Today’s revised GDP numbers show a much sharper decline in the 4th quarter of 2008 that previously reported — a 6.2% decline rather than 3.8%. However, the revised numbers are in line with the earlier expectations of a 5.5% to 6% decline (see earlier posting). The biggest change from the earlier data was in inventories, which shrank rather than increasing as reported earlier. That, as the Wall Street Journal points out:
was good and bad. Bad, because the $19.9 billion drop meant inventories added a mere 0.16 of a percentage point to GDP in the fourth quarter, instead of adding 1.32 percentage points as reported originally. But the drop also suggests there is less of an inventory overhang, a bit of good news.
The bottom line is that the situation is still very dynamic — any backward looking indicators are likely to be incorrect in the first estimates. So rather than look back, we need to keep our focus ahead. And that means crafting a transformative economic policy – not one that simply tries to reflate the bubble. The stimulus package and President Obama’s proposed budget seem to be heading us in that direction. For that reason, expect a fair amount of resistance. As the Wall Street Journal noted:
Democrats welcomed Obama’s budget as a long-awaited reordering of the government’s priorities. Republicans expressed dismay for the same reason./blockquote>Changing the status quo is never easy.
It has become the standard view that economic downturns are prime incubators of entrepreneurial activity. New opportunities arise and people who have been turned loose (i.e. fired) are more willing to take the risk of a start up. According to Harvard Business School Senior Lecturer Bhaskar Chakravorti (in a recent interview with HBS Working Knowledge), there are opportunities to “think-outside-the-box” – to use that old cliché:
Clearly there will be areas such as infrastructure, health care, education, clean technologies, etc., that will get a boost because of investments and demand from the public sector. Let us put these areas aside–because they will be readily identifiable. I am more interested in isolating the opportunities that arise organically and will be developed through private initiatives.
Here, I think it is critical to systematically identify what I would call “downturn needs.” There are many different kinds of such needs. First, there are needs that are created by the substitution effects I spoke of earlier. Second, there are needs that emerge because of the availability of excessive time or the unavailability of productive employment. These are by way of necessities. In addition, there is also a need for affordable luxuries. After all, just because consumers are cutting back doesn’t mean that they do not still enjoy products that give them pleasure and entertainment–or even distraction from the difficult times around them. The third category of needs is a more obvious one: products that deliver value for the money spent on them. When consumer budgets are tight, such products will have plenty of appeal.
In terms of lessons from the past, there are many examples that we can turn to. Taking the last of the needs first, in the airline industry alone, Southwest Airlines, Ryanair, and JetBlue were founded during downturns on the principles of delivering value. In terms of affordable luxuries, consider the emergence of cosmetics, such as Revlon, and media, such as CNN, during downturns. I already offered some examples of opportunities that come out of the substitution effect or of products that complement the surplus time that consumers may have on their hands. You could go even further and brainstorm a fairly long list of ideas: for example, think along the lines of meals at home, budgeting tools, job matching, etc.
The opportunity here is in all the surplus resources that you can tap into and harness. For instance, the downtime created by the collapse of the Internet bubble gave rise to a host of new applications that we now collectively know as Web 2.0. Technologies and materials left unused due to the collapse of one industry can be creatively re-directed towards others that can take advantage of the low input costs. Silicon and wafer cutting technologies that were rendered surplus after the semiconductor industry slowed down during the last recession were picked up by a fast-growing solar energy industry.
What I really like about Chakravorti’s advice is to look for opportunities where others aren’t. Everyone piling into green right now reminds me a little bit of the dot-com bubble. There have to be some other transformational ideas out there – things that no one has thought of but are, in retrospect, intuitively obvious. Those entrepreneurs are the ones who we will look back at as the real pioneers.
Are IT jobs coming back? Maybe, according to a story in today’s Wall Street Journal. The story talks about how major Indian IT firms — Infosys Technologies Ltd. and Wipro Ltd. — may begin hiring more American workers. The main reason, according the story: “to make sure they can still do business if the U.S. passes legislation that restricts their ability to send Indians to the U.S. to work.”
Note very carefully the specifics of the concern. The concern is not that they won’t be able to do business with US companies. The concern is the ability to “send Indians to the U.S.” In other words, people still have to come to the U.S. in order to do the work. As the story points out, “if Indians are going to compete with U.S. and European outsourcing companies, they need to have people in the U.S. to work face-to-face with customers, the outsourcers say.”
The standard view is that all the work is shipped overseas. The truth is much more complicated. Face-to-face is still important in the I-Cubed Economy. And our technology policy — including the immigration portions of that policy — needs to understand that complexity.
To follow up on my earlier posting on cars and battery technology, I would draw your attention to a story Strategy + Business is running on The Future is Lithium. The story reiterates a now standard theme: battery technology has moved to lithium and “Companies in Europe, Japan, South Korea, and China have clear leads in perfecting the battery.” Much of the piece describes the rivalry between GM and Toyota in developing the use of this technology in autos. They point out that GM may be key to developing the industry:
Of course, any U.S. hopes for securing a chunk of the lithium ion industry would be dashed if GM’s Volt project were to fizzle out because of the automaker’s financial problems. The work on the Volt is by far the most advanced lithium ion-based auto program of any U.S.-based manufacturer. “Because of GM’s efforts, the U.S. has a real opportunity,” says Patil. “The Volt is an opportunity to take leadership.”
I’m not sure that Volt is the key for the US electric vehicle industry. I think the trajectory is become clear. There are a number of other ways that the technology could move forward, including the battery consortium I’ve described before.
I do agree with the story’s concluding remark, however:
But even if the Americans don’t make the train, a future with more and more powerful lithium ion batteries is inevitable; after all, the rest of the world is already on board.
And the rest of the world is not only on board but possibly pulling ahead.
Last Tuesday, Frontline ran an interesting piece — Inside the Meltdown — about the collapse of the financial system. You can view the entire piece below. The website also has additional resources.
I thought this was very well down — a thoughtful look at how the system fell apart. However, it does leave somewhat of an incomplete picture. The story starts with the sage of Bear Stearns. The implication indirectly (and not intentionally) given is that the problems really started with the rumor started-run on Bear in March of 2008. The recession started in December 2007 (according to NBER). The Frontline time line on the website is more complete, starting in the summer of 2007 with the housing slowdown and discusses the fall of two Bear hedge funds in June 2007.
And many believe the economic troubles ran throughout the decade — as real incomes stagnated around the turn of the century.
So the collapse of the financial system is the tsunami that threatens to overwhelm us. But the roots of the crisis – the factors and triggering events – lie much deeper in the rickety economic situation that has developed over the past decade.
While the stimulus package may fall short of what some of us wanted in transformative programs, that doesn’t mean that the funds can’t be used in transformative ways. That seems to be the thrust, at least in education. According to a story in eSchool News:
President Barack Obama and his Education Secretary, Arne Duncan, want to do more than save teachers’ jobs or renovate classrooms with the new economic recovery law. They’re hoping to reinvent education for the 21st century–while transforming the federal government’s role in public education in the process.
Public schools will get an unprecedented amount of money–nearly double the education budget of this past year–from the stimulus bill in the next two years. With those dollars, Obama and Duncan want schools to do better.
Duncan will tie funding to reform efforts and help push the most successful programs as national models.
Sounds good to me.
As I noted in yesterday’s posting on the auto industry, policymakers are beginning to look seriously at the question of whether new green technologies will actually be produced in the US. For all the talk of “green jobs,” the stickiest of them are actually construction related – dealing with installation and retrofitting. These are not the highest-value added parts of the “green” value chain. Nor are green jobs necessarily even good jobs – as a new report from the Good Jobs First coalition – High Road or Low Road? Job Quality in the Green Economy.
We are likely to be hearing more and more about the issue of both US manufacturing and good jobs as the debate over an energy bill and climate change legislation continues. As the Wall Street Journal noted last month:
Congress is beginning to fear that the Obama administration’s push for renewable energy will produce more jobs in Asia and Europe — where most wind turbines and solar panels are made — than in the U.S.
The proposed remedy is a provision in the economic-stimulus bill that offers tax breaks to U.S. producers of the equipment.
Sen. Jeff Bingaman (D., N.M.), chairman of the Energy and Natural Resources Committee, is urging support for a provision in the Senate version giving a 30% tax credit to companies that expand or build U.S. manufacturing facilities geared to renewable energy, clean transportation or electric-system upgrades.
“Several of us have come to recognize that we’ve outsourced the very things we’re going to need to change the nation’s energy mix, and this is a way of encouraging more manufacturing here at home,” Mr. Bingaman said.
That provision is in the final bill – Sec. 1302. Credit for Investment in Advanced Energy Facilities. It is a good step forward. I expect we will see additional steps in future legislation.