EDA reauthorization includes tech and manufacturing programs

In an earlier posting, I noted that the Economic Development Administration (EDA) was expanding its activities toward technology commercialization through its i6 Challenge. Yesterday, the House Transportation and Infrastructure Committee took another step by passing a new EDA reauthorization bill that included a number of new initiatives (H.R. 5897- Economic Revitalization and Innovation Act of 2010).
Among other things, the bill expands support for business incubators and science and research parks. This also includes a provision that clarifies EDA’s ability to provide business incubator operating support. Use of EDA funds for operating support is something I have advocated — see earlier postings.
On the technology side, the bill creates funding for high-speed rail economic development planning and for alternative energy technologies programs. The bill also creates an Equity Financing Program in the form of a Revolving Loan Fund (RLF) to make equity investments in incubator companies, companies commercializing technology at science and research parks, and technology or manufacturing companies locating or relocating to the United States.
This is an important step forward for EDA – one that will move them into I-Cubed Economy.

Those new GDP numbers

Today’s advanced estimate of GDP data from BEA is disappointing — but expected and not as bad as some feared. GDP in the 2nd quarter of 2010 (April – June) grew by only 2.4%. Consumer spending leveled off and imports grew. But the good news is that business investment grew. As the New York Times reports:

Nonresidential fixed investment, which covers items like office buildings and purchases of equipment and software, was a key driver of growth in the second quarter, rocketing up at an annual rate of 17 percent, compared with a 7.8 percent increase in the first. The equipment and software category alone grew at an annual rate of 21.9 percent, the fastest pace in 12 years.

The other big part of the story was the revisions to earlier numbers. Last month, BEA reported that 1Q GDP grew by 2.7% — compared to today’s revision that 1st quarter grew by 3.7%. That was the only quarter where the number was revised upward. For every other quarter starting in 2007, economic growth was either the same or revised downward (see chart in the Wall Street Journal). In other words, the economy preformed even worse than we thought.
These revisions are the result of new data becoming available. And should serve as a reminder that as good as our statistical system is, we still have a lot of work to do to improve the numbers (see earlier posting). And, that we should remember that the data always contains an element of uncertain and should be treated accordingly.

New paper on IPR and innovation

Here is some new grist for the IPR debate mill —Intellectual Property Rights and Innovation: Evidence from the Human Genome by Heidi L. Williams, NBER Working Paper No. 16213

This paper provides empirical evidence on how intellectual property (IP) on a given technology affects subsequent innovation. To shed light on this question, I analyze the sequencing of the human genome by the public Human Genome Project and the private firm Celera, and estimate the impact of Celera’s gene-level IP on subsequent scientific research and product development outcomes. Celera’s IP applied to genes sequenced first by Celera, and was removed when the public effort re-sequenced those genes. I test whether genes that ever had Celera’s IP differ in subsequent innovation, as of 2009, from genes sequenced by the public effort over the same time period, a comparison group that appears balanced on ex ante gene-level observables. A complementary panel analysis traces the effects of removal of Celera’s IP on within-gene flow measures of subsequent innovation. Both analyses suggest Celera’s IP led to reductions in subsequent scientific research and product development outcomes on the order of 30 percent. Celera’s short-term IP thus appears to have had persistent negative effects on subsequent innovation relative to a counterfactual of Celera genes having always been in the public domain.

Is it really all aggregate demand?

In my earlier posting on jobs, I touched upon the growing debate as to whether the US is facing a structural change and must now confront structural unemployment. This brings to mind something that has been bothering me — going back to a statement last April by the Chair of the Council of Economic Advisors Christina Romer — Back to a Better Normal:

In short, in my view the overwhelming weight of the evidence is that the current very high — and very disturbing — levels of overall and long-term unemployment are not a separate, structural problem, but largely a cyclical one. It reflects the fact that we are still feeling the effects of the collapse of demand caused by the crisis. Indeed, at one point I had tentatively titled my talk “It’s Aggregate Demand, Stupid”; but my chief of staff suggested that I find something a tad more dignified.
The reason that I have been emphasizing that the high unemployment we are experiencing is cyclical rather than structural is not to somehow minimize or downplay it. In fact, just the opposite. It is to shake people out of the complacency that says, “That’s just the way life is.” It may be the way life is right now — but it doesn’t have to be. We have the tools and the knowledge to counteract a shortfall in aggregate demand. We should be continuing to use them aggressively.

Why does this matter? Dr. Romer answered that in the second paragraph above — how we should respond. If it is cyclical, then the standard economic prescriptions of demand management (aka stimulus) are in order. And there is a good chance that the economy will find its way back to equilibrium. On the other hand, if it is structural, then other actions may be needed. And the return to “normal” may be more difficult.
As I noted before, the Great Recession is a major cyclical downturn layered on a tectonic structural shift. The structural shift helped bring on the cyclical downturn as we tried to deal with the structural change by artificially inflating demand via a credit card spree. And the cyclical downturn was exacerbated by the structural shift.
As a result, the we have to face a different labor market than a traditional cyclical recession. As
Murat Tasci of the Cleveland Fed pointed out in Are Jobless Recoveries the New Norm?

Longer unemployment spells are a problem not only because they mean newly unemployed workers have a harder time finding jobs, but also because workers who are unemployed for too long can lose industry- and job-specific skills. Losing skills can reduce their odds of finding a job during the recovery as well as lower their productivity when they finally do find one.

The bottom line is that we need a transformational shift in order to create a non-bubble, sustainable economy. Dr. Romer did touch on some of the transformational points in her speech (and in the Economic Report of the President issued earlier this year). The speech cite the need to “rebalance demand”:

With appropriate policies, the normal we return to will be a higher-saving, higher-investment economy than that of recent decades. Consumer caution, sounder lending practices, and pro-saving policies are likely to lead to higher personal saving. Responsible fiscal policy will tame the budget deficit, further contributing to national saving. This will help to promote low real interest rates, high investment, and low trade deficits. New investment opportunities in areas such as clean energy, health information technology, and biotechnology, encouraged by appropriate policies to correct market failures or jumpstart key innovations, will further raise investment. A normal that involves robust business investment and exports is better for our economic health than a normal built on borrowing, consumption spending, and unsustainable construction.

It also mentions education and innovation:

Finally, there are a range of policy actions that can affect the key sources of productivity growth. Investing in education prepares our workers for the jobs of the future. An educated workforce can seize new opportunities when they arise, adapt to changing technologies, and discover better ways of producing things. All of this increases standards of living and makes our workers less like to suffer persistent dislocation as the economy evolves.
Investing in basic science — something that the private sector tends not to do enough of — is a way for the government to help spur innovation. Funding laboratories, research facilities, and graduate fellowships is a wise public investment that makes it easier for entrepreneurs to develop new production methods and whole new products. These new technologies and products not only improve our lives, they generate the jobs that will employ our children. By doing so, they make the economy stronger and more prosperous than before.

And Chapter 10 of the Economic Report of the President does specifically cover innovation. In that chapter there is an explicit reference to shifts:

The Great Recession has aggravated an already challenging trend: sectoral shifts that are changing the nature of work. While most American workers were once engaged in producing food and manufactured goods, often through physical labor that did not require a great deal of training, the United States is increasingly a knowledge-based society where workers produce services using analytical skills. The changing economy offers tremendous opportunities for American workers in high technology, in the new clean energy economy, in health care, and in other high-skill fields.

That is good as far as it goes. However, it does not go far enough to transform the economy and provide a sustained boost in productivity. Our policies need to build on that awareness of the shift — and not just look at specific industries. We need a broad economic and competitiveness strategy.

Exports, competitiveness and regional clusters

Yesterday Brookings released a new report on exports and metro areas. While the report contains good analysis and recommendations, I fear its scope is too limiting. The report highlights which metro areas are competitive in which industries – as measured by exports. And it does a good job of including services “exports” such as foreign student studying in the metro area. But the report should really about competitiveness and regional clusters.
International exports are only one part of the equation. Every metro area has “exports” regardless of whether those goods and services leave the boundaries of the US. Every car build in Michigan that is sold in Texas is — for the local economy — an export. The study specifically focuses only on the international exports. For a complete view, it needs to include the sales of the metro area to other U.S. regional economies.
Under that view, I wonder how much of the conclusions change. For example, the standard analysis shows that exporters pay higher wages. But is that true only for international exporters or domestic exporters as well? In other words, are international exporters really different — or is the major difference between those who produce for the local economy and those who produce for “export” outside of the metro/regional economy?
I suspect it is the latter. And that conclusion has a very different implication for public policy. It speaks more toward improving the competitiveness of the domestic export firms (including strengthening clusters) and upgrading the for-the-local market firms as well as promoting foreign trade and opening foreign markets.
Promoting international exports is a positive policy But promoting competitiveness is a much broader policy.

Changes to Basel capital requirements and intangibles

Earlier today, the Basel Committee on Banking Supervision of the Bank of International Settlements reached some agreement on a bank reform issue — specifically on what constitutes “capital” that banks have to hold as part of their reserve requirements (see press release and story in the Wall Street Journal). The agreement allows certain assets such as deferred-taxes, mortgage-servicing rights and minority interests in other financial institutions to be counted as “Tier 1” capital subject to a 15% limit. I have no problem limiting such assets to 15%. However, I would like to see a consistent approach on what intangible assets are explicit included or excluded — even in that 15%. If they can count mortgage servicing rights as capital, they should be able to count other intangibles as capital as well.
BTW, the agreement also settles a technical issue concerning treating software as an intangible by creating a option to use the IFRS rules.

Why won't companies hire

An interesting story line on the Great Recession has developed over the past few days. It appears that while company profits are up, company investment is not. The Sunday New York Times ran a story on this (Industries Find Surging Profits in Deeper Cuts) and Treasury Secretary Geithner commented upon it on the weekend news shows (Geithner Says U.S. Employers `Very Cautious,’ Job Growth Not Fast Enough). An article in the Wall Street Journal (Investors Say No to ‘Let’s Expand’ Companies) showed how the stocks of companies with expansion plans are doing poorly.

“You’ve got plenty of investors convinced out there that the economy is going to double dip,” said David Bianco, chief U.S. equity strategist for Bank of America Merrill Lynch. Given those worries, he adds, it is no surprise many investors are likely to react nervously if companies start ratcheting up production, lest they spend hard-earned cash preparing for a wave of customers that never materializes

Over in today’s Washington Post, Robert Samuelson blames the failure to reinvest on the “bunker mentality” that has taken hold. But he also takes a longer view, citing recent work by Robert Gordon on the business cycle. Gordon’s point is that the there has been a structural shift in the economy since the 1980’s that has changed the historical positive relationship between productivity and employment:

What explains this structural shift? First, the rise of immigration, imports, and medical care costs, together with the decline in the real minimum wage and of labor union power, have contributed both to a rise of inequality and an increasing tendency of firms to treat workers as disposable commodities. The ICT revolution has both increased the flexibility of labor markets and provided firms with new tools to boost productivity during economic recoveries as they continue to cut labor costs.

I have long argued the same case as Gordon – but with a different twist. The structure of the economy started to shift in the mid-1980’s. The Reagan Recession was the last of the industrial era cyclical downturns where workers could expect to be called back. Since then, cyclical downturns have combined with structural shifts to change the nature of the recession. People aren’t called back, production shifts to different sectors and the economy slides into a new configuration.
The irony of this new dynamic is striking. As Gordon notes, there is “an increasing tendency of firms to treat workers as disposable commodities.” At the same time, the shift to the I-Cubed Economy means that worker skills and knowledge is increasingly important.
In any event, if companies are afraid to invest in increased production then we may well be headed for a double dip (or at least a slowdown). If this is the case, we need to re-orient economic policy. Attempts to boost consumption may not be the way to go if companies aren’t willing to boost production to match. Nor will policies that boost company profitability — since we currently see profits not going into production. Rather, we may need more direct policies to boost company investment — like the green manufacturing tax credit (see earlier posting). The key is to expand and scale up such programs. That will be difficult in the current political environment. But in the long run, these type of programs may be the only way to prevent the return of an investment-led economic downturn.
BTW – over a year ago the WSJ Real Time Economics blog posted a note on research by Alliance Bernstein economist Joseph Carson on how Job Losses Outpace GDP Decline. That piece ended with this optimistic note:

“Improved productivity levels reflect an extremely lean corporate sector that should be capable of generating profit growth at much lower levels of GDP growth than in the past,” Carson writes. “By improving productivity during a recession, companies may even be able to generate extraordinarily strong and sustained productivity and profit gains when the economy reverts to more normal levels of activity. In time, a recovery in corporate profits will generate the need for additional labor.”

“In time” hasn’t seem to have arrived yet.

Different strokes

Over at the IAM blog there is a posting that everyone interested in patent policy and technology licensing should read – IP value creation at IBM and Microsoft – compare and contrast. Without giving away too much of the punch line, this is a great story about how the different needs drove different strategies toward their IP. Actually, let me broaden my first statement: everyone interested in intellectual assets and intangible capital should read this story. The same lessons drawn about strategic management of patents in this story apply across the broad to all IA/IC. There is no one best way; there is only the strategy best for the circumstance.

Rebalancing the economy — the UK case

Today’s FT has an interesting article on how the UK is approaching the question of rebalancing its economy [registration required]. The article implies that most people believe the UK economy veered too much to the financial industry and away from other sectors. It even quotes Prime Minister David Cameron:

“That doesn’t mean picking winners, but it does mean supporting growing industries – aerospace, pharmaceuticals, high-value manufacturing, high-tech engineering, low-carbon energy. And all the knowledge-based businesses including the creative industries,” he said in his first big economic speech.

All of this talk is welcome. The real trick, of course is how to pull it off. There the debate is joined — with all the standard issues of how much and what type of government assistance to offer and where growth will come from. The latter question is seeming to drag the debate in the UK back to the old services versus manufacturing canard (as least as outlined in the article).
However, there was one striking remark in the article’s sidebar discussion on sectoral job growth – “How the World Makes its Living”:

Boundaries between manufacturing and services have blurred: much of industry today sells advice as well as hardware while services such as consultancy feed off manufacturing. But most people’s jobs are unlike the blue-collar roles of former generations.

That insight (which long time readers of the blog will know is a constant refrain here) can help cut through the fog. Rebalancing is an important goal. But it does not mean returning to the economic structure of the part. The world has moved on; the I-Cubed Economy is here.
We need a economic structural policy that understands and builds upon this transformation – not one that is stuck in the mindsets of the past. And one of those mindset from the industrial era is this simplistic notion of “advancement” from agriculture to manufacturing to services. Economic dynamics is not like climbing a predetermined ladder. It is about transformation. The simply notice of the fact that the boundaries between manufacturing and services has blurred is a recognition of that transformation.
Now, can we build on that recognition?