January 2011 Archives

In an earlier posting on the State of the Union Address, I drew attention to the President's plan for government re-organization. Yesterday, the White House announced that Deputy OBM Director Jeffrey Zients to head up the government reorganization efforts. Zients is also currently also the federal government's Chief Performance Officer (CPO). The announcement noted that "Our first focus will be looking at trade and exports to see how we can better reform these functions to give American companies a leg up in the global economy."

This is a good step forward. But there are other steps the President can take immediately to push forward the competitiveness agenda.

As I mentioned earlier, Center for American Progress (CAP) published a report outlining a number of process steps the Administration could take to address policymaking on competitiveness. In that earlier posting, I highlighted the coordination and planning activities recommended in the report -- based on the national security model. I will come back to those recommendations.

However, the report (A Focus on Competitiveness) also addressed the reorganization question, with the following suggestion:

To address the fragmented responsibility for key competitiveness functions, the president should also ask the National Academies panel to study the needs of interested parties and evaluate an executive branch reorganization plan that could include:

* Creating a Department of Business, Trade, and Technology by combining relevant agencies within the Department of Commerce with trade and business focused agencies and offices, including the Office of the United States Trade Representative, the Small Business Administration, the Export-Import Bank of the United States, the Overseas Private Investment Corporation, and the U.S. Trade and Development Agency. Separate evaluations would determine where to put existing Commerce "administrations" not closely aligned with the new department's mission. Specifically, these evaluations should assess:

- Whether the National Oceanic and Atmospheric Administration is a better fit in the Interior Department, whose mission includes protecting America's natural resources and heritage. NOAA distributes environmental information, manages coastal and marine environments, and conducts applied scientific research on ecosystems, weather, climate, and water.

- Whether the Economics and Statistics Administration (including the Bureau of Economic Analysis and the U.S. Census Bureau) should be moved along with other federal statistical agencies to a new crosscutting U.S. Statistical Agency. Another option is to create two separate statistical agencies--one for demographic, economic, and business information, and another for environmental information, leaving other unrelated statistical functions where they are. As these options are being evaluated, we recommend the president issue an executive order that directs the design and implementation of a "virtual" U.S. Statistical Agency. (See box on page 28)

* Creating a more expansive "competitiveness agency" by adding to the new department described above job training and higher education programs from the labor and education departments

* Creating an even more comprehensive competitiveness agency by also including programs that promote science for economic development purposes, such as those in the departments of energy, transportation, and housing, and some science coordination functions from the White House Office of Science and Technology Policy

I doubt very much that the Administration will look to hard at the last two options of an expansive "competitiveness agency" or a super-agency. Those, especially the latter, are probably a bridge too far. President Nixon once tried the super-agency approach, but it never received serious attention.

But the creation of a Department of Business, Trade, and Technology is within the realm of possibility, as is the creation of a U.S. Statistical Agency. Although, the centralization of statistical functions has its own problems and pitfalls (I know -- I looked into this back in the 1980's as part of my role in the last attempt to create a Department of Trade and Industry).

While I may support such as reorganization (and clearly support the Administration looking at the options), let me add a note of caution. No form of reorganization will completely solve the coordination problem. I've noted before in the context of both financial regulation and homeland security that we don't necessarily need to create new hierarchical structure. We need to empower the network.

In that regard, I hope the Administration will look very carefully at the parts of the CAP report I highlighted earlier:
• A Quadrennial Competitiveness Assessment by an independent panel of the National Academies whose objectives are to collect input and information from many sources and perform a horizon scan that identifies long-term competitiveness challenges and opportunities
• A Biannual Presidential Competitiveness Strategy that lays out the president's competitiveness agenda and policy priorities, and captures the attention and buy-in of cabinet principals
• An Interagency Competitiveness Task Force led by a new deputy at the National Economic Council that develops the biannual strategy, oversees White House coordination of competitiveness initiatives, and monitors their implementation by agencies
• A Presidential Competitiveness Advisory Panel of business and labor leaders, academics, and other experts who assist the administration in developing policy details.

A version of the last point is taken care of with Council on Jobs and Competitiveness. I suspect that the Interagency task force might be in the works. The first two -- the assessment and the strategy -- can be implemented by Executive Order. In fact, the President can build upon the strategy report mandated in the reauthorization of the AMERICA Competes Act.

Reorganization is tricky and will use up a fair amount of political capital. In contrast, creating a Quadrennial Competitiveness Assessment and a Biannual Presidential Competitiveness Strategy is easy. And I suspect will have a greater long term impact.

The President should go ahead immediately with these two actions. It will show how serious he is about the competitiveness agenda. And it will start the process moving. Otherwise his agenda risks getting bogged down in the seemingly endless debate over budgets and government reorganization.

Canada gets it. Or at least Tony Clement, Canadian Minister of Industry, gets it when it come to understanding that the manufacturing and knowledge economy are one.

Here is a quote fro a recent article in Site Selection magazine:

Asked how important manufacturing continues to be in the digital age, Clement said, "I really do believe we have to continue to make things. When I first came to our department as minister, I found in speeches this false dichotomy between the knowledge economy and the old manufacturing economy. I really altered that message, because to me the two are very much connected. Yes, in ICT, you can move forward on the knowledge economy in and of itself. But the knowledge economy primarily is a means to an end -- it's how you do agriculture, oil and gas, greentech or manufacturing better."

Amen!

GDP estimates from BEA for the 4th quarter of 2010 shows that the economy grew by 3.2%. This compares with a 2.6% growth rate in the 3rd quarter. For the entire year, GDP was up by 2.9%. (Remember that this is an "advanced" estimate based on incomplete data, including trade data. It will be revised twice in future months and should be treated accordingly.)

Good news, but there is a worrisome detail in the data on fixed investment. Investment in equipment and software was up, but not as much as previous quarters. This investment grew by only 5.8% in the 4Q, compared with 14.6% in 4Q 2009, 20.4% in 1Q 2010, 24.8% in 2Q 2010 and 15.4% in 3Q 2010. However, almost all of that slow down is in investment in transportation equipment. Investment continues to grow in IT equipment and software and in industrial equipment. In the case of IT equipment and software, investment grew by 20.7% in the 4Q, although investment specifically in software grew by only 6%. Whereas investment in transportation equipment dropped by 9.3% and investment in industrial equipment grew by 4.2%.

Unfortunately, the GDP numbers do not offer any guidance on investment in intangibles other than software. So we do not know whether companies have increased their investment in important areas such as human and organizational capital. But that is a discussion for another time.

Bottom line: the economy seems to be picking up. But not as good as it could be. As the New York Times notes, "While an improvement, the latest output number was slightly below analysts' expectations of 3.5 percent." Nor is it anywhere near the levels of previous recoveries at this point in the cycle. So more needs to be done.

The GE Global Innovation Barometer 2011 - a survey of business executives - is out with some interesting findings:

The "GE Global Innovation Barometer" found that 95 percent of respondents believe innovation is the main lever for a more competitive national economy. But just how to accomplish that will take a uniquely 21st century path, as respondents are prioritizing technology that addresses local needs; looking for innovation from smaller organizations; and pursuing strategic partnerships to make tangible innovation happen. All of these areas are converging as problems are now bigger -- which involves a wider system of players.

Beth Comstock, chief marketing officer and senior vice president, GE, said the study illustrates that the rules around innovation are changing. Companies must "embrace a new innovation paradigm that promotes collaboration between all players -- big, small, public, and private -- fosters creativity, and emphasizes solutions that meet local needs."

Here is some details:

"Today Innovation is more driven by people's creativity than by high level scientific research"
27% Strongly agree
42% Somewhat agree
22% Somewhat disagree
6% Totally disagree

"The way companies will innovation in the 21st century is totally different than the way they have innovated in the part."
39% Strongly agree
36% Somewhat agree
17% Somewhat disagree
5% Totally disagree

And the biggest difference they see is the need for partnerships among several players rather than a single organization.

So, where is the public policy to foster this new paradigm of collaborative, beyond-science-based innovation?

Here is an interesting tidbit from BusinessWeek about the future plans for D&B. The credit reporting part of the business has been spun off as Dun & Bradstreet Credibility Corp. The CEO, Jeff Stibel, want to move the company into the business of reputation management. According to the story,

"What we're trying to do now is show a holistic picture" of what makes a business appear trustworthy, he says. "Credit is just one component.... D&B's largest competitors these days are Google, Facebook, and Twitter."
. . .
Credibility Corp.'s first new offering will collect comments and reviews from sites such as Twitter, the Better Business Bureau, Yelp, and Citysearch.
. . .
"Businesses are confused and paralyzed," he says, "because they don't know where to start" managing how they are perceived online.

Unfortunately, the same can probably be said for how small businesses manage most of their intangible assets -- not just reputation.

There has been a lot of bandwidth wasted (my update of the old "ink wasted") in reaction to the State of the Union. But here is an interesting side comment worth highlighting. Over at the IAM Blog, Joff Wild takes the President to task for claiming that the US issues the most patent. Joff notes that China issues far many more patents, but there are unexamined design and utility patents.

Now here is where it gets interesting. Joff does on to say:

However, the numbers are not really that important. It would be a huge mistake for the Americans to think that they are and to try to gauge how they are doing based on such a misleading measure. Instead, what matters is that patents being granted enhance the competitive position of their owners, and/or help them raise finance, and/or build new products, and/or enable expansion, and so on. A patent is just a piece of paper until it enables the patentee to do something it would not otherwise have been able to do. If the patents being granted by an office are not enablers then that office is merely spending time and money on handing out worthless pieces of paper. [Emphasis added]

So, as we talk about innovation policy -- and its subset innovation metrics, let us please try to keep this fundamental point in mind. And thanks to Joff for reminding us.

Sad news has come that Professor Daniel Bell has passed away. Bell was an early and profound influence on my thinking through his seminal book, The Coming of the Post-Industrial Society. That book shaped the discussion of our economic transformation for generations of thinkers. And generations of policymakers. If you scratch the surface of the debate over the changing nature of our economy, you will find it is built on the framework constructed by Bell.

While I now disagree with some of the concepts Bell elucidated in his work, I am profound grateful for his contribution. His path-breaking work helped us all better understand the world we live in. May he rest in peace.

There was a sleeper issue in last night's State of the Union. As expected, President Obama spoke of the need to confront our competitiveness challenges through greater investment in innovation (aka R&D), education and infrastructure. But the sleeper proposal was this: government reorganization. And not just reorganization in general, but reorganization tied to increasing American competitiveness. Here is what the President said:

We live and do business in the Information Age, but the last major reorganization of the government happened in the age of black-and-white TV. There are 12 different agencies that deal with exports. There are at least five different agencies that deal with housing policy. Then there's my favorite example: The Interior Department is in charge of salmon while they're in fresh water, but the Commerce Department handles them when they're in saltwater. (Laughter.) I hear it gets even more complicated once they're smoked. (Laughter and applause.) [Biggest laugh line of the night.]

Now, we've made great strides over the last two years in using technology and getting rid of waste. Veterans can now download their electronic medical records with a click of the mouse. We're selling acres of federal office space that hasn't been used in years, and we'll cut through red tape to get rid of more. But we need to think bigger. In the coming months, my administration will develop a proposal to merge, consolidate, and reorganize the federal government in a way that best serves the goal of a more competitive America. I will submit that proposal to Congress for a vote -- and we will push to get it passed. (Applause.) [Emphasis added.]

Government reorganization for competitiveness can mean only one thing: redoing the Commerce Department. Granted, there are other changes as well. For example, the Center for American Progress has recommended a number of internal coordinating mechanisms, including a Quadrennial Competitiveness Assessment (see earlier posting). But the big idea is turning Commerce into a Department of Industry and Trade.

As a scarred veteran of the last attempt to reorganize Commerce during the 1980's, I can attest that such a action will not be easy. There are many permutation to the new structure -- although some are better than others. There is no way to completely pull all the competitiveness related programs into one Department (e.g. should worker training programs be in Labor or Education). And there is a lot of vested interests in keeping the familiar structures in place.

Then there will be push from the GOP to not re-organize departments, but eliminate them.

So, I look forward the President's proposal. And to the debate that will follow. That debate will be set deeply in the context of the debate over spending and investment -- as reorganization is a way of answering the critic of "wasteful duplication."

With the budget and re-organization issues linked at the hip, this sleeper issue could well turn out to be the big issue of the year.

Every once and awhile commentators who I respect go off track. For example, Ezra Klein's and Paul Krugman's comments on competitiveness are just wrong headed.

Klein's column in today's Washington Post The problem with competitiveness, and Canada sums up the issue as follows:

In the end, the measure of our nation isn't in how many competitors see their economies left in the dust, but how many Americans see their incomes raised, their quality of life improved, their children's future secured. We're in a race not with China, but with how good we have it now, and how good we can have it tomorrow.

True to a point. After all, the original definition of competitiveness from the President's Commission on Industrial Competitiveness (Young Commission) 1985 report Global Competition: The New Reality is as follows:

Competitiveness is the degree to which a nation can, under free and fair market conditions, produce goods and services that meet the test of international markets while simultaneously maintaining or expanding the real incomes of its citizens.

But I have to fundamentally disagree with how he views the competitive situation. According to Klein:

But the Chinese, by and large, are competing with companies in India, Indonesia, Thailand and Malaysia, because the things those workers make are not, in most cases, the things we make or even the things we want to make.

"China competes on price," says Robert Shapiro, director of Sonecon, an economic consulting firm. "There isn't any doubt about that. The United States competes on quality and innovation. That's how our companies outdo other companies."

That may have been true a decade ago, but it is absolutely not true today. On the very same page of the Washington Post that printed Klein's article is this story -- Chinese tech giant turns to U.S. courts -- about the Chinese company Huawei, the world's second-largest telecommunications equipment maker [telecommunications?? something that we don't make or want to make any more??]. Huawei is suing Motorola for breach of intellectual property agreements. As the story notes:

"The case indicates that Chinese firms are climbing up the ladder of production," said Nicholas Howson, a professor of law at the University of Michigan. "Fifteen years ago we would have said a case like this was bogus. Now, we really don't know."

In another example, US states are looking to China for high-speed rail (see earlier posting). China recently entered into an agreement with GE to share aviation technology. As the New York Times story on the deal notes,

The first customer for the G.E. joint venture will be the Chinese company building a new airliner, the C919, that is meant to be China's first entry in competition with Boeing and Airbus.

High speed rail? Jet planes? Clearly not something we what to make in the US or that we compete with the Chinese on? NOT!

Unfortunately, Klein and Shapiro's comments reflect an strongly imbedded idea of an international division on of labor: China makes cheap things; US does high-value added production. As I've pointed out before, the reality is very different. And even if China (and other countries like India, Indonesia, Thailand and Malaysia) are currently the leaders in cheap manufacturing, they are content to stay in that position forever. Nor is the US the world's best competitor on innovation and technology. As I depressingly note every month in my analysis of the trade data, our 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.

So yes, we are in a competitive situation with respect to other countries such as China. And ignoring it doesn't make it go away.

Then there is Paul Krugman's piece on The Competition Myth. Krugman has long hated the concept of competitiveness. But he seems to have shifted his argument. Before, he argued that nations don't compete; companies compete. Therefore there isn't anything called national competitiveness. Now he argues that competitiveness is just a ruse for America Inc. (where the interests of the American economy is the same as the interests of American companies). I think he was closer to the truth the first time. American companies are the vehicle for national competitiveness -- but that competitiveness is important for everyone since workers earn their pay working for companies.

What I find absolute astounding is that Krugman can make the following comment:

Furthermore, while America is running a trade deficit, this deficit is smaller than it was before the Great Recession began.

His cavalier dismissal of the trade deficit is strange. Of course the deficit went down -- because demand (i.e. imports) went down. As Krugman has been saying over and over and over again, "it's all demand." But when demand come back up -- so will the deficit.

Our competitiveness problem started long before the current financial crisis created recession. And Krugman is correct that simply making companies more competitive does not necessarily help the overall economy. That what is so important about the overall definition of competitiveness. There are many ways to improve "competitiveness" -- such a drastic devaluation which could also drive down living standards. Thus the importance of the old goal of "maintaining or expanding the real incomes." But clearly that has not happened for the average American over the past few decades -- as Krugman has often pointed out. Instead, companies become competitive through means that did not boost real incomes for many.

Therein lies the difference between company competitiveness and national competitiveness. We need to get back to national competitiveness and we need to get back to that goal of rising incomes.

Actually, we need update it to specifically focus on the standard of living for all. They That will help us understand that competitiveness is a tool -- and not an end point. The end point is a prosperous economy for all. Being internationally competitive is how, in a globalized economy, we achieve that goal.

It is widely expected that this evening President Obama will use his State of the Union address to highlight America's economic competitiveness and the challenges we face. He will call for greater investments in R&D, education and infrastructure. That will touch off a debate over the federal government's budget and the role of government in the economy. GOP critics are likely to call for less regulation, tax cuts and spending reductions as an alternative means on boosting competitiveness.

However, I fear that both sides may be stuck in an earlier vision of economic competitiveness that is no longer useful as a guide for policymaking (see our earlier paper Info Age: Recast Issues Demand New Solutions). A quarter of a century ago, the United States confronted and overcame a challenge to its economic competitiveness. The U.S. now faces a similar challenge. However, the situation today is different in profound ways while our policy responses are, in many ways, echoes of the 1980s. We need to reevaluate so that we can reformulate appropriate policies.

The global economy has entered a new era. The industrial age was driven by machines and natural resources. This new innovation age is being driven more and more by people and intangibles. Foremost are worker skills and know-how, innovative work organizations, new business methods, brands, and formal intellectual property such as patents and copyrights. Our economy increasingly runs not just on technological advances, but also on ways of expanding consumer choice through more customized products, more individualized service, and greater attention to aesthetics in order to respond to changing consumer tastes.

In the 1980s, the U.S. faced global competition in goods and loss of domestic manufacturing firms; now it faces the fusion of manufacturing and services and the opening to international competition of services sectors once thought immune to such challenges. Then, the operating issues were quality and productivity; now they are customization, speed, and responsiveness to customer needs. Then, the concern was how to build on our successful scientific research system; now we must look for ways to maintain innovation defined broadly, including understanding and harnessing new models of technological and non-technological innovation.

Then, a key concern was creating a flexible and educated workforce; now, in addition, we must foster an educational enterprise that can provide the constantly changing skills required in a knowledge- and information-intensive economy.

Then, the main financial challenge was reducing the cost of capital; today's equivalent challenge is unlocking the value of underutilized knowledge assets and ensuring the efficiency and stability of the global financial system. Then, the policy problem was raising awareness of the importance of international trade; now it is crafting policy appropriate to a globalized and interconnected economy.

Our focus in the 1980s was on individual firms and industries; now we must find ways of sustaining networks of firms and of adopting new business models. Finally, these problems and challenges, as well as myriad new ideas and technologies, are rapidly sweeping across the domestic and international economy. Their speed requires that U.S. industry, both manufacturing and services--as well as the suppliers of financial, scientific, and human capital--have the capabilities and resources necessary to prosper and grow in this new environment.

Thus, the situation is different from where we were three decades ago. Consequently our policies should be different as well.

In dealing with this new situation we need to go beyond the standard rhetoric of increased spending on public education, R&D and infrastructure on one side and the call for tax cuts and less regulation on the other. Those are simply tools. We need to address what it is we seek to accomplish.

For example, we need to look at how we constantly upgrade the skills and knowledge of our entire population and create a learning society -- not just look at the formal education system. We need to look at the process of creating new goods and services (innovation ) -- not just R&D. We need to look at the organizational infrastructure that makes our workers and companies competitive -- not just the physical infrastructure of road and communications networks. We need to look at how incentives for are created -- not just address the tax rates. We need to have a pro-innovation regulatory system -- not just less regulation.

But first we need to understand the changes so that can we begin to craft policy responses. The new President's Council on Jobs and Competitiveness is a good start. Let's hope it can craft an overall vision on how to address the competitiveness issues of the 21st Century.

Download graph as pdf

The standard reaction to the question of regulation and innovation seems to that regulation is anti-innovation. However, I have made the case before that regulations can serve as a forcing function to create new opportunities. And a story in today's Washington Post "The rush is on to make food traceable" illustrates the point. The story's tag line (in the printed paper, but not on line) is "Firms compete to develop technology to comply with safety law."

In response to a new federal food safety law and growing consumer interest, vast amounts of new data are being generated about the complicated path that food takes from field to supermarket shelf.

And, increasingly, some of that information is being offered to curious shoppers, who in some stores can wave a smartphone above an apple or orange and learn instantly where it was grown, who grew it and whether it has been recalled. They can even contact the farmer, if they are so moved.

. . .

the new law has triggered a small gold rush for technology companies angling for a piece of an emerging market, which covers food other than meat, poultry and egg products. They are competing to develop the tracking technology and manage the data.

Regulations creating a "small gold rush"? Interesting. Isn't that the type of activity we want to encourage?

In an earlier posting, I was supportive of the new Executive Order on regulatory review and the requirement to promote innovation. However, there is a danger of elevating innovation to a goal of the regulatory system. That danger is that the court become involved in determining whether a policy is pro- or anti-innovation.

An immediate example is a lawsuit filed yesterday by the Association of Private Sector Colleges and Universities (APSCU) against the Department of Education over new regulations governing their industry. Those regulations set down a number of requirements for private sector schools' access to federal funds under Title IV. As the APSCU press release states, ""they will have a chilling effect on job creation and innovation" (emphasis in original). The lawsuit sums up the harm:

The final regulation impose significant new regulatory obstacles to private sector schools' ability to participate in Title IV programs. These obstacles will impede private sector schools from continuing to provide the benefits of their innovative educational programs to those traditionally ignored and often rejected by more conventional schools.

I can't -- and shouldn't -- judge the merits of this particular case. But it does lead me to the following question: if regulations are now required to "promote innovation", could future lawsuits hinge on that claim of anti-innovation harm? Would that be a violation of the Executive Order -- and therefore of administrative law? And, as important, how would the courts adjudicate what is and is not pro- or anti-innovation?

As we have seen in the political sphere, both side claim their proposals are pro-innovation, pro-growth and job creating while their opponents proposals are anti-innovation, anti-growth and job-destroying. And we have already seen arguments by economic experts on both sides of intellectual property and anti-trust cases. Will we see battles between "innovation experts" on either side of regulatory lawsuits?

More likely we will see more attention to claims of pro- or anti-innovation affects in the regulatory administrative process as agencies seek to build a record to ward off the possibility of being overturned in court.

It could get very interesting.

This afternoon, President Obama gives a speech at a GE plant in Schenectady NY. According to numerous press reports, he will announce the creation of a new White House Council on Jobs and Competitiveness -- to be headed by GE CEO Jeffrey Immelt. Immelt outlined his vision for competitiveness in an op-ed in this morning's Washington Post. This focuses on three areas:

Manufacturing and exports: We need a coordinated commitment among business, labor and government to expand our manufacturing base and increase exports.
. . .
Free trade: America cannot expand its manufacturing base without greatly increasing the volume of goods it sells overseas.
. . .
Innovation: Businesses should invest more of their cash and resources in advanced products and technologies that will create jobs in the United States, and government should incentivize this investment in innovation.

I applaud the President for setting up this new Council -- something that I have been advocating for years. However, I would warn of taking too narrow of a focus. If it simply becomes an export promotion policy council -- well, we have one of those already. Nor should it be a "innovation means R&D" council -- we already have an one of the those as well (PCAST).

The Council on Jobs and Competitiveness needs to look at a much greater range of issues. As I've noted before, The AMERICA Competes Act requires Commerce Department to undertake a study on economic competitiveness and innovative capacity of United States and develop a National Economic Competitiveness Strategy. That strategy (as described in Section 604 of the Act) is to include recommendations on the following:

(i) How the United States should invest in human capital.
(ii) How the United States should facilitate entrepreneurship and innovation.
(iii) How best to develop opportunities for locally and regionally driven innovation by providing Federal support.
(iv) How best to strengthen the economic infrastructure and industrial base of the United States.
(v) How to improve the international competitiveness of the United States.

I would also note that the White House Council is an external advisory body. There still needs to be an internal coordinating process that can implement any policy suggestions. That should be under the purview of the National Economic Council. My guess is that the new NEC head, Gene Sperling, will see this as his number one task. Given the new political climate, I think Gene's job may be the hardest of them all. Let hope the new Council can not only come up with needed policy recommendation, but can also draw attention to the problem and forge a broad consensus on the path toward solutions.

On Tuesday, President Obama signed Executive Order 13563 on Improving Regulation and Regulatory Review. This Executive Order could be a big step forward in our goal of harnessing the power of intangible assets for economic prosperity. But only if we recognize the opportunity and act on it.

Much has been made about whether this is a move back to deregulation or a bone thrown to business. I tend to agree with Bob Litan's analysis in the New York Times:

"It's more of a talking point than a policy," said Robert E. Litan, the vice president for research and policy at the Kauffman Foundation, who oversees academic research relating to entrepreneurship.

"Even if you find a rule you don't like, and they probably will, then they're going to have to go through rule-making and then it's going to take a year or two or longer," Mr. Litan added. "And then somebody will sue them; if it's not another industry it will be a consumer interest group or a Republican interest group."

He recalled that one of Ronald Reagan's first acts as president was to win repeal of a requirement for auto airbags that car-makers had fought. The insurance industry sued, arguing that the bags would save lives and medical costs, and ultimately won in the Supreme Court.

So, it is not a simply question of more or less regulation. The issue is what the regulation does and how does it accomplish that goal. The Executive Order sets out a process for regulatory review. There is a long history of Presidential orders dealing with the regulation process. This Executive Order puts the Obama Administration's stamp on that process.

But here is the interesting twist. The very first sentence of Section 1 of the Executive Order (General Principles of Regulation) states that a goal of regulation is "promoting economic growth, innovation, competitiveness, and job creation." Section 3 contains this provision: "Each agency shall also seek to identify, as appropriate, means to achieve regulatory goals that are designed to promote innovation." In other words, regulations should be pro-innovation. Of course, that leaves open the question of whether all innovation is beneficial -- as the experience of the last decade of financial innovation might throw into doubt.

Changing existing regulation to allow for certain activities is one way of promoting innovation. For example, as I have noted before, the Small Business Administration's regulations on the rules are unclear as to whether intangible assets can be used as collateral. The regulations could be changed to development specific underwriting standards for intangibles, especially intellectual property.

So rather than simply have someone scrub regulations on a cost-benefit basis, let me suggest an additional (and complementary approach). Existing regulations should be reviewed with a eye towards how they can be modified to help foster investment in and utilization of intangible assets. The SBA lending regulations would be a perfect place to start. Next would be regulations governing how the federal government uses its own intangible assets. And that stupid rule that bars Industrial Development Bonds from being used to finance facilities for the production of intangibles such as software or biotech research (although that may also require legislation).

I believe that such active use of regulations to foster intangible assets captures the spirit and the letter of the Executive Order. It would move the US toward more sustained economic growth in the I-Cubed Economy.

Apropos my earlier posting on learning from China, here is Steven Pearlstein's take on the situation:

The right response to these challenges would be for the president this week to laud China for the success of its economic policies and announce that the administration will begin forthwith to apply each and every one of them to Chinese exports into the United States. Subsidies and directed credit for local companies, buy-American provisions for government agencies and government contractors, currency manipulation, the rules on "conditional market access" and "indigenous innovation" - surely China could hardly complain if we were to pay them the highest compliment by embracing their economic model.
. . .
Americans are uncomfortable with the idea of industrial policy. But when competing against countries that practice it skillfully and aggressively, we may have no choice but to respond in kind - if for no other reason than as a way to negotiate a more level playing field for American firms and American workers.

This week's state visit by Chinese President Hu Jintao brings with it a lot of baggage -- and not just suitcase and trunk kind. Issues of trade, technology, economics and currency, human rights, military competition and North Korea make a very large - and contentious - agenda. But rather than just going into these discussions with demands (which we must do), we should also look for area to improve our own policies.

As I noted in a posting last year, a key question is whether the United States is smart enough to learn from the Chinese -- both on technology and economic policy. That earlier posting used the case example of the possibility that Chinese companies might build high-speed rail in the US. My argument was that there should be specific conditions for technology transfer to US companies, use of US labor and use of US suppliers. China (and other countries) have been doing this for years. We run away from such ideas.

The US need to act strategically in its economic policy -- the way China and other countries have been doing for years. US competitiveness policy is stuck in generalities: improve education; more R&D; build modern infrastructure. Chinese policy is made up of specifics. Can we learn from those specific -- and from the policies of other countries?

Thus, let us use the visit by President Hu to both look more closely at Chinese policy -- and to hold the mirror up to our own face. That would be a positive path to improvement for both sides.

With Steve Job's surprise announcement that he is taking medical leave, we get a stark look at what really drives value in I-Cubed companies such as Apple. One quote in the Washington Post story from Rajesh Ghai, an analyst with investment bank ThinkEquity, sums it up:

"There is a perception among investors that's pretty strong that Steve Jobs is the most important asset that Apple has," Ghai said. "But there is definitely an organization around him that understands the design philosophy and process he has embraced."

Seems like from an investor's point of view, we are back in the days of the Jay Gould and Commodore Vanderbilt, where rumor and suggestion -- not fact and data -- guided the markets. Granted, rumor and suggestion (and perception and intuition) will also play a part in financial markets. But data and measurement is key step toward understanding. And without understanding there is no effective management -- and no clear path to economic prosperity.

As the Apple situation suggests, we still have no system of measuring or understanding what is important in the I-Cubed Economy.

FYI -- as a followup to my recent posting on China's new patent strategy, here is an interesting piece in Business Week from Vivek Wadhwa -- China Could Game the U.S. in Intellectual Property.

Today, Treasury Secretary Geithner sits down to talk taxes with corporate CEOs. According to a story in today's Wall Street Journal, intangibles are already on the table:

More-targeted changes have also been floated recently by some corporate leaders, including sharp tax-rate reductions for income generated from patents and other intellectual property. Such rate reductions, known as "patent boxes" or "innovation boxes," have been adopted across Europe.

Business leaders on Mr. Obama's Export Council, an outside advisory group that looks for ways to boost U.S. exports, recently endorsed the idea, saying in a letter that a tax cut should extend to "all intellectual property that is important to the U.S. economy."

"It really needs to be looked at in the context of comprehensive tax reform," said Rep. Charles Boustany (R., La.), a member of the Ways and Means Committee who has been weighing the idea.

Critics argue that a patent carve-out could provide a windfall to some big companies and could be expanded to include logos and other less deserving types of intellectual property.

The problem, as the story goes on to note is that any new tax breaks for intangibles goes against the push for a more streamlined, simpler tax system - and against the deficit problem. The basic idea of reform is to broaden the tax base by eliminating specific tax breaks in order to be able to lower the overall rate:

Finding any new tax breaks that can meet the administration's tough budgetary standards is likely to prove a struggle. Mr. Obama is insisting that changes to the corporate-tax code not add significantly to the government's already dire fiscal problems.

That means the budgetary cost of new tax benefits--including a lower rate--likely would have to be made up through elimination of other popular business breaks.

Administration officials said they were open to corporate leaders' suggestions for specific breaks such as a patent box, but cautioned against breaks that add to deficits.

"If someone has an idea for greater incentives for investment, great," one official said. "But I hope they come with ways to accommodate it within [the standard of] revenue neutrality."

At the meeting where the president's Export Council approved its tax-overhaul recommendations last month, outgoing White House economic adviser Lawrence Summers encouraged business leaders to come up with ideas for spurring investment, but also urged them to avoid seeking a grab-bag of tax breaks.

"The case for investment incentives is compelling," Mr. Summers said, according to a transcript. But "if the business community formulates a wish list [without regard to budgetary impact], that is not a strategy that, in my judgment, is very likely to get to the end successfully."

While the idea of tax incentives for intangibles should be looked into (as we advocated back in our report Intangible Asset Monetization: The Promise and the Reality), let me suggest a slightly different approach. As I noted in an earlier posting, one of the principles of tax reform is that the tax code should not distort investment decisions. Our current system basically acts as a dysfunctional industrial policy with a myriad of very narrow tax breaks for specific industries.

Having said that, there are reason why certain investments should be encouraged over others. For example, I have long advocated a knowledge tax credit because of the market failure issues of free-riders and spillovers (which distorts companies incentives to invest in worker skills).

But as a larger principle I would go back to the economic argument of treating investments the same. Specifically, that principle needs to be extended to treating investments in intangible assets the same as tangible. The tax code should not distort investment decisions by skewing them toward physical assets.

How to do that may be difficult. In some cases, it may be a straight forward policy of including intangibles in eligibility requirements. For example, in the tax deal we should have extended the provisions allowing industrial development bonds (IBDs) to be used to finance facilities manufacturing intangible property. Instead, we went back to the old distorted system where only traditional factories were eligible for this program and new facilities for software development or bio-tech research facilities were excluded.

In other cases however, the tools to foster investments in physical assets are different that those for intangible assets. For example, the quickest way to encourage investment in plant and equipment is through accelerated depreciation -- which we did in the latest tax deal. Since investments in intangibles are already expensed immediately, this tool does not work. Instead, we need to think more in terms of parity. For example, I would have used at least part of the $146 billion allocated to the physical capital investment tax break (expensing of plant and equipment) for this human capital tax break (a knowledge tax credit).

Obviously, the question of taxes and intangibles is a very complex issue. But as we move forward on tax reform, it needs to be at the center of the discussion. If we fail to set a coherent policy on how the tax system fosters investments in intangible assets, we will have failed to come to grips with what is truly driving economic prosperity.

A recent speech by Treasury Secretary Geithner has been getting press coverage as it focused on his views on our economic relations with China. Those comments were an important statement that the relationship needs to change. (For the entire speech, see below.)

But in response to questions, according to the Wall Street Journal, he also spoke about the upcoming budget:

He said it was important to do that "but still preserve the capacity to invest more in things that will be essential to our competitiveness."
"So the debate we should be having has to be fundamentally about how to make sure that we're preserving the capacity to spend more - more wisely and more strategically in research and development, in education, in incentives for investment and in public infrastructure."

I hope that this focus on investing for competitiveness also includes the recognition that it is not simply about throwing more money at the problem. Our strategy needs to change as well. The comments on China reflect a little bit of that. But we also need to go beyond the standard areas as public education, R&D and infrastructure to carefully look at also the policies and investments needed to foster the broad range of intangible assets.

We need to look at how we constantly upgrade the skills and knowledge of our entire population and create a learning society -- not just look at the formal education system. We need to look at the process of creating new goods and services (innovation ) -- not just R&D. We need to look at the organizational infrastructure that makes our workers and companies competitive -- not just the physical infrastructure of road and communications networks.

In sum, we need a comprehensive look at the I-Cubed Economy in the 21st Century -- not just one that recycles the policies of the 1980's and 90's. So while I will applaud references to education, R&D and infrastructure in the State of the Union, I will be looking for a broader vision for the future of the US economy.

November's trade data from BEA showed little change in the deficit: a decline of $0.1 billion to $38.3 billion. According to the Wall Street Journal, economist had expected the deficit to grow to over $40 billion.

Both imports and exports rose slightly. As the chart below shows, a decrease in the non-petroleum goods deficit was basically offset by a larger deficit in petroleum goods. Exports of both petroleum and non-petroleum goods increase while imports of non-petroleum goods declined and imports of petroleum goods increased. Thus our continued need to import oil offsets any improvements in our trade deficit in other areas.

The same general story holds true for intangibles. There was a very slight improvement in the intangibles trade balance ($8 million) as both exports and imports of both private services and royalty payments increased.

The really bad news is that our deficit in Advanced Technology Products increased significantly in November to $11.2 billion (up from a deficit of $8.5 billion in October). The increase was due mostly to a surge in imports of information and communications technology. This is the worst monthly deficit since the government started publishing data specifically on Advanced Technology Products -- far eclipsing the previous high of almost $9 billion set just last September. 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.

Here is a heads-up on what could be a major change in how we treat human capital in the US -- specifically "blue-collar" workers. According to a story in today's Wall Street Journal:

GM CEO Daniel Akerson said Tuesday in a speech that he favors an "incentive-enhanced, variable pay system" for employees. "This would be a very large shift and the issue isn't simply one of principal but one of what the terms will look like," said Harley Shaiken, a professor at the University of California, Berkeley, who specializes in labor issues.

Yes, it would be a very large shift - with all sorts of ramifications. It is unclear to me what those ramifications would be for how we value and foster human capital. I look forward to hearing more.

Yesterday's Wall Street Journal had an article on the plight of the long term unemployed and their drop in wages when they finally find work (Downturn's Ugly Trademark: Steep, Lasting Drop in Wages). For the Economist FreeExchange blog, this story raises a number of questions -- mostly about the cyclical (demand) versus structural causes of unemployment. (See also my earlier posting on this topic).

I would highlight two specific questions that caught my eye:

Why wouldn't firms swap out older, more expensive workers for the cheaper unemployed ones available to them?
...
Or it could be that jobless workers are simply much less productive than those who continue to work. ... But if so many workers are now too unproductive to hire, one has to ask why firms had them on payrolls before the recession.

The answer can be found in firm-specific knowledge. Workers are not fungible cogs in a machine. Much of the intangible asset of worker know-how consists of tacit firm and job-specific knowledge. Thus, most companies know (the example of Circuit City notwithstanding) that in the I-Cubed Economy, replacing existing (expensive) with new but cheaper workers means a loss of worker know-how. Likewise, unemployed workers might have been productive in their old job but would be less productive in new ones (until they acquire that tacit firm and job-specific knowledge needed to be productive).

Unfortunately, too much of the analysis of labor market dynamics misses the point of tacit knowledge. For example, the debate over unemployment benefits assumes a job is a job is a job and that workers are interchangeable (the recent awarding of the Noble Prize to Peter A. Diamond, Dale T. Mortensen and Christopher A. Pissarides notwithstanding). Yet another example of how the legacy mindset of the Industrial Age continues to dominate in the Information Era.

Yesterday, the Supreme Court heard oral arguments in the case of Matrixx Initiatives, Inc. v. Siracusano. Technically, the case is about whether a drug company must disclose reports of adverse patient reactions even though number of reports may not be statistically significant. But it was clear from the discussion (including a series of questions on Satan) that the justices were interested in the broader question of how much information needs to be disclosed. As the New York Times reports,"Much of the argument revolved around whether reasonable investors would want to know about false and outlandish assertions like the one about Satanism so long as the assertions might affect the price of securities." (See also reports from the Washington Post, Wall Street Journal and Bloomberg.)

This question of what information is "material" to investor's decisions is key to the issue of disclosure of intangible assets. Previously, the Supreme Court ruled that the "total mix" of available information must be considered in determining materiality. If the Court comes up with a revised test, that could alter how the SEC and lower courts view the requirement for disclosure of information on intangibles -- either making it more or less likely that intangibles must be disclosed depending on how the Court rules.

I have long argued the intangible assets should be considered material. But I am not sure that I really want the courts to be determining this. I would rather see a more comprehensive set of guidelines. There are groups working on this -- such as the International Integrated Reporting Committee and the Enhanced Business Reporting Consortium. Maybe a Court ruling will spur on these efforts.

A decision is expected in June - so stay tuned.

This morning President Obama is expected to name Gene Sperling as head of the White House's National Economic Council (NEC) -- replacing Larry Summers. For those of you who don't remember, Gene was a key economic advisor to the Clinton campaign, deputy head of the NEC under to Bob Rubin, and then head of the NEC when Rubin moved over to Treasury. In the Obama Administration, he has served as an advisor to Treasury Secretary Geithner. So, Gene is an old hand at the job.

I expect the nature of the job to change somewhat in two respects. First, Larry Summers was essentially a macroeconomist. Gene Sperling is a policy wonk -- of the first order. He likes to call himself a pro-growth progressive -- who is deeply worried about the rise of economic inequality and the stagnation of the middle class. In part that means taking an active government role in more microeconomic concerns. For example, his take on the competitiveness issues is different from Summers. Here is an excerpt from his 2005 book (The Pro-Growth Progressive):

One positive outgrowth of the outsourcing debate may be an increased focus on the policies that maintain a competitive environment for quality job creation: research, fiscal, technology, regulatory, and education policies to improve innovation and build a highly skilled workforce. The United States must always compete for the cutting-edge industries likely to drive higher-wage job creation in the United States. Continually advancing to the cutting edge ensures that as technology and automation increase the ease of out-sourcing, we are developing new products and services that create new job opportunities at home.

Still we can do far more to compete even for the jobs that are not on the cutting edge or require advance technology degrees. When people hear that American jobs are being replaced by foreign workers at 10 percent of the wage costs, they may feel there is no hope of competing for any job that is not highly skilled or requires a physical presence in the United States. Some fear that our economy will see a hollowing- out of middle-class jobs. Yet, to the degree that wages become a smaller portion of the cost of overall production, even automation can increase the ability of the United States to compete for those jobs based on factors we can control: health care costs, modernized technology infrastructure, tax policy, and the skills of our workers. When America loses a job because a poorer nation can provide that service dramatically cheaper, there may be nothing we can do. But why should we ever lose even a single American job because there is better broadband in Bangalore than in Buffalo?

Second, I expect Sperling's style to be very different than Summers. Summers was a principle -- he viewed himself as a policymaker (the policymaker?). Sperling learned his role from Bob Rubin -- who viewed the role of the NEC as a facilitator and honest broker. This is the standard difference is roles that is usually seen best in the National Security Advisor (the Kissinger model versus others).

So I expect to see some shift in economic policymaking in the White House. I think Gene Sperling gets it. Tellingly, the President is scheduled to make the announcement at a factory which makes energy-saving windows in suburban Washington. Also tellingly, there is some talk that Ron Bloom -- the so-called manufacturing czar -- will be moving from the Treasury Department to the White House. And there is the appointment of Bill Daley -- a former Commerce Secretary -- as Chief of Staff.

So, all in all, the White House is becoming more populated with those who understand the need to confront not just the macroeconomic crisis, but the structural and competitiveness challenges facing America. I hope that in all of this shift the Administration will also recognize and take on the need to better foster and utilize our intangible assets. For that is what will be needed to succeed in the new I-Cubed Economy.

The December employment numbers released by BLS this morning showed a glimmer of hope. The unemployment rate dropped to 9.4% from 9.8% in November with the gain in employment of 103,000. The gain was concentrated in leisure & hospitality and health care sectors. The number of jobs created was somewhat below expectations -- the Dow Jones Newswires survey had predicted 150,000 new jobs. But the drop in the unemployment rate was greater than expected. That may be due in part to a slight decline in the size of the labor force.

In addition, the net number of new jobs created in October and November were revised upwards significantly. The new data shows that October's gain was 210,000 jobs compared to the 172,000 originally reported) and November's gain was 71,000 jobs (compared to the 39,000 originally reported).

The number of involuntary underemployed (both the number of workers part-time due slack work and number of workers who could only find part time work) declined ever so slightly. The number of voluntary underemployed also declined by a very small amount. However, as the chart below shows, involuntary underemployed and slack work remain at high level.

All in all, good news. But much more needs to be done before we return to a healthy employment situation (and stop wasting human capital).

In case you missed it, Ronald Coase turned 100 late last month. A Schumpeter column in the Economist (Why do firms exist?) explains and celebrates Coase's work on why economic activity gets organized in companies and other institutions rather than all simply handled as arm's length transactions in the marketplace. The answer is transaction costs. It is more efficient, for example, to hire workers on a long term employment contract than pay them on a per transaction (market) basis.

But, as the article point out, there is more going on than just transaction costs:

But Mr Coase's narrow focus on transaction costs nevertheless provides only a partial explanation of the power of firms. The rise of the neo-Coasian school of economists has led to a fierce backlash among management theorists who champion the "resource-based theory" of the firm. They argue that activities are conducted within firms not only because markets fail, but also because firms succeed: they can marshal a wide range of resources--particularly nebulous ones such as "corporate culture" and "collective knowledge"--that markets cannot access. Companies can organise production and create knowledge in unique ways. They can also make long-term bets on innovations that will redefine markets rather than merely satisfy demand. Mr Coase's theory of "market failure" needs to be complemented by a theory of "organisational advantages".

I would argue that this organizational advantage has to do with the nature of knowledge sharing and communications. Much of the coordination of economic activity relies on the communications of tacit knowledge -- especially in the I-Cubed Economy. That communications is easier and more efficient in an organizational setting than through the arms-length transaction of the marketplace (although a lot of marketplace transactions also rely on the transmission of tacit knowledge). Organizations are better knowledge management mechanisms than markets.

Thus, organizations are both an intangible asset (as a mechanism) and create an intangible asset (shared knowledge).

As readers of this blog know, one of our themes is that the I-Cubed Economy is a global phenomena. Innovation is not the sole purview of America or of the so-called "developed" nations. Other countries are racing to become knowledge economies, especially China.

China has taken another step in that journey by recently publishing a National Patent Development Strategy (which the USPTO has translated into English). The strategy calls for a strengthening of the patent system, including better IPR enforcement -- something that hearten those worried about lax Chinese response to infringement issues.

Many see this as yet another example of how China is becoming a stronger economic competitor to the US. For example, see Steve Lohr's story in the New York Times "When Innovation, Too, Is Made in China". Others (such as the Economist - "Invented Threats") see it as just wonderful -- more innovation for all.

Over at the IAM blog, Joff Wild has this take on the issue:

But China's embrace of patents goes far beyond posing questions for policy makers. The front line in all of this is the corporate one. Companies need to think carefully and creatively about how they are going to operate both inside China from a patent perspective and how they will respond to the challenges Chinese organisations pose for them elsewhere.

I tend to agree. While the document references the move toward more innovation-based economy, its specifics deal with patents. It sets a goal of 2 million new patent fillings annually by 2015, including utility-model and design patents as well as invention patents. That is a lot of patent filings.

But, as the Economist states "Lots of patent filings do not mean more products or techniques that are useful or demanded." It does mean increased potential for litigation and the potential for the creation of patent thickets as a means of increasing competitive advantage. Patent thickets are a set of interrelated patents on parts of a complex technology. Back in the 1980's companies complained that part of Japan's competitive strategy was the creation of patent thickets. The US strategic response was to increase our own patenting -- in essence creating our own patent thickets that could be traded for others.

So -- is the strategy here new innovation or using the patent system to give Chinese companies a competitive advantage? Or both? And are we prepared to respond to the two different challenges of these different strategies? One calls for ramping up our own innovative capability, including cooperative learning from others such as the Chinese. The other may call for a more adversarial approach to fight off mercantilist practices. The trick for both companies and policymakers will to manage both at the same time. That will be quite the tightrope act.

Today, the U.S. Court of Appeals for the Federal Circuit threw out the 25% royalty rate rule of thumb for calculating damages in a patent infringement case (see the Wall Street Journal "Court Changes Law on Patent Damages"). The court said the 25% rule of thumb was arbitrary and that damages needed to be tied to a fact based reasonable royalty rate. That fact based rate, obviously, needs to be based on the value of the patent to the patent licensee - and gets us back to that pesky need for good valuations of intangible assets.

As OceanTomo's in-depth analysis of the case notes, "Today's decision follows generally a trend by the Federal Circuit to require a fact specific nexus between a claim for damages and the patents in suit." It also puts more pressure on get the valuation issue right.

FYI -- from Bruce Bartlett The Very Real Threat of a U.S. Debt Default. Bruce is not exactly a flaming liberal (having worked for both Ron Paul, Jack Kemp and Ronald Reagan and having served as a columnist for Forbes).

This is something that I have also been privately talking about for a couple of months. I watched the drama unfold on the debt ceiling in the mid-1990's when I was working for a financial newsletter. We almost crashed the US economy then. It might really happen this time.

Defaulting on the US debt would very far reaching consequences as it would wipe out one of the largest intangible assets America has -- our creditworthy status. This drama will play itself out in the next few months. Stay tuned.

Apropos yesterday's posting on structural versus cyclical unemployment, here is an interesting posting by Catherine Rampell in the Economix blog of the NY Times -- The Jobs They Are A-Changin':

A large fraction of displaced workers who have found new jobs have had to switch careers, and most of those career-changers have downgraded to a lower-paying job, according to a new report from Rutgers's Heldrich Center for Workforce Development.

By the way, only 22% percent of those who found work in other fields had taken a class or re-training course.

For the currently unemployed, the meaning of the term structural unemployment has a different meaning. Economists use the term to signify a structural shift in the labor market -- from one set of jobs to another. For the unemployed, that structural shift means something else: downward mobility.

That also means a loss of workers skills and a waste of human capital (intangibles assets). And a diminution of the American economy.

Let us begin this New Year with an old debate. One of the ongoing debates in economics right now concerns the nature (and causes) of the persistently high rate of unemployment. The question is whether the unemployment is cyclical or structural. In other words, is the high unemployment rate due to a lack of demand. In which case hiring will pick up once consumers and businesses start spending and investing again. Or is the high unemployment due to structural changes in the economy. In this case, old jobs have been lost permanently and new jobs are being created and the unemployment rate therefore is a function of the mismatch between the old skills of the unemployed workers and the new skills needed in the new jobs.

This has been an ongoing debate as the recovery seem to have failed to take hold in the labor market (for example, see my posting from last summer). Just recently, James Surowiecki's latest piece in the New Yorker - "The Jobs Crisis" provided an excellent summary of the debate.

The difference has large implication for economic policy. If cyclical, the solution is to stimulate demand. If structural, then a different set of policies is called for.

My answer to the question as to whether it is cyclical or structural is yes. It is both. There is a huge demand component to this recession. Financial markets froze; consumer spending and business investment plummeted. No one can or should deny that. Thus, steps to stimulate economic growth were necessary, and apparently successful.

But every recession in the past three decades has been structural. Jobs were permanently lost in some sectors and new jobs created in others. As I've stated before, the recession of the early 1980's was the first recession of the I-Cubed Economy where workers were not placed on temporary layoff but permanently fired. Companies and workers were "downsized" rather than laid-off. Involuntary part-time work was the response of people downsized.

This was part of the switch away from the industrial economy. In the industrial economy, temporary lay-offs were the way of buffering the labor force from cyclical downturns. Workers were kept around for the next upturn -- with either union-based or government-based unemployment payments to maintain family income until the recall.

In the I-Cubed Economy, that process has disappeared. Workers have to find new jobs -- often in new industries. Cyclical downturns now lead to structural changes.

So the argument about either/or is misplaced -- and a dangerous diversion. It has become a rationale for doing nothing. One of the flaws in the debate is assumption that there is little governments can do to correct structural unemployment. Or, as Surowiecki notes, "if unemployment is mainly structural there's little we can do about it: we just need to wait for the market to sort things out, which is going to take a while."

I strongly disagree. [As an aside, I should noted that Surowiecki's general thesis is that the structural argument has been used as an excuse for not taking action on the demand side -- which I strongly agree with.]

We need to confront the need for new policies -- not just argue the either/or. When you think of the situation as a both/and then we can begin to get a grip on the problem. That means adopting both stimulus policies to deal with demand and labor market policies to deal with the structural shifts.

Unfortunately, the labor market policies of today continue to be geared toward the labor markets of the industrial age. For example, we provide government support for unemployment insurance and re-training once people lose their jobs. But we have few programs to upgrade workers' skills and keep them competitive so they don't lose their jobs in the first place. That is way I've been advocating a knowledge tax credit, and tying to unemployment benefits to job sharing and worker training.

There are numerous other policies I've mentioned before, including these from a paper I wrote a decade ago (Making the Global Economy Work for Every Worker: An Agenda for Expanding the Winners' Circle:

•  Building a rapid re-employment system. The Workforce Investment Act of 1998 made a promising start toward turning the crazy-quilt of government re- employment and adjustment assistance programs into a comprehensive system. Government policy should take the next steps to: 1) directly tie the unemployment insurance system to the training program in a comprehensive re-employment framework and 2) replace the multitude of specialized adjustment assistance programs with a broad- based adjustment program. Our goal is a seamless system driven by choice, competition, and information. This system would give workers information about training and education opportunities, vendors, and the job market, letting them make informed choices.

•  Creating a lifelong learning system. The New Economy has blurred the distinction between learning and work. Skills are no longer something taught once and for all. To succeed, workers must constantly adapt their abilities and knowledge to new employment circumstances and technologies. To meet this need, we must develop new public-private systems to give workers continual opportunities to learn and upgrade their skills, regardless of their current job status. Government's role should be to facilitate and leverage private resources to ensure both workers and companies get the tools and skills they need to prosper in this new environment.
•  Promoting worker empowerment and ownership. Workers need more control over their jobs, their financial resources, and their futures. We must foster true worker empowerment in the workplace through incentives, educational activities, and new labor laws. We must revise the pension and health care system to give individuals more control over these important parts of their lives. We should strive to give workers a greater financial stake in their companies and the health of the New Economy. And we must help all Americans share in the prosperity by helping to build wealth and assets.

I'm sure there are many, many more good ideas out there as to how to address both cyclical and structural unemployment.

But simply saying the market will eventually sort it out is unacceptable. In the I-Cubed Economy, people are our most important asset. And accepting high unemployment simply means throwing that asset away. That is not a recipe for either economic growth or market efficiency. Markets thrive where they make the most productive use of their key assets; markets fail where they waste those assets. And right now, the labor market is wasting key assets and thereby failing.