June 2011 Archives

Earlier this month, the National Advisory Council on Innovation and Entrepreneurship (NACIE) issued a report on Improving Access to Capital for High-Growth Companies. [NOTE: Formed in 2010 by Secretary Locke, the NACIE should not be confused with the recently established Innovation Advisory Board, mandated under the America COMPETES Reauthorization Act of 2010 or the President's Council on Jobs and Competitiveness.]

The report calls for a number of steps including:

Recommendations for Early-Stage Access to Capital
1: Provide a 30% refundable tax credit on angel group investments of <$200,000 into small businesses.
2: Provide a 100% exclusion on capital gains tax to small business investments held for 5 years, with deferrals permitted for roll-over investments into other small business within 9-month periods.
3: Provide a 100% exclusion on corporate income tax for the first taxable year of profit, a 50% exclusion on following two years of profit, and tax deferral on exercise of NQ stock options in small businesses.
4: Reduce further the SBIR/STTR grant review process from the current 6-12 months to a 3-month timeframe.
5: Support the SBA's proposed Early Stage Innovation Fund and efforts to further reduce SBIC license processing times and interest rate burden. Recommend future SBIC eligibility consideration be given to emerging investment classes such as angel groups, micro-VCs, and VDOs.
Recommendations for Later-Stage Access to Capital
6: Maintain the capital gains tax rate at 15%.
7: Amend the Spitzer Decree to permit payment for analyst coverage through banking revenue, and mandate analyst coverage of IPO issuers for at least five years.
8: Amend Sarbanes-Oxley Act Section 404 to reduce compliance controls and external-audit frequency on smaller public companies.

However, it also represents a missed opportunity: the use of intellectual property as collateral for loans. The report focuses almost exclusively on on equity financing, with a nod of the head to the SBIR/STTR grants program. But there are opportunities on the debt side as well. As readers of this blog know, I have long advocated for the use of intellectual property (and some other intangible assets) as collateral in debt financing. The irony of this missed opportunity is clear when looking at the SBA announcement (as part of Start Up America) of the Fund. They note that "Early-stage companies face difficult challenges accessing capital, particularly those without the necessary assets or cash flow for traditional bank funding." This statement is correct in one sense and completely off track in another. It is correct when it states that these companies don't have assets that traditional bank funding would accept as collateral. It is completely wrong in its implication that the companies don't have assets. These companies are often sitting on intangible assets that could be used in debt financing. The key is not necessarily to expand the equity route -- but to change how the "traditional bank funding" treats these assets.

As I've argued for before, there are two action that SBA could take:
•  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.

These two action would begin to unlock the debt financing option for high-growth companies. It is an option the Commerce Department and its National Advisory Council on Innovation and Entrepreneurship should not ignore.

Washington DC needs more lawyers

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Believe it or not, according to a recent economic analysis (see NY Times story The Lawyer Surplus, State by State for details), Washington DC has a lawyer deficit. The analysis projects a market for 618 new lawyers annually. But in 2009 only 273 passed the bar. Interestingly enough, the District of Columbia's Chief Financial Officer Natwar Gandhi recently cited other statistics showing that the absolute number of lawyers in Washington was declining (see WTOP story). Gandhi said that the decline in lawyers was one of the reasons for lower city revenues.

Now, I'm not sure that the economic analysis is necessarily correct -- especially when it come to the supply side. I live in a neighborhood full of lawyers who don't practice law (I even live with one). And DC has a reciprocity provision that allows lawyers who have passed the bar in other states to be automatically admitted to the DC bar. So that 273 number is suspect.

But the absolute decline in the number of lawyers in DC is interesting. I don't know if that is a reflection of firms downsizing or firms moving to Maryland or Virginia.

In any event, it raises an interesting point as to whether the District of Columbia will maintain its stock of that particular intangible asset (lawyers). It also raises the question as to whether it should -- and whether it matters at all. After all, one can argue that for some intangible assets (lawyers, investment bankers), a certain level is required to the smooth operation of the economy. But an oversupply of those assets might become a negative that simply gums up the works.

So that raises a meta question: contrary to what we normally think of a positive unlimited ceiling for knowledge, are there certain intangible assets that one can have too much of?

Default and the US's reputational capital

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As the country lurches toward a showdown over the deficit and the debt ceiling, one argument has come up that is especially worrisome. There are those who say that a short-term temporary default (or "technical" default) would not be damaging. If you look just at the amount involved, that is probably correct. But the amount involved is only a small part of what is at stake. The issue is not about the financial capital but reputational capital. In a piece in the Wall Street Journal last week (What Happens if U.S. Defaults?), Maury Harris, chief U.S. economist for UBS Investment Bank, and Drew T. Matus, senior U.S. economist, UBS Investment Bank, laid out what is a stake:

The U.S. occupies a special place in global finance. The symbiotic relationship between the U.S. dollar as a reserve currency and the U.S. Treasury market's monopolistic position as the safest, most liquid bond market in the world has served this country well. This unique position has allowed the U.S. to exercise significant authority in the global economy and enhanced its standing as a world power. Even a temporary default would eliminate the safe and liquid nature of the U.S. Treasury market, harming this country's ability to exercise its power, to the detriment of the U.S. and the global economy.
. . .
if the political impasse continues and the U.S. defaults, it would not simply be a question of whether Treasury investors would get their money; eventually they would. It would be a question of whether the U.S. would lose something that made it special. The answer would be yes and the consequences for U.S. growth could be significant.
They explain:
The main impact on markets would come from sharply reduced liquidity in the U.S. Treasury market, as financial firms' procedures and systems would be tested by the world's largest debt market being in default. Given the existing legal contracts, trading agreements, and trading systems with which firms operate, could U.S. Treasurys be held or purchased or used as collateral? The aftermath of the failure of Lehman Brothers should be a reminder that the financial system's "plumbing" matters. All the legal commitments and limitations in a complex financial system mean a shock from an event that is viewed as inconceivable - such as a U.S. Treasury default - can cause the system to stall. The impact of a U.S. Treasury default could make us nostalgic for the market conditions that existed immediately after the failure of Lehman Brothers.

Post-default liquidity could get even worse in the likely event of a rating downgrade. The liquidity event would not be limited to the Treasury market. Any reduction in the ability to use Treasury debt as collateral for loans would mean funds would need to be found: liquid assets sold to raise cash. Additionally, holders of U.S. Treasurys counting on timely payment could be forced to borrow funds in upset credit markets when those funds do not materialize.

What they don't talk about is how long it would take to get back to near normal - if at all. Once lost, reputational capital is very hard to regain. Once US Treasurys are no longer the foundation of the financial system, can they ever be again?

Let us hope that this is a question we will not be asking come the beginning of August.

Advanced Manufacturing Partnership

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Speaking of manufacturing strategy (see earlier posting), this morning the President announced the start of an Advanced Manufacturing Partnership (AMP). The program was a main recommendation in the new PCAST "Report to the President on Ensuring American Leadership in Advanced Manufacturing." It's really a manufacturing technology policy focused (as the PCAST press release puts it) on "precompetitive applied research to accelerate the maturation and manufacturing-readiness of emerging technologies" and therefore not a full manufacturing or innovation strategy.

AMP is heavy on the partnership aspect. But it does include the government investments in domestic manufacturing capabilities in critical national security industries, in advanced materials, in next-generation robotics, and in energy-efficient manufacturing processes:

One of the more interesting parts of the partnership has to do with some modeling and simulation software Procter & Gamble developed with Los Alamos National Lab. They will make this software available at no cost to American small and mid-sized manufacturers. Why? Well, as the President put it in his remarks:

Now, this is not just because Procter & Gamble wants to do good. It's also they've got thousands of suppliers, and they're thinking to themselves, if we can apply this simulation technology to our smaller suppliers they're going to be able to make their products cheaper and better, then that, in turn, is going to save us even more money. And it has a ripple effect throughout the economy.
As I've noted before, P&G is a leading practitioner of open innovation. Helping build up technological capabilities of the supplier base is a key means of strengthening the open innovation process. This collaboration with P&G is a great example of the type of new policy initiatives geared to the reality of the collaborative I-Cubed Economy. Let's hope we see more of them.

Creating a manufacturing strategy - JEC hearing

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Earlier this week, the Congressional Joint Economic Committee held a hearing on "Manufacturing in the USA: Why We Need a National Manufacturing Strategy?". Some of the testimony was the standard laissez-faire rhetoric on don't worry about manufacturing (i.e. "it's all part of economic evolution") or the problem is all taxes and regulations. But the testimony by Scott Paul of the Alliance for American Manufacturing and by Mark Zandi, Chief Economist for Moody's Analytics are worth noting.

Zandi was surprisingly optimistic about manufacturing's future prospects:

While it will take many years for the U.S. trade deficit in manufactured goods to disappear, the process is under way in earnest. U.S. manufacturers who have long seen the dark side of global trade are moving toward the bright side, where they will be long into the future.
In part, he felt the worst is over, stating that, "any U.S. manufacturer that survived the Great Recession must be doing something right, staying very cost effective and/or holding a global market niche." Companies that can build on those strengths can expand as the global economy recovers.

While issuing the standard warning about protectionism and "industrial policies" of subsidizing specific companies, he did offer a number of systemic policy proposals. These including confronting the Chinese currency issue, addressing the skills problem, reforming the tax code, lowering the cost of capital through increased SBA lending (including SBA equity financing) and improving infrastructure to lower the cost of transportation, telecommunications and energy.

Zandi also advocated work-share programs:

Manufacturers would also benefit from reform of the unemployment insurance system, including the expansion of work-share programs. Work-share allows manufacturers to avoid some layoffs by cutting workers' hours, with government making up some of the employees' lost compensation. This allows businesses to avoid severance costs and keep valuable employees whose skills are difficult to replace. Workers are increasingly willing to give up some hours to avoid being laid off. The unemployment insurance program should also provide incentives to unemployed workers to invest in their own retraining. Federal efforts to facilitate the retraining and education of displaced workers have been inadequate, and there has been little research into the design and implementation of effective retraining programs. This is especially important for unemployed workers in distressed regions of the country.

As I have noted before, work-share programs could effectively be combined with training programs so that workers spend those hours away from the job in training activities. But I would go beyond Zandi's call to reform worker training programs for dislocated workers. We need to revisit the entire unemployment insurance system and revamp the worker "retraining" system into a worker training system.

Paul outlined his own set of policies for fostering a vibrant and economically prosperous manufacturing sector. These too included enhanced skill training and expanding infrastructure investment. He also called for confronting the Chinese currency issue as well as dealing with other Chinese unfair trade practices. But Paul also warned about any strong dollar policy that would but US manufacturers at a competitiveness disadvantage.

In addition, he called for a reorientation of the Administration's trade goal of doubling exports to one of eliminating the manufacturing trade deficit. As he noted, "That's a far more accurate metric for success or failure in the manufacturing sector than increases in exports that may be offset by a flood of imports."

On regulation, Paul warned about cutting regulations:

while duplicative and unnecessary regulations should be reformed or eliminated, pursuing a race to the bottom with countries like China is foolhardy and ineffective as a means to boost our global competitiveness. A high-road strategy is the only feasible one for our nation. Advances in technology are making industries more sustainable, and ultimately, more competitive. The idea of rolling back decades of protections for workers and the environment is an exercise in futility, and time and resources would be better spent elsewhere. The goal should be for other nations to aspire to the quality of life that Americans enjoy, not to discard our efforts through a downward competitive spiral.

On taxes, Paul took issue with the especially the notion that manufacturing specific tax incentives should be eliminated in exchange for lower rates (see earlier posting):

The idea that a revenue-neutral corporate tax cut would be good for manufacturing is tenuous, at best. There appears to be little or no correlation between marginal tax rates and global competitiveness. A more significant factor is the presence of value added tax (VAT) systems with rebates for exports in virtually every industrialized and industrializing country except ours.

I agree with much of what Paul and Zandi said. I would add that we need to make sure these policies are crafted in a way to also foster the transition that manufacturing is undergoing. As I discussed in previous postings, manufacturing is becoming a more knowledge based activity and the distinction between manufacturing and services is disappearing. Our Policy Brief Intellectual Capital and Revitalizing Manufacturing outlines some of the steps that could be taken. These include work sharing and expanded worker training programs as mentioned above. But they also include recommendations to directly help companies and entrepreneur better utilized their intellectual capital. One step would be to expand the Manufacturing Extension Partnership (MEP), SBA assistance programs and EDA business incubator programs to include intellectual resource management that covers a broad array of assets, beyond help with intellectual property. Another would be to help companies use their intellectual capital to gain access to more financial capital. For example, SBA underwriting rules should be changed to allow companies to use their IP as collateral on loans and SBA could create a specific IP-backed loan fund. The paper also outlines other steps that could be taken in the financial system to encourage better recognition and utilization of intangible assets.

It is clear we need an overall manufacturing strategy. That strategy should build upon the current transformation of the economy -- neither fight it nor assume that a laissez-faire direction will be in the best interest of the nation. Let us hope the policymakers were listening to the good suggestions coming out of the JEC hearing.

Tax breaks for worker training?

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Apparently, the President's Council on Jobs and Competitiveness is proposing a tax break for worker training. At the meeting of the Council with the President on June 13, the group argued that worker training should be treated as a depreciable expense under Section 179 of the tax code. "Currently, equipment can be treated on a deductible basis, but improving our human capital is just as important to the tax code," Darlene Miller, President and CEO of Permac Industries said (see video below at the 73 minute mark). The tax incentive was part of a discussion on a pilot program to provide workers with manufacturing skills, essentially tying specialized school training and manufacturing internships.

I say apparently because the tax proposal is not yet included in any public documents of the Council and came up at the end of the discussion. There were hints of this in Miller's comments during the Council's first meeting (see previous posting). But the documents on the two websites (Jobs Council and White House website on the Council) restrict the worker training discussion to working with community colleges and others to better train manufacturing workers. This is an initiative already supported by the White House. The President spoke before on the importance of community college and spoke earlier this month on the manufacturing skills certificate initiative as part of the Skills for America initiative.

Adding a tax incentive would be a major step forward. As readers of the blog know, I have long advocated a knowledge tax credit (see earlier posting and my recently published "Comment on Cragg and Stiglitz: Invest in Intangible Assets" in The Economists' Voice. Using Section 179 to provide a tax incentives for worker training would be a way of implementing such a knowledge tax credit. While I realize the Jobs Council brought this up as tied to a specific pilot manufacturing training program, I urge the Administration to look at is more broadly as well.








For those interested in the details, there are two different websites for the Council. The Jobs Council website has documents on the "framing" document and an idea fact sheet outlining what was to be presented to the President as the June 13 meeting (as well as an a link to the Jeff Immelt and Ken Chenault oped in the Wall Street Journal). The second website is the White House website on the Council. That website's posting for the June 13 meeting has a copy of the President's remarks, a link to the White House blog PR type posting, a link back to the Jobs Council website (and documents) and the video of the meeting.

Norm Ornstein on the need for regulations

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In an earlier posting on regulations, I talked about the Agricultural Department's Food Safety and Inspection Service implementing a new program on regulating mobile slaughter facilities. This was note worth because, as the Ag Department noted, "approval of a mobile slaughter facility required a great deal of stakeholder involvement, creative thinking, and problem solving." Thus it was an example of new smart regulations.

In that piece I tossed out as an aside that "No one would want slaughter houses to be deregulated -- for obvious reasons of public health." Turns out, that is not the case. Recently, the House passed a farm bill that cuts food safety funding, arguing that safety in the food supply is self-regulated (i.e. the private sector can handle this just fine without government intervention).

Norm Ornstein of the American Enterprise Institute has written a piece on how foolish these cuts are (Mindless Cuts Can Have Dangerous Results). In it he details what the consequences of the cuts might be.

. . . the cuts in meat inspection would mean serious furloughs among meat inspectors and their support staff, who account for more than 90 percent of the agency budget.
That in turn could be extrapolated to mean about a million pounds of tainted meat and poultry being put on the shelves in supermarkets and butcher shops and on the menu in restaurants.
Given the statistics we have on the number of foodborne illnesses that hit Americans each year--48 million--that result in 128,000 hospitalized and 3,000 killed, those cuts would surely mean more hospitalizations and more deaths.
Cuts in the FDA mean fewer inspections of plants in China that provide food additives, many of which have included toxic substances.
Cuts in the CDC mean a lesser capacity to deal with an epidemic if and when one arises.

He dismisses the argument made during the House debate that the private sector is already handling this because of fear of lawsuits:

Of course, no food supplier wants to get sued. But if the private sector could self-manage this problem, we would not have seen the meat inspectors pull 9 million pounds of tainted meat and poultry from the system last year.
Parenthetically, I have to say I found the argument about how we can rely on the private lawsuit to protect the food supply especially ironic coming from a group of policymakers who are dedicated to the principle of reigning in private lawsuits (aka tort reform).

Ornstein goes on to note:

Whether it is offshore drilling, building construction, airline travel or sausage production, stuff happens and corners are cut to reduce costs or make bigger profits. Independent inspections are mandatory. Regulators can be captured by interests, as happened for decades at the Interior Department when it comes to oil drilling, or can be slothful or inefficient. But they are necessary for both public safety and public confidence.

And I would point out, regulations can be spurs to innovation -- as companies use them to create innovative processes and/or use compliance with the regulation to build brand reputation. So in this new rush to deregulate, I how we don't end up making matters worse -- not only jeopardizing health and safety, but in the name of economics worsen our innovative economy.

We need to better tell the innovation story

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The innovation story is getting lost in the jobs story. Case in point was the critique by George Mason University economist Russell Roberts on a comment by President Obama on technology and jobs (Obama vs. ATMs--Why Technology Doesn't Destroy Jobs - WSJ.com). Roberts takes the President to task for suggesting that some technologies replace workers and thereby create short term dislocation. Roberts discusses at great length the benefits to wealth creation of technology-induced productivity.

I agree with everything he said about the power of productivity (while I disagree with his political potshot at the President). But, when it came to tying technology to job creation, here is the best Roberts could do: "Somehow, new jobs get created to replace the old ones."

If we can't explain the "somehow", we will lose the policy debates.

Roberts more detailed explanation given was this: "Fifty years ago, the computer industry was tiny. It was able to expand because we no longer had to have so many workers connecting telephone calls." In other words, the computer industry grew because all those unemployed telephone operators (unemployed because of advances in computer technology) could all get jobs building the computers that replaced them.

Wrong. This is the fallacy of supply creating demand. Creative destruction is the process of new industries drawing resources from old industries. Freed-up labor doesn't magically create new jobs. Free-up labor fills new jobs that are created by new opportunities. It is the new opportunities part that keeps growth going -- not simply the higher productivity part. Higher productivity allows those workers greater output - thereby allowing labor to switch to other activities while maintaining the same or greater levels of production. But if it was simply greater output of the same old stuff, the system would grind to a halt with excess labor. This is the fear that has arise over the centuries.

Turns out these fears have not been realized -- because of innovation. Innovation creates new demand as well as increases productivity. The new demand for new products absorbs the labor freed up by productivity gains in a virtuous cycle - each side reinforcing the other.

In a posting on the Innovation Policy blog, Stephen Ezel had a more nuanced version of the productivity story. But I believe even he missed the central point that productivity and innovation are a coupled process. Productivity frees up resources; innovation grows by utilizing those resources.

So, by getting the story only half right, Roberts got it wrong. If we are don't pay attention to the innovation side of the equation, or economic prosperity will suffer. Here I agree with Stephen's comments "what the U.S. economy needs to restore job growth is a serious national innovation and competitiveness strategy".

But let me make one final point. It is not about technology; it is about innovation. The two are not necessarily the same. Innovation is broader concept. We need to focus on that broader concept of innovation in all its forms. Only then can we get the story right. And we desperately need to do a better job of telling the innovation story if we are to get the public policies in place to foster more sustainable economic growth.

IBM and the fusion of service and manufacturing

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Yesterday's brief piece on IBM noted that Big Blue's success is due to its intangible assets. One of those intangible assets is it close relations with its customer base. As a recent story in the Economist ("IBM: 1100100 and counting") points out, that close relationship was part of the company's culture from the beginning. It allowed the company to understand the demand for "electronic calculating machines" (aka computers) as a replacement for mechanical devices. According to some, IBM got in trouble in the 1980s when it stopped paying attention to that customer feedback.

The closeness has helped the company make the next switch -- from a producer of things to a supplier of solutions. Economist story explains:

From the beginning, as a maker of complex machines IBM had no choice but to explain its products to its customers and thus to develop a strong understanding of their business requirements. From that followed close relationships between customers and supplier.
Over time these relationships became IBM's most important platform--and the main reason for its longevity. Customers were happy to buy electric "calculating machines", as Thomas Watson senior insisted on calling them, from the same firm that had sold them their electromechanical predecessors. They hoped that their trusted supplier would survive in the early 1990s. And they are now willing to let IBM's services division tell them how to organise their businesses better.

The result is a company that embodies the structural shift in the I-Cubed Economy from a sharp division between goods and services to a fusion of the two. As the Economist notes:

"IBM is not a technology company, but a company solving business problems using technology," says George Colony, chief executive of Forrester Research, a consultancy.

IBM is, of course, not the only company to realize this shift. According to a recent story in the Wall Street Journal, Xerox is looking toward services:

For Xerox Corp. Chief Executive Ursula Burns, the future of the venerable printer and photo-copy machine maker isn't in making copies.
Ms. Burns has spent the nearly two years since she took on the CEO role trying to transform Xerox into a services-based business, as the rise of digital technology has cut into the company's traditional hardware line. In three years, two-thirds of company revenue will likely come from "services," or contracts to manage other companies' back office operations such as printing, human-resources and other areas of their business, she says.

I'm not sure from reading the story, however, that Xerox truly understands the nature of the shift. Conspicuously absent from the interview was any discussion about the customer, customer needs and solving customer problems. She notes the "managed print services that are really close to the document technology" which would be an extension of Xerox's current intangible assets. But the strategy seems to focus on acquisition of companies already in business process outsourcing, which appears to have little to do with Xerox's existing strengths. This seems to be a continuation of the mindset of services as something separate.

That mindset is one of the major traps that, I believe, both company executives and public policymakers continually fall into. An example of a counter to that mindset is the recent work of Henry Chesbrough. A recent interview in Strategy+Business notes:

Economists debate whether a service-based economy can be truly robust -- or whether prosperity depends on having enough of a manufacturing base to support service businesses. But what if this turned out to be a false dichotomy? That's the question raised by innovation expert Henry Chesbrough. All successful manufacturers, in Chesbrough's view, need to come to terms with a fundamental change: the accelerating flows of knowledge and information that are shortening product cycles and commoditizing their products. They can do this, he says, only by reinventing themselves, not as pure manufacturers or service providers, but as hybrid product-service companies that design their business models around creating more meaningful experiences for their customers.

I would argue that these hybrids ae the core of the I-Cubed Economy. Just a companies who mastered the complexities of the economies of scale and scope dominated in the industrial age, companies that understand the amalgamation of manufacturing and services will prosper in this new economy.

The public policy question, which we articulated years ago in our paper Info Age: Recast Issues Demand New Solutions and reiterated more recently in a previous posting, remains: what are the policies needed to foster and harness these new economic structures for the benefit of the society as a whole.

On that note, let me repeat what I've said before. Manufacturing is in the process of being transformed into a much more knowledge-intensive activity. The process is analogous to the transformation of agriculture. Agriculture did not disappear from the US, to be shifted to some other nation that continued to do things the way it had always been done. Agriculture was transformed; it mechanized (industrialized, if you prefer).

The key is not the output ("agriculture," "manufacturing," "service"). It is the production process that is important. During the industrial revolution, machine power replaced human and animal power. The key input was energy. Today, knowledge has become the key input (factor of production). Thus, we should not abandon "manufacturing" as an activity but embed it in the new economic structure.

Transforming manufacturing will take more than restructuring a couple of companies. It will take restructuring the entire production process. One of transformations is through a "high road" strategy that puts its emphasis on all upgrading of the inputs to the production process: technology, worker skills and cooperative/collaborative organizational structures (see previous posting).

It also means changing the manufacturing mindset. While the line between manufacturing and services has blurred, many companies are still fixed in the industrial age mentality of turning out a large volume of a commoditized product. The very nature of the supply chain forces 3rd and 4th tier suppliers in to this mode. These companies are not involved in product design and innovation; they simply respond to specs and price. Changing that structure will be painful and disruptive. Trying to revive that structure will be futile.

Thus, one of the major tasks for our new manufacturing policy needs to be focused on the lower tiers. How does the policy help these small companies re-orient themselves to the 21st Century?

It will take a multi-fold approach. Let me suggest one set of activities--by no means a complete list, but some ideas. We need more research on the service-manufacturing linkage to understand the transformation. That would be an excellent part of the "services sciences" agenda. We also need to find creative ways that the smaller supplier can move up the value-chain to take advantage of this shift. We then need to instill this notion of the fusion of manufacturing and services into the Manufacturing Extension Partnerships. The MEPs were on the front lines helping small and medium size companies during the quality revolution. They need to be on the front lines of the innovation and "customer solution" revolution.

These are but a couple of steps we could begin to take. As IBM illustrates, the transformation is already happening. Our public policy needs to catch up.

Innovation at P&G

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One of my pet peeves is our continually wrong mindset that innovation = technology and that only "technology" companies are innovative. Wrong! One of the most innovative companies in the world today is the consumer products company Procter and Gamble (P&G). P&G has innovation baked so deeply into its corporate culture that for anyone who studies the subject, the terms P&G and innovation are synonymous.

Years ago, Athena hosted a Congressional luncheon briefing on Innovation and Design that featured P&G. Last month, I was at a presentation by Bruce Brown, P&G's CTO, hosted by the Wilson Center. A summary of that presentation (Innovation in the Global Environment) is now available. Yes, P&G has a huge R&D effort. But, as Brown pointed out, P&G is a pioneer in open innovation with half of their innovations come from outside the company.

What especially continues to impressed me is P&G's commitment to all levels of innovation - not just those coming out of the lab. Their motto is that "the consumer is boss." As former head of P&G, A.J. Lafley explained in a 2008 article:

In other words, the people who buy and use P&G products are valued not just for their money, but as a rich source of in­formation and direction. If we can develop better ways of learning from them -- by listening to them, observing them in their daily lives, and even living with them -- then our mission is more likely to succeed. "The consumer is boss" became far more than a slogan to us. It was a clear, simple, and inclusive cultural priority for both our employees and our external stakeholders, such as suppliers and retail partners.

We also linked the concept directly to innovation. From the ideation stage through the purchase of a product, the consumer should be "the heart of all we do" at P&G. I talked about it that way at dozens of company town hall meetings during my first months as CEO. More and more people began thinking about how to apply the "consumer is boss" concept to their work. Resources were still scarce, and there were fierce debates about which ideas deserved the most attention and where to de­ploy money and people. But this concept came to matter more than those other concerns. People became more willing to subjugate their egos to the greater good -- to improving consum­ers' lives.

That also means permeating the idea of innovation throughout the company. Lafley went on to explain:

When I became CEO, we had about 8,000 R&D people and roughly 4,000 engineers, all working on innovation. But we had not integrated these innovation programs with our business strategy, planning, or budgeting process well enough. At least 85 percent of the people in our organization thought they weren't working on innovation. They were somewhere else: in line management, marketing, operations, sales, or administration. We had to redefine our social system to get everybody into the innovation game.

Today, all P&G employees are expected to understand the role they play in innovation. Even when you're operating, you're always innovating -- you're making the cycles shorter, or developing new commercial ideas, or working on new business models. And all innovation is connected to the business strategy.

To me, what he said should really be slogan: "Even when you're operating, you're always innovating." That is how innovation really works -- not our fixation with a linear flow from laboratory to final product.

And so where is the public policy that implements the "when you are operating, you are innovating" concept?

IBM's intangible assets

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IBM is celebrating its centennial this month -- which has prompted many to ask how a company can survive in the volatile information technology industry. Probably the best answer comes from Steve Lohr's piece in the New York Times (I.B.M. at 100 - Lessons in Tech Longevity):

One central message, according to industry experts, is this: Don't walk away from your past. Build on it. The crucial building blocks, they say, are skills, technology and marketing assets that can be transferred or modified to pursue new opportunities. Those are a company's core assets, they say, far more so than any particular product or service.

In I.B.M.'s case, the prime assets included strong, long-term customer relationships, deep scientific and research capabilities and an unmatched breadth of technical skills in hardware, software and services.

In other words, it's all about the company's intangible assets. But of course, you already knew that.

IBM's strategy also reviles another hallmark of the changing economy structure of the I-Cube Economy: the fusion of manufacturing and services. More on that tomorrow.

Apple's hidden intangible asset

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Everyone knows that Apple is the premier high-tech company in this knowledge economy. And everyone knows that brick and mortar retailing is the dinosaur of the information/internet age (just ask Borders). But, what everyone knows is only partially correct. The knowledge economy is far more complex and interesting when you peel back the cover and look inside. Case in point: Apple's retail stores. As a recent article in the Wall Street Journal notes (Apple's Retail Secret: Full Service Stores):

Steve Jobs turned Apple Inc. into the world's most valuable technology company with high-tech products like the iPad and iPhone. But one anchor of Apple's success is surprisingly low tech: its chain of brick-and-mortar retail stores.

A look at confidential training manuals, a recording of a store meeting and interviews with more than a dozen current and former employees reveal some of Apple's store secrets. They include: intensive control of how employees interact with customers, scripted training for on-site tech support and consideration of every store detail down to the pre-loaded photos and music on demo devices.

According to the article, Apple stores have become highly visited destinations. Key to success is store design (no surprise given Apple's design orientation) and extensive employee training. Also important is the sales approach. As the article notes:
According to several employees and training manuals, sales associates are taught an unusual sales philosophy: not to sell, but rather to help customers solve problems. "Your job is to understand all of your customers' needs--some of which they may not even realize they have," one training manual says.
This last point may be the most important. Problem solving, rather than sell products (goods and services), is the hallmark of the I-Cubed Economy. Looks like Apple figured that out a long time ago.

Pandora IPO and intangibles

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Follow up note to the earlier posting on Groupon and intangible accounting:

The latest internet IPO is that of Pandora Media, an internet radio company which went public today. A quick look at Pandora's Form S1 filing with the SEC shows a different tactic. No use of adjusted CSOI -- or any non-GAAP financial data at all. Sticking with GAAP reporting does seem to have hurt the stock sales -- see Pandora shares surge in first day of trading as Internet IPO fervor continues.

Interestingly, the filing lists a number of intangible assets that the company feels are important to future success. These are discussed in terms of risks, but it is not hard to see the intangible asset underlying the risk:

Our failure to convince advertisers of the benefits of our service in the future could harm our business.

Unavailability of, or fluctuations in, third-party measurements of our audience may adversely affect our ability to grow advertising revenue.

We operate under statutory licensing structures for the reproduction and public performance of sound recordings that could change or cease to exist, which would adversely affect our business.

If we fail to accurately predict and play music that our listeners enjoy, we may fail to retain existing and attract new listeners.

Our ability to increase the number of our listeners will depend in part on our ability to establish and maintain relationships with automakers, automotive suppliers and consumer electronics manufacturers and consumer acceptance of the products that integrate our service.

Our business and prospects depend on the strength of our brand and failure to maintain and enhance our brand would harm our ability to expand our base of listeners, advertisers and other partners.

We depend on key personnel to operate our business, and if we are unable to retain, attract and integrate qualified personnel, our ability to develop and successfully grow our business could be harmed.

Failure to protect our intellectual property could substantially harm our business and operating results.

If we cannot maintain our corporate culture as we grow, we could lose the innovation, teamwork and focus that contribute crucially to our business.

Of course, the risk discussion includes a far larger list of possible problems. But this list is a good indication of the intangible assets powering this company. A positive take on the assets can be found in the filings section on "What we do."

UPDATE:
It looks like the stock is not as hot as first thought. From the NY Times - Pandora Pares Its Gains After Its Debut Pop:

Pandora's shares closed at $17.42, a gain of 8.9 percent over its initial public offering price of $16. The stock did open at $20 and spiked as high as $26 in the morning before trailing off.

Does Groupon endanger intangible asset accounting?

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When Groupon floated its IPO, it had to report its financial data according to standard US accounting rules known as GAAP (Generally Accepted Accounting Practices). But, the company also touted an alternative metric called adjusted consolidated segment operating income (aka adjusted C.S.O.I.) (see filing with the SEC). Under this metric, costs such as marketing and acquisitions are not counted as expenses (see the NY Times Dealbook piece What is adjusted CSOI). The rationale for this is that they are temporary costs, not long term operating costs. Thus the company's "real" income is what it would be exclusive of these costs.

Robert Cyran, Antony Currie and Rob Cox have pointed out the flaws in this approach in a NY Times piece Fuzzy Accounting Enriches Groupon. They imagine the same rules applied to other companies:

Take Netflix, which spends heavily on marketing. Use Groupon's arithmetic and this cost can be ignored. Netflix also pays taxes and rewards executives with stock. Subtract these figures from its 2010 accounts, and it would have had around $600 million of adjusted C.S.O.I. Today, Netflix is valued around 48 times trailing operating profits of $284 million. Substitute C.S.O.I., and Netflix would be worth $28 billion.

Or consider an old-school enterprise like Johnson & Johnson. Last year it had multiple product recalls. Under adjusted C.S.O.I., costs associated with these may be treated as one-time expenses. Once a drug is invented, the formula is not forgotten, so research and development is a nonrecurring cost, too.

Do the numbers, and Johnson & Johnson's C.S.O.I. would be about $10 billion higher than its 2010 operating profit line. At the same multiple of operating profit that the company now fetches, using C.S.O.I. would add $100 billion to its worth. If Groupon is to be believed, the entire investment world has got its accounting all wrong.

As it turns out, I happen to believe that the standard accounting using GAAP is all wrong. Most of the investment world already knows that. But, I have a concern over this development. We are finally making progress with the notion that investments in intangible assets are investments. That includes spending on marketing and R&D. The economists have now accepted this and soon R&D will be treated as an investment in the GDP data. However, the accountants are still skeptical of all this. In their view, an expense is an expense is an expense.

Now comes along a new strange notion that an expense is not an expense if the company doesn't want it to be. This notion seems to be built upon (and may be used to try to sustain) the latest tech bubble. It is especially troubling that Groupon is so dismissive of its marketing expenses -- a major intangible investment. Given this highly unorthodox view, does treating intangibles as an investment get tarred with the same brush?

Or is this an opening we have been looking for to push alternative measures? After all, Groupon was allowed to report adjusted CSOI in its SEC filing. Maybe other intangible based companies will adopt alternative metrics to tell their story to investors -- measures that give a true picture of the company's intangibles and their contribution to company profits. That would be a story worth telling.

NYC creates an industrial policy - where is Washington?

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Revitalizing manufacturing is the hot topic in policy circles -- with pundits and politicians talking endlessly about the subject. Every week there is yet another report or white paper or conference on the subject. [Shameless promotion plug -- see our Policy Brief from last year -- Intellectual Capital and Revitalizing Manufacturing -- which is just as relevant today.] Yet Washington in remains in gridlock over what to actually do. The best the President's Jobs and Competitiveness Council could come up with is the creation of better manufacturing worker training and boosting tourism (see an oped in the Wall Street Journal by Jeff Immelt and Ken Chenault). Congress wrangles over issue of whether the patent office should be self-funded (or remain under the Congressional appropriations process) and over the issue of "first-to-file" verses "first-to-invent" -- while the patent backlog continues and more and more see the US patent system as fundamental broken.

So while Washington dithers, the real hope of any sort of progress on moved to the state and local government. Here the situation is not a bleak -- even with the horrendous budget pressures facing state and local governments. At least at the state and local level, policymakers have always understood that developing and implementing an effective industrial policy is part of the job description.

A recent case in point is New York City. According to a recent press release, city government is taking a number of steps to strengthen the manufacturing base of the NYC. These fall into three general categories:

Increasing access to updated, affordable, and right-sized industrial spaces; creating new financing resources and increasing access to existing programs; and better aligning City resources with industrial businesses' needs.
I won't go in to all of the specifics. But there are two specific elements I would highlight. First, part of the financing is coming from Goldman Sachs -- a $10 million programs for loan and technical assistance to food manufacturers. And second, the one I especially like:
NYCEDC [the economic development corporation] will build upon its previous success of dedicating staff to specific sector policy development and will establish a full-time "desk" at NYCEDC's Center for Economic Transformation dedicated to industrial sector policy.

The fact that the economic development corporation even has a Center for Economic Transformation is incredible. And the fact that they see manufacturing as part of that transformation is even more incredible.

So lets hope that the thousands of efforts like New York City's pays off. More importantly, let us hope that the efforts such as those of NYC get picked up by Washington. Our transformation to the I-Cubed Economy is a national issue and will ultimately need joint federal-state-local responses. Places like NYC are doing their part. When can we expect Washington to do its part?

Video of Bernanke speech at Athena conference

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Apropos my earlier posting on Fed Chairman Ben Bernanke's speech at our New Building Blocks for Jobs and Economic Growth conference last month, here is the CSPAN video of the speech.


April trade in intangibles

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The economy got a little good news today in the form of the April trade data released this morning by the BEA. Exports were up by $2.2 billion over March and imports down by $1 billion. So the overall trade deficit shrank to $43.7 billion. However that improvement was due to a decreased deficit in petroleum goods (reflecting lower oil imports due to higher prices). The deficit in non-petroleum goods actually increased. If we are going to reduce the deficit, we need to reduce the non-petroleum goods deficit. Even though exports increased, most of that was due to increased exports of petroleum goods, strangely enough. Exports of non-petroleum goods were essentially flat.

Our intangible trade surplus increased slightly in April -- up by $61 million, compared with a $251 billion increase in March (revised). Imports and exports of both business services and royalties increased.

Unfortunately, our Advanced Technology Products deficit continued to grow in March, increasing slightly by $7 billion. Contrary to the general trend, export dropped almost across the board. But so did imports. 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.

The other part of the story is the annual revisions and revisions to certain services categories. The annual revisions don't change the overall trade story. But they do change the story on intangibles. First of all, the category revisions re-arrange the intangible trade data slightly. BEA has moved the fees for the rights to distribute film and television recordings from other private services to royalties and license fees.

Other revisions to incorporate newly available data have a more dramatic effect. As a result, the intangibles surplus is actually smaller than previously reported in recent years -- by $1.4 billion in 2008, $6.1 billion in 2009 and $3.6 billion in 2010. For the earlier years of the decade, the revised data tell the opposite story of the surplus being greater than previously reported.

Most importantly, the revision dramatically change the intangibles trade story for 2009. Originally the data showed the surplus continuing to increase -- ever so slightly. The revised number show a significant decline in the surplus of over 3%. Likewise the composition of the trade was very different from previously reported. The original data showed large declined in both imports and exports (with exports declining somewhat less thereby leaving us with a slight surplus). The revised data shows exports declining not as much, but imports actually growing. A slightly similar story can be told for 2008, when the surplus also declined rather than rose as previously report (due to an under reporting of imports).

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Annual - intangibles v goods 2010 June revision.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.

More on SCOTUS, patents and collaborative research

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Seems that the editorial board of the New York Times is thinking along the same lines as this blog. In yesterday's post, I argued that the most important issue of the Stanford v. Roche case was the one that wasn't argued: the issue of patent rights and collaborative research.

Today's Times is running an editorial (The Fair Rewards of Invention) that states:

By stressing "the general rule that rights in an invention belong to the inventor," the majority opinion of Chief Justice John Roberts Jr. romanticizes the role of the solo inventor. It fails to acknowledge the Bayh-Dole Act's importance in fostering collaborative enterprises and its substantial benefit to the American economy.

It seems to me that making sure that the patent system (and the entire system of intellectual property rights) fosters collaborative research should be our number one priority. Instead, we are stuck in a fight over "first to file" versus "first to invent" and (the latest issue) whether the Patent and Trademark Office (PTO) should be able to keep the fees it generates.

[FYI -- this latter issue has just popped up. It seemed that the fee-diversion issue (i.e. where patent filing fees go to the general treasury rather than being retained by the PTO) had been settled toward giving the PTO those fees in order that it would have the resources it needs to do its job and eliminate the application backlog. Now comes word that the Chairman of the House Appropriations Committee and the House Budget Committee think that a self-funded patent office is a bad idea - and want to keep the patent office subject to Congressional appropriations. See the Wall Street Journal, Politico and the IAM blog for more details.]

Once again, here is a case where our old models of "innovation" are getting in the way. The fight over individual inventors versus corporate research (as exemplified in the first to file versus first to invest fight) seem to be stuck in the linear model of innovation where a scientist or lone inventor comes up with a new idea and then pushes it through to final product. In the real world of today, innovation is a messy process with many inputs and lots of collaboration. There are numerous feedbacks loops and cases of starting over. In many case, innovation is more like a stew - with various elements -- technology, business models, financing, organizational structure, marketing concepts -- being combined to create the end product. Even the pure technology part is mostly likely the outcome of collaborative research.

We need a public policy on innovation that reflects the knowledge economy world that we live in -- not some notion carried over from the past industrial age. Too bad we don't seem to be able to get the policy we need.

SCOTUS and allocation of patent rights

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Yesterday, the Supreme Court ruled in a patent ownership case that highlights the issue of collaborative research. The case, Stanford v. Roche involves an HIV test developed out of research at Stanford (funded by NIH) and at the biotech company Cetus (which sold their rights to Roche). The researcher, Dr. Mark Holodniy was required to assign the rights to his work first to Cetus and then to Stanford. The issue before the court was whether Stanford held superior rights to the patents under the Bayh-Dole Act -- and therefore could sue Roche for patent infringement. Roche countered that it held co-ownership of the patents based on Holodniy's agreement with Cetus -- and therefore could not be sued for infringement.

Under Bayh-Dole, organizations that do federally funded research are allowed to retain the IP rights to the outcome of that research (rather than all the rights automatically going solely to the government). The idea is to give the companies an incentive to commercialize their research by giving them the IPR.

The Court ruled in this case that Bayh-Dole does not automatically give the company superior rights:

Congress has in the past divested inventors of their rights in inventions by providing unambiguously that inventions created pursuant to certain specified federal contracts become the Government's property. Such unambiguous language is notably absent from the Bayh-Dole Act.
They state that the Act only covers the issue of the allocation of rights between the government and contracting institution.

Left up in the air, however, is the more interesting question of the apparent co-ownership of the IPR between Stanford and Roche. The ruling does not address how this should work -- only the Roche cannot be sued for patent infringement (meaning that Roche does not have to share any royalties on its HIV tests). Presumably, Stanford could develop and market its own tests based on its underlying patents.

In his dissent, Justice Breyer went directly to this issues of shared ownership and its effect on commercialization:

Given this basic statutory objective [of commercialization], I cannot so easily accept the majority's conclusion--that the individual inventor can lawfully assign an invention (produced by public funds) to a third party, thereby taking that invention out from under the Bayh-Dole Act's restrictions, conditions, and allocation rules. That conclusion, in my view, is inconsistent with the Act's basic purposes. It may significantly undercut the Act's ability to achieve its objectives. It allows individual inventors, for whose invention the public has paid, to avoid the Act's corresponding restrictions and conditions. And it makes the commercialization and marketing of such an invention more difficult: A potential purchaser of rights from the contractor, say a university, will not know if the university itself possesses the patent right in question or whether, as here, the individual, inadvertently or deliberately, has previously as-signed the title to a third party.
As Justice Breyer noted, these other issues of co-ownership should have been, but were not, argued more fully as part of this case. Because they were not he (and Justice Gingsburg) dissented.

It is unclear where the issue goes from here. Given the current fight over patent reform, I doubt whether Congress is willing to take on a re-examination of Bayh-Dole in light of this Court ruling. And, as the Court mentioned, the issue might be solved by simply changes in the IP assignment agreements between universities and their employees.

But I suspect that the intersection of IPR and cooperative research is an issue area that we are just beginning to explore. As someone noted at our recent conference on New Building Blocking for Jobs and Economic Growth, the patent system was designed for the era of the individual inventor - not this new age of highly collaborative research. Thus, we may -- as the Court implied -- see future cases concerning that issue of collaborative rights.

Your location is an intangible asset

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There has been a lot written about how your personal data is a valuable intangible asset (see earlier posting). But your location -- more accurately your cell phone's location -- is also a valuable source of information. This has nothing to do with you but with the ability to use your cell phone as a sensor. Many new "smart city" application require an extensive set of sensors. Where is that bus exactly? What is the condition of the road? all these require a sensor to provide that information.

According to a story in today's New York Times (Projects Use Phone Data to Track Public Services), researchers are finding ways to use cell phones as sensors:

Boston is developing a system called Street Bump that uses a smartphone's accelerometer and GPS system to detect when a driver hits a pothole and then sends that information to city officials.
. . .
[New York's] Densebrain's project works by taking note of which cellphone tower a phone is communicating with. It then looks for disruptions in service followed by significant changes in location. If a phone located near Times Square suddenly loses service and reconnects at Prince Street and Broadway 15 minutes later, then it has almost certainly traveled there using the N or R trains.
This type of data, when taken from large numbers of phones and analyzed algorithmically, could give an accurate look at the performance of the entire subway system in real time.

So -- what is the public policy implication of this? Who owns that data? If the data is being collected by the cell phone companies, can they charge the government to use the data? But what if it is coming from apps that are voluntarily downloaded by cell phone users? Do they collectively or individually own the data? What are the privacy issues?

Lots of interesting issues to be sorted out.

May employment

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The labor market took a turn for the worse in May. According to BLS, the unemployment rate rose to 9.1% as only 54,000 jobs were added in May. And the number of jobs created in the previous two months was revised downward. Granted, this is better than losing jobs. But we are supposed to be in a recovery. According to the Dow Jones Newswires, economists had expected at least 160,000 new jobs and an unemployment rate of 8.9%. In part the unemployment rate went up because more people were looking for work. The civilian labor force went up by over 270,000.

Some see the numbers as somewhat of an anomaly. As the New York Times notes:

The lackluster employment figures for May, as in months past, are largely attributed to temporary factors -- like the automotive supply chain disruption caused by the Japanese earthquake and tsunami, and the severe tornadoes that shuttered businesses in the Midwest.

Economists are hopeful that as these troubles pass, a robust recovery will finally burrow out from beneath the rubble.

"I do think there's more strength in the economy than recent numbers have been indicating," said Augustine Faucher, director of macroeconomics at Moody's Analytics. "I realize that's not much consolation for people who are already out of work."

There was interesting news concerning the involuntary underemployed. The total number of involuntary underemployed (part workers for economic reasons) declined in May. However, that was mostly due to a decline in the number of persons who could only find part time work. The number of workers on part time because of slack production increased. This give credence to the notion that the employment drop is temporary -- due to short term slow down in production rather than a permanent switch to part-time. However, as the second chart below shows, the rate of involuntary underemployment continues to be at historic highs for the post-WWII era.

Involuntaryunderemployed-0511.gif

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Words as a critical intangible asset

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No, this is not about copyright. It is about quick one liners that get your attention then fade away. It's about ad copy. Groupon is one of the hottest "intangible" companies right now. And according to recent New York Times story, Groupon's intangible asset is its ad copy:

The big Internet companies owe their dominance to something singular that shut out potential competitors. Google had secret algorithms that gave superior search results. Facebook provided a way to broadcast regular updates to friends and acquaintances that grew ever more compelling as more people signed up, which naturally caused more people to sign up. Twitter introduced a new tool to let people promote themselves.

Groupon has nothing so special. It offers discounts on products and services, something that Internet start-up companies have tried to develop as a business model many times before, with minimal success. Groupon's breakthrough sprang not just from the deals but from an ingredient that was both unlikely and ephemeral: words.

Words are not much valued on the Internet, perhaps because it features so many of them. Newspapers and magazines might have gained vast new audiences online but still can't recoup the costs from their Web operations of producing the material.

Groupon borrowed some tools and terms from journalism, softened the traditional heavy hand of advertising, added some banter and attitude and married the result to a discounted deal. It has managed, at least for the moment, to make words pay.

The biggest problem they seem to be facing? Finding writers who can write with the "Voice":

"A lot of professional writers apply here. I've had applicants from Rolling Stone, The Wall Street Journal," said Keith Griffith, director of recruiting. "But it's really hard to get them to do what we're looking for. It's easier to teach people than unteach them."

So maybe that public policy goal of promoting a general liberal arts education may be paying off. Or maybe we are just creating a new generation of Mad Men - this time in Chicago rather than Madison Avenue.

Ending Doha? and a new era of negotiations?

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According to a story in today's Wall Street Journal, it looks like we might finally have closure to the Doha Round of trade negotiations. But, it won't be the large deal that was envisioned a decade ago. But it might be a scaled down version the "Doha-lite" mentioned a few years ago. WTO Director-General Pascal Lamy is now using the term "early-harvest. "As the story relates:

Mr. Lamy on Tuesday outlined the new, more restrained approach in a speech to ambassadors. "Even though the Ministerial is in December, we cannot afford a Christmas tree," he said, comparing the overburdened holiday decoration to a trade agenda with too many items.

That remark suggests the era of big, multilateral trade deals is over, say WTO officials. In the future, trade deals will either not involve every WTO member, a so-called plurilateral deal, or will be limited in scope. The Government Agreement, a 1994 pact on the fair awarding of government contracts, signed by 39 countries, is seen as a model.


I've been saying that for years. It became clear to me after the Uruguay Round that we may have seen the end of large multilateral deals. Here is what I wrote 5 years ago:
During my Senate staff career, I was involved in the beginning and the end of the Uruguay Round. When we finally passed the implementing legislation, I mused out loud that I thought this would be the last global round of trade negotiations. None of my colleagues agreed - and some of the old hands seemed taken aback at such heresy. They argued that you can only get an agreement by linking everything in a big package. (In diplomacy - this is known as "linkage.")

Over a decade later, I still thing I am right. It is not just an issue of a backlash against globalization and a rise of protectionism. That is certainly a factor -- and a point that will be hyped over and over again should the Doha Round fail.

But there is much more going on - especially in the internal dynamics. Global trade talks have become to complex and overarching to succeed in one mega-negotiation. The dynamics that made these trade rounds work is no longer present. Trade talks aren't about just trade any more. They are talks about the harmonization of economic rules. As such, the old trade-offs no longer apply.

In previous negotiations, the focus was on tariff reduction. I'll reduce my tariffs on steel if you reduce your tariffs on autos. This allowed for a win-win (from economists point of view) situation that pushed for lower and lower tariffs. Everyone agreed that the end point was lower tariffs. The question was how to get there.

In the new talks, it is unclear how the trade-offs work, and in what direction the dynamics points. I'll lower my tariffs on steel if you increase your patent protection to 100 years? I'll allow you to subsidize your aircraft industry if you don't ban my genetically-modified beef? I'll decrease my agricultural subsidies if you reduce regulations on investment banking?

We don't have any agreement on what the end point should be. We have a general idea - "open economies" - but we differ dramatically on what that means and on the specifics.

In addition, I'm not sure that the Doha Round is even looking at the right set of issues. As I've said before (After Doha: What The WTO Is Not Talking About), it may be the last trade negotiations of the industrial era - not the first of the information age.

My gut reaction to the trade talks is that we will have to approach each of these economic regulatory issues separately - possibly in separate forums. Yes, this being a negotiation, there will be linkage. But the complex web of links will not become so great as to bring the entire structure down.

I, for one would welcome, such as shift. As the I-Cubed Economy matures, these economic harmonization discussions need to be ongoing. We are still feeling our regulatory way - and the economy keeps shifting. It is not as simply a matter as hitting a zero tariff number or eliminating a trade barrier. It is an evolutionary process that we need to engage with other countries real-time and continuously.

That is much more difficult that negotiating a trade agreement - but also much more important.

So, if the Doha Round collapses, let us not take it as a sign of failure. Rather, it is an opportunity to build the new international framework for regulating the new global I-Cubed Economy.

So, let's finish off Doha -- and then we can get on with the real work of building that new framework.

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


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