On Monday, the Conference Board released its index of leading indicators showing a surprise 0.3% increase. However, all of the benefit came from the increase in the money supply, and economists are questioning whether it should be used in the index at all.

The leading indicators index incorporates the data from 10 economic releases that traditionally have peaked or bottomed ahead of the business cycle. Some economists use it as a way to predict the direction the economy will take. But over the last few years, one of the key components -- the real M2 money supply -- may have been distorting the index.

The money supply measure at one time had a tight correlation with measures of growth, with M2 leading changes in the economy. Harm Bandholz of Unicredit says that in the past people put money into accounts measured in M2 in anticipation of higher spending. M2 measures demand deposits, traveler's checks, savings deposits, currency, money market accounts and small-denomination time deposits.

However, in the last 20 years or so that correlation has changed. "People have other places to put money when times are flush now," said Bandholz. "If you want to hold liquid assets, you don't have to hold it in M2-type accounts."

The Journal piece has a wonderful graph showing how there is actually a negative correlation now between M2 and economy activity.

So rather than being good news, the December M2 measure is yet another negative sign,

As the Church Lady used to say, "never mind."

A "transformational crisis" is the term used in the opening session of the World Economic Forum by founder Klaus Schwab to describe the state of the global economy today. Institutions are not working, unemployment is soaring and we have to first manage the crisis, then manage a new world post-crisis.

Well, if we are in a transformation crisis then we need to have people who know how to transform in power to do so. Transformers (innovators, designers, design thinkers) are not running big sessions, talking on-stage about major policy changes or debating top politicians about how best to create new institutions to deal with our new economic circumstances. Many transformers are here but they relegated to small, minor sessions or lunches that will have little impact.

Most of this year's World Economic Forum's big, public sessions at the Conference Center will have old faces, many belonging to people who got us into this mess in the first place. Do I really want to hear a banker tell me about the financial mess?

Other old faces will be politicians who will be offering up old solutions--more regulation, more government spending, more of the same of prescriptions. Unfortunately, politicians are the ones picking up the mess from the private sector folks who lost it and they are doing it with the tools they know.

As he points out, we are in danger of the same dynamic happening in Washington. With the critics pushing the stimulus package more and more into the traditional box and away from transformational, we may be losing a big opportunity.

However, the Administration is still a newborn - so we will see how things continue to play out.

Because the bulk of profits in the industry come from temporary monopolies -- government-granted patents -- the current marketplace is not where the important competition takes place. Rather, the real rivalry takes place "upstream," as companies compete to innovate, either by developing medicines in their labs or by buying up promising patents and biotech start-ups.

I agree, but wonder how this analysis would work. One of the growing key elements in the big pharma's innovation strategy is their form of "open innovation." As Pearlstein points out, they buy patents and start-ups. But, isn't the Pfizer-Wyeth deal a version of this? Pfizer needs new products and Wyeth has them.

If we are going to extend anti-trust analysis to the innovation side, doesn't that mean that we need to look at the issue of exclusive licenses - since that is the "anti-competitive" part of the equation?

FTC has done a fair amount of work recently on the nexus of patents and competition policy. That work should continue. But I'm not sure that would change the analysis of the Pfizer-Wyeth deal.

Much of Pearlstein's complaint in his column is about the generally anti-competitive stance of big pharma (using Ovation Pharmaceuticals as a poster child). His conclusions are of concern:

What we do know, however, is that because of the herd-like behavior of corporate titans and industry analysts, and the prodding of Wall Street's fee-grubbing investment bankers, the Pfizer-Wyeth deal will almost surely be followed by other mega-mergers. And we know that, in an industry with high barriers to new entrants, each of these mergers will result in one fewer company competing, or potentially competing, to develop new drugs.

I share that concern. But if the innovation is really coming from outside the system (patents and start-up), then I'm not sure innovation is the rallying cry. Seems to me the real problem with these mergers is the production and distribution end. And there, the market is pushed by the generics.

So I see this merger as less of a threat to innovation -- and more of a desperate strategy by an industry pushed at both ends.

Scientific research underpins the great technological advances of the past century, from mapping the human genome to the development of the Internet. Increased investment in scientific research, even if the increase is for only one or two years, will lead to long term payoffs in the form of more modern research infrastructure and laboratories, additional discoveries and innovation, and increased U.S. competitiveness.

Moreover, including substantial support for research in the stimulus package will create and retain a sizeable number of jobs, in a wide array of occupations, such as scientists, engineers, technicians, construction workers, and workers making scientific equipment. Spurring an additional $20 billion investment in our national research infrastructure will create or retain approximately 402,000 American jobs for one year.

And so why are the critics claiming that this shouldn't be in the package?

By the way, the first DUIS Annual Innovation Report has just been released as well.

I have always thought that the UK has valuable lessons for the US. In an earlier paper, UK leads; US lags, I talked about UK's focus on design as a competitive advantage. One of Straw's lessons for the US is, for me, especially interesting:

The final area where Britain provides lessons for the United States is at the cutting edge of innovation policy. U.S. policymakers should watch closely as the policies outlined in Innovation Nation are rolled out, including the innovation index. With a tight fiscal situation in the United States, and arguably more pressing social concerns, scarce resources will need to be spent wisely. This therefore provokes the question of what provides the biggest bang for a government buck.

It can be argued that the United States already has incentives in place to encourage applied research and that commercializing basic research has not been the same problem that it has been in Britain. New information on the make up of innovation within society could therefore help a new administration decide whether to continue to focus its innovation policies on science and technology or whether there are opportunities and, indeed, a comparative advantage in the service businesses that make up 80 percent of the U.S. economy.

I'm not sure that it is necessarily an either/or. But I strongly agree that we need an innovation policy that does more than focus on science and technology. Looking at what the UK is doing can help us broaden our own view.

Galen Gruman at InfoWorld offers a different take on the the agenda - A high-tech agenda for President Obama:

In economics and foreign policy, there are competing schools of thoughts that marshal think tanks, academics, activists, and business leaders to argue over and propose policy. The high-tech industry does not do this except in a very simplistic way. That fact is the biggest danger Obama faces in formulating and executing a high-tech agenda.

The tech industry is largely a libertarian one, which encourages creativity and respects differences among people but is perfectly happy with abusive monopolies, socio-economic imbalance, and profiteering. Its worst impulses are borne of meritocracy gone awry: The smartest succeed, and everyone else accepts what the meritocracy decides. Politically, this has kept Silicon Valley, Route 128, and other high-tech centers focused on keeping government out of the way so they can pursue economic and technology domination unfettered. Companies like Apple, AT&T, Comcast, Oracle, Microsoft, Sun, and Verizon are genuinely puzzled when people object to using their success in technology areas to lock out competitors and lock in customers to an ever-widening area of their own products. In the extreme version of this worldview, government is bad and/or incompetent, and customers are cattle.

But the high-tech industry also has a neo-socialist component, which distrusts both government and business. The positive aspect of this ideology engendered the open source movement and provided some balance to the techno-meritocracy in areas such as privacy and information access. But its extreme also promotes dubious ideas such as making software and Internet access free for all that are simply unworkable in the real world.

Both ideologies take for granted that technology is good, and if left unfettered goodness will prevail. There's an extreme naiveté that makes the high-tech industry as a whole one unequipped to lead efforts for the greater national good. Certainly there are individuals quite capable of that leadership, but the Obama administration should be very cautious in letting the high-tech industry as a whole try to set any agenda.

Instead, start with the policy agenda -- what is good for the nation and people as a whole -- and put the high-tech industry in the position of having to deliver on that policy agenda. It will do better executing than leading. With that in mind, my recommended tech agenda starts with policy proposals, not with technologies per se.

He then goes on to talk about a number of the hot button IT issues: broadband, outsourcing, medical records, privacy and national identity system, e-government, and research priorities.

An interesting analysis. I especially agree with the notion of starting with problems and goals and then turning to IT as a means of solution.

I would argue, however, that he falls into the same trap as he argues against -- starting with the technology. The agenda he talks about is not a "technology" agenda, nor an "innovation" agenda. It is an "information technology" agenda. The agenda he proposes is a good starting point. But it needs to be greatly expanded to include all of innovation policy.

Now, Jonathan Ortmans, President of The Public Forum Institute writing in at the Kaufman Foundation's blog on entrepreneurship makes the case that the package boost entrepreneurship:

The bill under discussion is relevant to entrepreneurship in so many ways from taxes to boosting science and technology, and education.
. . .
The proposed legislation also includes areas in which entrepreneurs can actually help more than we frequently realize. Entrepreneurs not only preserve and create jobs, but can also help America overcome its challenges through entrepreneurial innovation. We need to be smarter than ever to test the formula of the dog food before investing scarce dollars in it. Entrepreneurs understand this iterative process and know how to mitigate risk. They know how to create and innovate with little or no resources.

Sounds transformative to me.

On Friday, the BEA will release its advance estimate of 4th quarter 2008 GDP. The 3rd quarter GDP drop was only 0.3%. Based on what the coincident index shows, we can expect a very large GDP decline to be announced Friday. That should light a fire under those in Congress who are pushing the stop button on the stimulus package.

Comments have been invited on two draft documents with a view to making the valuation of intangibles more transparent and consistent. Issued by the International Valuation Standards Council, Revised Guidance Note no 4, entitled Valuation of Intangible Assets, identifies and defines the principal approaches and methods used in intangible asset valuation, with the objective of reducing the diversity of terminology, and making valuation reports more comprehensible to users worldwide. The new Guidance Note no 16, Valuation of Intangible Assets for IFRS Reporting Purposes, draws the attention of valuers, and those commissioning valuations for use in financial statements, to the principal accounting requirements of the International Financial Reporting Standards (IFRS) under which the valuations are prepared and provides guidance on the appropriate valuation response.

If these Guidance Notes can move us closer toward a standardized valuation methodology, then we will have taken a very important step to regularizing the use of intangible in the financial system.

Comments are due by April 30.

It has been an exciting week in Washington - with more surely to come on the policy and political front. An indication of how exciting is already evident in the debate over the stimulus package. President Obama wasn't even in the White House before the naysayers descended to criticize the package. It would be easy to dismiss much of this criticism as politically motivated, as much is coming from the Republican side of the aisle. That, however, would be simplistic. The real resistance seems to be based on an orthodox vision of economic policy. Take for example the tax cut versus spending debate. As I've noted before, some politicians and pundits are rushing toward tax cuts as a more effective stimulus -- at the same time as economists are questioning that assumption. And it is not just the right who are using this line -- today's Washington Post editorial "Priming the Pump" repeats the questionable line that tax cuts are better.

More telling is the debate over the vision of the stimulus - again highlighted by the Post editorial. In that piece the Editorial Board argues that "Much of the stimulus bill does not really claim to deliver a short-term boost to the economy." They then go on to criticize a number of spending items, such as Pell grants, the smart-grid electricity proposals and money for scientific infrastructures. They, unfortunately, get it wrong on two counts. The first is whether these programs provide a short term boost. They do. Building a new research lab has a simulative effect on the construction industry, for example. Providing grants to help people stay in college has as much a stimulus effect as paying them to be in the unemployment line.

Second is their assumption that the stimulus package should focus only on short-term stimulus - to the exclusion of other goals. This is what I call the stimulus versus downpayment debate. Over the course of the past few months, President Obama made clear that his vision for the package was stimulus as a downpayment on new priorities. The critics are arguing that stimulus should only be for stimulus.

Such a view is not only short sighted, but wrong. It is rooted in a vision of the status quo: that our goal is simply to return to the economic pattern of the pre-financial crisis. If we have learned anything, we should have learned that the "good old days" were not. They were artificial and unsustainable and they were fundamentally flawed. The bubble economy did little to strengthen the US's underlying economic competitiveness (witness the rise in the trade deficit and the financial indebtedness) and did little to help the prosperity of US citizens (witness the stagnation of incomes for most Americans).

To argue, as is implicit in the view of the critics, for a package that returns to the status quo ex ante is ludicrous. New priorities are not only a good idea - they are absolutely necessary if we are going to get out of this mess. That is why President Obama was elected and that is what the American people want to see happen - the prophets of the old way of thinking not withstanding.

Let us hope that others have learned a lesson.

The discussion highlighted a number of points in both the national innovation system and local economic development. MaryAnn Feldman discussed the importance of place (a theme she also discussed at an Athena Alliance event in 2004 - see Constructing Jurisdictional Advantage). Rob Atkinson discussed the need for a National Innovation Foundation (see earlier posting). Richard Seline described a way of centering innovation policy around Grand Challenges -- an idea I find intriguing as moves away from technology-specific innovation to problem-oriented innovation, which could be technological, social or organizational (see earlier posting on the FT Climate Challenge Competition).

A couple of points jumped out at me during the discussion. For example, Richard mentioned the generational change in university researchers - where the younger generation is much more interested in commercialization of ideas than the older generation.

The major new idea for me came in Tom Kalil's response to the papers. Tom formerly served in the Clinton White House as a technology policy aide -- so he knows the area very well. For the past decade, he has been with the University of California system, in the Chancellor’s office. Specifically, I was intrigued with his discussion of collaborative and open innovation. For example, UC Berkeley has a program to identify and help foster new ideas from their students -- see Big Ideas @ Berkeley Marketplace. The site matches student project with donors who can make the project work.

What struck was how far behind Washington policymaking was. I know I have sounded that theme repeatedly. But here was a case in point staring me in face. While we have all be throwing in policy pieces to the transition and advocating big technology policy ideas, we have really failed to confront the shift in innovation activities occurring out in the field. Big Ideas is an example of the type of activity we need to understand and support.

As a side note, this shift to more collaborative activity is something we at Athena Alliance have tried to get our hands around in our paper on Virtual Worlds. But Tom's remarks simply pointed out to me how much more we need to do.

While all countries account for investment in tangible assets in their gross domestic product (GDP) statistics, no country currently includes a comprehensive estimate of business investment in intangible assets in their official accounts. Most economists agree, however, that intangible assets—which represent an important input into the innovative process—are critical components of the modern economy. In the United States, some have suggested that investment in intangible assets now roughly equals investment in tangible assets.

Understanding the role of intangible assets—and thus the role of innovative activity in general—is critical to understanding the modern economy. This article updates the ongoing efforts at the Bureau of Economic Analysis (BEA) to better measure investment in various
intangible assets.

The article gives an overview of the role of innovation in economic growth:

Summing up, the innovation process leads to the creation of economically useful knowledge that exists separately from either people or tangibles, such as equipment or structures. This economically useful knowledge is an intangible that is an output of a productive process as well as an input into the creation of new output. By identifying measures of this knowledge, measuring them using national accounting, and incorporating them into a growth-accounting framework, one can begin to develop a comprehensive set of statistics to better understand innovation as a driver of economic growth.

BEA is already moving ahead to incorporate R&D as an investment in the GDP accounts by 2013 (see earlier posting). Investments in motion picture and sound recordings will also be incorporated into the GDP accounts. The research behind this article lays the groundwork for further incorporation of intangible investments in the GDP in the future.

While it is a big bill - $825 billion -- it is very much a targeted stimulus plan. Not a lot of new initiatives or breakthrough new policies. So, keep in mind, once it is passed, the work of evaluating and crafting new policies will begin.

First, on Monday, the Center for America Progress had an event which included a panel on patent reform (see second panel of the event video Enabling Economic Recovery Through Innovation -- more on the first panel on innovation later). The panel was an expansion of a series of articles on Patent Reform 101 in the Centers' new publication Science Progress. Worth reading the papers and listening to the video to get a good idea of where patent reform may be going in the new Congress and Administration.

Second, today's Wall Street Journal has an interesting take on the latest patenting data - Two Patent Paths for Tech Giants:

A report being released Wednesday shows that when it comes to intellectual property, two of the world's largest technology companies are on diverging paths.

In 2008, International Business Machines Corp. generated more U.S. patents than any other company, according to data from the U.S. Patent and Trademark Office compiled by research firm IFI Patent Intelligence. IBM was granted 4,186 patents last year, IFI said, up from 3,125 in 2007. It was the 16th consecutive year that IBM led the patent pack.

Hewlett-Packard Co., in contrast, produced 1,424 patents last year, down from 1,466 in 2007. That put H-P, which continues a strategy of limiting its patent activity, tenth on the 2008 list after finishing ninth in 2007.

H-P was once trying to compete with IBM as the most prolific patent producer. In 2005, for instance, H-P was the third-biggest producer of patents behind IBM's number one spot. But after Chief Executive Mark Hurd arrived at H-P in 2005, the Palo Alto, Calif., company spent less time and money filing new patents as the CEO strove to make the H-P more efficient, said Kevin Light, a deputy general counsel and vice president for intellectual property at H-P.

H-P has been focusing on "the quality of the patents that we seek, as opposed to the quantity," Mr. Light said. As a result, he added, H-P is seeking broad patents that relate directly to its main businesses, avoiding the costs of filing patents that may relate to more specific processes.

H-P's current strategy is a departure from the approach under former CEO Carly Fiorina, who tried to boost the company's profile as an innovator, said Rich Doherty, an analyst the The Envisioneering Group who follows patent filings. Mr. Hurd, in contrast, seems more focused on shorter-term financial results, he said. He also said H-P seems to be keeping secret certain innovations, especially in its services division, rather than filing patents. "They've turned the ratio of public patents to private proprietary advantage," he said.

In part, this divergence in strategies may have to do with how the two companies view their patent portfolio. IBM has an aggressive licensing strategy to monetize their patents (which, interestingly includes moving certain patents into the commons/open source). They see patents as a revenue generator. HP may be looking more to a patents-as-protection strategy. Just a guess.

Third, on the subject of monetization of patents, there is this story on Cash-Strapped Technology Small-Caps Hold Patent Sales: "Small-cap technology companies from Silicon Valley to Israel, struggling to raise enough money to survive amid the credit crisis, are selling prized patents to stay in business."

In some cases, this is a forced monetization -- needing the cash and not being able to raise it through the credit markets. But, as the story points out, this method of raising funds is not necessarily bad:

“They can essentially raise cash without diluting existing investors,” said Andrew Ramer, managing director of the transaction practice at Ocean Tomo LLC, a Chicago-based merchant bank that auctions intellectual property collections for smaller businesses and individuals. “Selling their patents and keeping a license back allows companies to have their cake and eat it, too.”

That strategy will, I believe, only grow in the future due to the combination of continued closed credit markets, greater awareness of the benefits of the strategy and lower transaction costs as such activities become more commonplace.