February 2011 Archives

Who owns your data?

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Who owns your data? That has been a long simmering issue in this new information-intensive economy. Now a new consensus seems to be emerging that people should be paid for access to their personal information (see story in the Wall Street Journal - The Market for Online Privacy Heats Up). A report released earlier this month by the World Economic Forum (Personal Data: The Emergence of a New Asset Class) argues that:

Increasing the control that individuals have over the manner in which their personal data is collected, managed and shared will spur a host of new services and applications. As some put it, personal data will be the new "oil" - a valuable resource of the 21st century. It will emerge as a new asset class touching all aspects of society.

It is good to see that information is being treated as an asset. I'm not sure I would go as far as equating personal data with the new "oil". I think that title belongs to the broader class of intangible assets (see Mary Adams and Michael Oleksak Intangible Capital: Putting Knowledge to Work in the 21st Century Organization).

But, the WEF report raises the point we made a number of years ago in our report, Information Age: Reframing the Debate that many of the main issues of the information economy are not technological but social. They are also interrelated:

we currently treat privacy, computer security, intellectual property rights, freedom of information, "right-to-know" policies and free speech issues as separate policy areas. Yet, they are all part of managing the information commons: what information is and should be private, what information is and should be proprietary and what information is and should be public. A more comprehensive approach is needed.

The WEF report is part of an ongoing project on Rethinking Personal Data. They might want to also rethink the scope of the project and tackle some of these broader questions.

4Q 2010 GDP revised downward

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Not so good news this morning. BEA released the second estimate for 4Q GDP -- which was revised downward to 2.8%. The first ("advance") estimate last month was that GDP grew by 3.2% (see earlier posting). According to BEA, the revision "reflected an upward revision to imports and downward revisions to state and local government spending and to personal consumption expenditures (PCE) that were partly offset by an upward revision to exports."

The new data is disappointing. As I noted last month, economist had expected 3.4% GDP growth for the 4th quarter. And, as the Wall Street Journal notes, "Economists surveyed by Dow Jones Newswires had expected GDP to be revised up to a 3.3% growth rate in the government's second estimate for the final three months of last year."

The revisions had a minor impact on one of the concerns I raised last month about the slowing of fixed investment. The revised data shows that investment in equipment and software rose by 5.5% rather than 5.8%. Investment in IT equipment and software grew by 18.8% rather than 20.7% reported earlier and investment specifically in software grew by 5.4% rather than 6%. Investment in transportation equipment dropped by only 8.8% rather than 9.3% and investment in industrial equipment grew by 3.8% rather than 4.2%.

And once again I would point out that 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.

Are public-sector workers overpaid or underpaid?

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Following on my earlier posting about Wisconsin and valuing employees, here is a comment from the Schumpeter blog over at the Economist that raises the broader issue (The government as an employer):

THE American blogosphere is abuzz with a debate about whether public-sector workers are overpaid or underpaid, with the left and right taking predictable positions. They are all surely missing the real point. Such workers are both overpaid and underpaid: the public sector is characterised by a relatively flat distribution of wages, with able people paid too little (and thus constantly poached by the private sector) and time-servers paid too much, and with the main driver of promotion being years of service.

It is clearly important to reduce the overall wage bill and bring public-sector pay and pensions under control. But, in the long run, it is also important to pay good people more, speed up their rise through the ranks, and generally widen the wage distribution in government jobs.

We need to modernize the system - not take a meat cleaver to unionization.

Yesterday, the White House announced the list of members of the new President's Council on Jobs and Competitiveness. Here is the annotated list (courtesy of the Wall Street Journal):

Steve Case, co-founder of America Online. Mr. Case chairs Revolution, a holding company that oversees multiple companies, which include Zipcar, LivingSocial and Everyday Health.

Kenneth I. Chenault, chairman and CEO of American Express Co.

John Doerr, a partner at venture capital firm Kleiner Perkins Caufield & Byers. Mr. Doerr hosted Mr. Obama and a gaggle of the tech industry's geek glitterati at his San Francisco home last week.

Roger W. Ferguson Jr., president and CEO of TIAA-CREF, retirement services purveyor for pensioners in academia.

Mark Gallogly, co-founder and managing principal of private equity firm Centerbridge Partners. Mr. Gallogly hails from the Blackstone Group.

Joseph T. Hansen, President of the United Food and Commercial Workers Union (UFCW) and chaiman of Change to Win, which rallied voters to Mr. Obama's presidential bid.

Lewis "Lew" Hay III, chairman and CEO of power company NextEra Energy Inc.

Gary Kelly, chairman, president, and CEO of Southwest Airlines.

Ellen Kullman, chairman and CEO of DuPont.

A.G. Lafley, former CEO of Procter & Gamble, now Special Partner at Clayton, Dubilier & Rice.

Monica C. Lozano, publisher and CEO of La Opinión, the nation's largest Spanish language daily newspaper.

Darlene Miller, owner and CEO of Permac Industries, a Minnesota machine parts manufacturer.

Paul S. Otellini, CEO of Intel Corp.

Richard D. Parsons, senior adviser at private equity firm Providence Equity Partners Inc.

Antonio Perez, CEO of Kodak.

Penny Pritzker, Obama fund-raiser and chairman of TransUnion, CEO of Pritzker Realty Group and chair and co-founder of The Parking Spot, Artemis Real Estate Partners, and Vi, formerly known as Classic Residence by Hyatt.

Brian L. Roberts, CEO of Comcast Corp.

Matt Rose, CEO of Burlington Northern Santa Fe Railway Corporation.

Sheryl Sandberg, chief operating officer at Facebook.

Richard L. Trumka, president of the AFL-CIO, the nation's largest labor federation.

Laura D'Andrea Tyson, professor at the Haas School of Business at the University of California Berkeley, and National Economic Adviser in the Clinton administration.

Robert Wolf, chairman of UBS Americas and president of UBS Investment Bank; Obama fund-raiser and frequent golf buddy.

It is an interesting mix of sectors and industries -- some of the usual suspects and a dash of others. I especially like the fact that the CEO of Southwest Airlines is on the list. They are a prime example of organizational and operational innovation. Likewise, A.G. Lafley, former CEO of Procter & Gamble is one of the foremost operational experts of open innovation. Now, let's see what they come up with.

Earlier this week, I posted an item about how technology could change the production process (The rise of the machines). In that posting I specifically highlighted a new technology that allowed for the "printing" of items in solid three dimensions. This could change how goods are "manufactured."

But there is another part of the story -- how goods are designed. A couple of years ago, we published a report on Virtual Worlds and the Transformation of Business: Impacts on the U.S. Economy, Jobs, and Industrial Competitiveness. The report described, among other things, how virtual worlds can be used in the collaborative design process. That possibility is rapidly becoming a reality.

For example, a couple of years ago, the Navy starting using Virtual World for prototyping. As a story in Government Computer News (Navy creates a virtual world to test submarine design) notes:

The Naval Undersea Warfare Center is doing that with an experimental approach to submarine design. It has created a Second Life-like virtual replica of a proposed design of a submarine's control hub using architectural renderings of the new design. By being immersed in a new environment, submarine commanders will have a better idea of the proposed changes to the hub and can offer more constructive feedback.
"We would like to support rapid prototyping," said Douglas Maxwell, technical lead for the project. "Basically, we would like to create an environment where the fleet, shipbuilders and scientists can collaborate on platform design. We could create many iterations of advanced design and let the users tell us which ones work and which ones don't."

Here are a couple of more examples. Sikorsky's virtual reality center puts designers inside the unbuilt CH-53K heavy lift helicopter:

The Sikorsky CH-53K heavy lift helicopter currently being developed for the U.S. Marine Corps will contain more than 20,000 individually designed parts. This means building an experimental prototype of the aircraft ends up being one hell of a complicated three-dimensional jigsaw puzzle. And if just one of the pieces doesn't fit where it's supposed to, it can cost millions of extra dollars. To find production and maintenance issues before things progress too far, Sikorsky has unveiled a virtual reality center that the company hopes will save it time and money in final assembly of the aircraft.

VR Breakdancing: Lockheed's New Jet-Building Tool:

Officially, the Collaborative Human Immersion Laboratory, or -- yes -- CHIL -- is an immersive virtual reality mechanism to cut down on the cost of building America's Air Force. In reality, the CHIL gives engineers an excuse to do some VR line dancing. But that rings hollow. Lockheed Martin has just built its engineers a virtual-reality playpen, unveiled today and based in Littleton, Colorado. Employees are hooked up to a suite of motion-detecting sensors, gamer gloves and a head-mounted display helmet, with wires hanging out of their extremities and optional Tron-ready clothing.

Inside the CHIL's "Cave" -- the CHIL Cave! -- they see themselves as uncanny valley-ready avatars, allowing them to test out and adjust various projects that the company manufactures to test their weak spots, all before the prototypes get physically built. Lockheed says it wants to use the CHIL to tweak its Air Force products, like the next-generation GPS satellite or the F-35 Joint Strike Fighter family of jets.

There is an important lesson here for public policy. These examples are all from the defense sectors. Once again, here is a case where defense procurement can lead in a manufacturing revolution. After all, remember it was the production of rifles that help spur the movement to interchangeable, machined parts that were a hallmark of the industrial revolution.

The trick will be more wide-spread adoption of the technology. As we noted in the report:

Policies funded by DARPA or DOC's Manufacturing Extension Partnership could support government-industry associations with the exploration and evaluation of how Virtual Worlds improve product development and services between suppliers, end manufacturers, or service providers. These collaborations could also be linked to state programs to improve the use of new technology.

But even more needs to be done.

The federal government should promote policies that focus on the four main indicators that are likely to enhance this nation's competitive status in the Virtual World economies of the future. The first group of policies should focus on ways that firms can transform themselves into collaboration enterprises. The second group of policies should focus on how rapidly collaboration enterprises can adopt new computer-based technologies. The third group of policies should address how well equipped employees are to work in a collaboration enterprise world. The fourth group of policies should focus on strengthening the technology base of the U.S. economy and creating a suitable environment for the operation of Virtual World technology.

In this way, we can help make sure these technologies benefit the entire US economy -- and that the US is on the forefront of the next manufacturing revolution.

New book on tech policy

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On Wisconsin?

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I find what is happening in the State of Wisconsin right now unsettling. And I don't mean just the protests and counter-protests. And not simply because the move by the Governor to break the public-sector unions is more a demonstration of political power than a budgetary issue. But because as a management and budgetary matter, it is antediluvian. It represents the worst of industrial era thinking. In a time when most CEO's at least give lip service to the notion that "our employees are our most valuable assets," the Governor seems not to have gotten the memo.

Steven Pearlstein makes a good point in his column today (Making sense of Wisconsin's union showdown:

Back when I was working at Inc. magazine in the mid-1980s, we loved nothing better when approaching a public-sector issue than to ask how the private sector would handle it. Faced with the situation in Wisconsin, we would have called up Tom Peters or Peter Drucker and posed the example of a new chief executive brought in by the shareholders (i.e., the voters) to rescue a company suffering from operating losses (budget deficit) and declining sales (jobs). Invariably, they would have recommended sitting down with employees, explaining the short-and long-term economic challenges and working with them to improve productivity and product quality in a way that benefits both shareholders and employees.

Now compare that with how Wisconsin's new chief executive handled the situation: Impose an across-the-board pay cut and tell employees neither they nor their representative will ever again have a say in how things will be run or get a pay raise in excess of inflation. A great way to start things off with the staff, don't you think? Remember that the next time you hear some Republican bellyaching at the Rotary lunch about why government should be run more like a business.

Well, the Governor does seem to be running the state as a business -- a 19th Century business. And we have seen how well that works in a service-oriented business in the 21st Century. Remember the story of Circuit City? As a cost cutting measure, Circuit City fired its' most expensive (read most experienced) workers. Customers left and Circuit City went bankrupt.

So my question is this, will Wisconsin be the Circuit City of the public sector?

State manufacturing centers - and managing intangibles

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My friends over at the Brookings Institution released a new paper earlier this month on Accelerating Advanced Manufacturing with New Research Centers. As the full paper states:

To strengthen their manufacturing bases, states must go beyond simply attracting large manufacturers from other states and even beyond assisting manufacturers with training and early-stage financing. They need to support the development and diffusion of improved manufacturing technologies, ways of organizing work, and relationships between final goods producers (typically, assemblers) and their suppliers. To accomplish these goals states should establish advanced manufacturing centers, based in their metropolitan areas, to help manufacturers solve generic technical and management problems in one or more industries.

The authors argue that parts of such state level programs already exist in various forms in a number of states but nothing like the scale and scope needed. Nor are federal programs, such as the MEP programs large or broad enough.

I completely agree. But I would add a very important missing component. Such centers (as well as the MEP centers) need to explicitly include assistance in identifying and managing intangibles. As we pointed out a year ago in our Policy Brief--Intellectual Capital and Revitalizing Manufacturing, manufacturing is in the process of being transformed into a much more knowledge-intensive activity. This transformation will require attention to all the inputs to the production process -- technology, worker skills, and cooperative/collaborative organizational structures -- all of which are key intellectual capital and intangible assets.

Embracing the role of intellectual capital and intangible assets in manufacturing requires going beyond the narrow view of formal intellectual property. Scientific and creative property are valuable assets that include product development activities beyond the patent, new architectural and engineering designs, and social and organizational sciences research. Computerized information, including customized software and databases, are other important company assets that go beyond our definitions of intellectual property. Specific business models, organizational structures, and organizational capabilities are key elements of any company's ultimate success. Worker skills and tacit knowledge--both general and firm-specific--are assets that managers describe as leaving the company every evening and returning every morning. Brand equity, reputation, and relationships with customers and suppliers are all important. All of these forms of intellectual capital need to be explicitly developed and managed by successful manufacturing companies.

Tools for managing intangible assets are only slowly emerging. The proposed state manufacturing centers are seen as a mechanism for developing and implementing new manufacturing technologies -- similar to the role played by the Fraunhofer Institutes in Germany. Such centers should also play a role in the development and implementation of new tools for managing intangible assets.

But these centers will only play that role if it is explicitly included in their mandate and in their understanding of their mission. The concept of intellectual capital and intangible assets needs to be baked into their DNA (to mix clichés). Only then can they tackle their wider task of being an engine for revitalizing American manufacturing.

Real financial innovation

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From Alex Pollack at AEI -- Dupes of False Innovation:

I propose to distinguish between illusory and real financial innovations. Real innovations turn ideas into institutions that endure. Real innovations occur much less frequent than cyclical illusory innovations, of course, because it is hard to do something truly new. Nonetheless, they do happen.
Here are some real innovations from fairly recent financial experience: interest rate swaps. TIPS (these inflation-indexed Treasury securities make it harder for the government to cheat savers through inflation, a worthy achievement), senior-subordinated securitizations, money market mutual funds, automated teller machines, general-purpose charge and debit cards and the 30-year, fixed-rate mortgage.
From further back in financial history, we have: mutual funds, deposit insurance, futures exchanges, stock exchanges and central banks.

I basically agree with this list -- although I'm not sure about interest rate swaps and TIPS. I would also agree with part of his comment that "'CDOs-squared' and 'SIVs' were merely new names for lending long and borrowing short" -- I think SIVs do have a limited useful function but are easily prone to abuse.

And I would disagree with his comment that the GSE charters for Fannie Mae and Freddie Mac were illusory innovations. Without them, one of his innovations -- the 30 year fixed-rate mortgage -- would not have existed. I think this is more the case of innovations that go beyond the time or scope or of their usefulness. The automobile does not qualify as an illusory innovation simply because someone has created a jet powered car that can only be run on the Bonnville salt flats. We need to carefully distinguish between the real innovation and the extreme use or abuse of that innovation.

So let me add one additional real innovation to the list: financial regulations that help prevent the harmful extreme use or abuse of a real innovation. Surely we can agree upon that.

Return of the digital divide

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A new report is out on the Internet which raises the concern over a digital divide. As the Washington Post story ("Survey of online access finds digital divide") sums it up:

A first-of-its-kind federal survey of online access found that Americans in lower-income and rural areas often have slower Internet connections than users in wealthier communities.

This new survey of internet usage, Digital Nation: Expanding Internet Usage, was released yesterday by the Commerce Department's National Telecomminications and information Administration. The press release highlights the following points:

• Broadband Internet access at home continues to grow: 68 percent of households have broadband access, as compared to 63.5 percent last year. (In the survey, broadband was defined as Internet access service that uses DSL, cable modem, fiber optics, mobile broadband, and other high-speed Internet access services.)
• Notable disparities between demographic groups continue: people with low incomes, disabilities, seniors, minorities, the less-educated, non-family households, and the non-employed tend to lag behind other groups in home broadband use.
• While the digital divide between urban and rural areas has lessened since 2007, it remains significant. In 2010, 70 percent of urban households and only 60 percent of rural households accessed broadband Internet service. (Last year, those figures were 66 percent and 54 percent, respectively.)
• Overall, the two most commonly cited main reasons for not having broadband Internet access at home are that it is perceived as not needed (46 percent) or too expensive (25 percent). In rural America, however, lack of broadband availability is a larger reason for non-adoption than in urban areas (9.4 percent vs. 1 percent). Americans also cite the lack of a computer as a factor.
• Despite the growing importance of the Internet in American life, 28.3 percent of all persons do not use the Internet in any location, down from 31.6 percent last year.

Unfortunately, this digital divide is nothing new. It's just that we haven't heard much about it over the past decade.

Also unfortunately, we seem to be approaching it in the same way we did a decade ago -- as a consumer-oriented technology deployment issue. As the New York Times story (Digital Age Is Slow to Arrive in Rural America) notes, the issue is important for economic development. But then goes on to say:

All of that is important, certainly. But here in Clarke County, where churches and taxidermy shops line the main roads and drivers learn early to dodge logging trucks hauling pine trees, most people would simply like to upload photos of their children to Facebook.

- - -

We need to recognize that this is an issue of inclusion in the broad information age -- not just access to Facebook. Over a decade ago, Athena Alliance held a conference on on this topic. The report, Information Age: Reframing the Debate made the following points:

Point one: Focus on the transformation, not the technology.

The issue of concern is the transformation to the Information Age. It is not simply a question of technological deployment. The end purpose is not to narrow some gap, but to ensure that everyone has access to the expanded opportunities. Our framework should be one of inclusion for all in the broader activities that make up society and the economy.

Point two: Review and coordinate efforts.

The problem has aspects of telecommunications policy, such as infrastructure and standards and elements of technology policy, such as research and development and technology deployment. But it also has aspects of policies on training and workforce development, education, economic development, housing and community development, human services and trade. Reaching our goal requires a coordinated approach -- in the private, public and non-governmental sectors - that combines the various elements of providing opportunity and inclusion in the information age. To coordinate policy, the focus of governmental digital opportunity efforts should be the White House, not in any one department or agency.

It is also time to take a new look at some policy areas. For example, a comprehensive approach is needed toward all parts of managing the information commons: privacy, intellectual property rights, "right-to-know" policies and other related areas.

Point three: Work to ensure that everyone has access to the technological infrastructure.

Barriers to access to the infrastructure are many. Ways of overcoming those barriers are also varied, including public access facilities that can combine access with training and other activities, as well as home access. With respect to access in the home, we must return to the question of universal access. We also need to address the development of broadband capabilities - both at home and at work. Both home use and public access points are important. Multiple access public points are needed, such as existing public facilities, training centers, libraries, and after-school centers. For these facilities, sustainability is the key. But, it is not enough to simply provide access. We must work to weave information technology into the operations of community groups in a way that will both help individuals use the technology and will make those groups more efficient and effective in their core mission.

Some of the barriers to digital inclusion are physical: the usability of the technology. This is not, as commonly thought of, an issue only for those with disabilities. The problems of usability and human-machine interfaces affect all of us and research on ways to increase access for those with disabilities will pay off in increased usability for all.

Point four: Encourage and facilitate participation and involvement by all in the digital economy and information society.

To foster participation and involvement, the technology must meet people's needs - not define those needs. Information technology can help people in their day-to-day lives if it is designed and structured in such a way that it helps answer their questions and solve their problems. Otherwise it becomes a barrier and a source of frustration. This is the danger of what some refer to as the "over-wired" world.
It is important to understand that individuals have different needs. A one-size-fits-all may help some - and increase their participation and involvement - but will block others. By focusing on "demand-pull," rather than "technology-push," we can better tailor the technology to meet individual needs.

Development of meaningful content, including more locally-based content, is one of the ways to increase the level of participation. E-government is one important form of meaningful content. But, we must also insure that those who are not on-line are not left behind. No services or information should be removed or dramatically cut back from traditional means of dissemination in favor of electronic dissemination until and unless all members of the community have access to that electronic means as easily as they have to the traditional means.

Point five: Focus economic development on the Information Economy, not the Internet Economy.

The information age will require a new approach to economic development. Key to the process is using and developing assets: financial, social, skill-based, and information assets. We must focus on building the local economy's vitality and ability to compete in the age of globalization and help people make the switch to the new economy.

Our priorities should include:
• development of processes for identifying and assessing local assets,
• revitalizing programs for training the existing workforce,
• helping small and medium size enterprises make use of IT, and
• fostering entrepreneurship at all levels and in all sectors.

We must also develop and utilize new mechanisms for financing the transformation, including Individual Development Accounts and new ways of financing intangible assets.
The New Markets Initiative is another example of a way to reach out to communities left behind.

Collaborative learning and sharing of information is also important in the larger process of economic development. There are a number of examples of information assets being applied within businesses and with local economies. We need to utilize new knowledge management techniques and old-fashioned communications techniques to collect, disseminate and better utilize that information.

Point six: We need a better understanding of what is going on.

We need to re-look at the data needed for economic development in the information economy. The problem of data extends beyond the scope of local economic data. We need both better data and expanded analysis of the socioeconomic aspects of the information technology. That research must be translated into policy relevant terms. For this reason, Congress should seriously consider re-establishing the Office of Technology Assessment (OTA).

Point seven: The decision making process must be open.

True inclusion and opportunity can only occur if the process of decision making is open and transparent. Information technology has a tremendous potential for opening and maintaining channels for general input and advocacy. However, decisions made about the technology can have the effect of closing off the process rather than opening it up. We must insure that all parties are at the table when decisions, including issues such as standard setting, are made.

Point eight: Innovate and experiment.

We are in a time of transformation and change. The speed of that change and the pace of economic activity will vary. Yet the change is real and will continue. In such a time, we must often invent new ways of coping with our problems and new policies for guiding our economy and society. Such experimentation will require great policy discipline, however. It requires a strong, unbiased means of evaluating programs and policies - and the political discipline to follow the guidance of that evaluation. We must also find means to ensure that the evaluations are timely for the fast moving policy arena. The goal in evaluation is not simply proving the effectiveness of an action - it is to facilitate learning. Learning is the hallmark of the Information Age. Our public policy process must embrace that concept as tightly as the rest of our economy and society already have.

While a little dated, these points are basically as relevant today as they were a decade ago. As we move forward with this need discussion of the digital divide, I hope we can focus on these broader issues.

The rise of the machines

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The big story in technology today is that IBM's Watson computer beat two human champions on Jeopardy last night (see NY Times story and analysis, and WSJ story and analysis). The upshot of this event is not just a game show win, but a demonstration that computers have reached the level of acting as effective expert systems. This means computers could take over a number of routine question and answer task. They could also backstop existing tasks, such as medical diagnosis.

But here is another -- as important if not more so -- story from the Economist about 3D printing (Print me a Stradivarius):

It works like this. First you call up a blueprint on your computer screen and tinker with its shape and colour where necessary. Then you press print. A machine nearby whirrs into life and builds up the object gradually, either by depositing material from a nozzle, or by selectively solidifying a thin layer of plastic or metal dust using tiny drops of glue or a tightly focused beam. Products are thus built up by progressively adding material, one layer at a time: hence the technology's other name, additive manufacturing. Eventually the object in question--a spare part for your car, a lampshade, a violin--pops out. The beauty of the technology is that it does not need to happen in a factory. Small items can be made by a machine like a desktop printer, in the corner of an office, a shop or even a house; big items--bicycle frames, panels for cars, aircraft parts--need a larger machine, and a bit more space.

These technological advances raise serious concerns about what the economy will look like in the future. Which activities will be handle by machines and which by humans? Or, but more bluntly, will machines replace humans?

I am generally optimistic (and partly excited) about these developments. I agree with John Seely Brown quote in the NY Times, "The essence of being human involves asking questions, not answering them." The extent to which the rise of tools such as Watson help us ask more interesting questions, the better humankind will be. The extent to which tools like 3D printing help us satisfy material needs, the better mankind will be. The result will be a truly "new economy."

In this new economy, there is a wealth of intangible assets to be created and mined. How that is done (i.e. how we organize "work" and "jobs") is a social organizational issue. How markets develop to allocate resources (inputs and outputs of that work process) is a political economy issue. Thus, the real challenges we face are social - not technological. The structure and nature of the economy is (and has been) constantly changing. Understanding, directing and ultimately coping with those changes is task we all face.

So, let the future begin.

Americans are working their way out of debt. But they are continuing to invest in the personal intangible of education. According to a story in today's Washington Post, Climbing out of debt, Americans are saving more, "Compared with the summer of 2008, when consumer debt peaked, Americans now have 7 percent less mortgage debt, 12 percent less in auto loans and 15 percent less credit card debt, according to the Federal Reserve Bank of New York." Not mentioned in the story, however, but shown in the accompanying graphic is the data on student loans. Contrary to the overall trend of less borrowing, student loans are up 18%.

I can think of a number of reasons why student lending would go up. People tend to stay in or go back to school in a recession. And the cost of higher education keeps going up. But I would like to think that the data indicates an intuitive understanding of the important of intangibles assets that drive future growth. People understand that home mortgages and car loans are ways to pay for consumption over time. Borrowing money to go to school is seen as an investment in an intangible assets. And that is why I think student lending has risen while other forms of lending have declined.

Just like his last budget, President Obama's FY 2012 contains provision on taxation of intangible transfers. As I describe last year, the proposals go to the issue of companies transferring their intellectual property to subsidiaries located in countries where the royalty income is tax at a low rate or not taxed at all. The parent company "sells" the IP to the subsidiary and then pays royalties to that subsidiary for the use of the IP. The key question is the fair market value of that transfer. US law requires that the transfer be valued at the same level as if it was an arms-length transaction between two independent entities. The parent would then pay US taxes on that income. There is concern that companies are low balling the value of the IP, "selling" it cheaply so as to minimize the amount of US taxes they have to pay on the income from those sales. The US loses in two ways, the tax on the income from the sale and the tax on the income from the royalties.

The specific proposals contained in the Treasury Departments' General Explanations of the Administration's Fiscal Year 2012 Revenue Proposals (aka The Green Book) are as follows:


Current Law

Section 482 authorizes the Secretary to distribute, apportion, or allocate gross income, deductions, credits, and other allowances between or among two or more organizations, trades, or businesses under common ownership or control whenever "necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses." The regulations under section 482 provide that the standard to be applied is that of unrelated persons dealing at arm's length. In the case of transfers of intangible assets, section 482 further provides that the income with respect to the transaction must be commensurate with the income attributable to the transferred intangible assets.

In general, the subpart F rules (sections 951-964) require U.S. shareholders with a 10- percent or greater interest in a controlled foreign corporation (CFC) to include currently in income for U.S. tax purposes their pro rata share of certain income of the CFC (referred to as "subpart F income"), without regard to whether the income is actually distributed to the shareholders. A CFC generally is defined as any foreign corporation if U.S. persons own (directly, indirectly, or constructively) more than 50 percent of the corporation's stock (measured by vote or value), taking into account only those U.S. persons that own at least 10 percent of the corporation's voting stock.

Subpart F income consists of foreign base company income, insurance income, and certain income relating to international boycotts and other proscribed activities. Foreign base company income consists of foreign personal holding company income (which includes passive income such as dividends, interest, rents, royalties, and annuities) and other categories of income from business operations, including foreign base company sales income, foreign base company services income, and foreign base company oil-related income.

A foreign tax credit is generally available for foreign income taxes paid by a CFC to the extent that the CFC's income is taxed to a U.S. shareholder under subpart F, subject to the limitations set forth in section 904.

Reasons for Change

The potential tax savings from transactions between related parties, especially with regard to transfers of intangible assets to low-taxed affiliates, puts significant pressure on the enforcement and effective application of transfer pricing rules. There is evidence indicating that income shifting through transfers of intangibles to low-taxed affiliates has resulted in a significant erosion of the U.S. tax base. Expanding subpart F to include excess income from intangibles transferred to low-taxed affiliates will reduce the incentive for taxpayers to engage in these transactions.


The proposal would provide that if a U.S. person transfers (directly or indirectly) an intangible from the United States to a related CFC (a "covered intangible"), then certain excess income from transactions connected with or benefitting from the covered intangible would be treated as subpart F income if the income is subject to a low foreign effective tax rate. For this purpose, excess intangible income would be defined as the excess of gross income from transactions connected with or benefitting from such covered intangible over the costs (excluding interest and taxes) properly allocated and apportioned to this income increased by a percentage mark-up. For purposes of this proposal, the transfer of an intangible includes by sale, lease, license, or through any shared risk or development agreement (including any cost sharing arrangement)). This subpart F income will be a separate category of income for purposes of determining the taxpayer's foreign tax credit limitation under section 904.

The proposal would be effective for transactions in taxable years beginning after December 31, 2011.

- - -


Current Law

Section 482 authorizes the Secretary to distribute, apportion, or allocate gross income, deductions, credits, and other allowances between or among two or more organizations, trades, or businesses under common ownership or control whenever "necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses." Section 482 also provides that in the case of transfers of intangible assets, the income with respect to the transaction must be commensurate with the income attributable to the transferred intangible assets. Further, under section 367(d), if a U.S. person transfers intangible property (as defined in section 936(h)(3)(B)) to a foreign corporation in certain nonrecognition transactions, the U.S. person is treated as selling the intangible property for a series of payments contingent on the productivity, use, or disposition of the property that are commensurate with the transferee's income from the property. The payments generally continue annually over the useful life of the property.

Reasons for Change

Controversy often arises concerning the value of intangible property transferred between related persons and the scope of the intangible property subject to sections 482 and 367(d). This lack of clarity may result in the inappropriate avoidance of U.S. tax and misuse of the rules applicable to transfers of intangible property to foreign persons.


The proposal would clarify the definition of intangible property for purposes of sections 367(d) and 482 to include workforce in place, goodwill and going concern value. The proposal also would clarify that where multiple intangible properties are transferred, the Commissioner may value the intangible properties on an aggregate basis where that achieves a more reliable result. In addition, the proposal would clarify that the Commissioner may value intangible property taking into consideration the prices or profits that the controlled taxpayer could have realized by choosing a realistic alternative to the controlled transaction undertaken.

The proposal would be effective for taxable years beginning after December 31, 2011.

The first proposal is a slight expansion of last year's concerning treatment of subpart F income. The second proposal is exactly the same as last year (and similar to a proposal made as part of the FY 2010 budget) .

As I noted last year and two years ago, these provision are worth consideration and discussion. But they should be part of a larger discussion under the rubric of corporate tax reform. That larger discussion should include issues of a knowledge tax credit (human capital being one our most important intangible assets) and the "patent box" idea of lower rate on royalty revenues.

Our previous report, Intangible Asset Monetization: The Promise and the Reality, pointed out that taxation has not yet fully come to grips with the rise of importance of intangibles assets. We will see if this is the year that changes.

Government procurement and user-driven innovation

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A couple of days ago, I posted a piece on user-driven innovation. In that piece, and other postings, I've been asking this question: what are the government policies to support user-driven innovation. Well, here is one (courtesy of GizMag) DARPA asks public to design new combat support vehicle:

In an effort to streamline the design and build process for manufacturing military vehicles, the Defense Advanced Research Projects Agency (DARPA) is enlisting the "power of the crowd". Through the Experimental Crowd-derived Combat-support Vehicle (XC2V) Design Challenge, which asks entrants to conceptualize a vehicle body design for combat reconnaissance and combat delivery & evacuation, the agency is looking to pick the brains of not only armed service members and engineers, but also members of the public and others that usually have no way to contribute to military design.

The challenge is being conducted with Local Motors, a Phoenix-based company that lets a community of car designers and engineers collaborate on designing cars, which can then be bought and built in regional micro-factories. Local Motors' first "open source" production vehicle is the Rally Fighter, which was developed in 2008 using a crowd-sourced process. The XC2V design submissions must be based on the lightweight, tubular steel chassis and the General Motors LS3 V8 powertrain found in that vehicle.

Government procurement as a way of supporting user-driven innovation. I love it.

President's FY2012 budget proposal

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Today is budget day in Washington, when the administration releases the President's FY 2012 budget proposal. I stress proposal since it is the Congress that finally allocated the funds. And that is still a long way off. In fact, Congress is trying now to finish up the allocation of funds for the current fiscal year. Since FY 2011 started last October, the federal government has been operating on a series of stop-gap continuing resolutions. To make matters even more uncertain, the process is likely to be highly politically charged and contentious. So that the budget proposal unveiled today may or may not look anything like what the government's revenue and spending activities finally look like in FY 2012.

Having said that, however, the President's budget proposal is an concrete outline of plans and priorities. And this budget makes clear that economic competitiveness is one of those priorities. Follow up on the message from the State of the Union and other recent Presidential speeches, the budget has a specific section on Competing and Winning in the World Economy. The introduction of that section has a straightforward summary of the President's plan:

We need to construct a new foundation for long-term economic growth that has as its pillars what is needed to win in the world economy: an educated and skilled workforce; cutting-edge research into the innovations that will power the industries of tomorrow; and a modern, robust infrastructure that can support a growing, high-tech economy and the jobs to support a growing middle class.

As I've noted before, I think this emphasis on investing in education, R&D and infrastructure is fine as far as it goes. But more needs to be done. The budget actually does include some of those items, such as increasing funding for the MEP centers. As I take a closer look at the budget during the week I will try to highlight some of those additional items.

Stiglitz on "Creating a Learning Society" -- in Egypt

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About a month ago, before the recent turmoil in Egypt, Noble laureate economist Joseph Stiglitz gave a thought provoking talk at The American University in Cairo -- Creating a Learning Society: An Agenda for Dynamic Societies in Uncertain Times.

As a newspaper summary of his talk put it:

Stiglitz listed five ingredients to change the comparative advantage that a country has through dynamic economics. It is all about education, openness and innovation, he insisted.

Not that there is any cause and effect here, but the setting for his talk was interesting as was his stress on the need for openness. And it was interesting that the first question was about creating jobs -- a major problem in the Egyptian economy. One of the takeaways for me was that getting governance and economics policy right is an important national intangible asset.

Regardless of the setting, his emphasis on creating comparative economic advantage based on the importance of creativity, innovation and knowledge is very much on point. His comments on industrial policy are interesting but his discussion of the knowledge gap between developed and developing nations is more important. Even though I don't agree with all his arguments, he raises some good issues.

(FYI - For more on his views of the link between economics and recent turmoil, see his more recent article in Slate -- Liberty, Equality, Prosperity: In Tunisia, learning how a more open society can lead to a more robust economy.)

December trade in intangibles - and 2010

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This morning's BEA's trade data for December showed a slight increase in the trade deficit, up $2.3 billion to $40.6 billion. However, as Chart 3 below shows, most of the worsening of the deficit was due to increased oil imports. Our non-petroleum goods deficit improved in December as exports rose faster than imports.

Our intangible trade surplus increased every so slightly as exports (both royalty income and business services exports) increased faster than imports (as Chart 1 shows). The trade surplus in intangibles is still overwhelmed by the goods trade deficit (Chart 2).

On an annual basis, our intangibles trade resumed it's growth trajectory in 2010 after dipping in 2009 (Chart 4). But as Chart 5 shows, that growth was miniscul compared with the return of larger trade deficits in goods in 2010.

The good news in the trade figures was in Advanced Technology Products. The deficit dropped dramatically in December to $5.5 billion from November's record setting deficit of $11.2 billion. The improvement was due to a major drop in imports of information and communications technologies (ICT) (of about $2.8 billion) combined with an increase in aerospace exports (of roughly $1.3 billion) and ICT (of $660 million). 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.

Chart 1Intangibles trade-Dec10.gif

Chart 2Intangibles and goods-Dec10.gif

Chart 3Oil good intangibles-Dec10.gif

Chart 4Intangibles trade-2010.gif

Chart 5Annual - intangibles v goods 2010.gif

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.

User innovation - NY Times story

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This morning's New York Times has a story (Consumer Innovation as New Economic Pattern) on Eric von Hippel's work on user-driven innovation. Specifically, they cite his recent paper surveying user innovation in the UK. The story points out that the idea of user-driven innovation challenges current innovation policy (which is still top down, technology-driven):

Carliss Y. Baldwin, a business administration professor at the Harvard Business School, called the research remarkable, adding: "What makes Eric's work so significant is that it is unprecedented to try to measure the extent of user innovation. He shows that we've had on a set of mental blinders."

To Ms. Baldwin and others who study innovation, the results point to the necessity of rethinking patent law as well as government incentives for research and open sourcing. As Stian Westlake, executive director of policy and research at the British National Endowment for Science, Technology and the Arts, put it in a report: "This democratization of innovation has potentially critical implications for innovation policy.

I couldn't agree more. We need to rethink policy to incorporate user-driven and other innovation mechanisms (including open-innovation, which is something different, and non-technological innovation).

We don't seem to be moving in that direction, however. As the Times story notes:

Mr. von Hippel said that the Finnish and Portuguese governments were financing him to conduct research similar to the British survey. As for the United States, he said, "there doesn't seem to be as much interest here."

Obama Innovation Strategy - and doing more

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Last week, the White House released their updated Strategy for American Innovation. This is part of the Administration's new push on innovation, jobs and competitiveness. As the Fact Sheet and the White House blog posting make clear, this is an expanded version of their earlier document. To quote from the fact sheet, this latest version includes 5 new initiatives:

  • The Administration's proposed Wireless Initiative, helping businesses reach 98% of Americans with high-speed wireless access within five years, accelerating wireless innovations, and substantially expanding, by 500 MHz, the development of new wireless spectrum for commercial use. Expanding new commercial spectrum is critical to avoid "spectrum crunch" and facilitate the rapidly growing wireless technology revolution.

  • A patent reform agenda, working to overcome the enormous backlog at the patent office and improve patent quality. Legislative and administrative initiatives can allow the USPTO to adequately fund its operations through user fees and implement new initiatives to improve patent quality. The overall agenda will reduce the average delay in patent processing times from 35 months to 20 months, and to less than 12 months where applicants prioritize their applications.

  • A commitment to clean energy leadership, proposing a Clean Energy Standard that will help us reach a goal of delivering 80% of the Nation's electricity from clean sources by 2035. To accelerate innovation, the Administration's FY 2012 Budget further proposes to expand funding for the Advanced Research Projects Agency - Energy (ARPA-E), to create three new Energy Innovations Hubs to solve challenges in critical areas, and to fund research, development, and deployment initiatives that will help the U.S. reach the goal of one million advanced technology vehicles on the road by 2015.

  • New commitments to improve K-12 education, emphasizing science and math skills. Administration initiatives will train 100,000 new science, technology, engineering, and mathematics (STEM) teachers over 10 years, establish ARPA-ED to drive educational innovations, build on the success of Race to the Top in spurring school reform, and expand on private-public partnerships to improve training and inspire more students - including girls and other currently underrepresented groups - to excel in STEM fields.

  • The Startup America initiative, working to facilitate entrepreneurship across the country and increase the success of high-growth startups that create broad economic growth and quality jobs. Startup America will accelerate the transfer of research breakthroughs from university labs, invest $2 billion in capital for entrepreneurs, improve the regulatory environment for starting and growing new businesses, and increase connections between entrepreneurs and high-quality business mentors.
Some of these, such as Startup America, were also announced separately last week. (See earlier posting)

As I noted about the earlier version of the document, there is much to support in this strategy. But there are other proposals that should be considered. Many of these points can be found in our Athena working paper from December 2008 Crafting an Obama Innovation Strategy. Rather than reiterating all the points in that document, let me focus on the four areas that White House economist Austan Goolsbee highlights in his "white board" talk on the Startup America initiative. Those are: access to capital; regulatory barriers; business mentors; and tax cuts.

Access to capital: As I've argued for before, SBA needs to change its programs to utilize intangible assets. SBA should work with commercial lenders to develop standards for the use of intangible assets as collateral, similar to existing SBA underwriting standards. Allowing IP to be used as collateral will increase the amount of funds a company, such as one in the high-tech sector, would qualify for.

In addition, we shoud create an IP-backed loan fund. Other nations have developed special programs to encourage IP-based finance. The U.S. should set up similar programs on a pilot basis, ideally run by the SBA to take advantage of its lending expertise. Technical support could be provided by the SBA's Office of Technology, which already coordinates the Small Business Innovation Research (SBIR) program. The SBA technology office also works with the U.S. Commerce Department's National Institute of Standards and Technology (NIST) on its Technology Innovation Program and has a hand in other federal science- and technology-related initiatives. Such a direct lending program would be a step beyond SBA's current loan guarantee programs--direct lending is needed to jumpstart the process. Once the process of utilizing IP as collateral is fully established, the program could be converted to a loan guarantee structure.

Regulatory barriers: Regulations can be a barrier to small business. But, as I have argued before, regulations can create new opportunities. We need a regulatory review system that promotes these new entrepreneurial opportunities. The President's push as part of the innovation strategy for clean energy standards is a perfect example of how government push can create market openings.

Business mentors: We need to expand technical assistance to include identifying and managing intangible assets. Entrepreneurs and small business especially need help in utilizing their intangible assets. Other nations already have such programs in place, previous postings. One possibility is to expand the mission of the Manufacturing Extension Partnerships. Better yet would be to create our own equivalent of the Scottish Intellectual Assets Centre and embed the tools and activities of such a Centre in the operations of all our small business and entrepreneurship programs.

Tax incentives: In the past, starting up a new company meant building a factory, buying raw materials and equipment, and hiring workers. Starting up a company today means developing your intangible assets -- your knowledge base and the skills of your workers. Yet our tax incentives are still geared toward the old model. Some of the tax incentives proposed by the Obama Administration move in the right direction -- especially the cuts in payroll taxes to lower the cost of hiring new workers. But we need to focus more on helping companies -- especially small business -- increase the knowledge base and skill levels of their existing workers. That is way we need a knowledge tax credit that would apply to company expenditures on worker training and education -- just like the R&D tax credit applies to expenditures on research activities. It only make sense that boosting worker skill levels is a necessary compliment to any activities to raise innovation and productivity.

- - -

So -- I support the expanded version of the Strategy for American Innovation. But much more can and needs to be done. The strategy should focus on the broad range innovative activity and recognize the role of intangible assets in fueling economic prosperity.

We have a good start. Let's push it further.

Technology Review article on open innovation

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FYI -- Apropos my earlier postings on how the innovation model is changing, Technology Review has an article on Open Innovation at GE - complete with links to other articles on open innovation.

Reverse innovation and the Post Scientific Society

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This insightful comment caught my eye - from a recent article in BusinessWeek Reverse Innovation at Davos:

The conventional wisdom is that innovations originate in rich countries and the resulting products are sold horizontally in other developed countries and then sent downhill to developing countries. After all, aren't developed nations such as the U.S. and Germany the richest and most technologically advanced nations in the world? The U.S. and Germany, for instance, have well over 300 Nobel Prize winners in science and technology whereas India and China have a combined total of less than 10. Doesn't it, therefore, stand to reason that developed countries will be the first to adopt the next wave of innovations? Won't the developing world adopts those innovations only when they have "caught up" economically? No. Not really.

We may be at the cusp of a new era in which breakthrough innovations happen first in developing countries and those innovations are then taken to other developing countries and subsequently flow uphill to developed countries.

If breakthrough innovations are going to come from nation's that don't have the most advanced scientific base, isn't this a confirmation that we are living in a post-scientific society? And what are the public policies for the US to take advantage of these shifts?

Investing in R&D - two tacks

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It would be easy to take a superficial read of this recent Wall Street Journal story about Pfizer versus Merck. Pfizer's new CEO announces he will cut R&D spending and the stock goes up. Merck's new CEO announces no cuts in R&D and the stock drops. The easy read: "Wall Street doesn't get it."

But the reality is much more complicated and sophisticated. It is really about who should pay for and take the risks of research. As the story points out:

Underlying the divergence is a deep-seated philosophical dispute over the merits of the heavy investment that companies must make to discover new drugs. By most estimates, bringing a new molecule to market costs drug makers more than $1 billion. Industry officials have been engaged in a vigorous debate over whether the investment is worth it, or whether they should leave it to others whose work they can acquire or license after a demonstration of strong potential.

In other words, big pharma is trying out different strategies: path-breaking innovator, fast-follower or (as the generics play the game) efficient mass producer.

On top of the strategic shift, the process of R&D has changed. Following on a trend that has been going on for decades, companies are shifting more and more to outside research. In the era of the Bell Labs, companies did their own research -- both basic and applied. But the industrial giants long ago closed down their big basic research labs. Now more companies are moving to an open innovation model where innovations come from outside.

With these changes, the issue shifts to where will the research funding come from. At one point, it looked like there was a pharma-biotech division of labor. Start-up bio-tech firms with VC and other high-risk capital would fund the research and sell the results to the pharma companies who would use their larger capital base to implement the results. But even that implementation is risky and requires a great deal of R&D funding (heavy on the D-side). It looks like some companies are no longer willing to bear that risk.

So the question remains, where will the funding for the research come from? Some new models may be emerging -- mostly to tackle the "orphan drug" problem (those drugs for specialized diseases where the total market does not appear to be able to cover the costs of drug's development). As big pharma sorts through its R&D strategies, look for new models to emerge.

Knowledge for policy in the knowledge age

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One of the ironic dilemmas of the knowledge economy is that we are having trouble creating the knowledge needed to craft effective policies. Take for example our education policy. It is accepted wisdom that we need to boost STEM education and college graduation. But, are those really the keys to economic prosperity? Are they necessary but not sufficient? Or are they well-meaning moves in a wrong or irrelevant direction?

I raise this question after seeing two stories in the media today. The first concerns education in the US from the New York Times, It May Be a Sputnik Moment, but Science Fairs Are Lagging. The tag lines says it all, "Despite Obama's Urging, Policy Stymies Science Students, Teachers Say."

Rarely have school science fairs, a source of pride and panic for generations of American students, achieved such prominence on the national stage. President Obama held one at the White House last fall. And last week he said that America should celebrate its science fair winners like Sunday's Super Bowl champions, or risk losing the nation's competitive edge.

Yet as science fair season kicks into high gear, participation among high school students appears to be declining. And many science teachers say the problem is not a lack of celebration, but the Obama administration's own education policy, which holds schools accountable for math and reading scores at the expense of the kind of creative, independent exploration that science fair projects require.

Beyond the question how to teach science, there is the issue of whether we are adequately addressing the other skills needed for success --- both personal and national -- in the I-Cubed Economy. As the New Commission on the Skills of the American Workforce pointed out in their 2006 study Tough Choices or Tough Times:

This is a world in which a very high level of preparation in reading, writing, speaking, mathematics, science, literature, history, and the arts will be an indispensable foundation for everything that comes after for most members of the workforce. It is a world in which comfort with ideas and abstractions is the passport to a good job, in which creativity and innovation are the key to the good life, in which high levels of education -- a very different kind of education than most of us have had -- are going to be the only security there is.

Are we really teaching that broad set of skills?

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Then there was this story in today's Wall Street Journal, Arab World Built Colleges, but Not Jobs:

"Surprisingly," International Monetary Fund economists Yasser Abdih and Anjali Garg wrote recently, "unemployment in the [Middle East and North Africa] region tends to increase with schooling." In the U.S., the opposite is true.

As the story notes, the US is in a position where a college education pays off. But clearly the blind goal of more college graduates is not a way to economic prosperity.

- - -

All of this is not to say that college degrees and STEM education in K-12 are not worthy goals. I simply point out that the way we pursue our policy objectives need to be based on some fundamental understanding (knowledge) of how the policies get us to our objectives. I'm not sure that we yet have understanding. I fear we are still working from the mindset of the industrial era where decision are based on aggregate numbers (math scores, number of engineering degrees) for a mass produced product (formal education).

Thus, more knowledge of the knowledge economy is needed.

Or, maybe we it is more wisdom we need.

January employment

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Unemployment dropped unexpectedly in January, according to data released this morning by the BLS. The unemployment rate went down to 9%. However, only 36,000 jobs were created as the decline in construction jobs was almost enough to offset the increases in manufacturing, retail trade and health care (among other industries gaining employment). If the construction decline was mainly due to poor weather, then the employment trend is clearly positive.

In other good news, 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, as the chart below shows.


Terra Firma and EMI - end of story?

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One of the stories I have been quietly watching over the years has been the takeover of EMI -- the record company with extensive holding -- by the private equity firm Terra Firma. The deal was highly leveraged and looked like an intangible-assets play where Terra Firma would sell bonds backed by the future royalty rights in order to pay for the acquisition of EMI. But then market for securitization collapsed. And alternatives to increase licensing revenue appears to have fallen flat.

Now, according to a story today in the Wall Street Journal, Citigroup Takes Control of EMI, the deal has reached the end of the line. And Citigroup is now recapitalizing EMI on its own.

I don't know if the deal would have pay off if the securitization went through. It might have ended up transferring the loss to the bond holders rather than Citigroup. On the other hand, we really don't know the valuation of the intangibles that EMI has -- nor do we know the revenue stream. So for all we know, Citigroup might come out of this ok -- even if Terra Firma greatly overpaid for EMI back in 2007.

There is one lesson however: intangible assets are still a risky market. If intangible asset-backed lending and securitization is going to move forward, we need to find sensible and effective ways of dealing with that risk.

Startup America - and intangible assets

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Yesterday, the Obama Administration announce a new entrepreneurship initiative called Startup America. According to the White House fact sheet, the initiative includes, among other programs:
•  Elimination of capital gains tax on certain small business investments
•  Increased SBA lending and expansion of other programs to provide access to financing.
•  Expanded mentorship, business incubator, and technology commercialization programs.
•  A fast-track option for patent examinations for entrepreneurs.
•  Expanded programs in the private sector on entrepreneurial education, mentoring and technology commercialization.

All of these programs are part of the President's new jobs and competitiveness initiative - and I applaud them.

But let me add two others to the list.

1) As I've argued for before, SBA needs to change its programs to utilize intangible assets.

•  Develop SBA underwriting standards for IP. SBA should work with commercial lenders to develop standards for the use of intangible assets as collateral, similar to existing SBA underwriting standards. Allowing IP to be used as collateral will increase the amount of funds a company, such as one in the high-tech sector, would qualify for.

•  Create an IP-backed loan fund. Other nations have developed special programs to encourage IP-based finance. The U.S. should set up similar programs on a pilot basis, ideally run by the SBA to take advantage of its lending expertise. Technical support could be provided by the SBA's Office of Technology, which already coordinates the Small Business Innovation Research (SBIR) program. The SBA technology office also works with the U.S. Commerce Department's National Institute of Standards and Technology (NIST) on its Technology Innovation Program and has a hand in other federal science- and technology-related initiatives. Such a direct lending program would be a step beyond SBA's current loan guarantee programs--direct lending is needed to jumpstart the process. Once the process of utilizing IP as collateral is fully established, the program could be converted to a loan guarantee structure.

2) We need to expand technical assistance to include identifying and managing intangible assets. Entrepreneurs and small business especially need help in utilizing their intangible assets. Other nations already have such programs in place, previous postings. One possibility is to expand the mission of the Manufacturing Extension Partnerships. Better yet would be to create our own equivalent of the Scottish Intellectual Assets Centre and embed the tools and activities of such a Centre in the operations of all our small business and entrepreneurship programs.

So while I support the StartUp America initiative, I think it can do more to support entrepreneurship in the I-Cubed Economy.

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

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