February 2009 Archives

GDP - reality catches up with expectations

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Today's revised GDP numbers show a much sharper decline in the 4th quarter of 2008 that previously reported -- a 6.2% decline rather than 3.8%. However, the revised numbers are in line with the earlier expectations of a 5.5% to 6% decline (see earlier posting). The biggest change from the earlier data was in inventories, which shrank rather than increasing as reported earlier. That, as the Wall Street Journal points out:

was good and bad. Bad, because the $19.9 billion drop meant inventories added a mere 0.16 of a percentage point to GDP in the fourth quarter, instead of adding 1.32 percentage points as reported originally. But the drop also suggests there is less of an inventory overhang, a bit of good news.

The bottom line is that the situation is still very dynamic -- any backward looking indicators are likely to be incorrect in the first estimates. So rather than look back, we need to keep our focus ahead. And that means crafting a transformative economic policy - not one that simply tries to reflate the bubble. The stimulus package and President Obama's proposed budget seem to be heading us in that direction. For that reason, expect a fair amount of resistance. As the Wall Street Journal noted:

Democrats welcomed Obama's budget as a long-awaited reordering of the government's priorities. Republicans expressed dismay for the same reason./blockquote>Changing the status quo is never easy.

Entrepreneurial opportunities in the downturn

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It has become the standard view that economic downturns are prime incubators of entrepreneurial activity. New opportunities arise and people who have been turned loose (i.e. fired) are more willing to take the risk of a start up. According to Harvard Business School Senior Lecturer Bhaskar Chakravorti (in a recent interview with HBS Working Knowledge), there are opportunities to "think-outside-the-box" - to use that old cliché:

Clearly there will be areas such as infrastructure, health care, education, clean technologies, etc., that will get a boost because of investments and demand from the public sector. Let us put these areas aside--because they will be readily identifiable. I am more interested in isolating the opportunities that arise organically and will be developed through private initiatives.

Here, I think it is critical to systematically identify what I would call "downturn needs." There are many different kinds of such needs. First, there are needs that are created by the substitution effects I spoke of earlier. Second, there are needs that emerge because of the availability of excessive time or the unavailability of productive employment. These are by way of necessities. In addition, there is also a need for affordable luxuries. After all, just because consumers are cutting back doesn't mean that they do not still enjoy products that give them pleasure and entertainment--or even distraction from the difficult times around them. The third category of needs is a more obvious one: products that deliver value for the money spent on them. When consumer budgets are tight, such products will have plenty of appeal.

In terms of lessons from the past, there are many examples that we can turn to. Taking the last of the needs first, in the airline industry alone, Southwest Airlines, Ryanair, and JetBlue were founded during downturns on the principles of delivering value. In terms of affordable luxuries, consider the emergence of cosmetics, such as Revlon, and media, such as CNN, during downturns. I already offered some examples of opportunities that come out of the substitution effect or of products that complement the surplus time that consumers may have on their hands. You could go even further and brainstorm a fairly long list of ideas: for example, think along the lines of meals at home, budgeting tools, job matching, etc.

Other ideas:

The opportunity here is in all the surplus resources that you can tap into and harness. For instance, the downtime created by the collapse of the Internet bubble gave rise to a host of new applications that we now collectively know as Web 2.0. Technologies and materials left unused due to the collapse of one industry can be creatively re-directed towards others that can take advantage of the low input costs. Silicon and wafer cutting technologies that were rendered surplus after the semiconductor industry slowed down during the last recession were picked up by a fast-growing solar energy industry.

What I really like about Chakravorti's advice is to look for opportunities where others aren't. Everyone piling into green right now reminds me a little bit of the dot-com bubble. There have to be some other transformational ideas out there - things that no one has thought of but are, in retrospect, intuitively obvious. Those entrepreneurs are the ones who we will look back at as the real pioneers.

Hiring American IT workers

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Are IT jobs coming back? Maybe, according to a story in today's Wall Street Journal. The story talks about how major Indian IT firms -- Infosys Technologies Ltd. and Wipro Ltd. -- may begin hiring more American workers. The main reason, according the story: "to make sure they can still do business if the U.S. passes legislation that restricts their ability to send Indians to the U.S. to work."

Note very carefully the specifics of the concern. The concern is not that they won't be able to do business with US companies. The concern is the ability to "send Indians to the U.S." In other words, people still have to come to the U.S. in order to do the work. As the story points out, "if Indians are going to compete with U.S. and European outsourcing companies, they need to have people in the U.S. to work face-to-face with customers, the outsourcers say."

The standard view is that all the work is shipped overseas. The truth is much more complicated. Face-to-face is still important in the I-Cubed Economy. And our technology policy -- including the immigration portions of that policy -- needs to understand that complexity.

The Future Is Lithium

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To follow up on my earlier posting on cars and battery technology, I would draw your attention to a story Strategy + Business is running on The Future is Lithium. The story reiterates a now standard theme: battery technology has moved to lithium and "Companies in Europe, Japan, South Korea, and China have clear leads in perfecting the battery." Much of the piece describes the rivalry between GM and Toyota in developing the use of this technology in autos. They point out that GM may be key to developing the industry:

Of course, any U.S. hopes for securing a chunk of the lithium ion industry would be dashed if GM's Volt project were to fizzle out because of the automaker's financial problems. The work on the Volt is by far the most advanced lithium ion-based auto program of any U.S.-based manufacturer. "Because of GM's efforts, the U.S. has a real opportunity," says Patil. "The Volt is an opportunity to take leadership."

I'm not sure that Volt is the key for the US electric vehicle industry. I think the trajectory is become clear. There are a number of other ways that the technology could move forward, including the battery consortium I've described before.

I do agree with the story's concluding remark, however:

But even if the Americans don't make the train, a future with more and more powerful lithium ion batteries is inevitable; after all, the rest of the world is already on board.
And the rest of the world is not only on board but possibly pulling ahead.

FRONTLINE: inside the meltdown

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Last Tuesday, Frontline ran an interesting piece -- Inside the Meltdown -- about the collapse of the financial system. You can view the entire piece below. The website also has additional resources.

I thought this was very well down -- a thoughtful look at how the system fell apart. However, it does leave somewhat of an incomplete picture. The story starts with the sage of Bear Stearns. The implication indirectly (and not intentionally) given is that the problems really started with the rumor started-run on Bear in March of 2008. The recession started in December 2007 (according to NBER). The Frontline time line on the website is more complete, starting in the summer of 2007 with the housing slowdown and discusses the fall of two Bear hedge funds in June 2007.

And many believe the economic troubles ran throughout the decade -- as real incomes stagnated around the turn of the century.

So the collapse of the financial system is the tsunami that threatens to overwhelm us. But the roots of the crisis - the factors and triggering events - lie much deeper in the rickety economic situation that has developed over the past decade.

Using stimulus to transform education

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While the stimulus package may fall short of what some of us wanted in transformative programs, that doesn't mean that the funds can't be used in transformative ways. That seems to be the thrust, at least in education. According to a story in eSchool News:

President Barack Obama and his Education Secretary, Arne Duncan, want to do more than save teachers' jobs or renovate classrooms with the new economic recovery law. They're hoping to reinvent education for the 21st century--while transforming the federal government's role in public education in the process.
Public schools will get an unprecedented amount of money--nearly double the education budget of this past year--from the stimulus bill in the next two years. With those dollars, Obama and Duncan want schools to do better.

Duncan will tie funding to reform efforts and help push the most successful programs as national models.

Sounds good to me.

Making green technology in the US

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As I noted in yesterday's posting on the auto industry, policymakers are beginning to look seriously at the question of whether new green technologies will actually be produced in the US. For all the talk of "green jobs," the stickiest of them are actually construction related - dealing with installation and retrofitting. These are not the highest-value added parts of the "green" value chain. Nor are green jobs necessarily even good jobs - as a new report from the Good Jobs First coalition - High Road or Low Road? Job Quality in the Green Economy.

We are likely to be hearing more and more about the issue of both US manufacturing and good jobs as the debate over an energy bill and climate change legislation continues. As the Wall Street Journal noted last month:

Congress is beginning to fear that the Obama administration's push for renewable energy will produce more jobs in Asia and Europe -- where most wind turbines and solar panels are made -- than in the U.S.
The proposed remedy is a provision in the economic-stimulus bill that offers tax breaks to U.S. producers of the equipment.
Sen. Jeff Bingaman (D., N.M.), chairman of the Energy and Natural Resources Committee, is urging support for a provision in the Senate version giving a 30% tax credit to companies that expand or build U.S. manufacturing facilities geared to renewable energy, clean transportation or electric-system upgrades.
"Several of us have come to recognize that we've outsourced the very things we're going to need to change the nation's energy mix, and this is a way of encouraging more manufacturing here at home," Mr. Bingaman said.

That provision is in the final bill - Sec. 1302. Credit for Investment in Advanced Energy Facilities. It is a good step forward. I expect we will see additional steps in future legislation.

Debating the American Brand

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The Economist is running an online debate on Brand American:

This house believes that Brand America will regain its shine.
Interesting way of phrasing the question - since it assumes that everyone agrees that the American brand has lost its shine. While I would agree with that assumption, I think there are those in the neo-con world who might dispute it. That The Economist takes the proposition of the decline of the American brand for granted is especially telling.

Changing auto value added

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GM and Chrysler have laid out their restructuring plans and the car mini-czar, Ron Bloom - recently appointed as Senior Adviser in the Treasury Department, is settling in. The plans call for cutting production, cutting jobs and otherwise downsizing. One of the actions will be for GM to spin off or eliminate the Saturn brand. As I've written before, spinning off Saturn is the best course - not eliminating it. Saturn was an experiment in re-designing the industry, which GM never fully backed. I hope there is a far-sighted group of investors out there (they must be far-sighted if they are sitting with enough cash to pull this off right now) who can take over Saturn and make the concept work. The industry - and the US - would be stronger as a result. And the Treasury Department should facilitate that transaction.

A stand-alone Saturn would be one innovation to help the industry and economy. More importantly is the broader set of new products. In a letter to stakeholders, Chrysler CEO Robert Nardelli outlined some of his near term innovation objectives:
•  More fuel-efficient powertrains such as the all-new Phoenix V-6 engine
•  Gas-electric hybrid technology such as the two-mode hybrid system that will be available on Dodge Ram next year
•  The electric-drive program developed by our ENVI group, with the first electric-drive vehicle coming in 2010 and other vehicles to follow
•  A changing portfolio mix that will include more small, fuel-efficient vehicles

This is all fine and well -- but it only begins to touch upon the massive shift about to occur in the industry. Ever since the internal combustion engine became dominate, the key to success in the auto industry has been control of the drive train technology. Companies that controlled this key element -- engine, transmission and differential -- reaped the highest value added.

Now that might be changing as transportation technology is changing. Electric motors and battery technology are coming to the fore as the key value added components. Batteries have not been a strength of the US auto industry.

As the Washington Post pointed out in its coverage of the Washington auto show last earlier this month:

The auto industry has placed its bets on lithium-ion batteries. The batteries are already under the hoods of many of the concept cars at the auto show.

But, while lithium-ion technology is widely used in laptops and cellphones, it has taken years for it to be tested and vetted for use in automobiles. As a result, Asian companies specializing in consumer electronics, such as Panasonic, have significant leads, analysts said. LG Chem beat out A123 Systems of Watertown, Mass., for GM's battery partnership.

Note that Bolivia is a major source of lithium.

It is not as if the industry and policy makers don't understand the challenge. As Michigan Senator Carl Levin said last month:

Because the heart of these green cars will be their batteries. As the nation makes a serious push toward greater use of hybrid electric, plug-in hybrid vehicles, and all-electric vehicles, there will be increasing demand for the advanced batteries that will power these vehicles. We must ensure that we can meet the demand for production of these batteries here in the U.S.
The stimulus package includes funds for battery research (see story in Technology Review).

The trick however is not just research but, as Senator Levin said, production. As I noted before, the industry has formed an National Alliance for Advanced Transportation Battery Cell Manufacture. If that group is to make a difference, it will need to move far beyond the research agenda and look toward actual US-based production. That is different from the Semitech model that the group's founders point to.

It should be noted that the switch to fully electric cars (rather than hybrids) will require a shift in the infrastructure. Hybrids can use much of the gasoline fuel delivery system - fully electric require a different system. Clayton Christiansen devoted a chapter to electric cars as a disruptive technology in his path-breaking book, The Innovators Dilemma. While the market dynamics have changed since he wrote the book in 1997, some of the key elements of his analysis remain.

So the change over is not be easy. Nor is it assured that the current players will remain (if Christiansen is right, they most certainly will not). At some point, the government's new auto industry task force will have to decide what its mission is: creating a new industry or mitigating the effect of the demise of the old industry. It can do both if it understands the watchword is change. If it simply tries to save the existing industry, it will only fail. True industrial policy is transformative; defensive industrial policy doesn't work.

Nightly Business Report's innovation list

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Following up on my earlier posting, here is the list of the Nightly Business Report's 30 top innovation in the last 30 years:

30. Anti retroviral treatment for AIDS - Health Care
29. SRAM flash memory - Electronics
28. Stents - Health Care
27. ATMs - Finance
26. Bar codes and scanners - Retail
25. Bio fuels - Biotechnology
24. Genetically modified plants - Biotechnology
23. RFID and applications (e.g. EZpass) - Electronics
22. Digital photography/videography - Electronics
21. Graphic user interface (GUI) - Computer Science
20. Social networking via internet - Media
19. Large scale wind turbines - Energy
18. Photovoltaic Solar Energy - Energy
17. Microfinance - Finance
16. Media file compression (e.g., jpeg, mpeg, mp3) - Computer Science
15. Online shopping/ecommerce/auctions (e.g., eBay) - Information Technology
14. GPS Systems - Electronics
13. Liquid Crystal Displays - Electronics
12. Light emitting diodes (first real devices in 1960s; in products in mid-70s) - Electronics
11. Open source software and services (e.g., Linux, Wikipedia) - Media
10. Non-invasive laser/robotic surgery (laparoscopy) - Health Care
9. Office software (Spreadsheets, word processors) - Computer Science
8. Fiber optics - Telecommunications
7. Microprocessors - Computer Science
6. Magnetic resonance imaging (MRI) - Biotechnology
5. DNA testing and sequencing/Human genome mapping - Biotechnology
4. E-mail - Computer Science
3. Mobile phones - Telecommunications
2. PC/laptop computers - Computer Science
1. Internet/broadband/WWW (browser and HTML) - Telecommunications

I must say that I am rather disappointed in the tech-centric nature of the list - although I should have known better. Only three of these can be remotely not gadget oriented: microfinance (clearly non technological); open source (an organizational technique - although they seemed to play up the technology output side of this); online shopping (Amazon and eBay are more organizational innovations than technological).

Granted, one of the Wharton professors did acknowledge that financial services innovations got knocked off the list because of the current negative view. But that should not have disqualified them.

And where were the other organizational --industry creating innovations? For example recycling? Yes, people recycled before 1979. But I used email back in 1976. The creation of the recycling industry and its impact on our lives really happened in the last 30 years. What about the big box store -- Wal-Mart and Costco? Again, existed before but really took off in the last 30 years. What about the coffeshop? Again, around for ages but the model fundamentally changed in the past 30 years. Same for microbrewers. Same for bottled water. And what about ESPN (founded September 7, 1979) and CNN (June 1, 1980).

I'm sure everyone could come up with more examples. The fact that the Wharton professors and Nightly Business Report apparently couldn't only reinforces how difficult it can be to break out of the gadget mindset.

Education and the stimulus

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I've not followed the education portions of the economic recovery package closely - but apparently Nicholas Kristof of the New York Times has. He says that, "This stimulus package offers a new hope that we may begin to reform our greatest national shame, education."

I'm not sure the package is a big a step toward reform as he believe. But I have to agree with this point Kristof raises:

So, for those who oppose education spending in the stimulus, a question: Do you really believe that slashing half a million teaching jobs would be fine for the economy, for our children and for our future?

I-Cubed Economy in the stimulus

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I'm not going to even try to give a detailed analysis of all of the provisions in the economy recovery package that affect the I-Cubed Economy. The major ones you will have already heard of -- things like research facilities, heath care IT, broadband, and the smart energy grid. I want to highlight just a couple that you probably won't hear of, but are important.

One of these is an expansion to the Trade Adjustment Assistance (TAA) program, including an expansion to include service workers and firms. The programs was first established, services were assumed to not be internationally tradable. But, of course they are and are even more so than before. The update of TAA to include services is long overdue.

Another is a provision deal with a strange problem with the industrial development bond (IDB) program. The IDB program is an important economic development tool helping. However, only the firms that make tangible products qualify for financing under the program. Companies that produce intangibles, such as software, are not eligible. The legislation would expand the definition of manufacturing to include the production of intangibles already recognized as assets under other portions the tax code.

Small changes, but with potentially outsized impacts. And importantly, a change in mindset. Maybe simply catching up to today's reality. But that is a starting point for tomorrow's changes.

Tyranny of Dead Ideas

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Speaking of defunct ideas (see earlier posting) and the difficulty of change, you may be interested in this new book from the Center for American Progress: The Tyranny of Dead Ideas: Letting Go of the Old Ways of Thinking to Unleash a New Prosperity. A download of the introductory chapter is available at the website.

The author, Matt Miller, outlines the following dead ideas as barriers to progress:

• The Kids Will Earn More Than We Do. Broadly rising incomes have been considered an American birthright. This pattern of generational advance is now at risk for as much as half the population.
• Free Trade Is "Good" (No Matter How Many People Get Hurt).
Though millions of people may be hurt by foreign competition, we're told, the overall gains from free trade so outweigh any downside that it is folly to question its ultimate advantages.
• Your Company Should Take Care of You. Business (not government) must fund and manage much of our health and pension benefits, this idea holds, or else we risk becoming socialist.
• Taxes Hurt the Economy (and They're Always Too High).
The truth is that taxes are going up no matter who is in power in the next decade, and the economy will be fine. We won't turn into France or Sweden.
• Schools Are a Local Matter. Americans need more skills to maintain our living standards as developing economies rise up to compete with us. America also spends more on schools than nearly every other wealthy nation--with worse results. Yet our
unique model of "local control" and funding of schools remains sacrosanct.
• Money Follows Merit. The most cherished illusion of today's educated class is that market capitalism is a meritocracy--that is, a system in which people basically end up, in economic terms, where they deserve to.

At its core, the book is about the future of capitalism. What I really liked was the follow statement about the fundamental political economy problem:
The basic aim when our economy reaches such a crossroads is to make sure that the infamous "creative destruction" of capitalism doesn't destroy so much for so many that America's embrace of innovation and economic change is also a casualty.

I agree that keeping that embrace of innovation and economic change is vital to solving our economic problems. The trick is to build up the safety net at the same time as providing incentives for innovation.

30 Most Important Innovations

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On Monday, PBS's Nightly Business Report will have a special half an hour program on the 30 most important innovations of the last 30 years. The list was put together with Knowledge@Wharton using the following criteria:
1. Did it have a direct and/or material effect on quality of life?
2. Did it address a compelling need? Did it solve a compelling problem?
3. Was it a fresh, new breakthrough? Was there a "WOW" factor?
4. Did it change the way business is conducted?
5. Did it increase the efficiency of how resources are used?
6. Did it spark an ongoing stream of new innovations on top of the original innovation?
7. Did it lead to the creation of a vast, new industry?

It will be interesting to see what type of innovations they come up with -- and whether they over come the "innovation=technology" mentality that plagues the debate. My guess (hope) is yes -- which will go a long way to improving the way we look at innovation.

As they say, check local listings for time and details.

(By the way, see my earlier posting for a list of the top innovation in history).

Opportunities Lost, Opportunities Found

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Congress is now poised to pass the economic recovery package. The President is reportedly scheduling a Monday signing ceremony.

Gallons of ink and terabits of bandwidth will be used over the net few days analyzing and critiquing both the bill and the larger political economy game. Some see the stimulus package as an opportunity lost. It is neither as big nor as transformative as some of us would have liked.

But the mere fact that it occurred at all - in spit of the solid opposition from the GOP and the public uncertainty and anxiety - is an opportunity found. That opportunity is to continue to apply the transformative message to rest of the agenda.

The economic package is just the beginning. Upcoming will be finishing the appropriations for the current year, next year's budget, an energy bill, a climate change bill, health reform -- just to name a few. Each of those will require as much heavy lifting as what we just went through. Each of them will require continued attention to doing things differently.

The fact that during the worse economic crisis since the Great Depression, an economic recovery package had so much trouble shows how far we have yet to travel to change. Still, a win is a win is a win.

December trade in intangibles - and 2008

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This morning's BEA trade data for December showed another improvement in our trade balance with the deficit down by $1.7 billion to $39.9 billion -- to its lowest level since February 2003. The smaller deficit was due to imports declining faster than exports. Imports dropped by $10.2 billion while exports were down $8.5 billion. Both declines underscore the weakness of the US economy.

This was, however, a much smaller decline than the huge $15.6 billion (revised) drop in the deficit in November. The deficit was somewhat larger than expected. According to the Wall Street Journal, "Economists surveyed by Dow Jones Newswires estimated a $35.0 billion shortfall in December."

Our intangibles trade balance worsened, however, as the surplus declined ever so slightly by dropping by $58 million. This is the third straight month that the surplus has worsened. The decline was completely due to a decreased surplus in private business services - as exports of those services has slowed steadily for the past three months (Oct to Dec). In contrast, the surplus in royalty income improved slightly. This is due, however, to a steady decline in imports (royalty payments made to those out of the country) since August. Total trade in intangibles has slowed since August.

Intangibles trade-Dec08.gif

For the year, however, both exports and imports are up. Exports increased by 8.5% over 2007 while imports were up 7.4%. The intangibles trade surplus was $150.2 billion in 2008, compared with $136.7 billion in 2007. Total trade in intangibles increased to $514.2 billion in 2008 - although the percentage of intangibles that makes up the total US trade declined slightly after growing steadily.

Intangibles trade-2008.gif

Intangibles trade-total 2008.gif

Once again, our deficit in Advanced Technology Products declined in December -- shrinking to only $2.2 billion. Still the total deficit for 2008 of $55.5 billion was $2.9 billion larger than the 2007. The December improvement was due to a $2.5 increase in aerospace exports compared to November, while imports continued to decline slightly in most areas. 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.

Intangibles beyond IP

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One of the more difficult concepts to get across in the discussions on intangibles concerns the breath of the asset class. What comes to mind most often and most easily is intellectual property -- that catch-all phrase we use for patents, copyrights, trademarks and trade secrets. Yet, the list of intangible assets is much, much longer. At one point, the AICPA (American Institute for Certified Public Accountants) listed about 90 specific types of intangible assets -- ranging from "Airport gates and slots" to "Use rights (air, water, and land)" with everything in between (like employment contracts, FCC licensees, Laboratory notebook, Subscription list and Training Manuals). The Financial Accounting Standards Board--SFAS 141 lists the following:

a. Marketing-related intangible assets
(1) Trademarks, tradenames
(2) Service marks, collective marks, certification marks
(3) Trade dress (unique color, shape, or package design)
(4) Newspaper mastheads
(5) Internet domain names
(6) Noncompetition agreements.

b. Customer-related intangible assets
(1) Customer lists
(2) Order or production backlog
(3) Customer contracts and related customer relationships
(4) Noncontractual customer relationships.

c. Artistic-related intangible assets
(1) Plays, operas, ballets
(2) Books, magazines, newspapers, other literary works
(3) Musical works such as compositions, song lyrics, advertising jingles
(4) Pictures, photographs
(5) Video and audiovisual material, including motion pictures, music videos, television programs.

d. Contract-based intangible assets
(1) Licensing, royalty, standstill agreements
(2) Advertising, construction, management, service or supply contracts
(3) Lease agreements
(4) Construction permits
(5) Franchise agreements
(6) Operating and broadcast rights
(7) Use rights such as drilling, water, air, mineral, timber cutting, and route authorities
(8) Servicing contracts such as mortgage servicing contracts
(9) Employment contracts.

e. Technology-based intangible assets
(1) Patented technology
(2) Computer software and mask works
(3) Unpatented technology
(4) Databases, including title plants
(5) Trade secrets, such as secret formulas, processes, recipes.

All of these are assets which can make money for their "owners". Therein is often times the catch: who is the "owner"? Multimillion dollar decisions hang in the answer, as we have seen from patent battles over ownership. But the same battles hold true with respect to the rest of the asset class. And public policy often determines the answer.

Take for example, the issue of your medical data. Who owns that data -- you or the health providers who collected that data? This question is at the core of a fight buried in the middle of the stimulus package over medical data privacy. As story in today's Washington Post (Lobbying War Ensues Over Digital Health Data) points out:

At the heart of the debate is how to strike a balance between protecting patient privacy and expanding the health industry's access to vast and growing databases of information on the health status and medical care of every American. Insurers and providers say the House's proposed protections would hobble efforts to improve the quality and efficiency of health care, but privacy advocates fear that the industry would use the personal data to discriminate against patients in employment and health care as well as to market the information, often through third parties, to generate profits.

Those profits, made by selling patient data, can be large. And they constitute an intangible asset. How that asset is treated should be a consideration in the debate.

There are a number of issues all jumbled up in the debate, including whether sold data would be used to discriminate and whether the data can be used to send marketing and our promotional materials. Right now, the emphasis in the debate seems to be on the right of the collector to collect and sell that data versus the patient's privacy rights. The health care industry argues that excessive privacy restrictions would drive up administrative costs. Privacy advocates argue that the industry simply wants to protect its profit stream.

What seem to be missing in the discussion of managing this asset, however, are two things. First, this is not the only information asset collected from individuals. There are policies in place for a number of areas. For example, how do the proposed privacy restrictions compare with other data privacy restrictions, such as credit and other financial information? Surely we can learn from those areas as to how sensitive information is handled.

Second, the discussion does not address the point that the value of the data is tied to its use. The value of anonymous medical data for research purposes is incalculable. It seems to me that such data with appropriate anonymity safeguards should be available - with no patient opt-out provision (just like Census data or data provided to financial regulators). Such data could be sold and manipulated as a private information service.

Data that is used for improved customer services, such as flagging drug interaction problems, is also valuable. Here, a strict usage provision might be in order, i.e. can not be shared with outside providers without permission. And an opt-out provision might be in order.

Data that is used for marketing purposes has a diminished value. Such marketing information, even if targeted to a specific audience based on their medical conditions, runs the risk of becoming just that much more junk mail. That is not to say that what we call junk mail doesn't have some value to marketer. But its value is not as great as in other uses. For such uses, an opt-in provision is probably most appropriate.

It seems to me that both sides would benefit from strong protection of the data - with the protection tied to the value. By looking at the use and value of the data as an intangible asset, a more nuanced and appropriate level of protection could be crafted.

Cutting R&D or cutting innovation

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There is a story in the Financial Times about car makers cutting their R&D budgets:

Carmakers, which are traditionally loath to talk about reducing R&D, warn that this will be next as they cut costs across their operations. "The global auto industry is under extreme pressure right now as a direct result of the financial crisis," says Christoph Huss, president of the international Association of Automotive Engineers and a group vice-president at BMW. "It is inevitable that some companies will be forced to review certain production and engineering projects, along with wider spending cuts in areas like marketing."

Mr Huss insists that cutting R&D is "not a viable option", given the regulatory pressure they face globally to produce cleaner and safer cars.

However, industry consultants say many car companies are already in effect doing so by delaying or mothballing new models.

It is unclear to me from the story whether the auto companies are cutting R&D or cutting innovation. If they are delaying new car models based on the same old designs of the past, then that may not be so bad. If, however, they are cutting back on the new innovative models, then there is a problem.

Ingrained notions of innovation

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One of the problems with our discussions over innovation is how ingrained the techno-centric, linear model is in our psyche. That this rather innocuous statement:

It is somewhat mystifying, and maybe even a little discouraging, that several decades into the age of information we still talk constantly about the urgent need for innovation, yet managers struggle mightily to move good ideas from the lab bench to the marketplace. That's not to say innovating can't be done -- the last I checked, IBM had racked up about 38,000 patents over the past 15 years, and Big Blue continues to stake out and commercialize intellectual properties with formidable speed and aggression.

What is wrong with that statement? Plenty.
1) "innovation" means moving ideas out of lab -- i.e. innovation is something that happens in labs
2) the measure of innovation is patents.
Those two assumptions help define the linear model of innovation. (For more on the linear model of innovation, see my earlier posting.)

Let's modify the statement slightly to read as follows:

It is somewhat mystifying, and maybe even a little discouraging, that several decades into the age of information we still talk constantly about the urgent need for innovation, yet managers struggle mightily to move good ideas from the lab bench to get new ideas into the marketplace. That's not to say innovating can't be done -- the last I checked, IBM had racked up about 38,000 patents over the past 15 years, and Big Blue continues to stake out and commercialize intellectual properties continues to introduce new products and services and refine old ones with formidable speed and aggression.

This may be a subtle change in words, but it carries a big change in underlying assumptions. In the rewording, innovation is about new ideas from many sources and about new products and services.

Keynes said, "practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist." In this case, we are still slaves to a defunct idea of innovation left over from the industrial age.

Car company intangibles?

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According to a story on Bloomberg, the Treasury Depart has hired investment banker Rothschild Inc., the bankruptcy specialist law firm of Cadwalader, Wickersham & Taft LLP and capital-markets specialist law firm Sonnenschein, Nath & Rosenthal to advise it on what to do about the auto industry. GM and Chrysler are facing a Feb 17 deadline to produce a viable restructuring plan for Congress and Treasury. I wonder if anyone is looking at the value of their intangible assets?

Those unemployment numbers

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Unemployment jumped again in January to 7.6%, according to this morning release by BLS. The 598,000 decline in jobs
was, as the Wall Street Journal noted, "well above the 525,000 drop Wall Street economists in a Dow Jones Newswires survey expected."

Interestingly, the seasonally adjusted number of involuntary underemployed (part time for economic reasons) actually declined slightly. [Note: the actual unadjusted number increased]. These could be good or bad news -- or just a quirk of the seasonal adjustment due to the post-holiday changes in the part-time labor force. The good news part could be the beginnings of a bottom -- although this is unlikely. More likely is the bad news part were the labor market has shifted from the "shared pain" strategy of cutting hours to preserve jobs to one of full time layoffs.

Pearlstein on a transformational economic package

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Steven Pearlstein's column in today's Washington Post goes after those Senators who are trying to cut the stimulus package:

As any economist will tell you, the economy tends to be forward-looking and emotional. So if businesses and households can see immediate benefits from a program while knowing that a bit more stimulus is on the way, they are likely to feel more confident that the recovery will be sustained. That confidence, in turn, will make them more likely to take the risk of buying big-ticket items now and investing in stocks or future ventures.
Moreover, much of the money that can't be spent right away is for capital improvements such as building and maintaining schools, roads, bridges and sewer systems, or replacing equipment -- stuff we'd have to do eventually. So another way to think of this kind of spending is that we've simply moved it up to a time, to a point when doing it has important economic benefits and when the price will be less.

Part of he wants is for those who are cutting programs to "explain why a dollar spent by the government, or government contractor, to hire doctors, statisticians and software programmers is less stimulative than a dollar spent on hiring civil engineers and bulldozer operators and guys waving orange flags to build highways".

He concludes:

Spending is stimulus, no matter what it's for and who does it. The best spending is that which creates jobs and economic activity now, has big payoffs later and disappears from future budgets.

I would stress the "has big payoffs later" part of that equation. What bothers me is not just the "arguing-over-the-size-of-the-firehose-as-the-house-burns-down" approach, but the implicit goal of simply reflating the bubble. That is why I am some what concerned about two provisions added to the bill with overwhelming support: tax breaks for home and car purchases.

On the surface both of these tax incentives sound good and make good politics. But both are examples of reflating the bubble. I would be more comfortable with them if they were tied to measures to restructure. But, Pearlstein points out, "many of the senators who supported these tax breaks then turned around and opposed as 'boondoggles' much more cost-effective proposals to stimulate auto and housing sales, such as having the government replace its current fleet of cars with hybrids or giving money to local housing authorities to buy up foreclosed properties for use as low-income rental housing."

It looks like change really will take some time.

Manufacturing and services

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One of the features of the I-Cubed Economy is the fusion of manufacturing and services. To understand this concept, I suggest a reading of a recent piece in the Economist about Rolls-Royce - Making things in a post-industrial society: Britain's lonely high-flier. The story talks about RR's strategy of selling services:

This is where Rolls-Royce has melded its technology with service to make it more difficult for competitors to pinch its business. Rather than simply giving away razors to sell razor blades it has, if you will, offered to shave its clients every morning. Instead of selling airlines first engines and then parts and service, Rolls-Royce has convinced its customers to pay a fee for every hour that an engine runs. Rolls-Royce in turn promises to maintain it and replace it if it breaks down. "They aren't selling engines, they are selling hot air out the back of an engine," says an investment analyst. The idea is not unique to Rolls-Royce; the other big makers of aircraft engines do much the same. But Rolls-Royce has adopted it with greater gusto. It has been offering the service for more than a decade; more than half of its engines in service are covered by such contracts, as are about 80% of those it is now selling.

This may seem to support the theory that Britain would do better to concentrate on supplying services rather than on making things. Yet it shows instead that it is sometimes necessary to be good at making things to sell the services connected with them. At Rolls-Royce it is difficult to see where one begins and the other ends.

The key point is summarized in the second paragraph: in order to sell the service, RR needs to be making the product. Just selling the product misses a lot of the value-added in the service end. But a service company is less valuable without the extensive knowledge of the product gained through product development and manufacturing. The combination is the winning strategy.

Transformation versus status quo

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In a rare oped, President Obama defended his economic package in today's Washington Post:

This plan is more than a prescription for short-term spending -- it's a strategy for America's long-term growth and opportunity in areas such as renewable energy, health care and education. And it's a strategy that will be implemented with unprecedented transparency and accountability, so Americans know where their tax dollars are going and how they are being spent.
That is exactly the problem, says the Washington Post editorial board, in a highly unusual direct response to the President. The editorial argues for a slimmed down stimulus only bill.

The Post editorial board is wrong. As I have argued before, a stimulus-only bill seeks to take us back to 2005. We need to inject transformation into the process - not shore up the status quo. Unfortunately, the Post has decided to become the defender of the old line.

Everyone, including the Post editorial board, understands that we couldn't simply return to the old way of doing things when it came to the financial crisis. That is why there is reform built into the process. The same is true with the auto loans - the requirement that the companies' show they are doing things differently.

Why is it so hard to apply the same principles to the stimulus package? The economy has shifted. Priority #1 of the economic package should be to grow the economy in a different way - not simply reflate the bubble.

Sen. Gregg and Commerce

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There is a disturbing story that has surfaced in the blogsphere about the newly nominated head of the Commerce Department. According to CQ Politics, Sen. Judd Gregg voted to abolish the Department back in 1995 (see also the Washington Note). On the other hand, Senator Gregg received an award in 2004 for saving the Manufacturing Extension Partnership -- one of Commerce's crown jewels. Traditionally, the Commerce Department has gone to a business person or someone with close ties to business. In Senator Gregg's case, he is mainly known as a budget hawk -- something the President referred to in his nominating remarks this morning. That is likely to raise some eyebrows among supporters of the Commerce Department's programs.

Let me suggest that one way that Senator Gregg could lower those eyebrows is to come out immediately with an innovation agenda. The President's remarks - and Senator Gregg's -- began that process. The President outlined the various important economic missions of the Department. The Senator talked about the need to create jobs and grow the economy. That is a good start. But he can do more. During his confirmation hearings, Senator Gregg should make a bold commitment to putting the Commerce Department at the forefront of restructuring the US economy for the 21st Century. Let me further suggest that a starting place for that commitment can be found in the numerous reports on the challenges facing America -- including our own paper on Crafting an Obama Innovation Policy.

There is no shortage of roadmaps and guideposts as to what needs to be done. All it takes is the leader to seize the initiative.

Is copyright dead? -- there is more to the story

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Copyright is dead. That is the latest buzz in the blogsphere. A new report by researchers at Delft University of Technology in the Netherlands -- Pirates and Samaritans: A decade of measurements on peer production and their implications for net neutrality and copyright -- makes that case. The report analysis the growth of content sharing and peer-to-peer networks. They concluded that the growth will overwhelm the system:

The largest academic measurement to date on the pirate side of peer production shows that copyrighted works are widely available for free download and enforcement of copyright is likely to become impossible by 2010.

While the "hot news" is about their assertion on the copyright debate, the paper has good insights as to the evolution and development of social networking:

The evolution of peer production shows that value creation and innovation is increasingly moving away from the telecommunication and content industries towards "the edges". The current main sources of revenue of both industries will be difficult to protect and uphold. The past decade of evolution shows the power of volunteers with self-governance and loose formation of hierarchical structure based on merit. The next decade is likely to show further growth as we begin to understand how to organise millions into a fully self-managing collective.

That last sentence is much more important that the during copyright debate. As these self-organizing, self-managing collectives continue to grow, we will see a major shift in the organization of work and economic activity.

The early tremors of a huge seismic shift are just being felt.

New paper on intangible and national accounts

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I recently came across Leonard Nakamura's latest paper on Intangible Assets and National Income Accounting. The paper looks at the underlying issue of getting the measurement right, which

requires a shift in the fundamental paradigm of economics, from the "invisible hand" to "creative destruction." The paradigm shift requires some adjustments as well in how we measure consumption, investment, and capital.
As he goes on to state, "Properly analyzing this economy requires new measures and new theory."

What I found especially useful was his straightforward discussion of macroeconomic growth theory. This section of the paper is one of the clearest explanations I have seen. Typical is this statement, which reminds use of a basic truth we often tend to forget:
Both tangible and intangible investments are valued not in themselves but for their consequences. We value a flour mill and the work of novelists because they contribute to the production of bread and books.

There is more, much more in the paper. If you are interested in understanding what we do and do not know about measuring the knowledge economy, you should read this paper in full - even if you don't follow all the math.

PS - Thanks to Mary Adams at the IC Knowledge Center for alerting me to the paper.

Getting it wrong

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Professor Diego Comin at the Harvard Business School has an interesting new paper out: An Exploration of the Japanese Slowdown during the 1990s. Much has been made of the "lost decade" in Japan and how the US can avoid the same mistake today. Comin's conclusion:

Why was the 90s a lost decade for Japan? This paper has argued that though the [macroeconomic] shocks that hit the Japanese economy were not so persistent, the investments that Japanese companies and entrepreneurs did not undertake to improve the technology and the production methods during this decade propagated those shocks and made their effects very long-lasting.

My take away is that the Japanese government policies failed to support productivity enhancing investments, i.e. transformational investments, thereby propagating the shocks.

So, the choice is not short-term stimulus versus transformational investment. Without transformational investments, the US runs the risk of falling into the "lost decade" trap.

Its about growth

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David Leonhardt has written an important piece in Sunday's New York Times magazine - The Big Fix

But while Washington has been preoccupied with stimulus and bailouts, another, equally important issue has received far less attention -- and the resolution of it is far more uncertain. What will happen once the paddles have been applied and the economy's heart starts beating again? How should the new American economy be remade? Above all, how fast will it grow?

That last question may sound abstract, even technical, compared with the current crisis. Yet the consequences of a country's growth rate are not abstract at all. Slow growth makes almost all problems worse. Fast growth helps solve them. As Paul Romer, an economist at Stanford University, has said, the choices that determine a country's growth rate "dwarf all other economic-policy concerns."

The piece helps put our focus where it belongs - on growth. I have voiced concerns before that there is a strong undercurrent in the stimulus debate (both pro and anti) of "let's return to the past." The vision many seem to have is of 2006. Bob Reich has labeled this a fight between the cyclists and the structuralists. I view this as a fight between the orthodox (who are on both the pro and anti-stimulus sides) and the transformationalists (see earlier posting).

I did find it interesting that Leonhardt mentioned Mancur Olson's thesis (The Rise and Decline of Nations) to describe the problem. Olson was right that it often takes a crisis to pry decision making from the dead hand of the status quo. But Olson's vision was that economic growth would happen by itself if the interest groups (and government) just got out of the way -- that the best government policy was to clear away the brush that clogged up the stream. It was a version of laissez faire that asserted that the economy didn't need any economic help.

Olson's ideas are diametrically opposed to the government intervention that Leonhardt then describes to cure our "investment-deficit disorder." On this, Leonhardt is exactly right:

Governments have a unique role to play in making investments for two main reasons. Some activities, like mass transportation and pollution reduction, have societal benefits but not necessarily financial ones, and the private sector simply won't undertake them. And while many other kinds of investments do bring big financial returns, only a fraction of those returns go to the original investor. This makes the private sector reluctant to jump in. As a result, economists say that the private sector tends to spend less on research and investment than is economically ideal.

Historically, the government has stepped into the void. It helped create new industries with its investments. Economic growth has many causes, including demographics and some forces that economists admit they don't understand. But government investment seems to have one of the best track records of lifting growth. In the 1950s and '60s, the G.I. Bill created a generation of college graduates, while the Interstate System of highways made the entire economy more productive. Later, the Defense Department developed the Internet, which spawned AOL, Google and the rest. The late '90s Internet boom was the only sustained period in the last 35 years when the economy grew at 4 percent a year. It was also the only time in the past 35 years when the incomes of the poor and the middle class rose at a healthy pace. Growth doesn't ensure rising living standards for everyone, but it sure helps.

This is exactly the vision, however, that the orthodox shy away from (sometimes violently). The idea that the government can do anything positive - other than fix "market failures" - is an anathema. When it is mentioned, the usually response from the orthodox is to pull out past government failures - the standard being the Synfuels Corporation of the 1970's.

Sorry folks, but that old chestnut is so worn out that it does you augment no good. There are dozens of counter examples - from Semitech to MEP to how the government created the radio and the air travel industries post WWI and the frozen foods industry in WWII.

Note that the story points also touches on the debate over FDR's program during the Great Depression. Some (such as Amity Shlaes in Sunday's Washington Post) like to point out that the New Deal didn't automatically stop the Great Depression. However, as Tim Geither points out in the story (and Paul Krugman has point out earlier) FDR's failing was to revert back to fiscal tightness before the stimulus could completely work.

So put me down in the camp of the tranformationalists. My worry is not that the stimulus package is too much - but that once the orthodox has gotten through with it, it will be too little.

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

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