Believe it or not, today’s GDP numbers from BEA were not as bad as many feared. The decline of 3.8% fell short of the 5.5% to 6% decline some worried about. The decline is about what I expected, based on the coincident indicators (see earlier posting). However, the reasons for the smaller than expected numbers are not necessarily good. Imports declined faster than exports and inventories increased.
The other news was about prices. As the Wall Street Journal points out:

There was a sea-change in the inflation picture. The core price index (excluding food and energy) retreated to a 0.6% annual rate in the fourth quarter from 2.4% in the third, leaving the annual rate at a 2.2% gain.
But headline consumer inflation fell at a 5.5% annual rate, the biggest drop on record.

As a result, incomes and savings went up. But now the specter raised by some is that of deflation.
As will be said a millions times today, the GDP data underscores the need for action on the stimulus package. But the trade part of the equation also sends out a silent emergency signal — hidden by the overall economic news. The GDP was not a bad as expected because we reversed our normal trade pattern of buying more than we sell. Once there is an economic recovery, it is likely that the old problem of the trade deficit will come back. That is why we need an economic package that is both simulative and transformative.

It all depends on your point of view

So, what is the biggest story in Washington right now? The economy, the stimulus package, foreign policy? No. Its ice. Specifically, it is about the President’s comments on how schools in the Washington area (because it is Maryland and Virginia suburbs that are often the problem).
Here is a sample of the competing headline:
Obama pokes fun at D.C. area’s reaction to snow
Icy Sidewalks Pose a Danger for Pedestrians.
The comments set off a minor flurry (pardon the pun) of activity. News camera’s were out on the street documented the danger and asking for opinions. There are editorials and opeds. The blogs are having a field (not a snow) day.
While this sounds like much to do about nothing, it is a reminder of the world that Barack Obama now inhabits. Every remark, every action, every gesture will be scrutinized.
And by the way, I would take issue with the reasoning behind the President’s remark. I was born in raised in Northern Michigan. Chicago was considered going south. The problem with Washington is that it doesn’t get snow like I was used to up north. Washington gets freezing rain and ice. In fact, everyone who cleared off their sidewalks when it was still snowing simply created an NHL quality ice rink on the bare sidewalk. They say all politics is local; so is all weather.
Mr. President, you’re not in Chicago anymore. Nor is your title “Senator.” Welcome to the biggest of the big leagues.
And welcome to Washington.
(By the way both the President and First Lady made a trip this morning to their daughters’ school — possibly to make amends for second guessing the school’s decision to close.)
PS –
As an email I got today shows, spring may be coming early to Northern Michigan: the deer are on the move.

SBA and economic development and intangibles

SBA is not normally associated directly with local economic development — although it is an important component — because SBA programs are not geographically based. But, as a recent story in Business Week points out, the new head of SBA, Karen Mills, is very familiar with economic development:

Research Mills conducted for the Brookings Institution on economic business clusters in Maine, along with her personal lobbying efforts, helped convince the Maine legislature to pass a $50 million research and development bond to spur innovation by small businesses. “I have watched [Karen] operate in farms and factories and sawmills, with boat-builders and everywhere else with comfort and ease,” says [Maine Governor John] Baldacci. “I have not seen her be anything but comfortable navigating the halls of Maine legislature.” Mills was also chair of Baldacci’s Council on Competitiveness & the Economy.

It will be interesting to see if she brings any new ideas on how to spur innovation to the SBA. One idea she could adopt almost immediately concerns SBA and intangibles. Our earlier report, Intangible Asset Monetization: The Promise and the Reality and paper, “Building a capital market for intangibles,” we point out that SBA rules for using intangibles as collateral in the loan process are unclear. Therefore, Ms. Mills should require that SBA:
• review laws and regulations to ensure that SBA loans can be used for the acquisition of intangible assets, and that intangible assets can be used as collateral for such loans.
• work with its commercial lenders to develop standards for use of intangible assets as collateral, similar to existing SBA underwriting standards.
These two actions could potentially open up millions of dollars to intellectual-capital rich firms that could be used for further innovative activities. That would be a huge step forward in out innovation policy.

Learning a lesson on employees as intangibles

Here is an interesting story from Business Week – Employers Avoid Axing Oldies but Goodies:

Last fall, drugstore chain CVS Caremark (CVS) cut some 800 jobs in Northern California after acquiring Longs Drugs, a Walnut Creek (Calif.) pharmacy rival. Despite those cuts, the company continues to recruit baby boomers and other older workers to staff stores across the country. “We need their expertise,” says Stephen Wing, director of workforce initiatives at CVS Caremark in Woonsocket, R.I. “When you’re in your 50s and 60s, you’re in your prime.”
Companies nationwide are laying off workers by the tens of thousands. But many are trying to spare the post-55 set from the ax, a reversal of the top-down trends in past waves of layoffs. They’re being driven by legal concerns–since boomers are in a protected age group–and by a need to keep experienced hands in place to keep the companies running and positioned for an upturn.

Have companies learned the “Circuit City” lesson? Let’s hope so.

Never mind — not good news afterall

In an earlier posting, I noted that the index of leading indicators went up in December. Well, here is the story why this is not necessarily good news. From the Wall Street Journal Real Economics blog:

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.”

From Davos-We Are In The Midst Of A “Transformational Crisis.”

Bruce Nussbaum makes a great point on his blog about what is happening or not happening in the economic policy debate, as exemplified by the discussions in Davos:

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.

Competition in drugs

In his Washington Post business column today, Not What the Doctor Ordered, Steven Pearlstein raises concerns over the Pfizer-Wyeth. In the piece, he makes an important point about the drug industry:

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.

He goes on to call for a new approach to anti-trust analysis.
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.

Stimulative impact of R&D facilities spending

Dan Castro and Rob Atkinson over at ITIF have published a new report “Stim-Novation”: Investing in Research to Spur Innovation and Boost Jobs:

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?

UK innovation policy

One other follow on to the earlier posting on the Center for American Progress’s report on innovation: their look at British Innovation Policy. This paper, by Will Straw at CAP, outlines the highlights, the problems and the evolution of the UK’s innovation policy. The paper touches upon an number of UK reports, most notably the UK Department for Innovation, Universities and Skills’ (DIUS) Innovation Nation.
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.

Another view of the tech agenda

As the stimulus package works its way through the Congressional process, more attention is being paid to the technology part of it — both pro and con. Critics question whether increased broadband and construction of research facilities is truly stimulative. Proponents argue for the importance of the transformational investments.
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.