Make election day a Federal holiday

My significant other voted at 7 am this morning. It took her almost an hour and a half. At 11:30 I voted and it took me about 5 minute. Same location. Why? Because the 7 am crowd were people who had to vote before they headed off to work. For them, it would not be practical to leave work in the middle of the day and go back home. Me, I work in the same neighborhood as I live – so it was an easy walk.
Most people are in the same situation as my significant other. They, like her, don’t work near where they live. That is why we have huge rush hour crowds at the polling places.
Solution: let people take the day off and stay home. Then they would naturally spread themselves out at the polling places. And, since voting would be easier, participation would probably increase.

Government signaling actions – and the bailout

Here is something that the proponents of the direct infusion approach probably didn’t think of: a chunk of the funds will go to institutions that don’t need it. According to the Wall Street Journal — Rescue Cash Lures Thousands of Banks banks are now lining up for the cash. Why, because they fear the consequences if they don’t:

Now institutions across the U.S. worry that if they don’t try for the money, the market will judge them as too unhealthy to qualify, or lacking the savvy to deploy cheap government capital on acquisitions and investments.
“There’s a perception in the market that the government is actively picking winners and losers…we wanted it well-known in the market that we’re on the list of survivors,” said Roy Whitehead, chairman, president and CEO of Washington Federal Inc. in Seattle, one of about 20 regional banks approved by Treasury for the program last week.

It is called “signaling” — and has been a feature of government programs for a very long time, as behavioral economist could have told us.

Deeper than we thought?

Factory Activity Slid in October –

The Institute for Supply Management, a private research group, reported Monday that its index of manufacturing activity failed to grow for a third consecutive month, moving to 38.9 in October, from the contractionary 43.5 in September and the 49.9 seen in August. The October reading was the lowest since September 1982, when it registered 38.8.
Readings above 50 point to expansion in activity. Economists polled in a survey by Dow Jones Newswires had expected the October index to hit 41.5.

Oh boy!

Stimulus packages

As the economy tanks, we are being inundated with suggestions for what to do. Most are standard macroeconomic stimulus ideas. But a few are in the same vein as my earlier comment that stimulus needs to do more than boost consumer spending. From Rob Atkinson at the ITIF comes this call for a Timely Targeted Temporary Transformative package:

As talk of a possible recession grows, so too does consideration of a second economic fiscal stimulus package. Rather than craft a conventional spending-oriented stimulus package focused solely on tax cuts for individuals and spending increases, Congress should craft a stimulus package of which at least a portion not only gives a quick shot in the arm to the economy but at the same time also boosts investments that spur productivity growth and innovation, especially in information and communication technology, which has been the engine of U.S. economic growth for the past decade.
. . .
1. Allow IT Investments to be Completely Expensed in 2009
2. Provide a Tax Credit for Investments in Health IT Made in 2009
3. Provide $2 Billion to Colleges and Universities That Invest in Needed Research Infrastructure in 2009
4. Provide a Tax Credit of 50 Percent for Investments in Energy Efficient Equipment in 2009
5. Provide $1.6 Billion for Computers and Broadband for Low-Income Families with Children at Home
6. Provide an $8 Billion One-Time Infusion into the Highway Trust Fund to Spur Ready-to-Go Surface Transportation Infrastructure Investments
7. Allow U.S. Companies to Bring Back Foreign Earnings at a Lower Corporate Tax Rate in 2009
8. Provide Forgivable Loans to States to Shore Up Budget Shortfalls, Provided That States Expand “Rainy Day” Funds in Later Years

I generally agree with this list, except for the repatriation of foreign earnings. I’m not sure the evidence is convincing that this worked in the past.
I’m also a little surprised that Rob didn’t call for something he has advocated in the past: the knowledge tax credit for worker training. I have long supported this proposal. As I’ve said before, If we can provide a tax incentive to invest in physical assets such as equipment (including IT), we should also provide tax incentives in the intangible assets of worker skills needed make those physical assets work. Such a training tax credit is especially important in a time of slower production. Rather than send workers to the unemployment office, let’s send them to the classroom.
James S. Henry and Jim Manzi writing in The Nation also call for a plan to Invest in Innovation:

In the midst of our deepening recession, the United States faces another economic crisis that is less visible but may be more important than house foreclosures, bank failures, plant closings or stock market avalanches: the systematic under-investment in technology and innovation. Our global economic leadership may be at stake because of it.

Specifically, they want to boost R&D spending and other technology programs
Bernard Schwartz and Sherle Schwenninger at the New America Foundation proposed their Economic Recovery Program for the Post-Bubble Economy earlier this summer – but it is getting renewed attention (see Steve Clemons comments in his blog The Washington Note). According to Schwartz and Schwenninger:

A longer-term economic recovery program must therefore steer the economy onto a new growth path that is less dependent on the debt-financed consumption that has driven economic growth over the past decade. The most promising new sources of growth are America’s enormous public infrastructure needs and the increased global demand for American technology created by the drive for greater efficiency in economies around the world. An economic recovery program built around public infrastructure investment and demand for American technology would be more effective in stimulating the economy in the short term, and far better for it in the long run, than would another round of tax rebates for American consumers.

Even David Brooks in the New York Times is writing about a more expanded plan. His is a A National Mobility Project. Brooks argues in favor of infrastructure spending, but not as a short term stimulus measure:

Major highway projects take about 13 years from initiation to completion — too long to counteract any recession. But at least they create a legacy that can improve the economic environment for decades to come.
A major infrastructure initiative would create jobs for the less-educated workers who have been hit hardest by the transition to an information economy. It would allow the U.S. to return to the fundamentals. There is a real danger that the U.S. is going to leap from one over-consuming era to another, from one finance-led bubble to another. Focusing on infrastructure would at least get us thinking about the real economy, asking hard questions about what will increase real productivity, helping people who are expanding companies rather than hedge funds.

Finally, but maybe most importantly, comes this call from Michael Porter Why America Needs an Economic Strategy – BusinessWeek:

The stark truth is that the U.S. has no long-term economic strategy—no coherent set of policies to ensure competitiveness over the long haul. Strategy embodies clear priorities, based on understanding the strengths we need to preserve and the weaknesses that threaten our prosperity the most. Strategy addresses what to do, but also what not to do. In dealing with a crisis, experience teaches us that steps to address the immediate problem must support a long-term strategy. Yet it is far from clear that we are taking the steps most important to America’s long-term economic prosperity.

In that article, Porter ends with the following:

We will need some new structures to govern strategically. I served on the last public-private President’s Commission on Industrial Competitiveness—in 1983! This time we need one that is less politically motivated. Congress would benefit from a bipartisan joint planning group to coordinate an overall set of priorities.

On the last point about a structure: we had one. It was a bipartisan Congressionally created organization – the Competitiveness Policy Council. It was created in the 1988 Trade and Competitiveness Act and operated from 1991 until 1997, when the GOP-controlled Congress cut off its funding. There was also legislation submitted in 2004 by Senator Lieberman to create a Commission on the Future of the US Economy — which Athena Alliance consulted on and supported.
Maybe the new Administration and the new Congress will look more favorable on these efforts.

Economic speed limits and transformation

In an earlier posting I mentioned that the economic task of the next Administration will be to deal with the weakness in the economy (going beyond the credit market seizure and financial market meltdown). The new IMF World Economic Outlook notes that:

The major advanced economies are already in or close to recession, and, although a recovery is projected to take hold progressively in 2009, the pickup is likely to be unusually gradual, held back by continued financial market deleveraging.

That is the standard macroeconomic world view: the economy will rebound but financial constraints will limit growth. In this view, we are working off a credit bubble that inflated the economy faster than it should have grown. As the IMF puts it:

lax macroeconomic and regulatory policies may have allowed the global economy to exceed its “speed limit” and may have contributed to a buildup in imbalances across financial, housing, and commodity markets.

While it is undoubtedly true that we are facing the hangover from an easy credit boom, the question of whether the economy exceeded its speed limit is at the core of the discussion as to future remedies. Is the economy doomed to a period of slow growth or are there actions that can be taken to effectively raise the speed limit?
Key to raising the economy’s speed limit involves continued productivity gains via innovation and re-establishing the link between productivity gains and wages. This will require a look at structure issues. A consumer-oriented stimulus package would be fine. But ultimately the economy will grow to the extent that we increase productivity – not by how much we increase consumer spending. As Larry Summers said in a recent piece in the Financial Times, “there is a need to ensure that the pressure to increase spending is directed at areas where it will have the most transformational impact. We need to identify those investments that stimulate demand in the short run and have a positive impact on productivity.”
This is not necessarily the standard view. As Rob Atkinson has pointed out, there are a set of standard views that look at the macroeconomic level without every considering innovation and that “transformation impact” mentioned by Summers. See Rob’s paper “Economic Doctrines and Policy Differences: Why Washington Can’t Agree on Economic Policies” – and his earlier book Supply-side Follies. William Baumol, Robert E. Litan, and Carl Schramm have a slightly different take on the argument. In there book, Good Capitalism, Bad Capitalism and the Economics of Growth and Prosperity, they focus on entrepreneurship as engine of growth.
The ability of the economy to transform itself is key to the discussion of the economic “speed limit” and the debate over “the new economy” in the late 1990’s. The term “new economy” has fallen into disrupt after the collapse of the dot-com bubble. At its best, the term helped describe the economic changes due to technological advances and other factors. At its worse, the term was used to justify an overly rosy outlook that the old economic rules no longer applied. When some of those fundamentals re-applied themselves (like the idea that companies actually needed to have revenues to sustain their stock prices), many were quick to discard the entire concept.
But the underlying question remains valid: to what extent have changes in technology and economic structure increased the productivity level and to what extent can those gains be sustained.
Some fundamentals. The economy’s “speed limit” refers to the potential non-inflationary growth rate of the economy. Conventional economic wisdom holds that economic growth can not exceed a certain rate without increasing inflation. That rate is determined by the rate of growth in the labor force (the number of workers and their hours worked) and the rate of growth of the productivity of those workers.
Proponents of “the new economy” talked about a number of factors that either 1) lowering the possibility of inflation or 2) raising the non-inflationary potential growth rate:
• globalization has increased competition and made it harder for companies to raise prices, therefore keeping down inflation;
• globalization has opened up new sources of supply, thereby reducing any domestic bottlenecks in the production process that could result in inflation due to a lack of capacity to meet demand;
• deregulation has forced companies to become more productive; and,
• new technologies have dramatically increased productivity;
• restructuring has allowed companies to become more productive through increased economies of scale and specialization.
The last two points – technology and structure – go directly to the argument on raising the economy’s non-inflationary growth potential centers through productivity. A decade ago, economist worried about the so-called so-called “productivity paradox.” Data on the overall productivity of the economy did not seem to show any impact from new information technologies. As Noble-laureate Robert Solow once quipped, “You can see the computer age everywhere but in the productivity statistics.” However, over time those productivity numbers final changed. Productivity has grown at an annual rate of 2.6% between 1995 and 2007, compared with a rate of only 1.4% between 1973 and 1995 (data from the Council of Economic Advisors: 2008 Economic Report of the President)
Brynjolfsson and Hitt have argued that the “productivity paradox” was over in large firms by 1991. Their 1996 research shows that “computers contribute significantly to firm-level output, even after accounting for depreciation, measurement error, and some data limitations.” Part of the reason for the delayed impact has to do with complementarities between technologies. Economic historians and theorists have pointed out that new technologies often require a host of other changes — technological, institutional/organizational, and in worker skills and knowledge — before they can be fully utilized. As Brynjolfsson and Hitt noted in a 2003 paper “Computing Productivity: Firm-Level Evidence”:

the observed contribution of computerization is accompanied by relatively large and time-consuming investments in complementary inputs, such as organizational capital, that may be omitted in conventional calculations of productivity.

One example often used is the case of electric motors replacing steam engines in the factory system. It took 40 years before full impact of this change was felt, because of the need for complimentary changes in power transmission technologies, plant design and organizational procedures. (See Nathan Rosenberg, “Uncertainty and Technological Change”.)
Every once and a while, this emphasis on information technology raises an alarm – such as this comment a few years ago in the Financial Times Federal Reserve may have hit speed limit

Importantly, most of that investment drop has come in computer equipment. So, to the extent that information technology is responsible for the productivity miracle of the 1990s, there is reason for added concern.

The Conference Board released a report earlier this month that U.S. Labor Productivity Growth in 2006 was the Lowest in More than a Decade. Much of the concern was about a slowdown in the impact of information technology:

According to Dr. Bart van Ark, Director of International Economic Research at The Conference Board: “Over the past decade, information and communication technology has been a key driver of global productivity growth, but with these latest numbers one begins to wonder whether ICT’s [Information and Communications Technology] contribution has peaked. The significant fall in U.S. productivity growth is unlikely to be purely cyclical, and the modest European revival of productivity also points to the limited impact of technological change and patchy liberalization of product and labor markets in many countries.”
However, according to the report, the “lull” in productivity could also be due to a transition phase to a second wave of ICT-driven productivity growth still to come.
Gail Fosler, Executive Vice President and Chief Economist of The Conference Board, said: “Today’s business models have reached a certain level of technology saturation, and incentives for creating a second wave of applications are weak. But there are many industries, in particular in services, in which the potential for more productive technology use seems large. Future productivity gains may be waiting for a new generation of business applications.”

But, it is unclear whether we have come to the end of information technology driven productivity increases. A new IT wave may be just beginning, in the form of cloud computing and Virtual Worlds. (Note: Athena Alliance has an on going project on IT and business collaboration – with the first paper to be released in a month or two.)
There are at least three ways in which information technology can increase areas: IT creating industries (such as software); intensive IT using industries (such as banking); and latent IT using industries (such as health care). Each has their own productivity rates. As the consulting firm McKinsey pointed out is a study “Where US productivity is growing”:

After 2000, some of the sectors with the fastest-growing productivity—notably computer equipment—saw their growth slow substantially. Yet productivity growth rates in both retail and wholesale trade have continued their strong growth trajectory. Interestingly, productivity in a much broader set of service industries, including administrative support, scientific and technical services, construction, and restaurants, has also increased. As a result, five of the largest contributors to productivity growth after 2000 were service industries. Over the past decade, the service sector, which today represents 70 percent of US employment, has been a major source of growth in productivity and employment alike.

Services may in fact be the area of biggest productivity increases in the future. (For a more detailed discussion of productivity in the services, see my earlier posting.)
Besides, IT doesn’t work as a productivity enhancer by itself. Organizational change is needed to take advantage of the new technology. Sometime the organizational change itself is enough to cause major productivity increases – think of Adam Smith’s example of the pin factory. As I’ve argued earlier in The Case for Technology in the Knowledge Economy), the issues is not just technology but knowledge.
Finally, there is the whole issue of innovation. Innovation does more than raise the productivity of the existing production process. It creates whole new products and processes.
But that is the subject of another posting.
Suffice it to say that the concept of an economic speed limit is useful. But when economic forecasts start raising the issue of hitting the limit, you need to ask questions about what that limit is, who enforces it and how to change it in order to continue economic growth.

Enforcing an intangible

Today’s New York Times had this tidbit — I.B.M. Sues to Block Executive’s Move to Apple:

I.B.M. sued one of its top executives on Thursday in an attempt to prevent him from taking a position at Apple.
The company said that the executive, Mark Papermaster, who until last week had been manager in charge of the company’s blade server business, had signed a noncompete agreement with I.B.M. that would prevent him from accepting a job with a competitor until one year after leaving I.B.M.
The company said that Mr. Papermaster had been one of its top 300 managers and that he had access to a wide range of the company’s intellectual property and trade secrets.

Noncompete agreements are a recognized intangible asset. But you don’t hear much about their enforcement in court – I suspect because most are honored. But there may be another reason: noncompete agreements are generally part of state contract law and many states do not recognize noncompete agreements. For example, as I noted in Intangible Asset Monetization, noncompete agreements are considered illegal under California’s Business and Professions Code Section 16600.
The IBM lawsuit was filed in the US District Court in Manhattan. The fact that it was filed in New York and in Federal court makes this case worth watching.