Budget deficits, health care and competitiveness

The latest World Economic Forum (WEF) competitiveness rankings are out – and the US has slipped to number 6. Business Week – Is the U.S. Losing Its Competitive Edge? points to the core problem:

While the U.S. excelled in such business categories as market efficiency and innovation, its score in the World Economic Forum’s annual ranking was dragged down by government-related measures. Out of 125 countries, the U.S. was 40th in health care and primary education and a lowly 69th in macroeconomy, reflecting its large budget and trade deficits. In macroeconomy, the U.S. scored lower than such nations as Vietnam, Venezuela, Uganda, the Philippines, Peru, and Nigeria. (Ouch.)
. . .
Was the deck stacked against the U.S.? That depends on whether you agree with the forum that the U.S. deserves big demerits for being the world’s biggest debtor, running a large budget gap, and having a current account deficit amounting to a record 6.5% of gross domestic product. Nouriel Roubini, a New York University economist who worked on the rankings, said that the U.S. score was probably also hurt by the government’s mishandling of Hurricane Katrina, relatively high infant mortality and low life expectancy, and the prevalence of AIDS.

The Wall Street Journal focused on the budget deficit:

“The U.S. remains a very competitive economy,” said Augusto Lopez-Claros, the Forum’s chief economist. “It leads in innovation and patent registrations, has some of the best universities in the world, and it has extremely high level of collaboration between universities and industry,” he said. “However, how you manage your public finances is very important.”
Serial budget deficits in the U.S. have led to rising public debt, which means an increasing portion of government spending goes on debt service. That means less money is available for spending on infrastructure, schools or other investments that could boost productivity. Heavy government borrowing, by competing for funds in financial markets with the private sector, also tends to drive up businesses’ borrowing costs.

As the New Economist blog points out, Lopez-Claros summarized the keys:

The top rankings of Switzerland and the Nordic countries show that good institutions and competent macroeconomic management, coupled with world-class educational attainment and a focus on technology and innovation, are a successful strategy for boosting competitiveness in an increasingly complex global economy.

While we should not put too much stock in these types of composite rankings, the WEF Competitiveness Report should be seen as a shot across the bow – especially to Washington.
1. Switzerland
2. Finland
3. Sweden
4. Denmark
5. Singapore
6. U.S.
7. Japan
8. Germany
9. Netherlands
10. U.K.
11. Hong Kong
12. Norway
13. Taiwan, China
14. Iceland
15. Israel
Source: Global Competitiveness Report, World Economic Forum

Innovation in unlikely places

On the Business Week blog – Learning from Informal Urban Economies: “If necessity is the mother of invention, then the residents of squatter cities will have much to teach us about resourcefulness and innovation.”
From a conversation with Stewart Brand on innovation in squatter cities:

Have you witnessed a business actually tapping into a squatter city and devising an innovative product or service as a result?
Yes. The AES Corporation, a leading power company, asked me to give a talk in Latin America. While I was there, I learned that squatter cities steal their power…there are illegal power chords siphoning electricity strung for miles. In Buenos Aires, stolen power is better than no power, but it has problems. It’s dirty power because it’s not regulated. It can be too strong and fry a fridge or a TV. The power is flaky. And dangerous. In Caracas, four people a month are killed stealing power.
So AES sent people into the field. They wanted to see how to convert thieves into customers. They realized there are consumers in squatter cities. And people were interested in getting clean power regularly. The problem was that squatters’ incomes are burst-y: They have some weeks with no money coming in, or others when they suddenly have it.
So paying a bill monthly doesn’t work. So AES came up with a token system, and squatters could use power meters fed by tokens. Folks can buy power tokens when they can. This system is now in progress. And squatters are now part of the formal economy in parts of Latin America.

By the way, the electricity by token system is an old idea – and was still in use in England when I encountered it a decade ago. Sometimes, reviving an old idea is a great innovation in a new context.

Design and management

This from Bruce Nussbaum’s blog – NussbaumOnDesign:Is Design The New Management Consultancy?. The answer is “almost but not quite.” As he notes, some serious work is being done at both d-schools and b-schools. As I’ve noted before, North America has the potential for a breakthrough in this area, led by the trio of Roger Martin, Dean of the Rotman School of Business at the University of Toronto; David Kelly, the Design Engineering Professor at Stanford and founder of the D-School; and Patrick Whitney, the Director of the Institute of Design at the Illinois Institute of Technology, But policymakers aren’t there yet in giving this change the boost it needs.
Also – check out the latest issue of Inside Innovation, the new Business Week magazine that Nussbaum edits.

So much for dark matter

Earlier this year, there was much ink spilled (to use an anachronistic phrase) over the issue of why the United States could continue to run an investment income surplus while we had such a large debt. The theory was advanced that there was a huge amount of intangible assets – “dark matter” – not being counted in the official statistics – a finding many disagreed with.
Well, there is a simpler answer to why we can run an investment income surplus. The answer is: we can’t. As the front page of today’s Wall Street Journal points out – U.S. Foreign Debt Shows Its Teeth As Rates Climb:

As interest rates rise, America’s debt payments are starting to climb — so much so that for the first time in at least 90 years, the U.S. is paying noticeably more to its foreign creditors than it receives from its investments abroad. The gap reached $2.5 billion in the second quarter of 2006. In effect, the U.S. made a quarterly debt payment of about $22 for each American household, a turnaround from the $31 in net investment income per household it received a year earlier.
The gap is still small within the context of the $13 trillion American economy. And the trend could reverse if U.S. interest rates decline. But economists say America’s emergence as a net payer illustrates an important point: In years to come, a growing share of whatever prosperity the nation achieves probably will be sent abroad in the form of debt-service payments. That means Americans will have to work harder to maintain the same living standards — or cut back sharply to pay down the debt.
“Our net international obligations are coming home to roost,” says Catherine Mann, a senior fellow at the Institute for International Economics. “It’s as if on our personal MasterCards we have run up large obligations and never had to make payments. You can’t believe that’s going to last forever.”

As I showed earlier, a small change in interest rates can make a huge difference given the size of the investments relative to the debt.
Yes, our official statistics do not adequately capture our intangible assets. But our intangible assets do not constitute some mysterious dark matter that magically resolves our international financial imbalances.
Only in theatre is there deux-ex-machina.

Losing creativity in advertising

Steven Pearlstein’s column in this morning’s Washington Post asks What Happened To Creative Advertising? In it he describes the changes in the industry:

Gone are the days when gray-suited admen would commute to Grand Central Terminal from the Connecticut suburbs, walk the few blocks to Madison Avenue, spend the day concocting clever, feel-good ads, collect 15 percent commissions for placing them with the three TV networks and glossy magazines, and schmooze clients over three-martini lunches.
Today, the center of gravity has moved downtown to SoHo and TriBeCa, and much of the work is done by twentysomethings in jeans and T-shirts. They earn less and work harder to peddle niche products through a fragmented media market to savvy consumers who tune out messages they find boring or irrelevant. The cushy commissions have been replaced by stingier, cost-plus-fee schedules imposed by numbers-driven corporate marketing officers who care less about the creativity of advertising than its return on investment.

The results, he argues is an attack of the bland:

Creative-services firms have proven ill-suited to the demands of public shareholders and analysts, with their fixation on quarterly earnings targets and double-digit growth. The emphasis on cost-cutting and meeting financial goals dampened the enthusiasm for risk-taking at the heart of creative advertising.
“The mantra became ‘Figure out what the client wants, do it, and get paid,’ ” explains Lee Clow, the legendary creative director at Chiat/Day. And because agencies are generally paid on the basis of fixed retainers, hourly billing rates and media commissions, there is no financial difference between delivering a blockbuster ad and delivering a mediocre one.
Not all the blame for bland, formulaic advertising, however, lies with the advertising industry. Many clients are also to blame. Chief marketing officers, with an average tenure of less than three years, have become loath to take risks. And in their drive to meet growth targets and cost-accountability, they rely heavily on research techniques such as testing ads in front of focus groups — leading, inevitably, to least-common-denominator ads.

I’m not sure I would completely agree with Pearlstein implied assumption that things were more creative before. The “good-old days” never struck me as an outpouring of creativity. And I have seen some very creative ads in recent years. (My favorite is the EDA “herding cats” ad which aired during the 2000 Super Bowl – which was followed the next year by the not-so-great “running with the squires” ad.)
I would agree with his closing statement:

Because so much time and money is shifting to the Internet, none of the old rules applies. Now, it is the clients who are pushing the agencies for change, and the agencies are finally examining how they are organized, how they are paid and how they conceive of their jobs. As a result, after a decade of fighting changes, the industry is coming around to embrace them. Changes once seen as frightening are now being viewed, at least at the top of the ad business, as opportunities.

But it is not just the shift in technology that is causing a change. One of the hottest new areas of advertising is product placement. To overcome that problem of “savvy consumers who tune out messages they find boring or irrelevant”, more and more advertisers are looking to place the message inside the story. Is that Bombay Gin that 007 is using to make his martini? Was that a Coke or Pepsi can that Arnold had in his hand? The creative test for such “ads” will be how to weave the product into the story line – not just have it show up on the screen. And how to make sure the product is not associated with the wrong part of the story (while, according to wikipedia, Ruffino Riserva Ducale (Chianti Classico) appears many times on the table of Tony Soprano, I don’t think company wants a bottle of its red wine on Hannibal Lecter‘s dinning table?)
This change is a perfect example of an innovative business model, i.e. a non-technological innovation. It will be innovative actions like that which will bring creativity back to the advertising industry.

Congress in competitive pause?

Most Washington insiders don’t expect much to happen legislatively before the November election. As the Washington Post put it, Congress Bustles With Busywork:

With 10 days left before the scheduled Sept. 29 recess, Congress’s much-trumpeted national security agenda is becalmed and awaiting a stiff wind to get it to port. This week, there doesn’t even seem to be a gentle breeze on the horizon.

My guess is that Congress will attempt to finish the Defense and Homeland Security spending bills – and that is about it.
Left on the table for either the lame-duck, or more likely next year, is the competitiveness agenda. For all the hype early on, the momentum on this has been slowed. Last week, Senate staff convened a group of interested parties to discuss the composite Senate bill — meddling together the various components from at least three Senate Committees. The unanswered question is whether the bill can make it to the Senate floor before recess (possible, but not likely) and if it does, whether it can be matched with the various piece of House legislation by the end of the year.
There is an old saying that a camel is a horse designed by a committee. Well, the competitiveness camel was very much on display. That is not to be taken as a criticism of the staff and committee’s work. The bill is admittedly the plain vanilla version. It has a lot of good things in it, including the establishment of a Cabinet-level Council on Innovation Policy and a concomitant outside advisory panel (as you may know Athena Alliance has advocated for the creation of a Commission on the Future of the US Economy – similar to the Young Commission on competitiveness in the 1980s). The bill also has some questionable items in it, specifically the elimination of the Commerce Department’s Technology Administration. There is also a lot missing – such as an expansion of the Manufacturing Extension Partnership to innovation and design issues. The legislation also does not address immigration and patent reform.
On the whole, it is a good piece of legislation – and one that deserves to be enacted.
But, it doesn’t really do that much to address our innovation and competitiveness challenges. A good step, but only one step. And if it becomes a way for folks to say “done that,” then it will have done the country a disserve.
Whether this bill passes or not, look for the issue to heat up next year. There will be two drivers, both coming out of the Senate Finance/House Ways & Means Committees: extension of the R&D tax credit and the expiration of trade negotiating authority. It is not clear in my mind whether the next Congress will be able to address these two issue. But if they do move forward, they become powerful locomotives to pull the rest of the innovation/competitiveness agenda along. A similar dynamic happened in 1987-88, and history has been known to repeat itself.

Creative Man

According to the Copenhagen Institute for Future Studies, we are now in the era of the “Creative Man”:

Who is Creative Man? Creative Man is, of course, both genders. Creative Man embraces both creative people and innovators. Creative Man is both the person full of brilliant, exciting ideas, but who seldom, if ever, carries them out; and her counterpart who can take an idea – his or someone else’s — and put it into practice.
New trends arise when needs meet means. When people have a need for personal development or gratification, and a technological or cultural innovation offers to fulfil that need, a new social trend results. This also applies to industrial trends, where new technological and social means fulfil new needs on the market and in the workplace.
From a social perspective, the rise of “Creative Man” is born of a need for greater personal growth, a need that our research indicates is becoming greater and greater. That need is being matched by the growth of new technologies that allow greater self-expression.
In the same way, increased automation is shifting workers out of the service industries. We believe that the same advances in technology will give these workers a home in creative and innovative industries.
The trend towards greater creativity and innovation, as expressed in ‘Creative Man’, has roots in both the social and the commercial evolution. So it makes sense for us to look at the most prominent needs and means that form the foundation for Creative Man. And we will look at what the rise of Creative Man logic will mean in the workplace, the marketplace, and to mass media.

For a more detailed discussion, see the website.