy" - and trust in "dark matter"

It had to happen. The editorial board at the Wall Street Journal has discovered "dark matter" -- and the trade deficit is all an illusion (see Trade Deficit Disorder):

Foreigners are willing to accept a lower rate of return on their U.S. investments, such as Treasury bills, because they are partly buying dollar currency stability, liquidity, and a safe haven against political and economic risk. Foreigners, for example, hold hundreds of billions of dollars of U.S. currency, which is the equivalent of a zero interest loan to Americans.

By contrast, American assets abroad earn higher than normal rates of return because of noncounted factors such as insurance, know-how, and the value of universally recognized brand names like McDonald's and Disney. When taking these into account, the authors conclude that America is a net creditor, not a net debtor, nation. Even more surprising, correctly measured, China is a net debtor to the U.S.

Thus, according to the editorial writers, the "dark matter" thesis shows that if you adjust for the interest rate differential between US assets and foreign assets, there is no trade deficit.

That is a lot like adjusting for the water level, there was no flood in New Orleans.

It has been great that foreigners are willing to accept a lower rate of return. But, a zero-interest loan is still a debt. And the fact that we earn more on our foreign assets maybe because of the power of our intangible assets -- or maybe because those investments are riskier. Neither of these factors erases the debt. It does explain why we can have a positive income flow while the debt is growing (as I discussed earlier). Nor is it clear how long that advantage will last.

The editorial goes on to repeat the old canard about how wonderful this deal is for America -- foreigners lend us money so we can spend it on buying their goods and services. Unlike the Journal editorial writers, at least the Chairman of the Federal Reserve understands (from Chairman Bernanke's written responses to the Senate Banking Committee):

as our external debt rises, the cost of servicing that debt increasingly will subtract from U.S. income. Accordingly, it would be helpful to raise our domestic savings and reduce our trade deficit while maintaining an environment conducive to investment and growth.

Intangibles are an important and powerful part of the US economy - and of reducing our trade deficit, promoting savings and all the other important economic goals. Unfortunately, they have become the latest peg for the "don't worry, be happy" crowd to hang its hat on. We need a serious look at how intangibles affect our trade flows. The old "assume a can-opener" trick proposed by the WSJ editorial writers just doesn't hack it.

(PS: if anyone is interested, I would be happy to explain the "assume a can-opener" joke in the comment section.)

Posted by Ken Jarboe at 10:45 AM | Comments (0) | TrackBack

March 14, 2006

Measuring intangibles - not "dark matter"

In my last posting on the "dark matter" thesis of intangibles and trade, I mentioned a new NBER paper by Corrado, Hulten and Sichel "Intangible Capital and Economic Growth." (an earlier version is available at the U of Maryland site). There are actually two papers, the second being their earlier 2004 work, "Measuring Capital and Technology: An Expanded Framework."

The papers look at our intangible asset stock and the size of our investments in intangibles. A few years ago, Leonard Nakamura estimated the annual investment in intangibles to be about $1 trillion. The C-H-S papers estimate a $800 billion investment and more than $3 trillion of business intangible capital stock are missing or miscounted in our statistics. The macroeconomic implication is that were are saving more than we thought and that

(t)he rate of change of output per worker increases more rapidly when intangibles are counted as capital, and capital deepening becomes the unambiguously dominant source of growth in labor productivity. The role of multifactor productivity is correspondingly diminished, and labor's income share is found to have decreased significantly over the last 50 years.

What I find more intriguing that the macroeconomic implications is the papers' finding that nonscientific research and development (R&D) and organizational factors are far more important intangible assets than traditional scientific R&D.

There are two key elements in the C-H-S papers. First, and primary, is the treatment of money outflow (expenditures) as either consumption or investment. Consumption and investment are treated differently in any accounting system - either company accounting (see our paper Reporting Intangibles) or in the National Income and Product Accounts (NIPAs).

The papers argue, as have others including myself, that expenditures on intangibles are investments. As the authors state in their 2006 paper:

In sum, the various characteristics that cause tangible and intangible capital to be different - verifiability, visibility, non-rivalness, and appropriability - are all important features that distinguish one type of capital from the other. However, none of these differences is relevant to the issue of whether to treat intangible expenditures as capital. That is determined by whether or not the expenditure is intended to yield output in some future time period. This is the conceptual analogue on the production side to the symmetry criterion of whether the expenditure was made in order to increase future consumption. Many intangibles satisfy these criteria and must therefore be treated as capital.

And capital is treated very differently for accounting purposes. Capital is written off over a number of years while non-capital expenditures (consumption) are counted completely in the year they occur. Much of the macroeconomic implications of this research flow from that simple fact.

The second issue is that some investments in intangible are not adequately captured in the NIPA. For example, the value of brand equity is not included in our stock of assets - although cost of advertising to maintain brand equity is included in the NIPA as a business expense. Likewise, what the authors call "business investments in firm-specific human and structural resources through strategic planning, adaptation, reorganization, and employee-skill building" are only imperfectly captured. Employee time and additional outside costs for training would be included as a business consumption expenditure. But the added stock of value of those trained workers would not be captured.

The papers are a step forward in dealing with many of the technical issues concerning how to classify intangible expenditures as investments, how to specifically break out the investment expenditures from the consumption expenditures, how to price and deflate those intangible investments, and how to estimate the missing investments. These are not trivial matters.

Take for example, the problem of prices and deflators. The purpose of depreciation is to account for an asset as it is used up. Even for tangible assets, there is a controversy and disagreement over the appropriate rates (is a machine tool really all used up in X number of years or Y number of years.) The question becomes much more difficult for intangible assets. As endogenous growth theory (or New Growth Theory) tells us, the growth of knowledge self-perpetuating and there are increasing rather than diminishing returns. Yet we know that the specific utilization of that knowledge for economic advantage, for example in a patent, can diminish over time. But, how fast does a patent diminish?

The C-H-S papers do not solve all these issues, but they do give us some reasonable assumptions with which to work (which I will not repeat here).

As mentioned above, treating intangibles expenditures as investments rather than consumption has consequences, as C-H-S point out in the 2006 paper:

Specifically, when intangibles are treated as an intermediate input, the spending on intangibles is subtracted from revenue as an expense, reducing measured profits. On the other hand, when intangibles are treated as an investment, they are not subtracted from revenue in the period of purchase, and profits are higher.

Thus, their conclusion should come as no surprise: if one corrects for the current misclassification of intangibles expenditures as consumption rather than investments, adds in those missing investments and properly capitalizes them, then business investment is higher than normally calculated.

The journalists at the Economist sum up the macroeconomic implications:

Thanks to higher investment, including intangibles pushes up productivity growth too—although it does not explain the acceleration of productivity after 1995. Capitalising intangible spending raises average productivity growth between 1973-95 by more than it does for the years since then.

A striking shift occurs between labour and capital. Official statistics say that workers' share of national income has been fairly flat for decades. Capitalising intangible investment increases capital's slice and reduces labour's, with a particularly sharp drop after 1980. If intangibles are included, labour's share today drops from 70% to 60%.

If investment is higher than today's statistics suggest, so, automatically, is saving. With firms' current spending lower and profits fatter, corporate saving (and so national saving) must be higher.

In other words, our economic statistics are wrong. But, as the Economist noted, "although measuring intangibles does change the picture of America's economy, it does not necessarily improve it."

What I find more interesting in the papers is their breakdown of intangibles by category. The authors define three major forms of intangible assets: Computerized information (mainly computer software); Innovative property (Scientific R&D and Nonscientific R&D); and, Economic competencies (Brand equity and Firm-specific resources).

Computerized information and scientific R&D are relatively straightforward categories. The nonscientific R&D includes "nonscientific commercial R&D industry, as measured in the Census Bureau's Services Annual Survey (SAS), as well as the costs of developing new motion picture films and other forms of entertainment, and a crude estimate of the spending for new product development by financial services and insurance firms."

Investment in brand equity is measured in an interesting manner:

Expenditures for advertising are a large part of the investments in brand equity, but as stressed in our earlier work, not all spending on intangibles should be counted as capital spending. Based on results from the empirical literature on advertising, we estimated that only about 60 percent of total advertising expenditures were for ads that had longlasting effects (that is, effects that last more than one year).

Finally, the papers provide an estimate of that illusive economic competency of investment in firm-specific human and structural resources:

It includes the costs of employer-provided worker training and an estimate of management time devoted to enhancing the productivity of the firm. Our estimates of the former are based on BLS surveys; the latter are based on SAS revenues for the management consultant industry and trends in the cost and number of persons employed in executive occupations.

The resulting investment numbers are not small. For the time period 2000 through 2003, investment in computerized information (mainly computer software) was $172.5 billion; scientific R&D, $230.5 billion; nonscientific R&D, $237.2 billion; brand equity, $160.8 billion; and, firm-specific resources, $425.1 billion.

What is most striking to me, however, is where the growth has occurred (in terms of percentage of total national income). Table 3 of the 2006 paper compares the time period 1973-1995 with 1995-2003. Overall intangible assets grew from 9.4% of total national income to 13.9%. Not surprisingly, computerized information went from 0.8% to 2.3%. However, scientific R&D was almost flat , increasing its share from 2.4% to only 2.5%. Brand equity rose slightly from 1.7% to 2.0%. The other big gainers were nonscientific R&D, which went from 1.0% to 2.2% and firm-specific resources, which increased from 3.5% to 5.0%.

In other words, the largest increase in contribution by intangibles to our economic wellbeing was not necessarily scientific R&D, but computerization, non-scientific R&D and company reorganization/management/worker skills.

A slightly different view is gained from looking at the annual growth rate of real capital of these intangibles between the two time period. Overall, the annual rate of growth of intangible capital increased slightly from 6.2% in the 1973-1995 time period to 6.9% in the 1995-2003 time period. However, the growth rate in the intangible capital of computerized information dipped from 16.0% to 13.0%. Growth rate of scientific R&D increased slightly from 3.6% 3.9%; nonscientific R&D declined from 12.4% to 7.2%; brand equity increased slightly from 4.2% to 4.6%; firm-specific resources grew from 5.3% to 6.2%. According to this analysis, we are likely to get our biggest increase in intangible capital in the category of firm-specific resources and nonscientific R&D (even though growth in the latter category has slowed down).

This detailed analysis reinforces a point I have made before: intangibles and innovation are not just technology. Organizational changes, design, worker skills, the utilization of computer technology and other non-technology creating innovations are the hallmark of the I-Cubed Economy. Technological creation is part of the equation, but only part. All of the other factors are just as important. And it is time for policymakers to start paying attention to all these other parts.

Posted by Ken Jarboe at 7:43 AM | Comments (0) | TrackBack

March 13, 2006

R&D in China

And why do we think we can compete with the Chinese on R&D?

From the front page of the Wall Street Journal: "Low Costs, Plentiful Talent Make China a Global Magnet for R&D":

Multinational companies, drawn by a huge and inexpensive talent pool, are pouring money into research and development in China -- a trend that promises to broaden the country's huge role in the global economy.

The total number of foreign-invested R&D centers in the country has surged to about 750 from 200 four years ago, according to China's Ministry of Commerce. And in a survey of multinationals published in September by the United Nations Conference on Trade and Development, China was by far the most frequently cited location for R&D expansion, well ahead of the U.S. and third-place India, China's chief rival as an emerging innovator.

Still, China's growth as a global R&D hub faces some constraints. Among them is the country's weak protection of patents and other intellectual-property rights. That has encouraged some foreign companies, fearful of risking their trade secrets, to keep more cutting-edge research out of China, analysts say. But others have rushed to expand the scope of their development efforts here.

Whereas R&D investment in China initially focused on adapting existing products and technologies to the Chinese market, companies such as Procter & Gamble Co., Motorola Inc. and International Business Machines Corp., among many others, have been investing to expand their Chinese R&D operations to develop products for the global market.

P&G opened a research arm in China in 1988, consisting of two dozen employees concerned mainly with studying Chinese consumers' laundry habits and oral hygiene. Today, the U.S. consumer-products giant runs five R&D facilities in China with about 300 researchers who work on innovations for everything from Crest toothpaste to Oil of Olay face cream.

The Chinese facilities have been a lead site for developing a new grease-fighting formula of Tide laundry detergent that sells in Asia, Eastern Europe and Latin America. At one facility in Beijing's university district, researchers use computer modeling to tinker with other promising formulas that chemists in white lab coats and protective glasses then mix and test. "We are developing capabilities in China that we can use globally," says Dick Carpenter, director of P&G Technology (Beijing) Ltd.

Giving impetus to the R&D expansion in sectors from biotechnology to pharmaceuticals to semiconductors is China's government. Having enlisted foreign investment to transform China into a manufacturing powerhouse over the past few decades, Beijing now is mounting a campaign to strengthen domestic innovation that could help push the country into more advanced niches of the global economy.

It is going to take more - much more - than an R&D strategy to compete in the new I-Cubed Economy. The US needs a competitiveness strategy, not just technology strategy.

Yet, we can't even get a decent technology strategy funding in this era of huge government deficits.

Posted by Ken Jarboe at 6:13 PM | Comments (0) | TrackBack

Michigan gets it

We all know about the problems of the US auto industry - including the problem of poor products. And as the US owned auto industry goes, so does Detroit and the entire state of Michigan.

But at least Governor Jennifer Granholm understands (even if the auto industry executives may be a little slow to pick up the theme). In a recent interview in Business Week, the "Michigan Governor Talks Design"

Michigan is home to major industries that shape how the nation travels, works and lives. They all rely on good design. No other state has the history and future that we have relative to design impacting people's lives. No other state has the combination of success with respect to products - namely, cars and furniture - that virtually everyone in the U.S. and the world touches. This means that huge opportunities still lie before us. Where do I think Michigan fits into this creative economy? Michigan is poised and has taken advantage of creativity to shape its economy. We are dissatisfied with status quo. We want to continually evolve and shape and attract others who are at that level in a design, research and development economy.

. . .

Diversification is important. In Michigan, we seek to foster a welcoming environment for those we fondly refer to as "the green hairs," the iconoclasts, so we can take advantage of their imagination and ease around computer technologies. When you look at the digital magic of movies and all that unbelievable software that goes into the development of video games, that's what we want to link to. Right now those kids are going to Pixar in California. We want them here.

. . .

Several active dialogues between businesses, educational institutions and economic development groups aim to identify ways to build on our creative environments. Focused scholarships, internships and interdisciplinary educational experiences, symposiums and conferences are some considerations.

Q: Are you going to push design exposure to the high school level?

You bet. In fact, we would love for a major design firm to join with us in piloting a curriculum. We are canvassing the field for those who would help us create a high school that is focused on design.

. . .

Design is about problem-solving. For us, it is an opportunity to leverage technology to solve problems and sell products - whether it's an industrial product or interior design or the landscape, healthcare, the design of tourism promotion, the design of cities or the design of a new economy. It is all about breaking down the way things have been done before. We see great value in creating and sustaining the environment where creative disciplines can flourish and continue to lead the innovative process so important for our state's future. That, to me, is the richest opportunity we have.

If we could just have that kind of understanding and leadership and the Federal level . . .

Oh, and for all you political junkies, no - this is not a pitch for a candidate in 2008. Granholm was born in Canada and is a naturalized citizen. She is therefore ineligible to run for the Presidency (unless they pass the Schwarzenegger Amendment to the Constitution).

Posted by Ken Jarboe at 8:21 AM | Comments (3) | TrackBack

March 10, 2006

How product are made

For those of us who spend most of our time in the intangible economy, it is easy to lose touch with the tangible economy. Milk comes in plastic bottles; food often delivered by a waiter; clothes off the rack at a store (or out of a catalog); computers in the mail for Dell (or magically appear in our office courtesy of the company techie). But the intangible economy is part and parcel of the tangible. What we produce in thoughts, ideas, words and images is inextricable linked with what is physically produced. And an important part of the power of intangibles is how we make those physical products better, cheaper, cleaner, more usable.

So for everyone who wants to get back in touch with their tangible side, let me recommend the following website:
How Products Are Made.

How Products Are Made explains and details the manufacturing process of a wide variety of products, from daily household items to complicated electronic equipment and heavy machinery. The site provides step by step descriptions of the assembly and the manufacturing process (complemented with illustrations and diagrams) Each product also has related information such as the background, how the item works, who invented the product, raw materials that were used, product applications, by-products that are generated, possible future developments, quality control procedures, etc.

For example, you can find here descriptions of Air Bag, Air Conditioner, Artificial Snow, Automobile, Battery, Blue Jeans, Chewing Gum, Coin, Compact Disc, Credit Card, DVD Player, Fireworks, Hologram, Jet Engine, Laser Pointer, Liquid Crystal Display (LCD), Nuclear Submarine, Paint, Popcorn, Refrigerator, Telephone, Television, Temporary Tattoo, Vaccine, Vacuum Cleaner or Watch.

This searchable site is suited for a general audience and the descriptive language of this reference material is easy to understand and to follow. So go ahead we invite you to learn about How Products Are Made!

It is a fun site - and who knows, you may even learn something. Or example, did you know that some egg processors coat the shell in a light film of oil? Or that the old "pig-skin" (football) was originally a pig bladder but is now covered with cowhide? (I guess that tossing around the old pig-bladder doesn't have the same appeal)

Posted by Ken Jarboe at 2:18 PM | Comments (0) | TrackBack

Feb employment

Quick take on the February employment numbers:

Good news: payrolls up by 243,000.

Not so good news: Biggest gainers are in non-export earning areas: construction (mostly in specialty trade contractors); services to buildings and dwellings; health care; education (educational services, state government educational employment and local government educational employment); and food and drinking establishments.
These areas accounted for over half of the jobs gains - 135,800. An additional 18,300 came from Professional and technical services and 22,000 in Financial activities -- both of which have some export earning potential.

Motor vehicles and parts took a big hit. But manufacturing production employment overall was steady.

Not a bad month in general, widespread gains offsetting loses in most areas. This was a continuation of the current trends, which unfortunately, do not look good on the export-earning side.

Posted by Ken Jarboe at 8:58 AM | Comments (0) | TrackBack

March 9, 2006

Indian marketing

Think that US exports of intangibles - like advertising services - will continue to help us offset our trade deficit? Well, think again. First, see my analysis of intangibles trade - a monthly surplus of $7.1 billion in intangibles is nowhere close to the total deficit of $68 billion.

Second, what makes you think that other nations can't compete in intangibles? For example, according to the Wall Street Journal, "Ad Agencies Are Booking Passage to India":

As one of Leo Burnett's Italian ad agencies pitches for part of the European business of Coca-Cola Co. this month, it has some unlikely competition: Leo Burnett India.

"Business is highly competitive, and clients say we need the best ideas," says Arvind Sharma, the company's CEO in India, internally named Burnett's top global office in 2003. "India can be a good place to turn, because quality is high and costs are significantly less."

Treated like a dirty word by many on Madison Avenue, outsourcing is starting to invade the global marketing industry, and India is leading the charge. While Mr. Sharma is leading a trend of Indian agencies doing high-end creative work, a large number -- whether branches of global marketers or Indian-owned companies -- have already taken on important roles at performing back-office and computer-intensive marketing tasks.

Granted, there is a certain amount of local knowledge needed for a successful marketing campaign. So advertising jobs are a little geographically sticky. But if US firms are needed to design ad campaigns in the US, it also means that Indian firms will have a competitive advantage when it comes to designing ad campaigns in India.

This means that US firms will face greater competition from Indian firms for that part of the process that is geographically mobile - and be shut out of that part which is geographically sticky. In either case it means we shouldn't bet on a huge increase in business services exports by US firms as the Indian economy grows. That is, unless we alter the status quo and US service firms become much more competitive.

One more reason to be concerned that Congress doesn't overlook the one part of the National Innovation Act which focuses on services (Section 106. Study on Service Science - for those of you keeping track).

Posted by Ken Jarboe at 2:56 PM | Comments (0) | TrackBack

January - and revised 2005 - trade in intangibles

BEA trade data released this morning is a case of the good, the bad and the ugly.

The good news is that their revisions of the 2005 data show our intangibles trade was much better in July August, September, and November of last year while worse in October and December. The net result of these revisions is a higher surplus than previously reported: $7.3 billion in November, declining to $7.1 billion in January. The revisions show that the rate of growth in intangible imports for 2005 was slower than previous estimated and the rate of growth of intangible export slightly higher. However, the rate of growth of intangible imports remains higher than that of intangible exports.

The bad news is that our intangibles trade surplus in January of 2006 declined by $84 million and had also decline in December, contrary to earlier data which showed it basically unchanged in that month.

The ugly is the size of our total trade deficit which grew by 5.3% to a record $68.51 billion in January. As the Wall Street Journal noted, the increase was due to a surge in imported goods:

"We may be selling more overseas but we just cannot match our demand for foreign goods," independent economist Joel L. Naroff wrote in a note.
. . .
Imports of foods and beverages rose $370 million. Imports of foreign cars and auto parts rose by 5.6% to $22.7 billion. Imports of computers and consumer goods were also up. Demand for foreign food products climbed by 6.2% to $6.4 billion amid higher demand for wine and other food products. Industrial-materials imports rose $1.37 billion, pushed higher by petroleum products.

According to the New York Times:

A 3.5 percent jump in imports in January appear to reflect the sharply higher consumer spending during the month and rising price of oil, gasoline and other energy products. Automobile and car parts imports increased 5.3 percent during the month and the country spent 4.3 percent more on petroleum-based imports.

Exports were up 2.5 percent from December, with soybean shipments doubling and airplane sales up 44 percent. But sales of most other American goods and services changed only modestly in January.

The volume of crude oil imports actually dropped in January by almost 9 million barrels. But since the average price rose by $2.17, the value of crude imports increase by roughly $220 million. Total imports of all energy-related petroleum products increased to $22.58 billion.

In other words, our intangible surplus pays for one-third of our foreign energy bill.

The deficit in Advanced Technology Products grew slightly in January to almost $3.4 billion, but both exports and imports dropped by about $2 billion each. 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.

Let me repeat what I have said before, the power of intangibles is how they re-invigorate all sectors of the economy. Utilizing that power to transform the entire economy, including 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 9:33 AM | Comments (3) | TrackBack

March 8, 2006

Why design is a competitive advantage

It is easy to fall into the trap of thinking of design as only skin deep. Products with good design have a competitive edge because they are "cool" and fashionable. Apple's iPod and Motorola's RAZR cell phone are examples that immediately spring to mind. And the business and design community often foster that view - just look at any article on Business Week about the latest hot new design.

Fashion is important - especially in this age of aesthetics (see Virginia Postel's book on the subject The Substance of Style and her blog The Dynamist).

But usability may be even more important as a competitive advantage. If people can't use the product, it really doesn't matter how "cool" it is (at least for most people). And usability is where many products fail, as a recent Reuters story "Complexity causes 50% of product returns" points out:

Half of all malfunctioning products returned to stores by consumers are in full working order, but customers can't figure out how to operate the devices, a scientist said on Monday.

Product complaints and returns are often caused by poor design, but companies frequently dismiss them as "nuisance calls," Elke den Ouden found in her thesis at the Technical University of Eindhoven in the south of the Netherlands.

A wave of versatile electronics gadgets has flooded the market in recent years, ranging from MP3 players and home cinema sets to media centers and wireless audio systems, but consumers still find it hard to install and use them, she found.

The average consumer in the United States will struggle for 20 minutes to get a device working, before giving up, the study found.

Product developers, brought in to witness the struggles of average consumers, were astounded by the havoc they created.

She also gave new products to a group of managers from consumer electronics company Philips, asking them to use them over the weekend. The managers returned frustrated because they could not get the devices to work properly.

Most of the flaws found their origin in the first phase of the design process: product definition, Den Ouden found.

Product definition starts with understanding the user. In the 1990's there was a movement in the engineering profession called "participatory design." The idea was that maybe it was a good thing to have users involved in the design. That movement is still alive, but seems confined to software. In the traditional industrial design field, I am told that the concept of involving users -- or even paying attention to user requirements -- is still an alien idea. Students in leading design school are taught that the most important relationship is between them and the object. What the user does with the object is secondary. The notable exceptions to this mindset in the US apparently are the Stanford d-school and the Institute of Design at the Illinois Institute of Technology. (For example of Stanford's approach to interdisciplinary teams see The Stanford Daily.)

I have complained earlier that design has been left out of the current discussions about improving our economic competitiveness. As part of the process of using design as a competitive weapon, maybe we need to also change the focus of design and stress the need for usability. Bringing the user into the process seems to me to be a common sense approach. At least any businessperson should be able to quickly understand the business opportunity that is presented by having 50% of your returns due to incomprehensibility of your product (unless of course you have the same boss as Dilbert).

Last month, in a piece in Business Week, Jeneanne Rae argued for "Bringing Innovation to the Classroom." Part (but, as she argues only part) of that greater awareness of innovation is a better knowledge of product design. Maybe what we need to do as part of this whole competitiveness discussion is to get the business schools to work on product design -- along with the design schools and engineering schools.

So, how about a series of fellowship, as Patrick Whitney suggested to me, that would bring practitioners and users -- engineers, doctors, businessmen -- into the design schools for a three month period? Or fellowships to have design students study mechanical engineering?

Product design can be one of America's great competitive advantages. But we have to get over the hurtle of still designing products that people have a hard time using. That will take teamwork and interdisciplinary activity. Government policies and programs can, as they have in the best, help move business and academia in that direction. The result would surely boost our economic prosperity.

Posted by Ken Jarboe at 10:36 AM | Comments (0) | TrackBack

March 7, 2006

Dark matter II

In my earlier posting on the dark matter thesis, I argued that there is an alternative explanation for why we continue to have a positive investment income even though our overall asset position is deeply negative. That explanation has to do with the huge growth in our overall foreign asset position (to over $12 trillion) - at that same time as our debt is growing.

There is one aspect of the dark matter concept I want to elaborate on. The real issue behind the dark matter thesis is whether or not our exports of intangibles will be sufficient to offset our trade deficit. And whether the flow of embedded know-how is captured in our trade statistics.

It is clear that our accounting/statistical systems do not adequately capture intangibles. For a discussion of the company specific account issues, see the Athena Alliance paper Reporting Intangibles. For a discussion of the macro-economic issues, I would recommend a new paper by Corrado, Hulten and Sichel "Intangible Capital and Economic Growth" and an article in The Economist ("Getting a grip on prosperity") about that paper.

There are two ways we can attempt to measure the value of our intangible assets (know-how, etc) that may be missing from our trade and foreign investment statistics. The first is to calculate part of the income we receive that is based on the intangibles portion of the assets, by backing out that portion from the income generate by financial and physical assets, and then imputing the missing size of the asset base from that intangibles income flow. [This is similar to the approach Baruch Lev uses to calculate the size of any particular companies intangible asset base - for a lay version of the idea see "Accounting Gets Radical"].

The heroic assumption here is that the entire intangibles portion of the asset base is missing from the existing statistic; that it is not captured in any way, shape or form.

So, let's start with the value of US-owned foreign assets:$9.052 trillion. Of that $2.367 trillion (at current cost valuation) is direct investment (Direct Foreign Investment - DFI). The rest is portfolio (aka financial) investment. Any intangibles know-how "dark matter" that is exported is only part of DFI.

[By the way, US DFI is $3.287 trillion using market value. Through out this example we will use current cost, since that is what BEA uses for the International Investment Position and International Transactions Account.]

That direct investment earns the US an income of $233.1 billion for a return of 10.5%.

[By the way, Foreign Direct investment in the US is $1.708 trillion, which given the US a net asset (tangible and intangible) of $658 billion. So the US has a net surplus in our direct foreign investment. The debt problem is that of our portfolio investments.]

The income stream due to tangible (physical) assets is calculated by multiplying the asset base by the "average" rate of return for tangible assets (Lev uses 7%). That means an income flow from the tangible portion of our direct foreign investments abroad of $165.7 billion ($2.367 trillion time .07).

Subtracting out that portion of the income that is due to a 7% return on tangible assets (remember we are assuming that the entire DFI value is only tangibles - the intangibles are completely missing) give us the income flow that is due to a return on our intangible assets: $233.1 billon - $165.7 billion = $67.4 billion.

[I apologize for not putting this into economist-speak of elaborate formulas, but I think simply arithmetic should suffice.]

Dividing that income flow time the rate of return for intangible assets (Lev uses 10.5% - the rate of return in software and biotech) given us the value of the intangible assets missing from the DFI data. $67.4 billion divided by 10.5% = $641.4 billion.

So, using these estimates of 7% return on investment for physical assets and an intangible rate of return of 10.5%, then there is about $640 billion of "dark matter" i.e. intangibles that are not accounted for in the US-owned foreign asset base. And it does not include an estimate of the intangible asset base of foreign direct investment in the US, for which we are paying income to outside the US. So the net amount would be even smaller.

This is a far cry from the missing $4.2 trillion that has made up our capital accounts shift. And from the claimed in the dark matter thesis that "the US owns about $3.1 trillion of unaccounted net foreign assets."

- - -

Another way of looking at the entire issue it to of estimate the capital basis for our intangible exports: our know-how that foreigners rent and pay for in the form of royalties and licensing fees (what might be called "intangible goods" since they are often embedded in some form of a transferable asset - a software programs, a licenses agreement, a patent, a copyright) and our sale of business services (which might be call "intangible services" since they are one-off uses of the know-how).

Our income from the "export" of intangibles is $213.3 billion. Based on Lev's estimate that intangible assets return 10.5%, our foreign-income earning intangible capital base within the United States is a little over $2 trillion. However, we pay for (rent) a foreign intangible capital base of over $1.2 trillion ($130.9 billion in imports of intangibles). If we consider the net intangible asset position as the mysterious "dark matter," it comes to about $785 billion.

Again, a far cry from the missing $3 trillion needed to balance our current accounts, as is claimed by the dark matter proponents.

By the way, Corrado, Hulten and Sichel estimate that the total stock of intangible assets in US businesses is an unreported $3.6 trillion. Nakamura estimated that the total value of intangible assets to be roughly $5 trillion in 1999.

So if this estimate that $2 trillion of intangible assets in the US is earning income from abroad (and thereby offsetting our trade deficit) is correct, then somewhere between two-thirds and two-fifths of our intangible asset base is already earning foreign income. That is a large percentage of our asset base to be earning foreign income. Lat us assume that 100% of that $5 trillion asset base was earning foreign income. At 10.5% return on investment, that would mean an income inflow to the US of $525 billion, rather than the current $213 billion. The additional income would be $312 billion. That income would not even cover the $340 billion in payments that flows out of the US in income foreigners make on their direct invest here. And it would not even come close to making a dent in the outflow of funds that make up our financial debt service payments (remember that other $6.5 to $7 trillion in foreign portfolio investment in the US).

Bottom line:

Yes, our statistical system may not adequately capture the value of our intangible assets - here and abroad. But the magnitude of those assets and the income we gain from them are utterly and completely swamped by the size of our foreign portfolio debt.

As long as we continue to rack up IOUs, we are headed for a painful realignment in our international accounts - regardless of claims by the theorist that "dark matter" can prevent a financial "big bang."

Our intangible assets wouldn't save us from our free spending way - no matter how hard you try to count them.

Posted by Ken Jarboe at 12:40 PM | Comments (0) | TrackBack

March 2, 2006

Immigration and competitiveness

While R&D funding and S&T education get most of the attention, there are many other parts to the emerging competitiveness agenda. For example, reform of US immigration laws are addressed in both S. 2109 - the National Innovation Act (NIA) and S. 2198 - the Protecting America's Competitive Edge Through Education and Research Act of 2006 (PACE-Education Act). Both of these bills generally defer to other immigration reform legislation pending in the Senate. The NIA has only a sense of the Congress on immigration reform. The PACE-Education Act has both Sense of the Senate language and specific proposals for changes in visas for scientists and engineers.

Today the US Senate begins debate on that immigration reform legislation in the Judiciary Committee. Competitiveness will not be on the tip of every Senator's tongues, however. The debate will be focused on the issue of illegal immigrants and national security. As the Wall Street Journal - "Senate to Weigh Immigration Overhaul" puts it:

None of the four bills the Senate is likely to consider this month require the 11 million illegal immigrants to pack up and leave -- a move that would throw the construction, food-preparation, maintenance, agriculture and manufacturing industries into a tailspin.

Instead, the debate will be about "what hoops you make them jump through to stay," says Tamar Jacoby of the Manhattan Institute, a conservative think tank in New York. As public sentiment turns against illegal immigration, those hoops are trickier to maneuver.

The competitiveness issue may be raised as amendments dealing with visas for engineers, scientists and computer programmers, either in Committee or on the Senate floor - or both.

That limited scope of debate is a missed opportunity.

The debate on illegal workers needs to focus as much on the economic issue and the national security. Those workers are an un-recognized key to our economic competitiveness. As the Journal article goes on to say:

Almost everyone in the immigration debate agrees they want to bring illegals in from the underground economy where they are prey to unscrupulous employers, can evade taxes, pose a security problem by their anonymity and aren't available to industries that want to see valid work papers. Anything less generous than permission to stay in the U.S. legally won't bring them in, [Senate Judiciary Committee Chairman Arlen] Specter argues.

"It is in our national interest to better protect our borders," Mr. Specter wrote his fellow senators this week. But it is also in the national interest for employers to be "able to find and hire available workers," he added.

But not only are those workers part of the low-skilled economy, they can and should be part of the I-Cubed Economy. There is no reason why creativity and innovation shouldn't infuse their jobs as well. As I've argued before, 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.

We also need to remember that it is the more ambitious, better skilled, more entrepreneurial persons who undertake the often hazardous journey to the US. These workers (and their children) represent a pool of talent that we can not afford to simply dismiss. If we treat them as just another cog in the economic machine, the opportunity to harness that talent will be wasted. If we continually force them back, we lose their contributions completely.

As Senator Specter noted, it will be important in this legislation to address both the issue of national and border security and economic competitiveness. A bill that does only one is not in our national interest. And regardless of what we do in other areas of the competitiveness agenda, this is one are we need to get right.

As the debate begins, America's economic competitiveness will probably not be at the forefront of the rhetoric. It will be, however, at the forefront of the economic reality confronting the Senators. I hope they will recognize that reality - and act accordingly.

Posted by Ken Jarboe at 12:06 PM | Comments (1) | TrackBack

March 1, 2006

Emerging markets and US deficits

There is a general belief in Washington (at least in the economic community) that the solution to the US trade deficit is for other countries to grow faster. This view is exemplified by Robert Samuelson's piece "The Next Big Spenders" in today's Washington Post:

Purchasing power would slowly shift from consumers in Chicago and Denver to those in Shanghai and Sao Paulo. What we call "emerging markets" would increasingly drive the world economy. If this transition occurs -- a big "if" -- everyone would benefit. The U.S. economy would depend less on Americans' spendthrift habits and more on exports and investment.

. . .

For countless reasons, this benign outcome might not materialize: Asian countries might cling to export-led growth; sloppy practices in consumer lending might create large losses (that's already happened in South Korea); and even a slow reduction in U.S. trade deficits might not prevent a currency crisis. But at least there's one plausible path from today's unsustainable trade imbalances to a more stable future.

A major part of this argument is macroeconomic: the trade deficit is a function of America's low savings rate (and therefore high spending rate). Or as Fed Chairman Ben Bernanke once called it (back in 2005 when he was a mere Fed Governor) "the global savings glut."

I agree in part that faster grow in other countries will help the US economy. But I disagree that this growth automatically creates the "soft landing" which avoids a painful currency crisis.

The foreign growth will save us argument is about a shift in consumption patterns. It says nothing about a shift in production. As Samuelson notes,

Their [multinational companies] investments in emerging markets increasingly focus on serving high-wage consumers as opposed to creating low-wage export platforms.

In o