August 2009 Archives

Here are some interesting stories on green tech competition that have popped up while we were gone:

From the Daily Telegraph in the UK - China powers ahead as it seizes the green energy crown from Europe:

China is running away with the green technology prize. It has conquered a third of the world market for solar cells and is on a breakneck course to build 100 gigawatts of wind turbines by 2020, doubling again the global capacity for wind power across vast stretches of Inner Mongolia and Xinjiang.
. . .
German pioneers Solarworld and Conergy allege foul play and have called for EU sanctions, accusing Chinese rivals of practices that "border on dumping". China's finance ministry says it intends to cover half the investment cost of solar projects. It is a life-and-death moment for the German solar industry, pioneers who provide 75,000 jobs and once led the world. "A large number of German solar cell and solar module producers will not survive," said UBS's Patrick Hummel.

From the New York Times - China Outdoes U.S. in Making Solar Products

Backed by lavish government support, the Chinese are preparing to build plants to assemble their products in the United States to bypass protectionist legislation. As Japanese automakers did decades ago, Chinese solar companies are encouraging their United States executives to join industry trade groups to tamp down anti-Chinese sentiment before it takes root.
The Obama administration is determined to help the American industry. The energy and Treasury departments announced this month that they would give $2.3 billion in tax credits to clean energy equipment manufacturers. But even in the solar industry, many worry that Western companies may have fragile prospects when competing with Chinese companies that have cheap loans, electricity and labor, paying recent college graduates in engineering $7,000 a year.

Then there is this story from Gizmag on how a new technology being developed at the University of Texas, Austin that may make all current solar tech obsolete -- Plan to turn rooftops, walls and windows into cheap solar cells:

Cheaper solar cells - roughly one-tenth the cost of current day prices - could be available within three to five years thanks to a manufacturing procedure that uses nanoparticle 'inks' to print them like newspaper or to spray-paint them onto the sides of buildings or rooftops. Even windows could become solar cells thanks to the semi-transparent inks.

Let's see, 3 to 5 years puts it at about the same point at which the Chinese solar companies say they will be at "grid parity" with fossil fuels. Could be interesting.

Following the coverage of Senator Kennedy's funeral over the weekend, I am struck by one overwhelming impression: that of the best and worst of human nature. The stories told at Friday's remembrance celebration of the Senator's graciousness, love of life and friendships with even his political opponents were outrageously funny and illustrated the life he lived.

Yet the comment sections of much of the coverage seems full of the haters -- small minded, malicious, petty people who seem to only interested in venting their own little prejudices for all the world to see. It is almost as if these angry people are compelled to try to bring the rest of the world down to their level to justify their lives. This, of course, is the much discussed dark side of the information era - where IT amplifies the ability individuals to make vicious comments anonymously of course as they know what they say would reflect negatively on them.

Teddy Kennedy, Jr. said yesterday, "He was not perfect, but my father believed in redemption." The haters apparently don't. Too bad for them.

A few months ago, an elderly neighbor of mine passed away. It did not know him all that well, but was touched by his sparkle, humor and graciousness. At his memorial service I learned of the full and rich life he lived. He was not a "great" man in the sense that historians use that word. But he had "a life well lived," to quote how his children summed it up.

There are those who live their lives in bitterness and anger--whose hate seems to be their guiding passion. Then there are those who strive for "the better side of our nature." Those we rightfully label as having a big heart. My neighbor was one of those, as was Teddy Kennedy.

So let the haters flame on. As they stand in contrast to those with big hearts, they are just proving my point. And giving us one more reason to treasure the memory of people like Teddy Kennedy.



The Intangible Economy returns to its economic topics tomorrow.

The lion of the Senate passed away last night - it is truly the end of an era.

To quote from Senator Kennedy's Senate website:

"For all those whose cares have been our concern, the work goes on, the cause endures, the hope still lives and the dream shall never die."

As the dog days of summer continue their hot and hazy passage across the calendar, the Intangible Economy is off to enjoy that most intangible of pleasures: time at the beach. See you after Labor Day at the end of the month.

Over the past couple of months we have been bombarded by articles, essays, commentary, books and book reviews on how economists (and others) missed the economic collapse (too numerous for me to even begin to describe). One of the subtexts of this discussion is how what we all thought would cause the collapse didn't. The standard scenario has always been that the international financial imbalances - as evidenced by our huge current account deficit - would cause a dramatic decline in the dollar as the world decided that deficit were no longer sustainable.

Even though the international imbalanced did not directly trigger the Great Recession, it remains a concern. With the collapse of trade, some are expressing tentative hopes that the current account problem is being lessened. So here is the real question - will the trade deficit remain at its relatively current low levels? Or will any revival of consumer spending and production return us to the deficits of the past decade? The latest trade figures engendered comments on both sides of that issue (see for example the recent commentary on the June trade figures.) Some argue that the stimulus activity in China is simply adding to worldwide excess capacity and will worsen the imbalances as the recovery takes hold. Mike Mandel points out that the non-petroleum goods deficit is declining and holds out some hope.

Here are the numbers. As the Figure 1 below shows, the total goods deficit peaking in July of last year and has since decreased dramatically. (This is a monthly updated chart of a chart of annual data published earlier).

As this figure shows, even with the dramatic change in the goods deficit, it is still about three times larger than the intangibles surplus. The Great Recession has simply returned the goods trade deficit to where it was at the beginning of the decade.

What about the oil story? The good news is true: the non-petroleum goods deficit has been steadily declining. As Figure 2 shows, so is the petroleum deficit.

However, as figure 3 shows, the size of the intangibles surplus is still smaller than either the petroleum or the non-petroleum goods deficits. And as the data shows, the level of the intangibles surplus has been basically flat for some time. Our imports of intangibles grew faster than our exports in 7 of the last 10 years.

Thus, if we are to return to balance, we either have to eliminate our goods deficit, eliminate our oil imports or cut each of those by more than half compared to today's depressed levels. Reducing the goods deficits will require a revival of domestic manufacturing, which is likely to increase energy imports to power that manufacturing. And, it is unclear whether domestic manufacturing has been gaining market share during the Great Recession.

So in the absence of a strong policy push on both energy and manufacturing (which even may not be enough), look for the trade imbalances to continue. Even the recent withering of trade has not been enough to bring about the dramatic correction everyone still fears.

Here is an item from today's Wall Street Journal's Washington Wire section Lobby Groups to Use Town Hall Tactics to Oppose Climate Bill

Taking a cue from angry protests against the Obama Administration's health care restructuring, the oil industry is helping organize anti-climate bill rallies around the nation.
The American Petroleum Institute, along with other organizations such as the National Association of Manufacturers opposed to the climate legislation Congress will consider again in the fall, is funding rallies across 20 states over the August recess.

In political circles, ginned up opposition is called AstroTurfing--meaning artificial grassroots. Looks like the practice has hit a new high (or low, as some might put it).



Just one more reminder that politics is a contact (some might say blood) sport.

As expected, the US trade deficit grew in June according to this morning's data from BEA. Exports increased by $2.4 billion while imports were up even more at a $3.5 billion increase. As a result, the monthly trade deficit rose from $26 billion in May to $27 billion in June. The deficit was not as big as some feared, however. As the Wall Street Journal reports, "Economists surveyed by Dow Jones Newswires had estimated a $28.7 billion shortfall." Rising oil prices were the cause of much of the increase. Interestingly imports of consumer goods continued to decline. Automotive imports increased.

On the positive side, our surplus in intangibles increased ever so slightly in June--by $55 million. Once again, exports and imports of private business services were up while both inflows (exports) and outflows (imports) of royalty payments were down. As I noted last month, the intangibles trade surplus has been essentially flat for the quite some time.

Our deficit in Advanced Technology Products worsened however. The deficit grew by over $1 billion in June to $4.6 billion as imports of information and communications technologies and opto-electronics rose. Again, this increase may be due to (and a sign of) a recovering economy. 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.

As you may recall, last year's bank stabilization (aka "bail-out") legislation created a Congressional Oversight Panel to keep an eye on the program. This morning, the Congressional Oversight Panel is releasing its latest report on The Continued Risk of Troubled Assets. This report takes issue with the progress made so far in getting the toxic assets off the banks' balance sheets:

This crisis was years in the making, and it won't be resolved overnight. But we are now ten months into TARP, and troubled assets remain a substantial danger to the financial system. Treasury has taken aggressive action to stabilize the banks, and the steps it has taken to address the problem of troubled assets, including capital infusions, stress-testing, continued monitoring of financial institutions' capital, and PPIP, have provided substantial protections against a repeat of 2008. These steps have also allowed the banks to take significant losses while building reserves. Nonetheless, financial stability remains at risk if the underlying problem of troubled assets remains unresolved.

The report also looks at the valuation and disclosure problems:

Part of the financial crisis was triggered by uncertainty about the value of banks' loan and securities portfolios. Changing accounting standards helped the banks temporarily by allowing them greater leeway in describing their assets, but it did not change the underlying problem. In order to advance a full recovery in the economy, there must be greater transparency, accountability, and clarity, from both the government and banks, about the scope of the troubled asset problem. Treasury and relevant government agencies should work together to move financial institutions toward sufficient disclosure of the terms and volume of troubled assets on institutions' books so that markets can function more effectively.

Let me stress that part about changing the accounting rules "did not change the underlying problem." At best, mark-to-myth simply gave the banks some breathing room. At worst, it is a step backwards - taking us further away from our goal of increasing transparency and thereby reducing uncertainty. As the Panel points out, markets will not be able to operate effectively as long as the value of the assets remain clouded.

Likewise, the regulatory process can not operate without good information. As the report states, "It is impossible to resolve the argument about whether banks are or are not solvent because of the uncertain value of their loans."

So as long as the true value and scope of the trouble assets remains unknown, both the market and the regulators are flying blind. Not a reassuring situation.

There was an interesting story in the Washington Post over the weekend (Small Automakers Take Big Electric Leap) about a number of small companies hoping to break into the electric car business, including Coda of Santa Monica, CA:

The Coda car is assembled in China, where six of the company's employees work. The chassis is licensed from Mitsubishi and made by a Chinese firm, Hafei Automobile Group. Delphi supplies the power steering. BorgWarner provides the transaxle. Lear provides an on-board charging device for the battery. The front and rear bumpers, hood and lights were designed by Porsche's design studio. The battery -- the main focus of Coda's 15-person engineering team -- was made by Tianjin Lishen Battery, one of the world's largest suppliers of lithium ion batteries to firms like Motorola and Samsung.

If that is the future of green and clean manufacturing in the US, then we are in trouble.

However, the story also talks about Bright Automotive of Anderson, Ind. An offshoot of Amory Lovins' Rocky Mountain Institute, the company is seeking Department of Energy loans presumably to manufacture in the US. Bright is going after the fleet market with a plug-in hybrid van. Thirty years ago, I worked on an analysis of the electric vehicle market. Back then, we concluded that the fleet market was idea place to start. Looks like Bright has come to the same conclusion.

There are also some countervailing forces that may help keep manufacturing in the US. A story in yesterday's Financial Times (Crisis and climate force supply chain shift) notes that "Manufacturers are abandoning global supply chains for regional ones in a big shift brought about by the financial crisis and climate change concerns, according to executives and analysts." The reason: rising energy costs and regulations on carbon. As the story notes, "Ernst & Young underlining how as much as 70 per cent of a manufacturing company's carbon footprint can come from transport and other costs in its supply chain." That will force companies to pull their supply chains in to a more local level.

I don't know if such changes will be enough to overcome the fabled "China price" that companies keep chasing (which now may be the "Vietnam price"). But I do know that an aggressive manufacturing policy is needed in the US if we are going to keep green and clean manufacturing in the US. As I've noted before, that policy needs to recognize the role of manufacturing in a knowledge economy and take the "high road" path to competitiveness. Either strategy of trying to re-create the "good old days" or to become a "service" economy (which is very different from a knowledge economy) will simply lead to decline.

Here is a tidbit from a Business Week story (How Whirlpool Puts New Ideas Through the Wringer) on new product development in the appliance maker:

On average, 100 are introduced to the marketplace. "Every month we report pipeline size measured by estimated sales, and our goal this year is $4 billion," says [Moises] Norena [director of global innovation]. With Whirlpool's 2008 revenue totalling $18.9 billion, that would mean roughly 20% of sales would be from new products.

So Whirlpool can measure innovation by amount of revenue generated by new products. That is a standard measure that every industrial nation (except the US) seems to collect. I understand that there is some reluctance to force the collection of such data on innovation -- and that this might not be the perfect metric to use. But maybe a good place to start is to help companies understand their own innovation process and begin to measure it internally -- like Whirlpool does. Isn't that what business assistance programs -- like the MEP -- are supposed to do?

In a shocker, BLS announced this morning that the unemployment rate actually dropped by 0.1% in July to 9.4%. Or, to use the BLS official statement, "was little changed." The decline in payrolls was only 247,000. That was, as the Wall Street Journal reports, "the smallest drop since last August and below the 275,000 decline economists in a Dow Jones Newswires survey had expected."

The number of involuntary underemployed (part time for economic reasons) was also "little changed" according to BLS. That number has been relatively stable for five months now, with a slight trend downward (See chart below). It looks like there is a possibility that the employment situation has stabilized. We will have to see how quickly it recovers.

In supporting news, today OECD released its Composite Leading Indicators (CLI) for June. The CLI for the US rose in June - and has risen slightly for the past four months. This indicates that US economy may finally reached bottom.

Yesterday, the Obama Administration announced the stimulus package grants to develop components for electric vehicles. As the New York Times story on the grants notes:

Sarwant Singh, a consultant at Frost & Sullivan, said the business should work well in the United States, because only 10 percent to 15 percent of the cost of a battery was labor. "There's no reason that this battery should be manufactured in China," he said. "There's no reason to look for a low-cost manufacturing base; you should look for a high-tech manufacturing base."

Exactly! And there are a lot of other areas besides green and clean where there is no reason why the manufacturing plants should be located simply because of low cost labor. In fact, I would argue that we need to move aggressively away from the era where manufacturing needs to rely on low cost labor as its competitive advantage. Our manufacturing strategy should be pushing the "high-road" strategy.

By the way, I prefer the concept of "high-road" to "high-tech." High-tech implies a limited set of outputs. "High road" puts its emphasis on all upgrading of the inputs to the production process: technology, worker skills and cooperative/collaborative organizational structures. By its definition, only some industries can be "high-tech." All industries can be "high-road." And it is the productivity and innovation gains from "high road" companies that spur economic prosperity -- not an emphasis on the latest "high-tech" gadget. (For more on "high-road" see earlier posting.)

The Obama Administration is correct in pushing green and clean as an example of the type of manufacturing we should hold on to in the US. It needs to also expand that so that all manufacturing makes the "high-road" transition to the I-Cubed Economy.

Here is an interesting posting over at the IP Finance blog - "You will never get the licence agreement your technology deserves". It links to a longer paper on their website by David Wanetick about negotiating tactics. As the title of the posting implies, Wanetick believes in taking a hard line: Business can be like war, you need to negotiate hard. Thus, at first glance, it appears that he is advocating an end goal of getting the best of the other guy -- rather than commercialization of the technology.

But read the paper carefully. First, it has great insights on the specifics of technology licenses. Second, the early battlefield references early in the paper may be misleading. As he explains:

The best negotiators do not view obtaining a signature on a license agreement as the ultimate goal of the negotiations. Rather, they view a long-term, lucrative relationship with the other side as the primary objective of the negotiations.

It may be that the negotiations are more like courting than battle. That is not to say that deal makers should let romance could their judgment. The best marriages are those based on a clear vision of reality.

But we are in the collaborative age. And maybe the best text for that type of negotiation is still the classic (in my mind) Getting to Yes (a summary is available at the Conflict Research Consortium).

Having said that, Wanetick's paper is still a valuable read for both negotiating tactics and technology licensing specifics.

Yesterday, OMB and OSTP issued a memo on S&T priorities for FY 2011 budget submissions, including "practical challenges" the R&D budget should address. As the Benton Foundation's Daily News Summery reports:

The four practical challenges are: 1) Applying science and technology strategies to drive economic recovery, job creation, and economic growth; 2) Promoting innovative energy technologies to reduce dependence on energy imports and mitigate the impact of climate-change while creating green jobs and new businesses; 3) Applying biomedical science and information technology to help Americans live longer, healthier lives while reducing health care costs; and 4) Assuring we have the technologies needed to protect our troops, citizens, and national interests, including those needed to verify arms control and nonproliferation agreements essential to our security.

What I found most interesting in the memo was this paragraph:

Agency budget submissions should also explain how the agency plans to take advantage of today's open innovation model--in which the whole chain from research to application does not have to take place within a single lab, agency or firm--and become highly open to ideas from many players, at all stages. Agencies should empower their scientists to have ongoing contact with people who know what's involved in making and using things, from cost and competitive factors to the many practical constraints and opportunities that can arise when turning ideas into reality. Agencies should pursue transformational solutions to the Nation's practical challenges, and budget submissions should therefore explain how agencies will provide support for long-term, visionary thinkers proposing high-risk, high-payoff research.

It will be interesting to see how the agencies respond.

Here is an interesting item from the newsletter Telecoms.com --

Skype in danger of shutdown over P2P licensing, says eBay:In a filing to the US Securities and Exchange Commission (SEC) late last week, eBay warned that Skype depends on key technology that is licensed from third parties. The third party in this case is Sweden-based Joltid, a peer to peer technology firm run by none other than Skype's founders and ex-owners Niklas Zennström and Janus Friis. . . . eBay's concern seems to stem from a court filing in March, 2009, in which Skype and Joltid came to legal blows over the technology licensing terms. Joltid argues that because Skype does not own the underlying code for its product, it has violated the licence terms by disclosing such code in other US-based patent cases. As a result, Joltid is threatening to terminate the agreement with Skype. A trial is currently scheduled for June 2010, but eBay warns that it might have to radically change or even shutdown Skype if it loses a case against Joltid and has no other alternative.

Very interesting - on three points. First is the substance itself - the claim that Skype "violated the license terms by disclosing such code in other US-based patent cases". So it is not a patent case per se but a contracts case.

Second, it an interesting situation where the company (eBay) did not secure all of the intangible assets when it acquired Skype -- either by not getting all the patents or not hiring Zennström and Friis or not getting some form of non-compete agreements. As the Telecom.com article notes, eBay has already written off $1 billion on this acquisition. This misstep makes the deal look even worse - and would, I think, call into question eBay's plan for spin off Skype in an IPO next year. I wonder what their shareholders think of this.

Third, eBay disclosed it in an SEC filing: a clear case where an intangible -- a patent license -- was seen as material information. The disclosure was made in eBay's 10-Q quarterly report for the second quarter of 2009. The item was part of the report's section on "Litigation and Other Legal Matters" where they discuss all pending litigation. Here is part of what eBay says specifically about the case:

Although Skype is confident of its legal position, as with any litigation, there is the possibility of an adverse result if the matter is not resolved through negotiation. Skype has begun to develop alternative software to that licensed through Joltid. However, such software development may not be successful, may result in loss of functionality or customers even if successful, and will in any event be expensive. If Skype was to lose the right to use the Joltid software as the result of the litigation, and if alternative software was not available, Skype would be severely and adversely affected and the continued operation of Skype's business as currently conducted would likely not be possible.

Later on in the filing in the section on Risk Factors, they there is a more general discussion about reliance on third party licenses:

Skype depends on key technology that is licensed from third parties.Skype licenses technology underlying certain key components of its software from third parties it does not control, including the technology underlying its peer-to-peer architecture and firewall traversal technology and the video compression/decompression used to provide high video quality. Although Skype has contracts in place with its third-party technology providers, there can be no assurance that the licensed technology or other technology that we may seek to license in the future will continue to be available on commercially reasonable terms, or at all. The loss of, or inability to maintain, existing licenses could result in a decrease in service quality or loss of service until equivalent technology or suitable alternatives can be developed, identified, licensed and integrated. While we believe Skype generally has the ability to either extend these licenses on commercially reasonable terms or identify and obtain or develop suitable alternatives, the costs associated with licensing or developing such alternatives could be high and the technical challenge of assuring "backward compatibility" with older versions of Skype's technology may be difficult to overcome. Any failure to maintain these licenses on commercially reasonable terms or to license or develop alternative technologies would harm Skype's business.

Interestingly there is little discussion about any other licensing agreements. The only other point of discussion is that eBay relies on security and encryption technologies licensed from third parties. But there is no discussion about the licensing agreements at risk -- just technological obsolesces (i.e. increased ability to overcome those security arrangements.) One would think that eBay -- and almost every other company -- has some level of reliance on third party technologies. And that a discussion of the vulnerability of those agreements might be in order.

I realize that companies rely on a myriad of contractual arrangements. A discussion of all of those arrangements might be overwhelming. But, I've noticed that in other cases key agreements (like Sirius contracts with certain radio personalities) are rightfully discussed in their SEC filings. I would think that key agreements would be "material" information even before a problem with the agreement threatens to sink the company. The place to start maybe a discussion by all companies on the key technologies they control versus those they license from third parties.

According to a recent press release from the Conference Board, offshoring of innovation is increasing -- Offshoring Evolving at a Rapid Pace, Report Duke University and The Conference Board:

Last year, more than 50 percent of companies had a corporate offshoring strategy in place, up from 22 percent in 2005. Sixty percent of companies currently offshoring say they have aggressive plans to expand existing activities. The report also confirms the globalization of innovation -- the major finding of last year's report -- is continuing at an increased rate in all areas of industry. Speed to market and the domestic shortage of science and engineering talent are two key drivers for offshoring projects.

While the press release was issued Monday, the actually report will apparently be discussed at a Conference Board conference in September. The report was done with Duke University's Fuqua School of Business Offshoring Research Network.

Regardless of what you think of offshoring, the report is a clear indication that the US can not take "innovation" for granted as a driver of competitive advantage. We need an innovation policy in this country.

It appears that the issue of mark-to-market (fair-market) accounting being replaced by mark-to-myth accounting is still very much alive. As you may recall, earlier this year (under pressure), the Financial Accounting Standards Board (FASB) changed the accounting rules to allow banks to basically say their hard-to-value loans are worth whatever they want to say they are worth - essential worth what they paid for them in the overvalued bubble market rather than what anyone would pay for them today (see many earlier postings).

However, Jonathan Weil reports on Bloomberg, Accountants Gain Courage to Stand Up to Bankers that things might be shifting back toward fair market valuation:

Now the FASB says it may expand the use of fair-market values on corporate income statements and balance sheets in ways it never has before. Even loans would have to be carried on the balance sheet at fair value, under a preliminary decision reached July 15. The board might decide whether to issue a formal proposal on the matter as soon as next month.

(See the FASB website for a summary of the Board decision and background materials).

Last week, Floyd Norris reported in his NY Times column (Politicians Accused of Meddling in Bank Rules) on activity on the international front:

Accounting rules did not cause the financial crisis, and they still allow banks to overstate the value of their assets, an international group composed of current and former regulators and corporate officials said in a report to be released Tuesday. The report, from the Financial Crisis Advisory Group, also deplored successful efforts by politicians to force changes in accounting rules and said that accounting standards should be kept separate from regulatory standards, contrary to the desire of large banks.

The report and a summary press release is available on the FASB website.

On the other side, there are folks who continue to believe account rules were the cause of the financial meltdown -- such as Brian S. Wesbury and Robert Stein's recent piece in Forbes - Suspend Mark-To-Market--Now:

In late 2007, the Financial Accounting Standards Board (FASB) changed the definition of mark-to-market accounting rules as they applied to the U.S. financial industry. The board forced financial firms and auditors to use "observable," market prices to value securities rather than models or cash flow. Within a year, the U.S. was in the middle of the worst pure financial panic in a hundred years. Coincidence? We think not

I must say I find it rather hard to believe that someone can state that the financial meltdown was due to an accounting change. I guess Messrs Wersbury and Stein haven't heard of subprime mortgages, under-water home loans, over-leverage, synthetic CDOs, credit default swaps, etc. It seems their argument was everything was fine until the building inspectors forced us to look at all the termite damage. As long as we didn't look, nothing bad was going to happen.

Of course, bad things did happen. And we are still not facing up to the need to clean up the mess (see earlier posting).

The ostrich approach to asset valuation is bad for banks, bad for investors, bad for the economy. It is bad for intangible assets - and the ability to bring intangibles into mainstream finance. It is just bad - period.

The sooner we deal with these over-valued hard-to-price loans, the better. Let's hope the new FASB rules will help in that process.

Two quick stories in today's papers on manufacturing. First this from leading venture capitalist John Doerr and GE head Jeff Immelt in the Washington Post - U.S. Needs to Lead in Clean-Energy Future:

We are clearly not in the lead today. That position is held by China, which understands the importance of controlling its energy future. China's commitment to developing clean energy technologies and markets is breathtaking.

Their answer, more innovation. While they reject "massive government intervention", their policy solutions sound like a green industrial policy to me (which I agree with): "a price on carbon and a cap on carbon emissions"; "driving efficiency through incentives, a renewable electricity standard and a national unified smart grid"; "energy standards that grow steadily stronger"; "funding research, development and deployment, at scale"; "open markets abroad -- including the Chinese market -- for U.S. clean-energy products." They specifically endorse the Clean Energy Deployment Administration idea of my old boss, Senator Jeff Bingaman.

Then there is this in today's Wall Street Journal - China's Gains in Manufacturing Stir Friction Across the Pacific:

China is on its way to surpassing the U.S. as the world's largest manufacturer far sooner than expected. The question is, does that matter? In terms of actual size, the answer is, no. But if size is a proxy for relative health of each nation's sector, the answer is yes.

The article goes on to give an overview of the new debate on manufacturing:

Many economists argue that the shrinking of U.S. manufacturing -- both in terms of jobs and share of gross domestic product -- is a normal economic evolution that started long before China emerged as a manufacturing powerhouse. From their point of view, the shrinking would happen regardless and is actually a sign of health that the sector doesn't need to be big to be productive and is shedding low-skill jobs and creating select higher-skill ones.
Global Insight's Mr. Behravesh is one of those who views China's rise as normal, even healthy. "In the natural course, countries go from agriculture to manufacturing to services," he says. "To subsidize manufacturing pushes [the U.S.] backwards down that curve."
But another school of thought -- one known by the somewhat backhanded label of "manufacturing fundamentalists" -- contends the U.S. decline isn't natural and must be reversed to retain America's economic power. From their perspective, that necessitates fighting Chinese policies that fuel low-cost exports, swamping a variety of industries from textiles to tires.
"The notion that we can be a nonmanufacturing society is folly," says Peter Morici, an economist at the University of Maryland. "It's pseudo-science that gives rise to the collapse of civilizations."

I have to say that both sides of this debate worry me. On the one hand, the "good old days" of manufacturing where workers could enjoy above average wages based on low skills is gone forever. Attempts to return to that economy are doomed to failure. The manufacturing of tomorrow will look less and less like the manufacturing of yesterday - or even today.

What worries me more, however, is the old idea that an economy the size of the US can survive without manufacturing. That notion is simply is ludicrous. If there was a "nature" progression from agriculture to manufacturing to services, then the US would not be a leading agricultural nation.

The shift in agriculture is a good case study to look at. Agriculture did not disappear from the US, to be shifted to some other nation that continued to do things the way it had always been done. Agriculture was transformed; it mechanized (industrialized, if you prefer). Likewise, manufacturing is in the process of being transformed into a much more knowledge-intensive activity.

In other words, the key is not the output ("agriculture," "manufacturing," "service"). It is the production process that is important. Knowledge has become the key input (factor of production).

Thus, what worries me is not that China is taking over low-skilled, low-wage manufacturing. That form of manufacturing is slowly dying (whether the industry and economists understand this or not). What worries me is the China is quickly ramping up to lead in the transformed manufacturing environment. Our concern should not simply be green technologies; all technologies and the overall production process are at risk.

The proposals outlined by Doerr and Immelt are important. But more, much more, needs to be done. Now.