Is growth back?

This morning’s advanced GDP numbers from BEA show the US economy surging ahead at an annual rate of 4.8% for the 1st quarter of 2006 – compared to 1.% in the 4 quarter of 2005. Some of the biggest changes were increased auto purchases, greater investments in equipment and software and increased exports.
However, similar to last quarter, BEA is estimating that services trade will be down, based on the Jan and Feb trade numbers. Our intangibles trade surplus in Feb was down sharply, but that may have been due to a one-time payment of royalties for the Olympics. March trade figures will be out on May 12. We will be able to see then what really happened to intangibles trade in the 1st quarter.

Innovation in finance – a new derivative

When the term “innovation” is used, most people automatically associate it with new things, specifically new technologies. That innovation = technology formulation is especially true in the current debate on economic competitiveness. However, innovation is a much broader concept. One of the often overlooked areas of innovation is in finance. It is also an area that highlights the complexity of innovation as an outcome by raising the question: “are all innovations good?”
To highlight financial innovation, the Chicago Mercantile Exchange (now simply called the CME) created a Center for Innovation in 2003. One of Center’s programs it the CME Fred Arditti Innovation Award.

The CME Center for Innovation’s signature program is the CME Fred Arditti Innovation Award. The Center annually honors an individual or group of individuals whose innovative ideas, products or services have created significant change to markets, commerce or trade. This award strives to celebrate innovation in action, not only the creative idea, but also the impact that practical application of the idea has made on improving the economic well being of individuals, an industry or a nation.

One of the forthcoming innovations from the CME is described by The Economist“Property derivatives: Homes with hedges”:

In the next few weeks, the CME is likely to open trading in financial futures and options linked to American house prices. Investors who want to hedge the risks of residential property — or merely to speculate on the market’s direction — will be able to bet on a rise or drop in a house-price index, without having to buy or sell bricks and mortar. With interest rates on the rise, prompting worries that the recent housing boom is about to give way to a downturn, the potential appeal of these new hedging products is easy to see.
Punters will be able to bet on price changes in ten cities from Boston to San Diego, as well on a national index that aggregates all ten. The indices will be part of the CME’s Alternative Investment Products group, which fosters derivatives linked to economically important trends and events not directly related to underlying securities or commodities. The group already has products based on the weather and on economic data such as non-farm payrolls.

Now, this immediately brings to mind the negative side of financial innovations: it is just one more tool for speculation. But, while speculation is a part of any financial market, the purpose of these new financial instruments is risk management. As The Economist goes on to explain:

Because the new derivatives will allow bets up to only a year ahead, homeowners will not be able to use them to hedge long-term risks. That limits their usefulness for ordinary folk. For many companies in the property industry, however, they should be helpful. A property developer or contractor, for example, can start a housing project without worrying whether prices will fall sharply by the time it is completed. Monika Piazessi, an economist at the University of Chicago’s Graduate School of Business, says that half the volatility in the price of individual homes is linked to city-wide changes in prices. So the CME’s new city indices could go a long way towards lowering the risks.

As a result:

Financial firms such as mortgage lenders will also no doubt find uses for the new derivatives. And so will investors with a view about America’s residential property market — whether they expect a continued boom, or a bust.

Given that a large percentage of most people’s net wealth is tied up in their homes, it would be a major step forward if these derivatives can smooth out risk of the price volatilities and thereby lessen the underbuild/overbuild cycle. On the other hand, if you believe that derivatives contribute to speculation, then this is a scary step for the housing market. (For more on the derivatives debate – especially Warren Buffet versus Alan Greenspan – see the 2003 story in Forbes. “The Great Derivatives Smackdown”.) (See also Andrew Gyn’s comment in today’s FT – “Finance’s rise threatens economic stability” – subscribtion required).
So, it this a good innovation or a bad innovation? I don’t know, but I am reminded of the old saying from technology assessment: technology is neither good nor bad, nor is it neutral. Maybe we should broaden that phrase to encompass all innovation?

Feb parody video – or is it satire?

The economics blog, The Big Picture: “Every Change of Rate”, has posted a link to a parody video by Columbia business students on Fed Chairman Bernanke, set to the Police tune “Every Breath You Take”.
Here is the direct link to the video.
As Big Picture says, “Its a bit harsh on Ben Bernanke, who after all has only been in office for one FOMC meeting. Still, the overall effect is quite amusing!”
Very amusing, indeed. My only question is whether it is protected under the parody provisions of copyright law. I think it is closer to satire, which is less protected. If the whomever the owner is to the song’s copyright goes after these Columbia business students, they may learn an interesting lesson about the business world’s take on IPR.
And, who knows, at the rate things are going this could end up as yet another Supreme Court case.

The Germans get it – a new d-school

A new design-business school in German is beginning to get noticed – the Zollverein School of Management and Design. The school was featured in the latest online conversation of the NextDesign Leadership Institute in New York – NextD Journal. According to the conversation “Think NewB+NewD: Understanding the New Zollverein School” with the schools founder, Prof. Dr. Ralph Bruder:

The whole project of founding a new school started in 1999 as part of a larger program to transform a former coal mining complex in the western part of Germany into a leading international location for design, art and culture. This coal mine (named Zeche Zollverein) is very special for the region, not least because it became part of the UNESCO World Heritage list in December, 2001, and is a symbol of the rise and fall of a complete industrial branch. But also Zollverein represents the necessity for an imaginative restart in an area with a high rate of unemployment. So the European Union, the state of North Rhine-Westphalia and the city of Essen decided to give a total of 110 million euros from 2002-2007 to not only preserve the historic place, but to revitalize it with a focus on creative businesses.
In 1999, the idea was born that a new school is needed at the Zollverein area that can work as a stimulator for creating new jobs in the so-called creative business sector.
The following three years were spent writing proposals to get public funding, creating a network of academics and practitioners to support the idea of the school and looking for an appropriate organizational structure for this new school. Finally in December, 2003, the Zollverein School of Management and Design was founded as a private institution for teaching and doing research in the field of business and design.
The purpose of the Zollverein School is to create a platform for the mutual exchange between the often separated fields of business and design. At the Zollverein School, managers become familiar with the views and ways of thinking of designers or architects and vice versa. Both sides move away from their traditional viewpoints and link their activities to create innovative and sustainable strategies for future businesses.
What makes the Zollverein School very special and unique is that it is neither a business school nor a design school, but rather an institution where those different disciplines define a space of mutual respect
. . . .
The Zollverein School becomes more and more attractive as well for professionals who have no basic education in any design-related disciplines, but who feel that understanding design processes and adapting design methods might be helpful for their future professional careers.

The school is positioning itself squarely in the MBA tradition, even participating in the World MBA Tour, a join international recruiting tour of top MBA schools. There are also special doctoral programs in design science offered with other universities. The first group of MBAs will graduate this September.
While this is not “unique” (meaning one and only), it is certainly unusual and cutting edge — like the Stanford d-school. It may be unique for Europe, however. We have a fairly good sense where the Stanford grads will end up. Where the German students will go is unclear. Given that the MBA is taught in English, they could go anywhere. Some of the current students are apparently coming from large European companies – such as Deutsche Telekom. But my perception is that the larger companies – which dominate the European economies – are not necessarily open to or enthusiastic about or see the need for such an innovative degree. It will be worth tracking where the graduates end up. That will give us a good leading indicator of what countries, and companies, truly do get it.
It will also be worth tracking to see if the school sparks any development of the local economy. As it founder stated, the government’s purpose in supporting this endeavor was to revitalize the area with a focus on creative businesses. It is standard wisdom that universities serve as a key economic development catalyst. That has been true in numerous examples (i.e. Silicon Valley). But there are also numerous counter examples. Other elements must be present as well.
Officials in the area understand that economic re-development will take a concerted effort — and have been making that effort. Essen and the Ruhr area has been named the European Cultural Capital 2010 and has taken the motto “Transformation through Culture – Culture through Transformation”. Numerous cultural/creative projects are underway or planned as part of this activity.
Watching the Essen experiment in preparing for the I-Cubed Economy (and the development of the Zollverein School) should prove to be very enlightening.

Jane Jacobs

Jane Jacobs died early today at her home in Toronto. To understand why the words “profound” and “path breaking” applied to her thought, read the story in the New York Times outlining her life and work. All of us who struggle with understanding creativity and urban life owe her more than a debt of gratitude – she was there first and her ideas will long out last us all.

Yet another Supreme Court patent case?

U.S. Justices May Review Patent Case – New York Times:

The Supreme Court asked the Bush administration yesterday for help in deciding whether to review a patent dispute between the Microsoft Corporation and AT&T over technology used to improve Internet voice transmissions.
The request, directed to the United States solicitor general, Paul D. Clement, signaled that the justices might have questions about a lower court ruling that allowed AT&T to seek royalties for programs installed in copies of the Microsoft Windows operating system on computers in foreign countries. The court generally heeds the administration’s advice on whether to take up pending appeals.
Microsoft’s appeal seeks to limit the vulnerability of software makers to patent lawsuits for sales outside the country. Microsoft, the world’s largest software maker, argues that software code does not fit within the provision in federal law that bars exports of patented inventions without permission.
“This case presents a recurring question of vital importance to the U.S. software industry,” Microsoft argued in its appeal, filed in Washington. The lower court ruling “vastly expands the extraterritorial reach of U.S. patents involving software.”
. . .
AT&T urged the justices not to hear the patent case.
“Microsoft’s position conflicts with 30 years of patent jurisprudence, business practices in the software industry and Microsoft’s own patent portfolio,” AT&T argued.

Seems like the Court has decided that patent law is too important to be left to the lower courts and that 30 years of jurisprudence they have laid down.

Design economy gone wrong

The Wall Street types have found a new “new economy” to hype. According to Andy Kessler, a former hedge fund manager and now techie investment pundit, its The Design Economy:

Perhaps here’s how the world works these days. No need to borrow billions and build big ethylene plants anymore. You invent something here (chip, movie, iPod, medicine, financial instrument), email the design overseas for manufacture in $1-an-hour factories (OK, not financial stuff), and then ship it back for consumption. Sure, this runs up trade deficits, and our precious dollars leave the country, but that’s only half the story. Those dollars come back and invest in the U.S. Most go into long bonds, 10-years and 30-years. That’s why Alan Greenspan left with a puzzled look on his face. Foreign buying is keeping long rates low; the yield curve is flat.
But maybe the stock market has figured out that we’re running out of long bonds. Maybe, just maybe, the surprise is fiscal discipline being voted into office in November and shrinking red ink in D.C. Marginal rate tax cuts and lower rates on dividends and cap gains might actually work and increase revenue. If we run smaller deficits, then there’ll be fewer bonds for foreigners to buy, so they have to buy something else with those dollars and the next big pot of liquidity is — hmm, let me think for a second, oh yeah, on Wall and Broad, the $15 trillion stock market. When bonds are scarce, foreigners are going to have to buy our stocks, or so the stock market might be screaming.

That scenario may be great for the Wall Street speculators looks for the next big score. But it is a disaster for the economy. Yes, those dollars come back and pump up an inflated bond market (higher bond prices = low interest rates) and could pump up an inflated stock market. But, they still represent the selling off of our assets (either IOUs or equities) to foreigners – leading to what Warren Buffett calls the “sharecropper society” (in this case, where we labor to come up with those wonderful designs that make other rich.
I must say this scares the beejeeze out of me. When the folks who were involved in stoking up the last big hype of the bubble have discovered “design” – I worry that a great idea is once again going to be inflated beyond recognition and lost.
Let me repeat what I said before: design is a key factor in maintaining our competitive advantage. The combination of design-manufacturing-marketing-service can lead to a sustainable intangibles-based economy in the US. That kind of “design economy” would also be good for Wall Street over the long term, a fact that most investors (rather than speculators) might appreciate.