January 2009 Archives

Believe it or not, today's GDP numbers from BEA were not as bad as many feared. The decline of 3.8% fell short of the 5.5% to 6% decline some worried about. The decline is about what I expected, based on the coincident indicators (see earlier posting). However, the reasons for the smaller than expected numbers are not necessarily good. Imports declined faster than exports and inventories increased.

The other news was about prices. As the Wall Street Journal points out:

There was a sea-change in the inflation picture. The core price index (excluding food and energy) retreated to a 0.6% annual rate in the fourth quarter from 2.4% in the third, leaving the annual rate at a 2.2% gain.
But headline consumer inflation fell at a 5.5% annual rate, the biggest drop on record.

As will be said a millions times today, the GDP data underscores the need for action on the stimulus package. But the trade part of the equation also sends out a silent emergency signal -- hidden by the overall economic news. The GDP was not a bad as expected because we reversed our normal trade pattern of buying more than we sell. Once there is an economic recovery, it is likely that the old problem of the trade deficit will come back. That is why we need an economic package that is both simulative and transformative.

So, what is the biggest story in Washington right now? The economy, the stimulus package, foreign policy? No. Its ice. Specifically, it is about the President's comments on how schools in the Washington area (because it is Maryland and Virginia suburbs that are often the problem).

Here is a sample of the competing headline:
Obama pokes fun at D.C. area's reaction to snow
Icy Sidewalks Pose a Danger for Pedestrians.

The comments set off a minor flurry (pardon the pun) of activity. News camera's were out on the street documented the danger and asking for opinions. There are editorials and opeds. The blogs are having a field (not a snow) day.

While this sounds like much to do about nothing, it is a reminder of the world that Barack Obama now inhabits. Every remark, every action, every gesture will be scrutinized.

And by the way, I would take issue with the reasoning behind the President's remark. I was born in raised in Northern Michigan. Chicago was considered going south. The problem with Washington is that it doesn't get snow like I was used to up north. Washington gets freezing rain and ice. In fact, everyone who cleared off their sidewalks when it was still snowing simply created an NHL quality ice rink on the bare sidewalk. They say all politics is local; so is all weather.

Mr. President, you're not in Chicago anymore. Nor is your title "Senator." Welcome to the biggest of the big leagues.

And welcome to Washington.

(By the way both the President and First Lady made a trip this morning to their daughters' school -- possibly to make amends for second guessing the school's decision to close.)

PS -
As an email I got today shows, spring may be coming early to Northern Michigan: the deer are on the move.

SBA is not normally associated directly with local economic development -- although it is an important component -- because SBA programs are not geographically based. But, as a recent story in Business Week points out, the new head of SBA, Karen Mills, is very familiar with economic development:

Research Mills conducted for the Brookings Institution on economic business clusters in Maine, along with her personal lobbying efforts, helped convince the Maine legislature to pass a $50 million research and development bond to spur innovation by small businesses. "I have watched [Karen] operate in farms and factories and sawmills, with boat-builders and everywhere else with comfort and ease," says [Maine Governor John] Baldacci. "I have not seen her be anything but comfortable navigating the halls of Maine legislature." Mills was also chair of Baldacci's Council on Competitiveness & the Economy.

It will be interesting to see if she brings any new ideas on how to spur innovation to the SBA. One idea she could adopt almost immediately concerns SBA and intangibles. Our earlier report, Intangible Asset Monetization: The Promise and the Reality and paper, "Building a capital market for intangibles," we point out that SBA rules for using intangibles as collateral in the loan process are unclear. Therefore, Ms. Mills should require that SBA:
• review laws and regulations to ensure that SBA loans can be used for the acquisition of intangible assets, and that intangible assets can be used as collateral for such loans.
• work with its commercial lenders to develop standards for use of intangible assets as collateral, similar to existing SBA underwriting standards.

These two actions could potentially open up millions of dollars to intellectual-capital rich firms that could be used for further innovative activities. That would be a huge step forward in out innovation policy.

Here is an interesting story from Business Week - Employers Avoid Axing Oldies but Goodies:

Last fall, drugstore chain CVS Caremark (CVS) cut some 800 jobs in Northern California after acquiring Longs Drugs, a Walnut Creek (Calif.) pharmacy rival. Despite those cuts, the company continues to recruit baby boomers and other older workers to staff stores across the country. "We need their expertise," says Stephen Wing, director of workforce initiatives at CVS Caremark in Woonsocket, R.I. "When you're in your 50s and 60s, you're in your prime."

Companies nationwide are laying off workers by the tens of thousands. But many are trying to spare the post-55 set from the ax, a reversal of the top-down trends in past waves of layoffs. They're being driven by legal concerns--since boomers are in a protected age group--and by a need to keep experienced hands in place to keep the companies running and positioned for an upturn.

Have companies learned the "Circuit City" lesson? Let's hope so.

In an earlier posting, I noted that the index of leading indicators went up in December. Well, here is the story why this is not necessarily good news. From the Wall Street Journal Real Economics blog:

On Monday, the Conference Board released its index of leading indicators showing a surprise 0.3% increase. However, all of the benefit came from the increase in the money supply, and economists are questioning whether it should be used in the index at all.

The leading indicators index incorporates the data from 10 economic releases that traditionally have peaked or bottomed ahead of the business cycle. Some economists use it as a way to predict the direction the economy will take. But over the last few years, one of the key components -- the real M2 money supply -- may have been distorting the index.

The money supply measure at one time had a tight correlation with measures of growth, with M2 leading changes in the economy. Harm Bandholz of Unicredit says that in the past people put money into accounts measured in M2 in anticipation of higher spending. M2 measures demand deposits, traveler's checks, savings deposits, currency, money market accounts and small-denomination time deposits.

However, in the last 20 years or so that correlation has changed. "People have other places to put money when times are flush now," said Bandholz. "If you want to hold liquid assets, you don't have to hold it in M2-type accounts."

The Journal piece has a wonderful graph showing how there is actually a negative correlation now between M2 and economy activity.

So rather than being good news, the December M2 measure is yet another negative sign,

As the Church Lady used to say, "never mind."

Bruce Nussbaum makes a great point on his blog about what is happening or not happening in the economic policy debate, as exemplified by the discussions in Davos:

A "transformational crisis" is the term used in the opening session of the World Economic Forum by founder Klaus Schwab to describe the state of the global economy today. Institutions are not working, unemployment is soaring and we have to first manage the crisis, then manage a new world post-crisis.

Well, if we are in a transformation crisis then we need to have people who know how to transform in power to do so. Transformers (innovators, designers, design thinkers) are not running big sessions, talking on-stage about major policy changes or debating top politicians about how best to create new institutions to deal with our new economic circumstances. Many transformers are here but they relegated to small, minor sessions or lunches that will have little impact.

Most of this year's World Economic Forum's big, public sessions at the Conference Center will have old faces, many belonging to people who got us into this mess in the first place. Do I really want to hear a banker tell me about the financial mess?

Other old faces will be politicians who will be offering up old solutions--more regulation, more government spending, more of the same of prescriptions. Unfortunately, politicians are the ones picking up the mess from the private sector folks who lost it and they are doing it with the tools they know.

As he points out, we are in danger of the same dynamic happening in Washington. With the critics pushing the stimulus package more and more into the traditional box and away from transformational, we may be losing a big opportunity.

However, the Administration is still a newborn - so we will see how things continue to play out.

In his Washington Post business column today, Not What the Doctor Ordered, Steven Pearlstein raises concerns over the Pfizer-Wyeth. In the piece, he makes an important point about the drug industry:

Because the bulk of profits in the industry come from temporary monopolies -- government-granted patents -- the current marketplace is not where the important competition takes place. Rather, the real rivalry takes place "upstream," as companies compete to innovate, either by developing medicines in their labs or by buying up promising patents and biotech start-ups.

I agree, but wonder how this analysis would work. One of the growing key elements in the big pharma's innovation strategy is their form of "open innovation." As Pearlstein points out, they buy patents and start-ups. But, isn't the Pfizer-Wyeth deal a version of this? Pfizer needs new products and Wyeth has them.

If we are going to extend anti-trust analysis to the innovation side, doesn't that mean that we need to look at the issue of exclusive licenses - since that is the "anti-competitive" part of the equation?

FTC has done a fair amount of work recently on the nexus of patents and competition policy. That work should continue. But I'm not sure that would change the analysis of the Pfizer-Wyeth deal.

Much of Pearlstein's complaint in his column is about the generally anti-competitive stance of big pharma (using Ovation Pharmaceuticals as a poster child). His conclusions are of concern:

What we do know, however, is that because of the herd-like behavior of corporate titans and industry analysts, and the prodding of Wall Street's fee-grubbing investment bankers, the Pfizer-Wyeth deal will almost surely be followed by other mega-mergers. And we know that, in an industry with high barriers to new entrants, each of these mergers will result in one fewer company competing, or potentially competing, to develop new drugs.

I share that concern. But if the innovation is really coming from outside the system (patents and start-up), then I'm not sure innovation is the rallying cry. Seems to me the real problem with these mergers is the production and distribution end. And there, the market is pushed by the generics.

So I see this merger as less of a threat to innovation -- and more of a desperate strategy by an industry pushed at both ends.

Dan Castro and Rob Atkinson over at ITIF have published a new report "Stim-Novation": Investing in Research to Spur Innovation and Boost Jobs:

Scientific research underpins the great technological advances of the past century, from mapping the human genome to the development of the Internet. Increased investment in scientific research, even if the increase is for only one or two years, will lead to long term payoffs in the form of more modern research infrastructure and laboratories, additional discoveries and innovation, and increased U.S. competitiveness.

Moreover, including substantial support for research in the stimulus package will create and retain a sizeable number of jobs, in a wide array of occupations, such as scientists, engineers, technicians, construction workers, and workers making scientific equipment. Spurring an additional $20 billion investment in our national research infrastructure will create or retain approximately 402,000 American jobs for one year.

And so why are the critics claiming that this shouldn't be in the package?

One other follow on to the earlier posting on the Center for American Progress's report on innovation: their look at British Innovation Policy. This paper, by Will Straw at CAP, outlines the highlights, the problems and the evolution of the UK's innovation policy. The paper touches upon an number of UK reports, most notably the UK Department for Innovation, Universities and Skills' (DIUS) Innovation Nation.

By the way, the first DUIS Annual Innovation Report has just been released as well.

I have always thought that the UK has valuable lessons for the US. In an earlier paper, UK leads; US lags, I talked about UK's focus on design as a competitive advantage. One of Straw's lessons for the US is, for me, especially interesting:

The final area where Britain provides lessons for the United States is at the cutting edge of innovation policy. U.S. policymakers should watch closely as the policies outlined in Innovation Nation are rolled out, including the innovation index. With a tight fiscal situation in the United States, and arguably more pressing social concerns, scarce resources will need to be spent wisely. This therefore provokes the question of what provides the biggest bang for a government buck.

It can be argued that the United States already has incentives in place to encourage applied research and that commercializing basic research has not been the same problem that it has been in Britain. New information on the make up of innovation within society could therefore help a new administration decide whether to continue to focus its innovation policies on science and technology or whether there are opportunities and, indeed, a comparative advantage in the service businesses that make up 80 percent of the U.S. economy.

I'm not sure that it is necessarily an either/or. But I strongly agree that we need an innovation policy that does more than focus on science and technology. Looking at what the UK is doing can help us broaden our own view.

As the stimulus package works its way through the Congressional process, more attention is being paid to the technology part of it -- both pro and con. Critics question whether increased broadband and construction of research facilities is truly stimulative. Proponents argue for the importance of the transformational investments.

Galen Gruman at InfoWorld offers a different take on the the agenda - A high-tech agenda for President Obama:

In economics and foreign policy, there are competing schools of thoughts that marshal think tanks, academics, activists, and business leaders to argue over and propose policy. The high-tech industry does not do this except in a very simplistic way. That fact is the biggest danger Obama faces in formulating and executing a high-tech agenda.

The tech industry is largely a libertarian one, which encourages creativity and respects differences among people but is perfectly happy with abusive monopolies, socio-economic imbalance, and profiteering. Its worst impulses are borne of meritocracy gone awry: The smartest succeed, and everyone else accepts what the meritocracy decides. Politically, this has kept Silicon Valley, Route 128, and other high-tech centers focused on keeping government out of the way so they can pursue economic and technology domination unfettered. Companies like Apple, AT&T, Comcast, Oracle, Microsoft, Sun, and Verizon are genuinely puzzled when people object to using their success in technology areas to lock out competitors and lock in customers to an ever-widening area of their own products. In the extreme version of this worldview, government is bad and/or incompetent, and customers are cattle.

But the high-tech industry also has a neo-socialist component, which distrusts both government and business. The positive aspect of this ideology engendered the open source movement and provided some balance to the techno-meritocracy in areas such as privacy and information access. But its extreme also promotes dubious ideas such as making software and Internet access free for all that are simply unworkable in the real world.

Both ideologies take for granted that technology is good, and if left unfettered goodness will prevail. There's an extreme naiveté that makes the high-tech industry as a whole one unequipped to lead efforts for the greater national good. Certainly there are individuals quite capable of that leadership, but the Obama administration should be very cautious in letting the high-tech industry as a whole try to set any agenda.

Instead, start with the policy agenda -- what is good for the nation and people as a whole -- and put the high-tech industry in the position of having to deliver on that policy agenda. It will do better executing than leading. With that in mind, my recommended tech agenda starts with policy proposals, not with technologies per se.

He then goes on to talk about a number of the hot button IT issues: broadband, outsourcing, medical records, privacy and national identity system, e-government, and research priorities.

An interesting analysis. I especially agree with the notion of starting with problems and goals and then turning to IT as a means of solution.

I would argue, however, that he falls into the same trap as he argues against -- starting with the technology. The agenda he talks about is not a "technology" agenda, nor an "innovation" agenda. It is an "information technology" agenda. The agenda he proposes is a good starting point. But it needs to be greatly expanded to include all of innovation policy.

In an earlier posting I noted the need for the stimulus package to be transformative rather than simply boost consumption in an attempt to re-inflate the bubble.

Now, Jonathan Ortmans, President of The Public Forum Institute writing in at the Kaufman Foundation's blog on entrepreneurship makes the case that the package boost entrepreneurship:

The bill under discussion is relevant to entrepreneurship in so many ways from taxes to boosting science and technology, and education.
. . .
The proposed legislation also includes areas in which entrepreneurs can actually help more than we frequently realize. Entrepreneurs not only preserve and create jobs, but can also help America overcome its challenges through entrepreneurial innovation. We need to be smarter than ever to test the formula of the dog food before investing scarce dollars in it. Entrepreneurs understand this iterative process and know how to mitigate risk. They know how to create and innovate with little or no resources.

Sounds transformative to me.

A slight piece of good news this morning. The Conference Boards' Leading Indicator Index -- designed to forecast future economic activity -- rose in December for the first time in a number of months. This is somewhat of a surprise. The not-surprising news is that the Coincident Indicator Index -- which measures current activity -- declined in December. The bad news about that decline is the size. Over the past six months, the coincident index has declined at an annual rate of 4.3%.

On Friday, the BEA will release its advance estimate of 4th quarter 2008 GDP. The 3rd quarter GDP drop was only 0.3%. Based on what the coincident index shows, we can expect a very large GDP decline to be announced Friday. That should light a fire under those in Congress who are pushing the stop button on the stimulus package.

Joff Wild at the IAM Magazine blog passes along this important tidbit:

Comments have been invited on two draft documents with a view to making the valuation of intangibles more transparent and consistent. Issued by the International Valuation Standards Council, Revised Guidance Note no 4, entitled Valuation of Intangible Assets, identifies and defines the principal approaches and methods used in intangible asset valuation, with the objective of reducing the diversity of terminology, and making valuation reports more comprehensible to users worldwide. The new Guidance Note no 16, Valuation of Intangible Assets for IFRS Reporting Purposes, draws the attention of valuers, and those commissioning valuations for use in financial statements, to the principal accounting requirements of the International Financial Reporting Standards (IFRS) under which the valuations are prepared and provides guidance on the appropriate valuation response.

If these Guidance Notes can move us closer toward a standardized valuation methodology, then we will have taken a very important step to regularizing the use of intangible in the financial system.

Comments are due by April 30.

After a week of Inauguration activities, houseguests and software upgrades - the Intangible Economy is back to blogging.

It has been an exciting week in Washington - with more surely to come on the policy and political front. An indication of how exciting is already evident in the debate over the stimulus package. President Obama wasn't even in the White House before the naysayers descended to criticize the package. It would be easy to dismiss much of this criticism as politically motivated, as much is coming from the Republican side of the aisle. That, however, would be simplistic. The real resistance seems to be based on an orthodox vision of economic policy. Take for example the tax cut versus spending debate. As I've noted before, some politicians and pundits are rushing toward tax cuts as a more effective stimulus -- at the same time as economists are questioning that assumption. And it is not just the right who are using this line -- today's Washington Post editorial "Priming the Pump" repeats the questionable line that tax cuts are better.

More telling is the debate over the vision of the stimulus - again highlighted by the Post editorial. In that piece the Editorial Board argues that "Much of the stimulus bill does not really claim to deliver a short-term boost to the economy." They then go on to criticize a number of spending items, such as Pell grants, the smart-grid electricity proposals and money for scientific infrastructures. They, unfortunately, get it wrong on two counts. The first is whether these programs provide a short term boost. They do. Building a new research lab has a simulative effect on the construction industry, for example. Providing grants to help people stay in college has as much a stimulus effect as paying them to be in the unemployment line.

Second is their assumption that the stimulus package should focus only on short-term stimulus - to the exclusion of other goals. This is what I call the stimulus versus downpayment debate. Over the course of the past few months, President Obama made clear that his vision for the package was stimulus as a downpayment on new priorities. The critics are arguing that stimulus should only be for stimulus.

Such a view is not only short sighted, but wrong. It is rooted in a vision of the status quo: that our goal is simply to return to the economic pattern of the pre-financial crisis. If we have learned anything, we should have learned that the "good old days" were not. They were artificial and unsustainable and they were fundamentally flawed. The bubble economy did little to strengthen the US's underlying economic competitiveness (witness the rise in the trade deficit and the financial indebtedness) and did little to help the prosperity of US citizens (witness the stagnation of incomes for most Americans).

To argue, as is implicit in the view of the critics, for a package that returns to the status quo ex ante is ludicrous. New priorities are not only a good idea - they are absolutely necessary if we are going to get out of this mess. That is why President Obama was elected and that is what the American people want to see happen - the prophets of the old way of thinking not withstanding.

According to an AP story on WSJ.com, Circuit City has "reached an agreement with liquidators on Friday to sell the merchandise in its 567 U.S. stores after failing to line up a buyer or a refinancing deal." As I noted before, Circuit City made a colossal blunder when it fired its most experience employees - a sign that it did not understand and did not care about its key intangible asset. That action is not the sole reason for the company’s utter failure. But it ranks up there as a major contributing factor.

Let us hope that others have learned a lesson.

As I mentioned in Wednesday's posting, the Center for American Progress held an event on Monday on Spurring Innovation to Lift the Economy (also see the video of the roundtable panel discussion). Like the patent reform discussion described on Weds, the innovation panel was an expansion of a series of articles on Regional Centers of Innovation in the Centers' new publication Science Progress.

The discussion highlighted a number of points in both the national innovation system and local economic development. MaryAnn Feldman discussed the importance of place (a theme she also discussed at an Athena Alliance event in 2004 - see Constructing Jurisdictional Advantage). Rob Atkinson discussed the need for a National Innovation Foundation (see earlier posting). Richard Seline described a way of centering innovation policy around Grand Challenges -- an idea I find intriguing as moves away from technology-specific innovation to problem-oriented innovation, which could be technological, social or organizational (see earlier posting on the FT Climate Challenge Competition).

A couple of points jumped out at me during the discussion. For example, Richard mentioned the generational change in university researchers - where the younger generation is much more interested in commercialization of ideas than the older generation.

The major new idea for me came in Tom Kalil's response to the papers. Tom formerly served in the Clinton White House as a technology policy aide -- so he knows the area very well. For the past decade, he has been with the University of California system, in the Chancellor’s office. Specifically, I was intrigued with his discussion of collaborative and open innovation. For example, UC Berkeley has a program to identify and help foster new ideas from their students -- see Big Ideas @ Berkeley Marketplace. The site matches student project with donors who can make the project work.

What struck was how far behind Washington policymaking was. I know I have sounded that theme repeatedly. But here was a case in point staring me in face. While we have all be throwing in policy pieces to the transition and advocating big technology policy ideas, we have really failed to confront the shift in innovation activities occurring out in the field. Big Ideas is an example of the type of activity we need to understand and support.

As a side note, this shift to more collaborative activity is something we at Athena Alliance have tried to get our hands around in our paper on Virtual Worlds. But Tom's remarks simply pointed out to me how much more we need to do.

The latest issue of BEA's Survey of Current Business contains an article Toward Better Measurement of Innovation and Intangibles:

While all countries account for investment in tangible assets in their gross domestic product (GDP) statistics, no country currently includes a comprehensive estimate of business investment in intangible assets in their official accounts. Most economists agree, however, that intangible assets—which represent an important input into the innovative process—are critical components of the modern economy. In the United States, some have suggested that investment in intangible assets now roughly equals investment in tangible assets.

Understanding the role of intangible assets—and thus the role of innovative activity in general—is critical to understanding the modern economy. This article updates the ongoing efforts at the Bureau of Economic Analysis (BEA) to better measure investment in various
intangible assets.

The article gives an overview of the role of innovation in economic growth:

Summing up, the innovation process leads to the creation of economically useful knowledge that exists separately from either people or tangibles, such as equipment or structures. This economically useful knowledge is an intangible that is an output of a productive process as well as an input into the creation of new output. By identifying measures of this knowledge, measuring them using national accounting, and incorporating them into a growth-accounting framework, one can begin to develop a comprehensive set of statistics to better understand innovation as a driver of economic growth.

BEA is already moving ahead to incorporate R&D as an investment in the GDP accounts by 2013 (see earlier posting). Investments in motion picture and sound recordings will also be incorporated into the GDP accounts. The research behind this article lays the groundwork for further incorporation of intangible investments in the GDP in the future.

The House Democrats have released the outline of their American Reinvestment proposal. There is a lot in there, including a number of items to stimulate innovation, such as increased funds for the Technology Innovation Program and the Manufacturing Extension Program, money for R&D facilities and equipment, education, training, investments in new IT project for government, and funds for energy technologies and health care information technologies.

While it is a big bill - $825 billion -- it is very much a targeted stimulus plan. Not a lot of new initiatives or breakthrough new policies. So, keep in mind, once it is passed, the work of evaluating and crafting new policies will begin.

A few quick tidbits from the patent wars:

First, on Monday, the Center for America Progress had an event which included a panel on patent reform (see second panel of the event video Enabling Economic Recovery Through Innovation -- more on the first panel on innovation later). The panel was an expansion of a series of articles on Patent Reform 101 in the Centers' new publication Science Progress. Worth reading the papers and listening to the video to get a good idea of where patent reform may be going in the new Congress and Administration.

Second, today's Wall Street Journal has an interesting take on the latest patenting data - Two Patent Paths for Tech Giants:

A report being released Wednesday shows that when it comes to intellectual property, two of the world's largest technology companies are on diverging paths.

In 2008, International Business Machines Corp. generated more U.S. patents than any other company, according to data from the U.S. Patent and Trademark Office compiled by research firm IFI Patent Intelligence. IBM was granted 4,186 patents last year, IFI said, up from 3,125 in 2007. It was the 16th consecutive year that IBM led the patent pack.

Hewlett-Packard Co., in contrast, produced 1,424 patents last year, down from 1,466 in 2007. That put H-P, which continues a strategy of limiting its patent activity, tenth on the 2008 list after finishing ninth in 2007.

H-P was once trying to compete with IBM as the most prolific patent producer. In 2005, for instance, H-P was the third-biggest producer of patents behind IBM's number one spot. But after Chief Executive Mark Hurd arrived at H-P in 2005, the Palo Alto, Calif., company spent less time and money filing new patents as the CEO strove to make the H-P more efficient, said Kevin Light, a deputy general counsel and vice president for intellectual property at H-P.

H-P has been focusing on "the quality of the patents that we seek, as opposed to the quantity," Mr. Light said. As a result, he added, H-P is seeking broad patents that relate directly to its main businesses, avoiding the costs of filing patents that may relate to more specific processes.

H-P's current strategy is a departure from the approach under former CEO Carly Fiorina, who tried to boost the company's profile as an innovator, said Rich Doherty, an analyst the The Envisioneering Group who follows patent filings. Mr. Hurd, in contrast, seems more focused on shorter-term financial results, he said. He also said H-P seems to be keeping secret certain innovations, especially in its services division, rather than filing patents. "They've turned the ratio of public patents to private proprietary advantage," he said.

In part, this divergence in strategies may have to do with how the two companies view their patent portfolio. IBM has an aggressive licensing strategy to monetize their patents (which, interestingly includes moving certain patents into the commons/open source). They see patents as a revenue generator. HP may be looking more to a patents-as-protection strategy. Just a guess.

Third, on the subject of monetization of patents, there is this story on Cash-Strapped Technology Small-Caps Hold Patent Sales: "Small-cap technology companies from Silicon Valley to Israel, struggling to raise enough money to survive amid the credit crisis, are selling prized patents to stay in business."

In some cases, this is a forced monetization -- needing the cash and not being able to raise it through the credit markets. But, as the story points out, this method of raising funds is not necessarily bad:

“They can essentially raise cash without diluting existing investors,” said Andrew Ramer, managing director of the transaction practice at Ocean Tomo LLC, a Chicago-based merchant bank that auctions intellectual property collections for smaller businesses and individuals. “Selling their patents and keeping a license back allows companies to have their cake and eat it, too.”

That strategy will, I believe, only grow in the future due to the combination of continued closed credit markets, greater awareness of the benefits of the strategy and lower transaction costs as such activities become more commonplace.

Here is an interesting headline for the Wall Street Journal - Pfizer Plans to Lay Off Up to 800 Researchers:

Pfizer Inc. will lay off as many as 800 researchers Tuesday in a tacit admission that its laboratories have failed to live up to the tens of billions of dollars it has poured into them in recent years.

. . .

For years, big drug makers considered their R&D operations sacrosanct and focused their cutbacks on other departments, such as sales and manufacturing. But that is changing as industry executives conclude that in-house research isn't yielding enough drugs to justify its high costs.

Now, pharmaceutical companies think they can trim their research costs while still bringing the same, if not more, new drugs to market, either by buying the rights to promising molecules from smaller biotechnology companies or by purchasing those companies outright.

"R&D is still the heart and soul of a pharmaceutical company, but it doesn't always have to express itself as a company's own R&D, and that's what I'm seeing more and more," says David Canter, who headed Pfizer's Michigan labs until they shut down last year.

Sounds like big pharma is embracing the open innovation model.

Martin Wolf's column last week (Choices made in 2009 will shape the globe’s destiny) outlines the coming challenge:

Welcome to 2009. This is a year in which the fate of the world economy will be determined, maybe for generations. Some entertain hopes that we can restore the globally unbalanced economic growth of the middle years of this decade. They are wrong. Our choice is only over what will replace it. It is between a better balanced world economy and disintegration. That choice cannot be postponed. It must be made this year.

We are in the grip of the most significant global financial crisis for seven decades. As a result, the world has run out of creditworthy, large-scale, willing private borrowers. The alternative of relying on vast US fiscal deficits and expansion of central bank credit is a temporary – albeit necessary – expedient. But it will not deliver a durable return to growth. Fundamental changes are needed.

In his discussion of global finance, he gets to the core problem:

The US and a number of other chronic deficit countries have, at present, structurally deficient capacity to produce tradable goods and services.

As long as our inability to earn enough to pay for purchases exists, the financial problems will simply get worst. Wolf rightly points out that the US can't redress the imbalance alone. The surplus countries need to help, he says. This appears to be a thinly veiled call for China (and others) to stimulate domestic demand and stop attempting to revive their own economies through exports: "The US and a few other advanced countries can no longer absorb the world’s surpluses of savings and goods."

But the US has done its share in creating this mess. And I don't mean the simple (and often simplistic) point about "living beyond our meas." The problem is not just the "living" part, but the "means." We have let our "means" deteriorate. Let me repeat what Wolf has said, the US has a "structurally deficient capacity to produce tradable goods and services." Until and unless we address that structural deficiency, the problems will persist.

Rectifying the deficiency will not be easy. It will mean dramatically improving our manufacturing base and overall economic competitiveness. In that task, we should be was of easy solutions. For example, green will not, in and of itself, change the situation. President-elect Obama has said, "we will put Americans to work in new jobs that pay well and can’t be outsourced – jobs building solar panels and wind turbines; constructing fuel-efficient cars and buildings; and developing the new energy technologies . . " That is only partially correct. Some of those green jobs, such as retrofitting buildings, can't be outsourced. But, on the other hand, those jobs don't contribute to our task of creating tradable goods and services.

In addition, there is no inherent reason why the US should have a monopoly on building solar panels and wind turbines (as opposed to installing them) or making fuel-efficient cars or developing other green technologies. Other nations are already in that business - such as Germany's well established wind turbine industry, and Korea, China and Japan's battery industries. Others are getting into the green business well -- even the oil-rich Gulf nations, as a New York times story points out.

We are in a competitive race for green -- just as we have been in that race for other manufacturing and technology areas. We need policies that help make the US internationally competitive in manufacturing and technology, period. Doing so will help green -- but will also help other sectors as well -- including new areas that we don't even know about yet.

Some think that the new I-Cubed Economy is solely about services -- that manufacturing doesn't have a place. They dismiss it as old economy - 20th Century economy. They are dead wrong. Making thinks is core -- but in this new era, it involves all three elements: information, innovation and intangibles. Just as agriculture remained an important element of the US industrial economy, so to will manufacturing remain a key element in the US I-Cubed Economy.

The sooner we realize that, the sooner we can put in place policies to overcome our core problem. Otherwise, we will, as Wolf reminds up, face economic disintegration.

The November trade date reported this morning by BEA showed a dramatic decline in the deficit: down $16.3 billion to $40.4 billion. Exports dropped by $8.7 billion (to $151.5 billion) while imports plummeted by $25.0 billion (to $208.2 billion). In normal times, such a decline in the deficit would be seen as good news. But the dramatic decline in imports highlights depth of the decline in US demand.

The other bad news is that trade in intangibles went the other way: our surplus shrunk by almost 2% in November. The intangibles surplus declined by $257 million to $12.7 billion. Receipts of royalties (exports) increased. But that was not enough to offset a $423 million decline in exports of business services. Royalty payments (imports) and imports of business services also decline. The fall off of business service exports is especially worrisome, as many believe this is one of the areas of US competitive advantage.

Our deficit in Advanced Technology Products trade returned to a more normal level of $4.58 billion, after a couple of bad months nearing the $8 billion mark. The improved numbers were due to a drop off in imports, however, rather than an increase in exports. Once again, this highlights the decline in US demand. 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.

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.

Following up to my earlier posting on the involuntary underemployed, our friends over at Calculated Risk have put together this chart of part time workers.

Dueling columns in today's New York Times underscore the most important challenge facing President-elect Obama -- expectations.

From David Brooks: too much. The Confidence Surplus:

The problem is overload. Four months ago, no one knew how to put together a stimulus package. Now Obama wants to use it to rush through instant special-ed programs and pre-Ks. Repairing the power grid means clearing complex regulatory hurdles. How is he going to do that in time to employ workers in May?
His staff will be searching for the White House restrooms, and they will have to make billion-dollar decisions by the hour. He is asking Congress to behave and submit in a way it never has. He has picked policies that are phenomenally hard to implement, let alone in weeks. The conventional advice for presidents is: focus your energies on a few big things. Obama just blew the doors off that one.
Maybe Obama can pull this off, but I have my worries. By this time next year, he’ll either be a great president or a broken one.

From Paul Krugman: not enough. The Obama Gap:

But Mr. Obama’s prescription doesn’t live up to his diagnosis. The economic plan he’s offering isn’t as strong as his language about the economic threat. In fact, it falls well short of what’s needed.

What is that old political saying, "if both sides are unhappy then you must be doing something right."

The intangible of leadership is at the forefront right now. I for one want to believe that both Mr. Obama -- and we, the American people -- are up to the challenge.

The huge jump in unemployment to 7.2% in December (as reported this morning by BLS) simply underscores what President-elect Obama said yesterday: we are in deep economic trouble.

The hidden part of the crisis is even worse. In December, the involuntary underemployed (employed part-time because of economic conditions) jumped increased by about 700,000. In the past year, the number of involuntary underemployed has almost doubled -- from 4.75 million to 8.25 million. As the Wall Street Journal reports:

By some broader measures, labor-market conditions are even worse than the main numbers suggest. When marginally attached and involuntary part-time workers are included, the rate of unemployed or underemployed workers reached 13.5% last month, up almost six percentage points from a year earlier.

And that does not even count those workers with reduced pay. In some ways, reduced pay might be a preferred alternative. It is often referred to as "sharing the pain." For a good discussion of this, see Steven Pearlstein's column a couple of weeks ago - Universal Pay Cuts May Lighten Recession - washingtonpost.com.

However, while such pay cuts may avoid layoffs, there are still macroeconomic consequences. Just as with reduced hours, reduced pay cuts income -- which cuts spending. There is a similar (although some would argue smaller) decline in aggregate demand. (One could argue the decrease in aggregate demand is the same. A company needs to trim $1 million in payroll. Whether the million is cut through laying off X number of workers or cutting the pay or hours of X plus Y workers, the macro economic effect is the same. Others would say that the shock and uncertainty of unemployment - as opposed to lower pay - tends to cause a person to cut back spending even more.)

I have previous argued that one solution to this problem is a reduction in or a " tax holiday" on payroll taxes [update - to be clear, the proposal is for an income tax credit to offset payroll taxes - so that money still flows to the trust funds]. With a cut in the amount of withholding for payroll taxes, all workers, including part time, would get an immediate boost. I understand that the Chairman of the Senate Budget Committee, Kent Conrad, has criticized this proposal. I greatly respect Senator Conrad -- he has one of the toughest jobs in town. But I would urge him to reconsider. [Update: I've talked to Senator Conrad's office about this. The Senator feel that the small amount of stimulus is not worth the expense. He would rather spend the funds on investment. I agree on the investment - but still would like to see if there is a more targeted way of replacing the lost income of the newly involuntary underemployed.]

The second piece of the stimulus package I would advocate for is the knowledge creation tax credit - specifically a tax credit for worker training. That credit should cover not only the cost of direct cost of the training but also the wages paid to the worker while they are undergoing the training. To repeat what I have said before, such a knowledge tax credit helps in a number of ways:
1) it addresses the macro economic stimulus of boosting individual spending;
2) it targets directly the problem of the involuntary underemployed (those who are part time for economic reasons), which is the hidden factor in the current slowdown;
3) it makes companies (and the economy) more competitive; and,
4) it facilitates the transition to the I-Cubed Economy.

The training tax credit would help both the unemployed and the underemployed. If companies are going to either cut back a worker's hours or lay the person off completely, wouldn't it be better to send them to the classroom instead?

Yesterday, outgoing Treasury Secretary Paulson gave a speech about Fannie Mae and Freddie Mac. His speech took direct aim at the issue of the business model of the GSE's (government sponsored enterprises):

The inherent conflict in this structure is obvious – the GSEs served both a public mission and private shareholders – they received public support but operated for private shareholder gain.
. . .
Government support needs to be either explicit or non-existent, and structured to resolve the conflict between public and private purposes. Any middle ground is a recipe for another crisis.

Yet, that middle ground has become more and more occupied over the past couple of decades as the concept of public-private partnerships has grown. According to the National Council for Public Private Partnerships:

A Public-Private Partnership is a contractual agreement between a public agency (federal, state or local) and a private sector entity. Through this agreement, the skills and assets of each sector (public and private) are shared in delivering a service or facility for the use of the general public. In addition to the sharing of resources, each party shares in the risks and rewards potential in the delivery of the service and/or facility.

Key to a successful public-private partnership is carefully defined goals, roles and responsibilities and active participation by both public and private sector participants. The overriding point is the alignment of public and private goals.

As noted above, the term public-private partnership is usually associated with the delivery of public services by a private sector entity (seen as a form of privatization). But the concept is much broader. Some view the Federal Reserve as a good example of a successful public-private partnership. (Remember, the Federal Reserve Banks are member-oriented. The Federal Reserve System: Purposes & Functions notes, "The Reserve Banks are the operating arms of the central banking system, and they combine both public and private elements in their makeup and organization.")

In the area of technology policy, public-private partnerships have a long standing role as a successful means of developing and deploying new technologies. (A Google search of "public private partnerships" and "technology" returns about 770,000 items).

So there is a lot to learn from a variety of government and private sector experiences as we look to refine the model of the GSE's. The GSE model was developed almost a hundred years ago with the Federal Farm Credit Banks in 1916. Much has happened since then.

By the way, Paulson called for the continuation of Fannie and Freddie's activities, but under a regulated utility model: privately owned but with a rate setting commission. I'm not sure that solves the structural problem. Rather it sets up a permanent conflict between the public and private goals. My choice would be to make them government agencies. If we feel that subsidies to the mortgage housing market are still needed, then let's make those subsidies straightforward and clear.

Just my 2 cents on that point.

At the recent American Economic Association annual meeting, economist confronted the stimulus package. According to a story in today's New York Times - More Economists Warm to Government Spending:

Nearly every economist who spoke here agreed that a dollar invested in, say, a new transit system or in bridge repair is spent and respent more efficiently than a dollar that comes to a household in a tax cut.

Yet, the Obama stimulus package is going to devote 40% of the stimulus to tax cuts. The buzz circulating around Washington is that this is being done in part to get the GOP on board. Whether that works or not remains to be seen. As the Washington Post reports:

Rank-and-file Republicans questioned the details of the stimulus plan, large portions of which were negotiated over the holiday break by Obama advisers and Democratic staff members, and suggested that could set the stage for how the Obama agenda takes shape over the next two years.
"Somebody needs to slow this train down," said Sen. Jeff Sessions (R-Ala.), warning Republicans that they should not accept "small, temporary tax cuts" -- which Obama advisers have pegged at $300 billion -- "in exchange for massive federal spending."

I'm not going to opine on whether or not tax cuts should be part of the stimulus package. But I do find it interesting to see the phenomena of politicians running to embrace tax cuts as a fiscal stimulus when economics economists are moving away from it. A clear indication of the tendency to "fight the last war."

The same type of thinking pervades too much of policy making in the I-Cubed Economy. Much of our competitiveness policy is a rehash of the 1980s, attempting to simply restore what was gutted over the last decade. Our "innovation" policy is still rooting in the post-WWII thinking of the linear model of technology development: R&D in; gadgets out.

As Keynes warned, “The difficulty lies not so much in developing new ideas as in escaping from old ones.”

As noted in an earlier posting, the financial emergency legislation (notice I am trying very hard not to use the words "bailout') passed by Congress late last year required the SEC to report back on its mark-to-market account rules. Last Tuesday (right before the New Year's Eve shut down), the SEC delivered its report. Contrary to what some may have wanted, the report does not call for a suspension of mark-to-market (also know as fair value accounting). The report goes on to state, "Fair value and mark-to-market accounting has been in place for years and abruptly removing it would erode investor confidence in financial statements." Instead, the report calls for a number of specific improvements to how mark-to-market rules and calculations operate.

It also clear does not put the blame for the problem on these accounting rules. The report gives a succinct statement of the cause:

Rather than a crisis precipitated by fair value accounting, the crisis was a “run on the bank” at certain institutions, manifesting itself in counterparties reducing or eliminating the various credit and other risk exposures they had to each firm. This was, in part, the result of the massive de-leveraging of balance sheets by market participants and reduced appetite for risk as margin calls increased, putting enormous pressure on asset prices and creating a “self-reinforcing downward spiral of higher haircuts, forced sales, lower prices, higher volatility, and still lower prices.” The trust and confidence that counterparties require in one another in order to lend, trade, or engage in similar risk-based transactions evaporated to varying degrees for each firm very quickly. What would have been more than sufficient in previous stressful periods was insufficient in more extreme times.

The SEC report will probably be attacked by those who are convinced that mark-to-market is evil. The report, however, appears to me to be a thoughtful analysis with useful recommendations which Congress, the SEC and FASB should weigh carefully. Whether that rational approach is followed or the political approach (similar to what happened in the EU) remains to be seen.

John Plender has a fascinating defense of financial innovation in yesterday's Financial Times - Originative sin: the future of banking. The discussion is a wonderful tour of the subject, including a sidebar on the role of financial innovation in the rise of the Genoese bankers, who developed the equivalent of interest rate swaps in their lending to the Spanish government. The heart of the argument is as follows:

The financial system does many things. Among others, it provides a means of payment and exchange; it transfers the spare cash of savers to those with investment opportunities; it allows assets to be traded; and it provides insurance, whether in conventional contracts or in such instruments as swaps, options and other derivatives.

In all these areas, innovation has provided tangible benefits. Computerisation has improved the payments system, while technology such as automated teller machines has been a huge convenience to retail bank customers. The internet is transforming the availability of financial information and is lowering transaction costs in broking. Like many other innovations in retail finance, these advances do not involve the creation of debt.

Even in those areas that do, the outcome can still be beneficial. The development of the swaps market, for example, led to the new disciplines of treasury and risk management whereby the banks’ ability to swap fixed for floating interest rates and vice versa allowed them to insure against rate volatility. Currency swaps fulfilled a similar function. With the huge increase in market volatility stemming from deregulation and the abandoning of fixed exchange rates in the 1970s, this ability to hedge was a boon to banks. At the same time, computerised trading increased the efficiency of markets.

More often than not, innovation is satisfying genuine demands. Where the curse comes in is that many innovations are double-edged. Plastic cards, in so many ways a benefit to bank customers, may lead to over-­indebtedness, a growing social problem. Derivatives can be used to punt as well as to hedge. Credit default swaps were developed as insurance to protect investors against a failure to honour loans or bonds. Then came the collapse of Lehman Brothers, which revealed the extent to which people had underestimated the risk of their counterparties defaulting.

Thus, the need to look at innovations carefully. As they used to say in technology assessment, technology is neither good nor bad, nor is it neutral. Substituting the word "innovation" would be completely appropriate. Innovation -- by its very definition -- is not neutral because it changes things. When things change, both good and bad can happen. The trick is to facilitate the good and mitigate the bad -- and, because it all depends on where you stand, it might be hard to tell the difference between the two.

Minor case in point, I would take some exception to Plender's concluding argument that most financial innovation stems from regulatory arbitrage -- the desire to get around government regulations. He points to the 1970's and 1980's experience with the imposition and then removal of Regulation Q interest rate caps. I have a slightly different set of lessons from that experience. He points to how Regulation Q created a wave of regulatory arbitrage. I would point to how the imposition and then removal of Regulation Q led to a wave on unintended consequences -- including the S&L crisis -- because of the lack of a systemic view. One action creating problems and issues, the solution of which created other problems, and so forth in a cascading manner. The result was a completely different regulatory environment by happenstance, not design.

That is a lesson that I fear we appeared to have forgotten in our current crisis.

Over the past couple of years, I have posted a number of items on medical tourism. This is the practice of traveling to usually foreign locations for less expensive medical treatment. Travel to India for routine surgery (such as hip replacements) is a common example. The reason I have highlighted this trend is to illustrate the intangibles trade flows in the I-Cubed Economy. Goods and services need not travel -- people can go to where the good is made or the service is performed.

It also highlights the international competition in what many assume is a locally based industry: health care. How many times have we heard the advice to laid-off workers: retraining into health care? The medical tourism phenomenon is a reminder that health care need not be locally based.

But this should be nothing new to the careful observer. As I've noted in earlier postings, a number of locations in the US have created a competitive advantage in specialized health care for decades – which draw patents from not only all over the US but from around the world. The Mayo Clinic is but one of many examples. Even more mundane, we have all heard of people traveling regionally for specialized care.

What is different about the medical tourism trend is the nature of the competition. Traveling for health care used to be about specialization. Medical tourism is about price. The former is based on providing a premium service usually at a premium price; the latter is based on commodity pricing. One goes to Mayo Clinic to consult the best in the field. One flies to India for the best price on a routine procedure.

Sounds like a neat division of labor. The problem is that in a knowledge and skill intensive activity, routine and specialized are often intermingled. Something becomes routine to a particular practitioner because they undertake that activity numerous times.

That is not to say that certain health care procedures should only be done by the top 10% of practitioners. But the ability to undertake the activity a great number of times is what turns it into routine. This argues for a certain scale of activity to sustain the process (and the premium). If all so called routine procedures are done elsewhere, will there be enough activity to keep the premium specialists at a high level of skill, to refine that skill even more and to develop the process for passing that refinement on to others?

Second it the question of economics. Can a highly specialized activity cover the fixed costs of the equipment and facilities needed? Operating rooms and specialized equipment are expensive. I'm not an expert in hospital economics, but I suspect that some of the "routine" activities are helpful in paying the bills.

All this is to say that a division of "complex here; routine there" may not be sustainable. In addition, as we have seen in other industries, a location (such as India or China) may start out with the lower end ("routine") activities. But they quickly move up the value chain.

Now comes a story in the Washington Post of locations in the US seeking to compete for the medial tourism market (Need Surgery? Try the Heartland):

In 2007, Thomas Van Buskirk, 64, a chiropractor in Oakland, Calif., had a blocked carotid artery and no insurance. He'd have paid $70,000 to have surgery at a Bay Area hospital, and $12,000 plus travel expenses to do it in India. Then he found Oklahoma Heart Hospital, which did the surgery for just $15,000.

. . .

Brokers such as Vancouver-based North American Surgery, which helped Van Buskirk, and traditional medical-tourism outfits, such as Healthbase, in Boston, are connecting patients with U.S. hospitals willing to compete on price with providers overseas and across town.

And, according to the story, US hospitals are given big discounts to patients who pay up front in order to fill unused capacity.

So, it sounds like the realities of global competition are taking root in the health care industry. If the industry is now facing up to those realities, then there is hope of crafting a competitive strategy.

That strategy, however, is likely to undercut the economic policymakers’ mantra to the unemployed of “get into health care.” Confronting that issue – “retraining for what” – will put us on the road to crafting a better over all strategy for dealing with globalization.