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.

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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?

Building a trampoline

In yesterday’s posting, I discussed the need to revamp our unemployment insurance system. But much more needs to be done. A decade ago, I wrote a paper for the Progressive Policy Institute outlining how the safety nets could be turning into a trampoline — Making the Global Economy Work for Every Worker: An Agenda for Expanding the Winners’ Circle. That paper outlined three sets of actions:

•  Building a rapid re-employment system. The Workforce Investment Act of 1998 made a promising start toward turning the crazy-quilt of government re- employment and adjustment assistance programs into a comprehensive system. Government policy should take the next steps to: 1) directly tie the unemployment insurance system to the training program in a comprehensive re-employment framework and 2) replace the multitude of specialized adjustment assistance programs with a broad- based adjustment program. Our goal is a seamless system driven by choice, competition, and information. This system would give workers information about training and education opportunities, vendors, and the job market, letting them make informed choices.
•  Creating a lifelong learning system. The New Economy has blurred the distinction between learning and work. Skills are no longer something taught once and for all. To succeed, workers must constantly adapt their abilities and knowledge to new employment circumstances and technologies. To meet this need, we must develop new public-private systems to give workers continual opportunities to learn and upgrade their skills, regardless of their current job status. Government’s role should be to facilitate and leverage private resources to ensure both workers and companies get the tools and skills they need to prosper in this new environment.
•  Promoting worker empowerment and ownership. Workers need more control over their jobs, their financial resources, and their futures. We must foster true worker empowerment in the workplace through incentives, educational activities, and new labor laws. We must revise the pension and health care system to give individuals more control over these important parts of their lives. We should strive to give workers a greater financial stake in their companies and the health of the New Economy. And we must help all Americans share in the prosperity by helping to build wealth and assets.

These ideas probably need to be updated to take in to account policies developed since they were proposed over 10 years ago. But the basic ideas remain the valid. We need a coordinated system of worker (and company) assistance to make sure these basic building blocks of economic activity are competitive in the I-Cubed Economy.

Unemployment insurance and the transformation of the US economy

After much maneuvering, the Senate is set to vote on an extension of the unemployment benefits – with the House to rapidly follow. (HR 4213 that also includes a number of tax break extenders — see stories in the Washington Post, New York Times and Wall Street Journal.) I support this extension — but see the debate as a wasted opportunity. Much of the debate has been a re-hash of the stale old arguments as to whether unemployment compensation causes people to stay unemployed longer (because they are more likely to turn down a potential less-than-perfect job waiting for something better).
For the record, I think this argument is wrong. It also illustrates the problem with the debate. It assumes that that a downward movement in workers’ skills is acceptable — i.e. you should be willing to take a job at lower pay just to get a job. This is the commodity theory of employment — all workers are fungible commodities and the labor market adjusts to overall supply and demand.
In truth, many jobs carry a specialized skill set and knowledge base. This is part of the power of the I-Cubed Economy — the value of the intangible asset embodied in worker skills. The individual tragedy of long term unemployment and downward mobility is that the worker’s skill set and knowledge base diminish. The economic tragedy is that these lost skill sets and diminished knowledge bases are a wasted asset.
Our unemployment insurance system doesn’t understand that. A job is a job is a job. The system needs an overhaul.
Yes, over the years the system has been jury-rigged to try to fit in with a re-training system. But our re-training system is inadequate and our training system (for incumbent workers) is almost not existent. And the UI system doesn’t even begin to touch the problem of the involuntary underemployed (see my postings on the employment data).
There are a number of ideas out there worth looking at — every thing from using UI funds to help people start a business (entrepreneurship) to job sharing (see earlier posting). Few of these ideas came up during the debate.
As Phil Izzo points out in a posting in the Wall Street Journal blog, we are likely to see a push for another extension later this year. However, I doubt that we will be able to do anything about transforming the program at that time either — just before an election.
We keep mouthing the words — “our people are our most important asset.” But we don’t put our money where our mouth is. We lost the opportunity to do something meaningful during this most recent debate. We will likely waste the opportunity as well the next time around. And nation, our economy and our people will continue to be ill-served.
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FYI Update: There is a program in the Labor Department that allows the use of UI funds to help start a business — the Self-Employment Assistance program. However, UI is administered by the states and right now this is a voluntary program operating only in Delaware, Maine, Maryland, New Jersey, New York, Oregon and Pennsylvania. In other states, if you are actively seeking clients for a new business, you don’t qualify for unemployment benefits (see this story about North Carolina).

Innovation and regulation

Steven Pearlstein’s latest column (Can regulation beget innovation?) is based on this insight:

It’s been 20 years since Harvard Business School professor Michael Porter provided scholarly support for the notion that, rather than hamper economic growth and competitiveness, well-crafted regulation could actually promote it. Porter’s first observation was that some of the world’s most prosperous and economically vibrant countries were also those with some of the most stringent business regulations, such as Germany and Japan. His studies of specific industries also turned up numerous examples of new products and more efficient ways of doing business that came about only because companies and industries were forced to comply with rules.

Pearlstein goes on to talk about energy companies who are waiting on Congress to settle on the rules on carbon emissions before investing billions of dollars in new technologies. He notes that the real problem is not the possible rules and regulations but the lingering uncertainty over the rules due to political bickering. Once those rules are in place, then the companies can make their investments. The longer the politician debate, the greater the uncertainty and the greater the delay in making the investments.
I completely agree with Pearlstein’s (and Porter’s) basic point. Regulations can serve as a forcing function to create new opportunities. The old joke about car companies was that US executives would come out of a meeting on new regulations and immediately go talk to their lawyers and lobbyists; Japanese executives would immediately go talk to their engineers. I’m not sure that is exactly how Japanese car companies gained a competitive edge on Detroit, but it does illustrate differing views of opportunities.
One of the most important drivers of innovation is customer demand. A demanding customer is an important factor in creating competitive advantage (as Porter also pointed out a number of years ago). This demand driven innovation is the reverse of the standard linear model of innovation that seems to entrenched in our policymaking psyche. That linear model is technology driven. Someone has a new (technological) idea and the whole process is about bring that idea to market. Nothing about whether the market wants that idea or not.
The public policy for such a model is simple: funding for research and technical education in; patents and other forms of commercialization assistance out. The entire America COMPETES Act (see previous posting) is built on this model.
In truth, the successful ideas are those that meet a market need. An entrepreneur pulls together a previously uncoordinated hodgepodge of ideas and technologies into a product or service that customers demand.
The demand driven model can open up new vistas for fostering innovation. It means that government procurement can drive innovation — just as it did in military and space related technologies. Government as a demanding customer can create the “thin opening wedge” — new products and services that have a specialized use. Once that specialized use is established, the product or service can be refined and adopted to a broader customer base. The demanding customer in fact becomes a co-creator.
Regulations can serve the same function by creating demanding customers.
We need a public policy that recognizes this fact. There have been proposals to create an Office of Innovation Policy in the White House that would review regulations. The White House has already announced a review of regulations in response to complaints by business leaders (see story in the Wall Street Journal). I worry about such actions — that they stem from the “regulation always impedes innovation” mind set. (I also worry that such an Office of Innovation Policy would be overly narrow — focused only on regulation and only on technology.) Instead, any regulatory review process needs to instill a sense that regulations can be used to create demanding customers and thereby foster innovation.
Crafting a process that uses the power of regulations to enhance innovation will be difficult. The natural tendency is to see regulations as barriers — as they can be. But a balanced approach to regulation is needed. And something that policymakers should constantly strive for.

Senate COMPETES Act reauthorization bill – the good and the disappointing

Friday, Senator Rockefeller (Chair of the Senate Commerce Committee) released a staff draft of the Senate version of the America COMPETES reauthorization. In many ways the draft Senate bill tracks the bill passed by the House (H.R. 5116), including reauthorization of various S&T and STEM programs, making permanent the Commerce Department’s Office of Innovation and Entrepreneurship and authorizing new cluster initiatives. In others ways it is different — for example not including Energy Department programs which fall under the jurisdiction of the Senate Energy Committee.
The Senate bill includes two provisions of the House bill I am especially interested in, as I discussed in an earlier posting. Both the House and Senate bill include a provision to get the MEP Centers into the product development game. Labeled the Innovative Services Initiative, this provision allows the Secretary to set up programs in MEP to assist SME in “accelerating the domestic commercialization of new product technologies.” I would have liked the language to say “shall” set up the program rather than “may” — but it is still a step forward.
In addition, the Senate bill includes a requirement for a study to “evaluate obstacles that are unique to small manufacturers that prevent such manufacturers from effectively competing in the global market.” I would argue that one of the problems is the inability of small manufacturers to effectively manage their intangible assets. This issue should be included in this new study.
The second provision I am especially interested in is the creation of a program of loan guarantees for projects that “reequips, expands, or establishes a manufacturing facility in the United States to (1) use an innovative technology or an innovative process in manufacturing; or (2) manufacture an innovative technology product or an integral component of such product.” The program also uses MEP Centers as an outreach mechanism for the loan guarantees. I would hope that the definition of an innovative process includes organizational innovations. This would orient the program toward being an important step toward helping to transform US manufacturing (see earlier posting).
On the downside, I would also note that both bills require the White House Office of Science and Technology Policy (OSTP) to develop and report to Congress on an National Competitiveness and Innovation Strategy. While I support the idea of such a strategy, I believe that OSTP is wrong place to house this activity. As long time readers of this blog will know, I have consistently argued that competitiveness and innovation are much broader concepts than S&T and R&D. Placing competitiveness and innovation strategy in OSTP will drastically narrow the view for such a policy.
The original America COMPETES Act created a Cabinet-level President’s Council on Innovation and Competitiveness (PCIC) as a mechanism to “develop a comprehensive agenda for strengthening the innovation and competitiveness capabilities of the Federal Government, State governments, academia, and the private sector in the United States.” The statutory Chair of the Council is the Secretary of Commerce and is made up of the heads of 16 departments and agencies (a nonexclusive list). The utilization of this Council is something that I have been advocating for some time as a means of creating a broader strategy (see Crafting an Obama Innovation Policy). Both the Bush and Obama Administrations have chosen to ignore this mechanism. Now it appears that the Congress has written off the PCIC as well. That is too bad.
So let me advocate once again for a different route toward creating a broad competitiveness strategy. 25 years ago when facing a competitiveness challenge, President Reagan created the President’s Commission on the Industrial Competitiveness (the Young Commission), which proved to be a successful mechanism for confronting the issues of its time. It’s time to create a similar a Commission on the Future of the US Economy. The competitiveness agenda has changed but the need to craft a holistic solution remains. A new Commission could give us exactly the broader vision we need.