June 2007 Archives

From last night's Democratic debate -- Tavis Smiley . Special Feature . All-American Presidential Forums . Video | PBS

Outsourcing Jobs
Ruben Navarrette, Jr. asks if the candidates find outsourcing of U.S. jobs to be a problem, and if so, what their solution is.

The candidates went through the general list of solutions: better trade agreements, elimination of tax breaks that encourage movement of jobs, better education system, more training in math and science and health care system that takes burden off of businesses.

The highlight for me was Bill Richardson calling for an industrial policy (yes - he actually used the words) to keep companies here. By the way, Dennis Kucinich got the biggest round of applause when he called for the cancellation of WTO and NAFTA.

Here is a fun article from today's Washington Post on techno-hype -- The iPhone As Crowning Achievement? Um, Hel-lo? - washingtonpost.com

Americans love their techno-hype, which -- from the space program to the Segway -- has long been a facet of daily life. Embracing the hype over the would-be Next Big Thing is one of the things that defines us as Americans, the most innovative and optimistic people on Earth.

Today, that Thing is the iPhone. Perhaps you've heard of it? Apple's new gizmo -- on sale starting today! -- is a cellphone, a camera, an Internet browser, a music player and (possibly) a Swiss Army knife. Gaseous clouds of publicity have hung about its introduction since January, when Apple co-founder Steve Jobs declared that his company is "reinventing the telephone." The San Francisco Chronicle played along, asking this week: "Can the iPhone Change Your Life?" (The paper's conclusion: Um, yeah, kind of.)

The iPhone is just the latest iCon in our Golden Age of Techno-Hype. It follows essentially similar swoons for the XBox, PlayStation 2, the Razr phone, PalmPilot, BlackBerry, iPod, HDTV and other products. Periodically, hosannas are also shouted over the latest wonder of the Internet (Amazon, eBay, Google, MySpace, Facebook, YouTube, etc.).

What's more, there are whole utopian promises floating major parts of our scientific-industrial complex. Nanotechnology. Biotechnology. Artificial intelligence. Gene-mapping and stem cell medicine. Fusion power and hydrogen fuels.

The persistent techno-hype of this era, however, masks a simple observation: We don't live in particularly inventive or transformative times. This has been an age of scientific refinement, not revolution.

As British historian David Edgerton notes in his new book, "The Shock of the Old: Technology and Global History Since 1900," much of the basic technology we rely on today was introduced many decades ago, although improved upon in multiple ways since.

. . .

If a person were to time-travel from the late 1940s to today, observes Edward Tenner, a technology historian, he'd have very little trouble recognizing our age.

Tenner, the author of "Why Things Bite Back," about the unintended consequences of technology, argues that truly radical innovation has occurred in roughly 30-year cycles -- and that our own era isn't one of the radical waves.

. . .

The downside of techno-hype is that it has raised expectations that can't, or haven't yet, been met. Despite bright promises, some technologies have never quite worked as touted, or have had side effects that arrested their potential (which is why no one wants a nuclear power plant in their back yard).

Remember artificial intelligence, which was supposed to make computers as intuitive as a human being? A 2-year-old child still has superior reasoning and cognitive abilities. Remember magnetic-levitation (mag-lev) trains, which would speed passengers to their destinations in frictionless comfort? Remember low-temperature superconductivity, which would enable almost infinite power storage?

Remember the supersonic Concorde, which would take over transatlantic travel? The SST is now just a museum piece.

The good news is that if Tenner's cycle theory is right, we could be on the verge of a new 30-year wave of paradigm-shattering innovation. Maybe in a few years, stem cell medicine will yield all the miracles that its supporters have promised. Maybe animal cloning and genetically modified foods will lead to the end of malnutrition and starvation. Maybe breakthroughs in battery and other energy-storage technologies will create true alternatives to fossil fuels and thus slow the pace of global warming.

Maybe. But as in all things technological, it pays to heed a disclaimer buried in the fine print:
You can't always trust the hype.

I strongly agree that we are in the grips of techno-hype. Our view of innovation suffers from gadget-ites. But I have to disagree that we haven't seen major technological breakthroughs. We have seen the "green revolution" (those of you under 50 would probably not remember that - but it dramatically increased food supplies, especially in the developing world), the transportation revolution, the communications revolution. And the double-helix structure of DNA was not articulated until the early 1950's. Each decade has its breakthroughs - which are sometimes not recognizable until well after the fact. The breakthroughs of the past 10 years may still be in the academic literature and discussed within the small circle of specialists -- not in the popular press and not yet showing up in the form of gadgets.

So I think the person from 1945 would suffer from a form of "Future Shock" if they arrived today. Not because of the basic technology, but because of the social and organizational uses of that technology and of all the other social and organizational changes. In this sense, both historians and the author of the article fall into the same technological determinism trap of believing in techno-hype. So much more has changed in the economy and society since 1945 that we often fail to realize it. Innovation has been piled upon innovation -- and only some of them technological.

So, the bottom line is true -- you can't always trust the techno-hype. But you also can't trust the hype of the techno-hype.

According to the AP, the Senate has voted to block the immigration bill. The vote to limit debate was 46 to 53 far short of the 60 needed and even short of a majority. That is a clear sign that the bill is dead. And any immigration reform will not likely come up until 2009.

So the chaos of the status quo will continue for who knows how many more years.

Two quick notes on financial markets in the I-Cubed Economy.

From a recent speech by Fed Chairman Bernanke comes this reminder of the importance of that intangible we call money -- The Financial Accelerator and the Credit Channel--June 15, 2007:

Economic growth and prosperity are created primarily by what economists call "real" factors--the productivity of the workforce, the quantity and quality of the capital stock, the availability of land and natural resources, the state of technical knowledge, and the creativity and skills of entrepreneurs and managers. But extensive practical experience as well as much formal research highlights the crucial supporting role that financial factors play in the economy. An entrepreneur with a great new idea for building a better mousetrap typically must tap financial capital, perhaps from a bank or a venture capitalist, to transform that idea into a profitable commercial enterprise. To expand and modernize their plants and increase their staffs, most firms must turn to financial markets or to financial institutions to secure this essential input. Families rely on the financial markets to obtain mortgages or to help finance their children's educations. In short, healthy financial conditions help a modern economy realize its full potential. For this reason, one of the critical priorities of developing economies is establishing a modern, well-functioning financial system. In the United States, a deep and liquid financial system has promoted growth by effectively allocating capital and has increased economic resilience by increasing our ability to share and diversify risks both domestically and globally.

I thought that was a good summary of the role of financial markets. The rest of the paper is a discussion of the interplay of financial conditions and monetary policy

But Bernanke also points out the other role of financial markets:

By developing expertise in gathering relevant information, as well as by maintaining ongoing relationships with customers, banks and similar intermediaries develop "informational capital."

Informational capital is one of the financial markets greatest intangibles. When studies are done on the competitiveness of the US financial system, that fact needs to be front and center in any analysis. Ongoing relationships and other tacit knowledge may be one of the reasons companies seem to still pay a premium to raise capital in the US. Let's keep that in mind as we "reform" the system.

The second is Martin Wolf argument that capitalism itself is changing - FT.com / Comment & analysis / Analysis - Unfettered finance is fast reshaping the global economy:

It is capitalism, not communism, that generates what the communist Leon Trotsky once called “permanent revolution”. It is the only economic system of which that is true. Joseph Schumpeter called it “creative destruction”. Now, after the fall of its adversary, has come another revolutionary period. Capitalism is mutating once again.

Much of the institutional scenery of two decades ago – distinct national business elites, stable managerial control over companies and long-term relationships with financial institutions – is disappearing into economic history. We have, instead the triumph of the global over the local, of the speculator over the manager and of the financier over the producer. We are witnessing the transformation of mid-20th century managerial capitalism into global financial capitalism.

Excellent point.

PS Thanks to Dani Rodrik's blog Dani Rodrik's weblog: Martin Wolf makes my day for pointing this out.

And the process of looking at our financial competitiveness continues, as the Wall Street Journal reports -- Paulson Details Plan to Review U.S. Regulatory System:

Treasury Secretary Henry Paulson Wednesday unveiled the next phase in his plan to improve the competitiveness of U.S. capital markets, which some analysts worry are falling behind international competitors.

Wednesday's announcement calls for a "modernized regulatory structure," mutual recognition of comparable international regulatory regimes and the development of voluntary best practices for asset managers and investors in hedge funds, among other initiatives.

"To maintain our capital markets' leadership, we need a modern regulatory structure complemented by market leaders embracing best practices," Mr. Paulson said in a statement. Mr. Paulson is formally announcing the review at The Wall Street Journal's "Deals and Deal Makers Conference" in New York.

With regard to the regulatory overhaul -- which should produce a "blueprint for reforms" from Treasury early next year -- possible changes could include merging regulators with overlapping responsibilities, such as the Office of the Comptroller of the Currency and the Office of Thrift Supervision.

Apparently, few details were available.

Modernizing the regulatory structure sounds fine - as long as it sticks to that task. My only concern, as stated many times before, is that we don't misdiagnose the problem and end up with a regulatory system that is worse than before.

This just in from today's New York Times -- Chef Sues Over Intellectual Property (the Menu):

Sometimes, Rebecca Charles wishes she were a little less influential.

She was, she asserts, the first chef in New York who took lobster rolls, fried clams and other sturdy utility players of New England seafood cookery and lifted them to all-star status on her menu. Since opening Pearl Oyster Bar in the West Village 10 years ago, she has ruefully watched the arrival of a string of restaurants she considers “knockoffs” of her own.

Yesterday she filed suit in Federal District Court in Manhattan against the latest and, she said, the most brazen of her imitators: Ed McFarland, chef and co-owner of Ed’s Lobster Bar in SoHo and her sous-chef at Pearl for six years.

The suit, which seeks unspecified financial damages from Mr. McFarland and the restaurant itself, charges that Ed’s Lobster Bar copies “each and every element” of Pearl Oyster Bar, including the white marble bar, the gray paint on the wainscoting, the chairs and bar stools with their wheat-straw backs, the packets of oyster crackers placed at each table setting and the dressing on the Caesar salad.

Mr. McFarland would not comment on the complaint, saying that he had not seen it yet. But he said that Ed’s Lobster Bar, which opened in March, was no imitator.

This appears to be a new wave in IP litigation:

In recent years, a handful of chefs and restaurateurs have invoked intellectual property concepts, including trademarks, patents and trade dress — the distinctive look and feel of a business — to defend their restaurants, their techniques and even their recipes, but most have stopped short of a courtroom. The Pearl Oyster Bar suit may be the most aggressive use of those concepts by the owner of a small restaurant. Some legal experts believe the number of cases will grow as chefs begin to think more like chief executives.

According to the story, some chefs are having their employees sign non-disclosure agreements to protect their recipes. I can understand this. A chef's signature food is a major part of the draw. But in part, it is the tacit knowledge and the total package that defines a good restaurant. Non-disclosure agreements and other trade secret mechanisms are difficult to utilize in that situation. Is good service a trade secret?

I also worry about the ability to spin-off new restaurants and menus. Do these agreements cover derivative works -- dishes that are slightly different? Will a spin off restaurant have to pay royalties? What happens when the recipe is published in a cookbook?

A whole new area for the lawyers to explore. Let's hope they don't muck it up.

This story from Information Week -- Wi-Fi Takes Shape As The Next Patent Battleground

A little-noticed Federal court decision issuing an injunction against wireless LAN equipment vendor Buffalo Technology in its patent fight with an Australian science agency could have broad implications for the Wi-Fi industry.

Judge Leonard Davis of the U.S. Eastern District Court of Texas found on June 15 that Buffalo violates the Commonwealth Scientific and Industrial Research Organization's 1996 patent underlying 802.11a/g technology--the core of all corporate wireless LANs and public Wi-Fi networks. Davis issued an injunction blocking Buffalo, a Japanese manufacturer with a subsidiary in Austin, Texas, from selling WLAN products until it has a license agreement with CSIRO.

Buffalo is likely to appeal the ruling and ask the court for a stay of the injunction. But if the ruling stands, Davis' decision could force makers of Wi-Fi-based products--from laptops to smartphones to semiconductors to game consoles--to pay hefty licensing fees to CSIRO, an Australian federal agency akin to the U.S. National Science Foundation.

Recognizing the CSIRO patent as a threat, a group of major tech companies that includes Dell, Hewlett-Packard, and Intel filed lawsuits in May 2005 to have the CSIRO patent invalidated. CSIRO countersued. In all, CSIRO has three other cases challenging Wi-Fi use by Belkin, Dell, D-Link, Fujitsu, HP, Intel, Microsoft, Netgear, 3Com, Toshiba, and others. Notably absent is Cisco Systems, which pays royalties to CSIRO from its acquisition in 2001 of Radiata, a company formed by CSIRO.

MP3, VoIP and now Wi-Fi? Does anyone really know who owns these fundamental patents?

The AP is reporting that there may be a switch in trade negotiation tactics by some countries -- Countries propose compromise in faltering global trade talks - International Herald Tribune:

A group of Latin American and Asian members of the World Trade Organization proposed a "middle ground" Monday in talks to liberalize trade in manufactured goods, a sign that developing countries are breaking ranks with Brazil and India.

The proposal, signed by Chile, Colombia, Costa Rica, Hong Kong, Mexico, Peru, Singapore and Thailand, would open industrial markets in the developing world to more foreign competition than has been proposed by Brazil and India.

This sounds a lot like a version of the "Doha-lite" idea Pascal Lamy floated last year. That would go ahead with those sectors already agreed upon (and abandon the traditional nothing-is-decided-until-everything-is-decided approach). Essentially, this is a version of the sectoral approach I have advocated.

Interesting.

Three stories today on the buy out boom and the debt market raise the issue that higher interest rate may force a slow down in the private equity market:
• Has boom in going private hit its peak? | csmonitor.com
• Buyout Boom Could Slow as Investors Push Back - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times and Private Equity Investors Hint at Cool Down - New York Times
• Behind Buyout Surge, A Debt Market Booms - WSJ.com

Like the leverage buy-out boom of the 1980's, the current boom is financed by cheap debt. Back then, it was junk bonds; today it is low interest rates. As rates go up, debt becomes more expensive - and deals become harder.

So, what has this got to do with intangibles? For the past year or so, I have been researching the monetization of intangible assets. One form of monetization is securitization -- where intangible assets (such as brands) are spun off and the royalty income used to back the sale of bonds. It is exactly the same process as used for mortgage-back securities.

Up until now, intangibles have had only limited use in securitization. That might change. Last year, three private equity companies used securitization of the Dunkin' brands to partially finance the purchase (see Caroline Salas, “LBO Firms Use Ice Cream Recipes, Toy Stores for Low-Cost Bonds,” Bloomberg, June 13 2006). Using the royalties from the brands as collateral moved the bonds to the AAA rating, dramatically lowering the cost of capital for the deal.

Whether or not this form of financing takes hold in the private equity market remains to be seen. It is a difficult transaction - with a lot of back-up mechanisms needed. And the problems in the mortgage securitization market from sub-prime loans may just scare everyone off.

But key an eye on this one -- and look for our Athena Alliance paper on the subject coming out later this year.

Many people (including myself) believe that clean energy technology is the next big thing. (See the recent Business Week story - The Business Benefits of Going Green)

Today, the Energy Department will put its oar in the water by announcing three new biofuel research centers, according to the New York Times:

One of the new bioenergy centers will be led by the Oak Ridge National Laboratory, an Energy Department lab in Tennessee. Participants include another lab, the National Renewable Energy Laboratory, Golden, Colo.; the Georgia Institute of Technology, Atlanta; the University of Georgia, Athens, and the University of Tennessee, Knoxville.

A Great Lakes center, in Madison, Wis., will be led by the University of Wisconsin, and will include Michigan State University, East Lansing; the Pacific Northwest National Laboratory, Richland, Wash.; the Lucigen Corporation, Middleton, Wis.; the University of Florida, Gainesville; Oak Ridge National Laboratory; Illinois State University, Normal; and Iowa State University, Ames.

The third, the Joint Bioenergy Institute, will be led by the Lawrence Berkeley National Laboratory in California, and will include Sandia National Laboratories; Lawrence Livermore National Laboratory; the University of California, Berkeley; the University of California, Davis; and Stanford. Dr. Orbach said that the centers’ geographic diversity would help researchers examine a wide range of plants.

The centers, each to be financed by $25 million a year, are supposed to be fully operational by the fiscal year beginning Sept. 1, 2009.

$25 million isn't much -- but it is a start.

BTW, DOE yesterday announced two wind turbine testing centers as well. Only $4 million - but again it’s a start.

The last "big thing" is retailing was the big box shop - taken to its logical point by Wal-Mart. But economies of scale were not their only competitive edge. Wal-Mart's logistical system (supply chain management) was what made it all possible. One of the other rules of thumb in retailing has been differentiation: either you go cheap (Wal-Mart) or upscale (Whole Foods). Supermarkets caught in the middle run the risk of being roadkill.

Now, according to a report in the latest Economist (Fresh, but far from easy), America should be prepared for a new British invasion that will change that American icon, the supermarket. The British company Tesco will soon be opening stores here under the brand Fresh & Easy. The company has a twist on the normal differentiation and big box story:

Tesco's offering in America will swim against this tide. It is aiming Fresh & Easy squarely at the middle market. The firm is hoping to repeat its success in attracting shoppers from all the main social groups in Britain, where social class until recently played at least as big a role in determining where people shopped as price and convenience did. Tesco will also be a pioneer in two other important ways: the size of its stores and their range of goods.

Most Fresh & Easy outlets will be relatively small, at about 10,000 square feet. Although about the same sales-floor size as the average Walgreen's, a chain of drugstores, most food retailers in America are either much bigger (six Fresh & Easy's would fit into a typical supermarket and ten into the average Wal-Mart), or much smaller (each is about three times the size of a 7-Eleven convenience store).

Does size matter? In America's lightly regulated supermarket industry, most shoppers in all but the deepest backwoods live just a few minutes' drive from a large supermarket. The chances are the store has acres of parking, is open all night and has a good selection of whatever you might need: prescription medicines, dog food and piping-hot meals that have been cooked in the store.

Convenience, however, has many dimensions. Tesco is betting that there is demand for smaller stores closer to home with fewer products, making it easier to find things. People in too much of a rush to stop at a supermarket use tiny outlets such as 7-Eleven, of which there are close to 1,200 in California alone. But their range is limited. Retail Forward, an American consultancy, reckons nearly 40% of convenience sales come from cigarettes and tobacco, followed closely by beer and wine. As for nutrition, most offer little more than snacks and frozen pizza. “The typical American convenience-store consumer would be Homer Simpson,” says Ira Kalish, a retailing expert at Deloitte, an accounting firm. “No one has done convenience and quality food together.”

As for products, Tesco's second innovation will be a range of preservative-free “ready meals” that are familiar to British consumers yet barely exist in large parts of America. “There's a big hole in the American market,” says Rajiv Lal, of Harvard Business School. “American supermarkets have not been innovative with prepared foods. You can't eat them more than three days in the week without eating the same stuff. But I suspect there are people in Britain who live off prepared meals from Marks & Spencer for three weeks on end.”

Key to making this work is supply chain management:

Whereas American stores are good at moving goods hundreds of miles and keeping them cheap, British retailers specialise in regular, frequent deliveries to heaving city-centre stores. Their supply chains are more sophisticated because they have to be. Stores can be so small that they have to switch from selling sandwiches at lunchtime to selling ready-made suppers in the afternoon.

Expensive labour and a shortage of space have encouraged British retailers to seek economies of scale from centralised food preparation. Rather than cooking on site, they make a wide range of meals that can last for a couple of days. These are not just staples such as macaroni cheese or lasagne. A typical London supermarket now stocks more than 50 different meals, including treats such as organic beef in wine, Keralan prawn curry and Asian noodles with vegetables.

And this system is also flexible, allowing for micro-differentiation:

But Tesco's biggest innovation has been in the way it collects and uses customer data from its Clubcard, a loyalty programme. Many retailers use clubs to provide nothing more sophisticated than a discount to customers as they pay for their goods. Because rivals can easily match this, it reduces profit margins for all, says Deloitte's Mr Kalish.

The Tesco scheme mails discount vouchers to customers to encourage them to return. More importantly, it tracks every purchase to build one of the world's largest databases. This finds correlations between purchases, allowing Tesco to finely tune the product range in each store. Sales of pickled vegetables, for instance, may suggest Polish immigrants have moved in, prompting it to stock barszcz, meatballs and sauerkraut.

As a result, its stores in Asian areas of Britain offer Bollywood movies, curry spices and large sacks of rice and flour. Its stores in London's wealthiest parts, meanwhile, are stocked with ripe organic avocados, dainty packs of mange tout and steaks in fancy sauces.

It is unclear whether Tesco will be able to pull this off. As the story points out, the US market has its own characteristics. But the smaller, urban market that is bigger and better than a convenience store is an idea that just may catch on. As the story also points out, Warren Buffet has become one of Tesco's largest shareholders. That is a pretty good endorsement.

As the Senate resumes debate on the immigration bill, keep an eye on two amendments, according to a story in today's New York Times (High-Tech Titans Strike Out on Immigration Bill). A Kyl-Cantwell amendment would increase the number of green cards for "immigrants of extraordinary ability, outstanding professors and researchers and certain managers and executives of multinational corporations." The tech companies have been pushing this. The other is a Durbin-Grassley proposal that gives priority to American workers over H-1-B visas and specifies the wages that must be paid to workers who have H-1B visas. Needless to say, the tech companies oppose this.

Last week, I posted a story on moving from a technology strategy to an experience strategy. Now comes this story in Business Week -- Experience Is the Product:

At some point, product categories require a quantum evolution—beyond technology and features—to the satisfaction of a customer experience. The VCR begat the DVR, and TiVo, the leading DVR brand, is successful because they began with an experience mindset, and developed the product to suit that.

In some ways, it's unfair to compare TiVo with earlier VCRs, because the underlying technology is fundamentally different. But, like George Eastman did with his roll film, TiVo took a new technology (hard drive-based digital video recording) and didn't simply copy prior models, but applied an experience mindset that lead to a fundamental rethinking of people's relationship to television.

. . .

At best, most product organizations have a list of requirements to meet, and, more typically, they simply have a set of features to develop. Designing and developing to requirements and feature lists leads to unsatisfactory experiences, because you're no longer oriented to the perspective of the user. As you make decisions along the way, your concerns for features, data, and technology trumps serving the customer. This is in large part because you have those requirements and feature lists in front of you, but nothing to represent the experiential point of view.

This is where experience strategy comes into play. As my colleague Jesse James Garrett has commented, experience strategy serves as "a star to sail your ship by." An experience strategy is a clearly articulated touchstone that influences all the decisions made about technology, features, and interfaces. Whether in the initial design process, or as the product is being developed, such a strategy guides the team and ensures that the customer's perspective is maintained throughout.

An experience strategy can take many forms. At heart it is a vision, an expression of the experience you hope customers will have. The ur-experience strategy is George Eastman's slogan for Kodak, "You press the button, we do the rest." As a description of the desired experience, it's not particularly soulful or nuanced—nothing poetic about capturing memories. But it oriented Eastman's delivery for an entire photographic system that supported this simple experiential goal.

Very good advice for succeeding in the I-Cubed Economy.

From the Christian Science Monitor, Commentary -- Still waiting for the tax-cut boost:

Economist Paul Kasriel is still twiddling his thumbs, waiting for the predicted good results in the economy from the major tax cuts of 2001 and 2003.
In an analysis a month ago for his bank, Northern Trust Co. in Chicago, he referred to the famous Samuel Beckett play, "Waiting for Godot," in which Godot never shows up.
Last week, Mr. Kasriel said he still can't detect the promised big boost in national output, investment, and savings from what economists call "supply side" tax cuts made by a GOP-led Congress and approved by President Bush.
"The data don't seem to support the hypothesis," he said in an interview.
Kasriel will be watching Friday's gross domestic product (GDP) report to see if the nation's output of goods and services in the first quarter is revised upward. In May, the Commerce Department reported that GDP rose at an annual rate of 0.6 percent after inflation, the worst three-month showing in more than four years.
With a recession under way at the start of this decade, the Republican leadership cut taxes in an attempt to get the economy moving ahead. The cuts were structured to lower marginal tax rates (the rate on the last dollars earned) on wage and salary income, and especially the tax rates on capital income, including capital gains and dividends.
"I don't think you could have ever seen a more scripted supply-side tax cut than under the Bush administration," says Kasriel.
Maybe, he adds, the economy would have performed worse if taxes hadn't been cut. But so far, GDP growth in the current economic recovery has been the slowest of any expansion since 1961. It is even slightly slower than the record-long expansion that began in 1991, during which presidents George H.W. Bush and Bill Clinton raised taxes.

I'm sure that there are a lot of people who would dispute this analysis. There is some evidence, I believe, that some of the individual tax cuts, especially in the lower and middle income levels help spur growth (or at least consumer spending) in the early part of the decade.

But, the effect of supply side tax cuts on the economy is still a debated proposition. For more, I would suggest Rob Atkinson's new book, Supply-Side Follies: Why Conservative Economics Fails, Liberal Economics Falters, and Innovation Economics is the Answer. I think their may be more to "liberal economics" than Rob give it credit, but I generally agree "innovation economics is the answer."

Here is a news item you may have overlooked, but that has great significance for the future of the I-Cubed Economy -- Audit Group Endorses Ending Quarterly Earnings Guidance - WSJ.com

The Center for Audit Quality, a Washington, D.C., nonprofit affiliated with the American Institute of Certified Public Accountants, announced its support Monday for guidelines requiring companies to stop providing quarterly earnings guidance to analysts and to tie executive compensation to long-term corporate growth.

The guidelines, known as the Aspen Principles, aim to end short-term focus on business performance in favor of long-term results. Firms that adhere to them won't give quarterly earnings guidance to analysts or comment on analysts' estimates for quarterly results. Such companies also require senior executives to hold stock they receive after leaving the firm, and bar them from hedging the risk of long-term stock option grants, tying the executives' fortunes to the long-term health of the firm. Additionally, the principles call for "clawbacks" that allow firms to recover performance-based executive awards when results are reduced or erased later by financial restatements.

It is not just the Center for Audit Quality who has signed on to the Aspen Principles, but a coalition of groups (see press release) (See also the Center's press release). The report - Long-Term Value Creation: Guiding Principles For Corporations And Investors outlines three areas of action:
• Define metrics of long-term value creation
• Focus corporate-investor communication around long-term metrics
• Align company and investor compensation policies with long-term metrics

While the report does not speak specifically to intangibles, the focus on long-term performance measure rather than short term financial results is exactly what is needed to better develop and utilize intangibles assets. Our earlier working paper, Reporting Intangibles, noted that increased disclosure of performance measures is sorely needed -- and must be used as a management tool tied into management’s financial rewards and management accountability. The adoption of the Aspen Principles is a step in that direction.

The AP is reporting that "WTO talks in Germany collapse":

A crucial meeting of the World Trade Organization's four most powerful members has failed, officials said Thursday, dealing a major setback to efforts at reaching a new global commerce pact.
"It was useless to continue the discussions based on the numbers that were on the table," Brazilian Foreign Minister Celso Amorim said after the talks ended two days ahead of schedule.

This may or may not be the end of the Doha Round -- there have been numerous time that the Round has been called dead, only to see one more last-gasp attempt. As the - Washington Post reports:

But despite the severe setback, the ministers insisted that the Doha liberalization round was not dead.

If this is truly the end however, it does not come as a surprise - including to me. The real trick is what happens next. I have long argued for a more sectoral approach to the harmonization of economic rules (for that is really what it is all about - not just trade). For those who would argue that a sectoral approach won't work, let me suggest that it is a little more than ironic that Doha seems to have crashed and burned on the sectoral issue of agriculture (see Global Trade Talks Founder On Farm-Subsidy Issues - WSJ.com). Explicitly recognizing the sectoral approach is, in my humble opinion, the only way we will move forward in our quest to cope with the emerging global I-Cubed Economy.

Two short bits about the pre-fight fight over the Supreme Court security litigation case. First, Treasury Secretary Paulson is the one who directly asked the Justice Department not to support the SEC position, according to the Washington Post -- Paulson Behind Opposition to Third-Party Suits. This is consistent with the Bush Administration's policy on lawsuits.

The second piece is more interesting. The public justification -- or at least how the press is reporting it -- is that the case could undermine the competitiveness of the US financial markets. Example if this is the following from the Economist's story Securities lawsuits: The Stoneridge showdown:

The Treasury is at odds with the SEC, too, fearing that a ruling in favour of investors would further damage American competitiveness. Many foreign firms that choose to list their shares elsewhere point to America's “litigation lottery” as the principal reason. Although filings of securities class actions have been falling since 2005, the overall value of settlements has continued to rise.

Yet, the case itself may have little bearing on whether companies' list in the US or not. As the same Economist story points out:

If suppliers and advisers can be dragged into class actions, it would no longer even be necessary to issue shares in the United States to incur securities liability, points out Peter Wallison of the American Enterprise Institute, a think-tank. Any firm, anywhere, doing business with American companies would have to live with the risk that the transaction could later be portrayed as fraudulent or deceptive.

Let me repeat -- "any firm, anywhere." "It would not even be necessary to issue shares in the United States." In other word, the case has no impact on whether companies are listed in the US.

Can we come clean on this then? The case may be bad for American companies - therefore US competitiveness in general, some might claim. But the justification that it will make the US financial markets less competitiveness seems to less than correct.

In an earlier posting, I mentioned that the US may soon be willing to accept financial statements done in accordance with the rules of the International Accounting Standards Board (IASB). Yesterday, the SEC voted to allow foreign companies listed in the US to report using only the international rules. Technically, what the ruling does is eliminate the need for foreign companies to reconcile their accounts to the US standard of GAAP. While this only applies to foreign companies, it may be the first step toward greater harmonization, as the Wall Street Journal points out:

Adoption of the change could spell the beginning of the end for U.S. GAAP. The SEC will seek public reaction for 75 days, after which a second vote by the five-member commission is required before the rule takes effect.
The proposal doesn't include giving U.S. firms the option of using international accounting rules, although the SEC is expected to raise that question this summer by issuing a "concept release," often a prelude to a rule change.

For those interested in the I-Cubed economy, this development bears watching. US and international accounting standards differ in how they treat intangibles -- specifically R&D (see our paper Reporting Intangibles). Having foreign companies report under one system and US companies under another will force analysts to confront the issue directly as they seek to make comparable analysis. It may therefore raise their awareness, both on intangibles and on the preference as to how to account for intangibles.

Then again, they may just blow the whole thing off – as they have been wont to do regarding intangibles in the past

We will see.

I ran across this AEI publication - Can NCLB Survive the Competitiveness Competition? - which to me serves as a good example why we have trouble getting the competitiveness debate right: too many non-issues and false trails. According to the authors, Frederick M. Hess and Andrew J. Rotherham:

Historically, there always has been an unavoidable tension between efforts to bolster American "competitiveness" (read as efforts to boost the performance of elite students, especially in science, math, and engineering) and those to promote educational equity. Champions of particular federal initiatives tend to argue that the two notions are complementary, but trends of the last fifty years show that the ascendance of one tends to take attention from the other.

Unfortunately, this is a misreading of the competitiveness debate. The argument that competitiveness requires concentration on elite education was never a dominate theme. The only way you can read that in is if you define STEM (science technology engineering and mathematics) as elite.

In fact, during the competitiveness debate of the 1908's, it was often stated that we needed to learn from the Japanese. While the top students in the US did well, the average students in Japan did much better than in the US -- and the poorest students in Japan did better than the average students in the US. The lesson was that we needed to bring up the bottom -- not just concentrate on the top.

I won't deny that there is a tension between emphasis on "rigor" and "equality" as the report describes. But don't blame that on competitiveness. Too often, I suspect, the argument between the two is whether the school board has the political will to flunk the high school quarterback because he failed a science course. That goes to the tension between local and national control over education – something that the report seems to gloss over.

The report does highlight one major concern for competitiveness. As long as "competitiveness" is seen as equal to just STEM, and the extent to which math and science are seen as "hard" subjects to be avoided or relegated to just the super smart folks, we have a problem. First, as I argue over and over again, "competitiveness" is much more that STEM. What about entrepreneurship? What about the creative areas? What about increased innovation and productivity due to organizational, social and cultural skills? Competitiveness = math & science is the worst type of blinders.

Second, equating math and science for only the brainy kids is a losing self-fulfilling prophesy. Everyone needs a basic understanding of the STEM areas. If we don't make STEM interesting and relevant to everyone, we have lost the competitiveness game before we even take the field.

So the authors of the report have done us a favor in raising the issue. It’s just not the issue they thought they were raising.

The OECD Employment Outlook 2007 is out and one of the stories is increased worry about the downside of globalization:

Does globalisation, notably the integration of China and India in the world economy, render workers less secure or reduce their bargaining power? What are the implications of offshoring for employment and earnings? What can policy-makers do to ensure that workers receive their fair share of the gains from globalisation?

Of course, that is only a portion of the report -- but the most headline grabbing. It is also the topic of the lead "editorial" in the report: Addressing the globalisation paradox

It seems, however, that the report may have missed part of the story. As the Wall Street Journal (Offshoring and Cheap Imports May Hurt Workers, OECD Says) points out:

But trade isn't the main culprit, the OECD claims: The spread of computer technology -- even harder to reverse than Chinese imports -- is the main thing that is creating a widening gap between the incomes of low-skilled and high-skilled workers, it argues.

The interplay of trade and technology - and the changing nature of work - is likely to explain a lot of economic insecurity at all level of skills. It is not just the low skilled who are affected - although they bear the brunt of the change. But increasingly tradable high skill activities are rising everyone's level of concern.

As Kenneth F. Scheve and Matthew J. Slaughter say at the start of their new Foreign Affairs article (A New Deal for Globalization):

In contrast to in earlier decades, today it is not just those at the bottom of the skill ladder who are hurting. Even college graduates and workers with nonprofessional master's degrees saw their mean real money earnings decline.

Dealing with that decline will take more than some transfer payments for the winners to the losers, which is essentially what Scheve and Slaughter suggest. I like the idea of a more progressive tax system and eliminating the regressive payroll taxes. AS they argue, this would be a major step beyond bolstering education and adjustment assistance. But even that is not sufficient. It will take a deeper understanding of how economic activity has changed. Until we have that understanding, our policy prescriptions are, unfortunately, little more than band-aids.

The I-Cubed Economy is often thought of as technology-driven. However, technology is only one part of innovation. And as Nick Carr keeps pointing out, in many ways, technology can become a commodity. One of the hard things for us to get our heads around is how to create a non-technology strategy. This is especially true in so-called high-tech industries.

Apple is one company that has shown the way. The iPod is a design and business model breakthrough, not a technological one. Now comes a story in Business Week about another company -- peripheral maker Kensington (see Kensington's Peripheral Challenge):

Like Nintendo, Kensington's competitors are locked in a battle to deliver more sophisticated technology and longer lists of features. And like Nintendo, Kensington has chosen to opt out of the technology arms race and turned to product experience as a competitive advantage.

The result is Kensington's Ci Lifestyle Collection, a new line of mice and keyboards for home and mobile users designed with extensive field research on customer experience in mind. But as Juan Ernesto Rodriguez, senior global product manager for Kensington explained to me, shifting Kensington's thinking from a technology-driven approach to an experience-driven one wasn't easy.

Kensington revamped its design strategy to focus on creating user-driven products - and then looked for the technology to make it work. That is backward from our normal view of the process -- at least in policy circles -- where the drive is to turn every technology into a new product. This linear, pipeline approach to innovation is one of the most enduring remnants of our old assembly line mentality. For all our policy wonk sophistication, we desperately and unconsciously cling to this model. Even when we say we don’t, our policy actions betray us. Our solutions – more funding for science and for commercial R&D, better mechanisms for technology transfer, reform to intellectual property protection – all seem to stem from that linear model.

Trying to conceptualize a new model of innovation is difficult. It starts from the recognition that end users needs – not the technology – should be driving the process. Think about technology as a pool of resources that entrepreneurs and product designers dip into to solve their problems.

But what that means for public policy, we have a hard time fathoming. Instead, we cling to the old standard set down over half a century ago: basic research is a public good and if we feed that process, everything else will flow from it.

Unfortunately, that formulation is only half right. R&D is a public good. But it is only one of many inputs into the process. Research on user needs is another. Yet, it is generally agreed that we should have government programs to specifically educate scientists and engineers but not specifically to educate people in those market researcher, product designer and applied anthropology skills that Kensington needed to change its strategy. So we feed the pool of innovation with technologies but don’t teach people how to fish in it.

Somehow, that just doesn’t make sense to me anymore.

We have all seen the ads - a musician saying that downloading a song for free is theft. But apparently there is one group that doesn't have to pay musicians -- the radio stations.

From Variety.com - Musicians want pay for radio play:

Currently, payments from radio airplay are made only to songwriters and music publishers. The U.S. is the only Western free-market nation that does not require radio stations to pay artists and labels when they broadcast performances on the radio, according to the organization [MusicFirst].

MusicFirst is pushing for legislation to change that -- but the National Association of Broadcasters is fighting back.

"Congress has long recognized that radio airplay of music generates millions of dollars in revenue for record labels and artists," said NAB exec veep Dennis Wharton. "Were it not for radio's free promotional airplay of music on stations all over America, most successful recording artists would still be playing in a garage."

Wait a second -- isn't that the same argument that gets made for free downloads? Is the NAB anti-property rights?

Interesting.

There are two things about the general discussion of intangibles and innovation that drives me right up the wall: the constant substitution of intellectual property (patents, copyright, and trademarks) for intangibles and the hype that intangibles are something new. Both of these notions are just true enough to be misleading. IP is but a small portion of intangibles and intangibles have been around since forever. To understand the role of intangibles in today's I-Cubed Economy, it is important to keep those two facts in mind.

Thus, I go crazy when I read a statement (as I have recently) that "In Adam Smith’s day there was little discussion of the role or value of intellectual property in the economy. Then the main sources of competitive advantage were the availability of natural resources and a skilled labor market." (Identity of the author not revealed to protect the guilty).

1) isn't a skilled labor market an intangible?
2) assuming that the author meant that "Adam Smith's day" was the same as the era of industrial revolution, the competitive advantage was the growing economies of scale (an intangible) and the ability to substitute energy and machinery for skilled labor (investment in tangibles).
3) Adam Smith's major point of specialization was all about an intangible: the new organization of work as illustrated by the pin factory.
4) in Adam Smith's day, there was a lot of discussion about ideas and science and technology -- what we now call intellectual property. Companies were begin formed right and left to capitalize on new ideas -- such as that new machine called the steam engine. In fact, England passed a law to prevent skilled engineers from leaving the country in order to protect their intellectual property (which, in the end, didn't stop Samuel Slater from leaving and setting up shop in America).

What is new compared to the industrial revolution is the centrality of innovation as a driver of value creation -- as opposed to economies of scale and scope as the central driver. And intangibles are a key driver of innovation. It is not enough that your workforce is highly skilled. Your workforce has to be highly skilled and innovative. Otherwise, today's high skills become tomorrow’s old news.

Ironically, this shift both raises and lowers the importance of intellectual property. IP becomes more important as a means of protecting the gains from innovative activity. IP is less important because you can't simply rely on yesterday's ideas. Your competitors will simply innovate around you.

Thus, the most important set of intangibles are not what we call "intangible goods" -- patents, copyrights etc -- those ideas which have been formally encoded in a tangible form. The most important intangibles are capabilities -- the ability to innovate and disseminate knowledge and find a way to create sustainable economic activity around that knowledge (aka a new product).

In the I-Cubed Economy, your value should not be measured solely on the size of your IP portfolio. Important? Yes. Definitive? Not by a long shot. There is a lot of activity on the IP side. Now we need much more on the capability side.

Latest update on my an earlier postings about the investor fraud case: Apparently, it was the President who broke the deadlock between the SEC and Treasury (see Bush Weighs In Against Investors In Fraud Case - washingtonpost.com and Harold Meyerson - Stuff Happens at Justice - washingtonpost.com). This indicates that the Solicitor General may weigh in on the other side - but, as I said earlier, we won't know until later.

For a lively discussion of the specifics of the case, see the Wall Street Journal's Law Blog -- Cliffhanger: Stoneridge

Yesterday, the House Science and Technology Committee held a hearing on The Globalization of R&D and Innovation. The hearing was shortened because of votes on the House floor. The witnesses' testimonies were basic summarizations of what they have said in the past. Alan Blinder described his ideas about the importance of face-to-face contact in determining whether a job is subject to trade and his breakdown of jobs as "personal" versus "impersonal" services. “Personal” services have to be done physically or the quality deteriorates markedly when not done at a distance. Workers will migrate to these “personal” occupations since these are non-tradable. The policies needed under this situation are an improved safety net, education system (current system for industrial era, not to new shift), innovation agenda (TV as industrial success – started manufacturing then innovated into new areas). He did later on mention an entrepreneurship agenda as well. Unfortunately, he did not confront the problem of how to earn foreign income -- see my earlier posting. But there were hints of some thinking on the subject.

Martin Baily talked about the benefits of globalization – inflow of capital and goods. He did admit that exchange rate problem. He also discussed the lack of retraining system, including the need to learn lessons from the Danish model of flexibility security. One point he raised I thought was of special interest was the discussion about how the US needs to embrace that science and technology as a global endeavor and be open to absorbing innovation and technology from wherever. Unfortunately, this was just mentioned in passing – but it deserves much greater attention.

Ralph Gomory talked about the divergence of company and country goals. He stress that the end output of R&D that creates wealth – not the R&D itself. Even if R&D stays here, the wealth creation part of the value chain has moved. – and the R&D will eventually follow. He went on to discuss his notion of shifts in comparative advantage due to changing productivity. He also made another point I think doesn’t get enough attention: education and R&D are not enough – they are good steps in increasing productivity, but not enough. His solutions center around aligned company and country interests by rewarding companies to produce high-value jobs through tax incentives, such as scale corporate tax rate to value-added per employee in the US.

Tom Duesterberg spoke about the manufacturing paradox that US manufacturing continuing to hold on to share of GDP with far less employment. He argued that manufacturing has benefited from globalization and that more R&D is insourced to the US than outsourced. Nevertheless, he argued that funding for basic R&D is key to maintaining innovation here in the US.

All in all, not much was new to those who have been following these issues. But it was a good session for raising their profile on Capitol Hill.

(See also the story in the Wall Street Journal - House Committee Explores Effect Of Outsourcing on the Economy)

Business Week' Innovation and Design section is running a special report on Cutting Edge Designers. The article reminds of the cross-disciplinary nature of innovation:

The Frisbee. The escalator. Reinforced concrete. These very different inventions share one thing in common: They weren't invented exactly—each was borrowed from an unrelated field. The flying toy was inspired by the metal pie tins of the Frisbie Baking Company that college students of yore tossed for fun. The escalator was originally conceived as a Coney Island amusement ride. And reinforced concrete was first patented in 1848 by a French gardener trying to develop a better flowerpot.

Cutting edge design understands this -- as the article points out:

Then, as now, the most exciting work in design happened at the intersection of two or more disciplines, where knowledge from one finds relevance in another. Many designers might say, quite rightly, that they always work at the nexus of disciplines—synthesizing the demands of engineering, business, and human factors, not to mention style. Yet some designers still push beyond the expectations of their profession, breaking down more boundaries.

Interesting stuff.

As I mentioned in an earlier posting, yesterday was the deadline for the US Solicitor General to file a Supreme Court brief in support of the SEC’s position in a key investor fraud case. The Treasury Department has taken the oppose view of the case – contending that it would hurt the competitiveness of the US financial system – a claim disputed by some. This has put the Solicitor General and the Justice Department in the middle of an interagency fight. The deadline has come and gone – and the Solicitor General has taken no action (see Investors Lose Key Advocate In Case on Financial Crimes - washingtonpost.com and U.S. Lets Pass Deadline to Back Shareholders in High Court Case - WSJ.com),

However, that does not necessarily mean they will be neutral. Briefs on the other side are not due for another month.

So stay tuned.

Just as the immigration debate is floundering on Capitol Hill, the Kauffman foundation is weighing in on how foreign students are fueling our technological entrepreneurship. According to the press release (Kauffman Foundation Study Offers Revealing New Data on Immigrant Entrepreneurs Who Are Fueling U.S. Technology and Engineering Companies):

"Our research confirms that advanced education in science, technology, engineering and math is correlated with high rates of entrepreneurship and innovation," said lead researcher Vivek Wadhwa, executive in residence, Pratt School of Engineering, Master of Engineering Management Program at Duke University. "The U.S. economy depends on these high rates of entrepreneurship and innovation to maintain its global edge. Our higher education system has historically attracted talented immigrants from around the world to the United States to study. We now face a choice—to encourage more Americans to complete higher degrees in these fields, or to encourage foreign students to stay in the United States after completing their degrees. We need to do both."

The full study - Education, Entrepreneurship and Immigration: America's New Immigrant Entrepreneurs, Part II - is available from the Social Science Research Network.

While the various reports expressing concern over the competitiveness of US financial markets may not result in major action (see earlier postings), they may affect numerous important details. For example, the competitiveness concern is sparking an internal fight within the Federal government on an upcoming Supreme Court case on investor fraud, according to the Washington Post (Investors, Advocates Worry About U.S. Position on Fraud Recovery). The Post story relates that "labor groups and plaintiffs' lawyers sounded alarms yesterday over upcoming court filings in a case that could determine whether investors in Enron and other fraud-ridden companies can recover money from investment banks." The gist of the concern is that the Treasury Department will force the Solicitor General to either be silent to take the company's side in the upcoming case.

The issue will come to a head Monday when briefs supporting plaintiffs are due in a Supreme Court case that revolves around the issue, called scheme liability. Industry groups and class-action lawyers have lobbied the Securities and Exchange Commission intensely to support their opposing positions, in which millions of dollars are at stake.

The five-member SEC recently voted to support the idea that investors could collect money from third parties that may have watched a fraud take place but did not make false statements about it, The Washington Post reported a week ago. That position tracked a pro-investor argument the SEC advanced in previous years, activists said.

But the Treasury Department adopted a different stand in a letter it sent to the solicitor general's office last week. Treasury officials said that U.S. companies could lose ground to foreign rivals if such cases were allowed to proceed, echoing language in three recent industry reports that claim the United States is at a disadvantage because of securities lawsuits.

This may not be the earth shattering actions called for in the various deregulation reports. But it does show how the mindset (possibly based on incorrect analysis) can influence day-to-day decisions. This is exactly why we need to take a much closer look at the issue -- and get it right.

The US trade deficit declined in April by $3.9 billion, according this morning's BEA trade data. Importantly, revised data for trade in intangibles shows positive growth in the surplus rather than basically a steady-state.

The improvement in the overall deficit was due to a $3.6 billion drop in imports; exports were essential the same. Much of the previous month's deficit was due to increased imports of oil, gas and petroleum products. In April, energy imports remained roughly the same in March. The improvement in the deficit came from a decrease in imports of consumer goods ($1.5 billion), automotive vehicles, parts, and engines ($1.0 billion) and capital goods ($0.6 billion).

Our surplus in intangibles stayed essentially the same at $10.1 billion (there was a minor drop of $55 million). Both receipts (exports) and payments (imports) of royalties rose. Exports of business services declined slightly while imports rose.

The deficit in Advanced Technology Products reverted to form, with a monthly deficit of $4.7 billion. March had seen a decline to $2.9 billion. The latest data indicates that March's good news was an anomaly. 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.

The big news is the revisions -- going back to 2004. The biggest change was in exports of business services, which were re-estimated upward at over $1 billion monthly. In other words, the previous data failed to catch over a billion dollar in service exports. Service imports were also revised upward, but more in the $200 million range. Royalty receipts were also generally revised upwards while royalty payments were revised only slightly.

The result is that our intangibles surplus is roughly $1.5 billion greater than previously reported. As the comparison chart below shows, these revisions indicate a much stronger positive trajectory over the past year or so. While it was previously reported that the level of the surplus has leveled off, the new data shows an increase. That increase in our intangibles surplus is a welcome sign

Another welcome sign is the change to the BEA's data collection process which brought about these revisions. As BEA explains:

Most of the revisions resulted from the incorporation of results from BEA's quarterly surveys. . . . The revisions reflect results from recent BEA initiatives to better capture movements of large and volatile categories of transactions, as well as to improve the coverage of transactions.

Not the huge amount of improvement that the "dark matter" folk would like to see. But a solid improvement in both data and data collection, nonetheless.

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.

In an earlier posting, I outlined some of the tensions in the immigration bill about family versus skill based preferences. Today's Wall Street Journal had an extended article on the family versus skills argument in the immigration debate --Benefits of Issuing Visas on Merit Are Questioned - WSJ.com:

Proponents of the pending immigration bill argue that current U.S. policy does more harm than good to the economy, by issuing most visas based on applicants' blood ties to earlier arrivals rather than on skills and education.

But it turns out there is scant evidence to back up arguments that a merit-based system -- which would award points for job skills, education and other favorable attributes -- would help ensure immigrants become a boon rather than a burden. Some economists, pointing to the dearth of academic literature on the matter, question whether there is a significant difference in the contributions made by either type of newcomer.

. . .

Many critics of the merit-based approach frame the debate as one pitting morality -- whether to bring families together or keep them apart -- against economics. But some of them say even the economics in favor of the proposed changes aren't sound. In testimony before the House last month, former Urban Institute economist Harriet Duleep argued that family-based immigrants don't hurt but help the economy, by adding flexibility that can more readily fill holes in a changing labor market. Family-based immigrants are more likely than employment-based immigrants or native-born Americans to jump at opportunities by acquiring skills, she argued.

Many learned construction skills during the recent home-building boom or have enrolled in certification courses to meet health-care shortages, for example. That adaptability means that while many enter the U.S. job market at low wages, their paychecks grow faster than those of employment-based immigrants, whose salaries start higher, Ms. Duleep said.

Some economists also argue that family-based immigration promotes entrepreneurship. Family members pool their resources and labor to open small businesses or factories. Many of those are in struggling inner cities or rural towns, where the cost of starting a business is lower and immigrant-owned restaurants and shops have become a force behind economic revitalization.

James P. Smith, a Rand Corp. economist who backs skill-based immigration, says entrepreneurs account for "a relatively small part of who comes. Mostly, [immigrants] do jobs like the rest of us."

Low-skilled immigrants free up time for higher-skilled workers to be more productive, argues Columbia University economist Jagdish Bhagwati. They run day-care centers so better-educated women can enter the labor force or train as nursing aides, who free nurses for higher-skilled work, for example.

And not all family-drawn immigrants are poor and poorly educated. The sibling of an immigrant cardiologist is also likely to be -- or become -- a professional. Last year, 42,000 family-based immigrants were in management or professional jobs, or almost as many as those admitted on employment-based preferences.

These arguments don't seem to hold any water with those firmly in the skill-based approach. As the Journal story notes:

"Family unification is a bad deal for taxpayers," says Steve Camarota of the Center for Immigration Policy, which favors restricting immigration.

In another twist, James Surowiecki (Be Our Guest!: Financial Page: The New Yorker) argues that the guest worker program should be expanded, not reduced:

However imperfect, the guest-worker program is better than any politically viable alternative. Opponents of immigration sometimes imply that adding workers to a workforce automatically brings wages down. But immigrants tend to work in different industries than native workers, and have different skills, and so they often end up complementing native workers, rather than competing with them. That can make native workers more productive and therefore better off. (In construction, for instance, the work of carpenters and masons, who are often immigrants, can create a need for crane operators and foremen, who tend to be native-born.) According to a recent study by the economists Gianmarco Ottaviano and Giovanni Peri, between 1990 and 2004 immigration actually boosted the wages of most American workers; its only negative effect was a small one, on the wages of workers without a high-school diploma. And if by increasing the number of legal guest workers we reduced the number of undocumented workers, the economy would benefit even more.

Guest workers are also, paradoxically, less likely than illegal immigrants to become permanent residents. The U.S. already has a number of smaller—and less well-designed—temporary-worker programs, and there’s no evidence that workers in those plans routinely overstay their visas. Mexican workers, contrary to popular belief, do not, generally, intend to live their entire lives in the U.S. Instead, as the sociologists Douglas Massey and Jorge Durand concluded after a comprehensive study of immigrant attitudes and behavior, most want to work “for short periods to generate an alternative source of household income . . . or to accumulate savings for a specific purpose,” like buying a house in Mexico. This is harder to do as an illegal immigrant than as a guest worker, both because illegal workers are paid less and because when an illegal goes home he runs the risk of getting caught. One remarkable study found that after border enforcement was stepped up in 1993 the chances of an illegal immigrant returning to Mexico to stay fell by a third.

. . .

In fact, whatever benefits the guest-worker program brought to the U.S. economy or to particular businesses, the biggest winners would be the workers themselves. The Harvard economist Dani Rodrik has calculated that the economic value to poor workers of a comprehensive temporary-work program dwarfs the value created by lowering trade barriers or eliminating capital regulations. When a good made by a foreign worker enters this country, the worker gets only a tiny slice of what we pay. But when the worker himself comes into this country his earnings can rise by a factor of ten or more. There are few, if any, foreign-aid programs that do as much for people in developing countries as simply allowing them to work in the U.S. legally. Congress, of course, is under no obligation to care about foreign workers. But the program’s costs to American workers are negligible, the gains for the guest workers are enormous, and the U.S. economy will benefit.

In general, I worry about an immigration program that is based on including certain skills and prohibiting others. To me, this really sounds like what conservatives have been decrying for decades: government picking winners and losers. And in general, I am for the free movement of people -- just like the free movement of goods, services and investment.

It seems to me that much of the debate isn't about immigration - it is about economic competitiveness and globalization. If the structure of the US economy contained less economic insecurity, we wouldn't be having this debate in the same way. As a recent Forbes special section (Outsourcing Vs. Immigration) points out, there are two ways this can work: the people can come here or the jobs can go there. Now, this is not completely true -- for example farm workers and construction workers have to come here rather than being able to send the jobs there. But the point is well taken.

I believe we need to fix the immigration problem - and the bill under consideration is a step in the right direction. But let's not think we are solving all the immigration issues in this bill. Too many of those are part and parcel of other bigger issues -- like repairing our social safety net, reconstructing the social contract and adapting to the transforming nature of the economy. Those are the big picture items we need to get focused on as we work out these details.

By now you may have hear about the uproar over the new London Olympic logo. Today's Financial Times (FT.com / World - London Olympic logo row goes global) weighs in with some advice from brand experts:

Nigel Currie, director of Brand Rapport, a UK company specialising in sponsorship, said: “There was some hue and cry over Sydney’s Olympic logo when it was first unveiled, but the reaction to the London logo has been unprecedented. Locog certainly doesn’t have to worry that it won’t be recognised by people in the UK.”

Rita Clifton, UK chairman of Interbrand, the branding consultancy, said: “Whether people like it or not is not the point – likeability is not correlated with effectiveness in branding. It would have been easy for Locog to do something grand and bland. It is very important now that the organisers show a great deal of confidence in it and keep showing it so people will get used to it.”

She added: “It would be a great shame if they were to change their minds about it as it does what it was supposed to do which was to capture something dynamic and distinctive about Britain. It would have been easy to have put Big Ben or the Tower of London in the logo.”

In a separate move, Ofcom, the UK media regulator, will investigate three complaints from viewers that television companies broadcast footage of the logo which involved flickering images.

Under UK regulation, broadcasters are required to issue a warning if they show images which include flickering lights that might affect people with photosensitive epilepsy.

I'm not sure that I would dismiss the lack of "likeability" so quickly -- but, clearly, triggering epileptic seizures can't be good for the brand.

Apropos the last posting on the death of manufacturing comes this note from Australia --
Innovation not a question of old or new economies -- talking about how the predictions of the decline of the "old" economy were wrong:

Of course, prices of "old economy" goods and services (which Australia exports a lot of) have risen, while the prices of "new economy" goods and services (which Australia typically imports) have fallen. As a result, Australia has experienced a record "terms of trade" rise. The ratio of the price of exports to the price of imports is at its highest level in 30 years. And what about the 30¢ to the US dollar? On the contrary, the "little Aussie battler" has become a "dollar dazzler" as the dollar appreciated and is now "living in the 70s" in US-dollar terms compared with the 50s at the time of the Olympics.

So what did the "new economy boosters" miss? In short, there was plenty of new economy in the old-economy industries. The old-economy people were innovative: they tried things, they put new ideas into practice, and found new ways to work and create value. So as mining prices rose, lots of small- and medium-sized services companies (providing technology, training or professional services to the miners) thrived with it.

In fact, you could see innovation at the Sydney Olympics itself. Putting on "the best Games ever" required innovation among our builders, architects, sports scientists, environmental engineers and the like. Even the "volunteer concept" was an innovation in its own right (and has been exported to Athens, Beijing and the Asian Games in Doha) and even Ian Thorpe's fastskin suit that won him lots of medals was a good example of Australian innovation.

What is the lesson of this? That innovation is all around us. There are no innovative industries and non-innovative industries, like there are no purely "new economy" or purely "old economy" industries. Potentially, all industries can be innovative, and can apply knowledge and technology to improve productivity and performance.

And that is something I’ve been saying for years.

From North Carolina, this quick note -- Charlotte Observer | 06/03/2007 | The Carolinas 100:
Manufacturing still matters

North Carolina's manufacturing sector has taken a beating in the past decade as cheaper competition forced restructuring that threw thousands out of work. Many still struggle to rebuild their lives. Vacant factories scar communities.

But they also mask a transformation. Furniture builders, cigarette makers and textile mills have survived and prospered through automation and innovation. And drug, airplane and other advanced manufacturers have redefined what it means to produce in North Carolina.

Manufacturing is not dead. It is an alive and vital part of the I-Cubed Economy. It just doesn't look like it did in the 1950's and 60's and even the 70's.

From this morning's Wall Street Journal comes this Page 1 story (Industries Brace For Tough Battle Over Patent Law) about today's Senate Judiciary Committee hearing. The article points out some of the tensions:

Cisco has been joined in its support of the overhaul legislation by high-tech leaders including Microsoft Corp. Goldman Sachs Group Inc. and other financial-services companies are also backing the changes. The widening use of patents on "business methods," such as ways to service mortgages or clear checks, has prompted the industry to focus on the patent issue, as has the industry's rapid embrace of the Internet and other high technology.

The financial-services industry is particularly vulnerable to "infringement suits and nuisance claims," says John Squires, Goldman's chief intellectual-property counsel. Mr. Squires, who is scheduled to testify today in the Senate, says the legislation is needed to "restore some balance and fairness to the litigation landscape."

But pharmaceutical companies like Eli Lilly & Co. and Pfizer Inc., along with manufacturers like Caterpillar Inc. and Dow Chemical Co., have been telling lawmakers the proposed measure goes too far. They say the legislation wouldn't only weaken the value of patents, but would make challenges to them too easy to launch -- and win.

"It's almost everything an infringer could ever want," says Phil Johnson, the chief patent attorney for health-care products maker Johnson & Johnson. He says the legislation being pushed by the leadership of the influential Senate and the House judiciary committees would make "very sweeping changes," and would be a "very substantial policy shift away from fostering innovation."

Mr. Johnson's complaints notwithstanding, it appears that Congress is poised to actually do something on patent reform this year. I'm not sure what the deal will be between the two major competing interests: IT and pharma. But the proverbial train is leaving the station -- thanks in large part to the Supreme Court. The Court has taken on a number of thorny patent issues. Time for Congress to take over.

Are personal services the next wave of offshoring? Even though you may think that personal services are locally rooted, there is a growing trend to offshore certain services, such as writing projects, graphic design and tutoring. According to the Wall Street Journal - Outsourcing Your Life:

Such "personal offshoring" is still new and represents a tiny fraction of the more than $20 billion overseas outsourcing industry. But management consultants and economists say it's likely to evolve into a larger niche as offshore workers identify the opportunities. Thanks to instant messaging, computer scanners and email attachments, any work that doesn't require meeting in person has the potential to be done overseas.

The approach relies on the same model that drives corporate outsourcing: labor arbitrage, or benefiting from the wage differential between U.S. workers and those in developing countries. In the U.S., tutoring services charge $40 to $60 an hour for math help. Some skilled tutors in India are paid $2 to $3 an hour.

The Journal article tested a number of services -- from simply databases (for a wedding guest list and mislabeled "Wedding Planning" in the article) to kitchen remodeling design. They liked most of the services - except for the kitchen design with required on-site measurements (which they labeled "inconvenient"). Having lived through at least two kitchens, I can tell you it is more than inconvenient to have to do your own measurements. Unless your house is new (and then why are you redoing the kitchen) and therefore perfectly standard in its dimensions, don't do it yourself. There will be some nuance of the space which an on-site designer is going to catch that you will miss.

The test of the landscape designer was a similar (but more positive) case:

Though it would have helped if our designer had seen the property in person, the plans proved to be a good starting point, for a very affordable price.

All in all, the article doesn't change my view of what can be offshored. Telecommunications are now good enough to be able to do math tutoring from a distance -- at least for many. However, those areas which need some sort of physical or site specific knowledge require on-site presence.

But how those on-site jobs translate into exports is still a mystery (see my previous posting).

OECD has a new study out on private equity and hedge funds: The Role Of Private Pools Of Capital In Corporate Governance. Their finding is that these types of investors are generally positive:

On the basis of available evidence, the Steering Group concluded that “activist” hedge funds and private equity firms could help strengthen corporate governance practices by increasing the number of investors that have the incentive to make active and informed use of their shareholder rights. This may include demands for changes in management, the composition of the board, dividend policies, company strategy, company capital structure and acquisition plans. Such active and informed ownership is expected to stimulate the search for the best possible use of corporate assets and thereby contribute to better risk and resource allocation in the economy as a whole.

To me, one of the most interesting findings concerned the long-term/short-term perspective:

It is sometimes suggested that activist strategies weaken corporations by directing resources away from long-term, value-creating strategies, which are the ultimate objective of good corporate governance. This point of view is associated with other propositions including a belief that the economic and corporate governance frameworks together foster short termism rather than patient, long-term investment by “real owners” that leads to improved economic performance. The period of engagement by activist investors of some 2-6 years is often taken as proof of the “short run” proposition.

The claim is closely related to a long running debate about the degree of market myopia and about whether and under what circumstances markets are likely to be strongly efficient (“perfect foresight”). Empirical work suggests that while markets are not necessarily perfect, longer term factors are valued even in markets characterised by short-run behaviour: equity valuations tend to reflect corporate investment activity and price/earnings ratios imply long term considerations of often around 15 years. Research and development (R&D) investments and related innovation strategies are also incorporated quite rapidly into market valuations. Even if investors as a whole might be myopic, the literature indicates that a small pool of active investors looking at long-run prospects are key to market performance even if the same investors will only invest in the company for a limited period. Hence, at least in cases where these market participants consider long-term prospects, reference to the investment horizon of an investor class does not say much about the efficiency of the market and long-run economic performance.

Available empirical research suggests that it is the lack of a credible long-term strategy that makes a company a target for active investors in the first place, especially when it has large cash reserves and is unable to communicate a credible investment strategy. It is not surprising that corporate strategies that have been developed to make companies less attractive to private equity firms and “activist hedge funds” typically highlight the need for the company to: (a) have an informed board; (b) communicate a viable long-term strategy to market participants; (c) review the capital structure; (d) establish a clear dividend policy, etc. That is to say, even in response to investors with a limited time horizon, companies are encouraged to make sure they meet standards that are commonly associated with good corporate governance.

So, a myopic focus on the short-term is what attracts the buyout and hedge funds – thinking that they can do better. Company CEO’s and Boards take note: the weakness of your long term vision makes you vulnerable.

Very interesting. But Warren Buffett already had that figured out.

Over at The Globalist, Brian Beary has posted a good summary of Why Ireland's Economic Boom Is No Miracle. The answer may disturb some of the anti-economic planning types:

The Celtic Tiger continues to roar — the product not of a laissez-faire culture but rather of a consensual, comprehensive, constantly updated plan to create conditions that allow the economy to flourish.

The article is only a synopsis view of the Irish "miracle." But it makes the important point: strategic economic development by national governments make a difference in the I-Cubed Economy. A lesson we should keep in mind here.

Every author (or aspiring author) knows about the slush pile -- that stack of unread book manuscripts. Most manuscripts end up in the pile because there is not enough time or energy to read everything. Publishers concentrate on known writers or agent referrals. Now, authors may have the chance to have their works read by a larger group, with an increased possibility of acceptance. According to a story in the Economist (Place your bets), a new online method of picking books has emerged:

Gut instinct plays too large a part in the publishing industry's decisions, says Mark Gompertz, vice-president of Touchstone, an imprint of Simon & Schuster, a publisher based in New York. So Touchstone is trying a new approach: a service concocted by Media Predict, a start-up based in New York. It uses the internet to obtain editorial feedback from a large number of volunteers in order to help executives decide which manuscripts should become books.

Media Predict hopes to do this using a virtual stockmarket for unpublished books, unsigned music acts and proposed television shows. It opened last week at mediapredict.com. Artists or their agents post samples of their work (a book chapter, say, or a television pilot). Traders armed with a free wad of virtual cash buy shares in the material they feel has the greatest potential. The idea is that as traders buy and sell shares in competing content, the cream will float to the top—where entertainment-industry bosses can skim it off. In September Touchstone plans to choose one or more of the top 50 book manuscripts on offer for publication.

Sounds like it might just work. On the other hand, are traders really going to be able to find that needle in the haystack or will they just go with the safe bets? After all, we know that attention is limited in real stock markets and Wall Street has its own herd mentality. Information overload continues to be a major factor in the I-Cubed Economy. These "wisdom of the crowd" mechanisms are useful in bringing more eyeballs to bear -- to collect and categorize information. But, as Nick Carr recently pointed out, they may not be as useful in developing new ideas and insight.

If publishing is about finding the next blockbuster, the stockmarket approach may work very well. But if finding and nurturing new talent is the goal, some other way of getting through that slush pile may be required.

According to an article in Advertising Age - Ditch the Flags; Kids Don't Care Where You Come From, national origin is becoming less important as a brand. The article cites a recent study by Anderson Analytics of college students:

"They don't care about country of origin because of the way their world has been defined," said Ted Morris, senior VP-global alliances at BrandIntel. "Being online transcends geography. ... Point of origin is becoming less relevant."

. . .

"For the most part, this next generation of educated American consumers either have no clue where the brands they use come from or simply assume everything comes from the United States, Japan or Germany," said Tom Anderson, managing partner.

For instance, only 4.4% of college students surveyed knew that Nokia is Finnish, while 53.6% guessed the brand was Japanese. Lego, LG, Samsung and Adidas faced similar problems, with fewer than 10% of students knowing the respective countries of origins as Denmark, Korea, Korea, and Germany, instead guessing, also respectively: U.S., U.S., Japan, and U.S. Not surprisingly, retail brand Ikea did well with this crowd -- likely because their stylish but cheap furniture is a college staple -- with 31.2% correctly guessing Sweden. But even then, another 23.6% thought the brand was from the U.S.

However, just because they didn't know or apparently care where something came from doesn't mean that national reputation isn't a factor:

Interestingly, though, the same kids had definite ideas about which countries produce the highest-quality goods overall: Japan was first at 81.8%, followed by the U.S. at 78.5%, Germany at 77.1%, Italy at 3.9% and the U.K. at 66.1%.

Linking to one's home base seems to work better for some products than for others. In the Anderson Analytics study, college students rated tech products like cellphones as roughly of the same quality, whether they knew the correct country of origin or not.

But that was not the case for luxury goods -- or, interestingly, for cars. Hermès scored 23% higher with students who correctly identified it as a French rather than a U.K. brand. Similarly, Lexus got 13% more low ratings from students who thought it was a U.S. brand than it did from those who knew it was Japanese.

So subconsciously, national brands still seem to matter in some cases.

But for other goods, the kids may be right. It is not just that they live online, disconnected from geography. They understand that the products they buy are themselves disconnected from geography. Adidas is German - but is it associated with high-precision German engineering or with American athletes? Does being from Denmark mean anything to the marketing of Lego? At least Ikea, who probably makes very little in Sweden, benefits from the mental association with "Swedish" design.

Country of origin may or may not be losing its importance. But, like any other brand, it relies on the substance behind it. And more and more, that production is less national than global. How soon before some ad agency picks up on this and starts running a “Made on Earth” campaign?

Nick Carr may have done it again. In 2003, he wrote an article (later expanded into a book) that set the IT world spinning -- "IT Doesn't Matter" -- where he argued that IT was no longer a company strategic advantage but was becoming a commodity.

Now he has a new article out -- The Ignorance of Crowds, questioning the hype over peer production systems (of which open source is a common example):

First, peer production works best with routine or narrowly defined tasks that can be pursued simultaneously by a big crowd of people. It is not well suited to a job that requires a lot of coordination among the participants. If members of a large, informal group had to coordinate their efforts closely, their work would quickly bog down in complexity. The crowd’s size and diversity would turn from a strength to a weakness, and the speed advantage would be lost. Second, because it requires so many “eyeballs,” open source works best when the labor is donated or partially subsidized. If Linus Torvalds had had to compensate all his “eyeballs,” he would have gone broke long ago.

Third, and most important, the open source model — when it works effectively — is not as egalitarian or democratic as it is often made out to be. Linux has been successful not just because so many people have been involved, but because the crowd’s work has been filtered through a central authority who holds supreme power as a synthesizer and decision maker. As the Linux project has grown, Torvalds has gathered a hierarchy of talented software programmers around him to help manage the crowd and its contributions. It’s not a stretch to say that the Linux bureaucracy forms a cathedral that coordinates the work of the bazaar and molds it into a unified product.

. . .

But for all its breadth and popularity, Wikipedia is a deeply flawed product. Individual articles are often poorly written and badly organized, and the encyclopedia as a whole is unbalanced, skewed toward popular culture and fads. It’s hardly elitist to point out that something’s wrong with an encyclopedia when its entry on the Flintstones is twice as long as its entry on Homer. Eric Raymond himself has become one of Wikipedia’s harshest critics. “The more you look at what some of the Wikipedia contributors have done, the better [Encyclopaedia] Britannica looks,” he told the New Yorker in 2006. If Wikipedia weren’t free, it is unlikely its readers would be so forgiving of its failings.

The Linux operating system, in contrast, is renowned for its high quality. It routinely runs for months on end without crashing. What explains the difference? Wikipedia’s problems seem to stem from the fact that the encyclopedia lacks the kind of strong central authority that exerts quality control over the work of the Linux crowd. The contributions of Wikipedia’s volunteers go directly into the product without passing through any editorial filter. The process is more democratic, but the quality of the product suffers.

. . .

The bottom line is that peer production has valuable but limited applications. It can be a powerful tool, but it is no panacea. It’s a great way to find and fix problems, to collect and categorize information, or to perform any other time-consuming task that can be sped up by having lots of people with diverse perspectives working in parallel. It can also have the important added benefit of engaging customers in your innovation process, which not only allows their insights to be harnessed but also may increase their loyalty to your company.

But if peer production is a good way to mine the raw material for innovation, it doesn’t seem well suited to shaping that material into a final product. That’s a task that is still best done in the closed quarters of a cathedral, where a relatively small and formally organized group of talented professionals can collaborate closely in perfecting the fit and finish of a product. Involving a crowd in this work won’t speed it up; it will just bring delays and confusion.

The open source model is also unlikely to produce the original ideas that inspire and guide the greatest innovation efforts. That remains the realm of the individual.

Whether you agree or disagree, you have to admit that Carr will once again get us thinking.

By the way, Carr has a new book coming out -- The Big Switch: Our New Digital Destiny:

A hundred years ago, businesses began dismantling their waterwheels, steam engines, and generators. After producing their own mechanical power for centuries, they suddenly had an alternative. They could plug into the newly built electric grid and get all the electricity they needed from central stations. The cheap power pumped out by electric utilities didn't just transform how businesses operate. It set off a chain reaction of economic, social, and cultural changes that brought the modern world into existence.

Today, a new technological revolution is under way, and it's following a similar course. Companies are beginning to dismantle their private computer systems and tap into rich services delivered over the Internet. This time, it’s computing that’s turning into a utility. The shift is already remaking the computer industry, bringing new competitors like Google and Salesforce.com to the fore and threatening stalwarts like Microsoft, SAP, and Dell. But the effects will reach much further. Cheap, utility-supplied computing will ultimately change society as profoundly as cheap electricity did.

Sounds like an interesting follow on to IT Doesn't Matter.