Ed Glaeser’s advice to the GOP:
Today, human — not physical — capital determines economic success. If we want to make sure that our children are wealthier than the Chinese, we will have to make sure that they are better educated. If Republicans really want to become the party of long-run economic success, they will also need to become the party of human capital: the leaders who understand that we will stay a great nation not by providing a more generous safety net for the elderly but by investing more in our young.
Yes — and no. Yes, human capital is important in the I-Cubed Economy. No, education is not the silver bullet. Building and deploying human capital goes far, far beyond education. As I’ve written before, we need a “high road” strategy to actually utilize that human capital. Creating high performance work organizations require changes in numerous policy areas — including changes to technology policy to focus on the developing and deploying the needed tools and techniques. Other areas include tax policy, labor policies, and trade policy.
So Glaeser’s advice to the GOP is partly right. Not investing in education is a guarantee of economic failure. But the reverse is not true. Investing in education is only the starting point to restoring economic competitiveness. So much more needs to be done.
Yesterday, I discussed my concerns over the deficit reduction plan of the National Commission on Fiscal Responsibility and Reform. I should have noted that this is but one of a number of plans that have come out. And yesterday yet another plan was announced: Investing in America’s Economy: A Budget Blueprint for Economic Recovery and Fiscal Responsibility. Put together by DEMOS, the Economic Policy Institute and The Century Foundation, this plan has a distinctively leftward orientation.
I’m not enamored with everything in this budget. For example, I think the call for no spending cuts until the unemployment rate reaches 6% is a formula for simply putting off needed cuts.
However, the reports focus on investment — especially the return on public investment — is a welcome addition to the debate. Their Appendix G summarizes the case very well. My only argument is that it stops with traditional investments in education, infrastructure and R&D. We need a broader look at investment in knowledge and intangibles creation — and at the role of the public sector in making and fostering those investments.
All of the talk in Washington right now is about deficit reduction. I don’t question the need to bring the deficit down. I do question the means of how to do that. Done right, deficit reduction will help put the economic on a path of sustainable economic growth. Done wrong, it will hobble our economy for generations. And I am deeply worried that we are on the path of doing it wrong.
Of specific concern is an apparently underlying philosophy the proposals that government has no role in growing the economy.
Let’s just look at the National Commission on National Commission on Fiscal Responsibility and Reform. The co-chairs proposal includes a principle of promoting economic growth and competitiveness with the following two points:
• Cut red tape and inefficient spending that puts a drag on the economy and job creation.
• Invest in education, infrastructure, and high-value R&D.
The first point speaks for itself — “just get government out of the way.”
The second point would make sense – it is the standard consensus mantra. However, as the SSTI summary points out, the illustrative list of cuts makes a number of cuts in R&D and economic development programs. And the justification for the cuts again is based on the old the-market-can-do-no-wrong mentality. For example, it proposes eliminating the highly successful MEP program on the grounds that it “supports inefficient companies that would otherwise go out of business.” In other words, the government has no business helping companies. Of course, this is a complete misreading of the MEP program — implying ongoing subsidizes rather than needed technical assistance.
The list of cuts also calls for the elimination of the Economic Development Administration — citing, in part, studies from 1980, 1986 and 1999 as justification. One of the standard rationales for eliminating EDA has been that it no longer focuses just on distressed areas. To me, that is a good thing. The issue of sparking economic growth goes well beyond the old assumptions that all we have to do is help those who have fallen behind. As Brian Darmody (Immediate Past President, Association of University Research Parks and Associate VP for Research and Economic Development, University of Maryland) has stated, “EDA’s recent reforms to link its programs to commercialization, job creation, and an innovation economy should be applauded, and not criticized as straying from ‘its core mission of supporting depressed areas.'”
Unfortunately, the issue for the Commission is one of credibility. Based on what I have seen in the illustrative list, I’m not sure they understand which programs are important to economic growth and which are not. They seem to be approaching the issue from the starting point that no government programs are useful. And that is bad bias to bake into the process.
Frankly, if we are going to have a serious debate about the deficit, we have to get past simply pulling out the tired old list of anti-government ideas.
Each holiday has its own special characteristic. Christmas is about gift-giving. Halloween is about kids. Easter is about spring and renewal. Thanksgiving is about food.
So here is a thought provoking article on agriculture for your Thanksgiving holiday enjoyment — Is Our Agricultural Technology Innovation System Up to 21st Century Challenges?. Written by Professor Paul Thompson of Michigan State University, the piece argues that:
Americans have been disinvesting in agricultural research for the last three decades. Our agricultural innovation engine has become too narrowly focused on piecemeal adjustments in plant and animal genetics, to the exclusion of potentially valuable research into alternative, low-input methods such as organic, no-till, and poly-crop agriculture. This leaves us in a dangerous position with too few options for the future.
I’m not sure I would go as far as argue that the emphasis on plant and animal genetics has been misplaced. But my earlier posting on the transformation of Brazilian agriculture point out the importance of more than just genetics. To quote the story on this transformation from the Economist — “The miracle of the cerrado“:
Brazil’s agricultural miracle did not happen through a simple technological fix. No magic bullet accounts for it–not even the tropical soyabean, which comes closest. Rather, Embrapa’s [Empresa Brasileira de Pesquisa Agropecuária, or the Brazilian Agricultural Research Corporation] was a “system approach”, as its scientists call it: all the interventions worked together. Improving the soil and the new tropical soyabeans were both needed for farming the cerrado; the two together also made possible the changes in farm techniques which have boosted yields further.
In other words, they used information, intangibles and innovation to work a transformation.
All of this reinforces a point that I have been saying for some time: economic growth and development is all about transformation in all sectors of the economy.
Unfortunately, this concept of transformation is not clearly understood. It gets distorted into an idea of transition for one part of the existing economy to another. For example, some continue to say we can abandon manufacturing. It is the natural order of things for other countries to take over as making things. Just as we moved from agriculture to manufacturing, so are we moving from manufacturing to services/information/knowledge.
Wrong. Wrong analysis based on wrong history. As this country’s economy “progressed,” we did not abandon agriculture. We transformed it. We did not transition from one set of existing economic activities to another set. We created new forms of economic production and activity.
That process should not stop. As Thompson’s piece points out, we need to continue to transform agriculture by renewed attention to alternative methods. As I have long argued, we need to transform manufacturing as well.
So as you enjoy your Thanksgiving feast, think about how far we have come since the days of the first Thanksgiving. And think about how we continue to grow, innovate and transform.
Today’s new “second estimate” of the 3Q GDP shows a significant revision upward to 2.5% (the preliminary estimate last month was 2%). This is much better than the 1.7% GDP growth in the 2nd quarter. In part, the trade numbers (specifically exports) came in better than expected.
However, as the news stories note, this is not strong enough to bring down the unemployment rate. And real GDP has not yet gotten back to where it was when the economy peaked in the 2Q 2008.
So this is good news — but only partially good news. We still have a long way to go to reach a healthy economy.
Last week, I posted a piece on the role of the states in administering the health care reform efforts. As I argued, health care (both availability and cost) is a key factor in economic competitiveness. Different states are likely to take different routes with respect to setting up a cornerstone of the reform efforts: the health insurance exchanges. That sets up a nature experiment as to which approach will be best to boost state economic competitiveness.
In his column today, Ezra Klein takes up the argument about experimentation (“Health-care proposal would let states decide what ‘real reform’ is”). Klein discusses a bill by Sens. Ron Wyden (D-Ore.) and Scott Brown (R-Mass.) to expand states’ ability to set up various systems. The bill, S.3958 Empowering States to Innovate Act, simply moves up the start date for a state waiver provision that Wyden, and Sen. Bernard Sanders (I-Vt.) got in the health care reform legislation — but was delayed until 2017. As Klein notes:
What Wyden and Brown are offering is the chance for the various sides to prove that they’re right. If industry players make the system work better, then the states that prize their involvement will prosper. If conservative solutions are more efficient, that will be clear when their beneficiaries save money. If liberal ideas really work better, it’s time we found out.
I’m sure that there will be all sorts of arguments against this. For example, I’m sure that some companies will complain about the possibility of having to cope with 51 separate plans (yes 51 — remember DC counts as a state in such matters even though we don’t have a vote in Congress). In part I suspect that delay until 2017 was to give time for a “national” system to be set up that would then be harder for the states to modify.
On the other hand, as my earlier posting points out, we are already headed into a situation of state experimentation. So let’s do it right — rather than half-ass. If Vermont sets up a workable single-payer system, then we will have some important information. If Mississippi’s approach to health care raises the economic competitiveness of that state, then we will have additional information.
So let the grand experiment begin! It can’t be much worse than the dysfunctional system we have right now.
Over at IAM Blog, they have posted a recap of the most recent ICAP-OceanTomo patent auction. The headline of posting says it all: No big bids at ICAP OT auction as most lots go unsold; but value is created nevertheless. I’m not going to argue with Joff about whether value really was created. I agree that having the auction does create some new information about pricing. But I’m not sure this is the most useful or efficient way of creating and disseminating market price information. There are other mechanisms — harkening back to the earlier days of commerce — such as clearinghouses and broker surveys. I know that some of these already exist such as large expensive surveys of licensing transactions.
But we might want to think about other ways to pierce the veil of, as Joff puts it, “what is normally a very opaque world.” One way might be through enhanced corporate reporting (see our ealier report Reporting Intangibles: A Hard Look at Improving Business Information in the US). For example, there could be more detailed disclosure of what companies (and universities) sold and bought and the price. I realize that such disclosure will raise howls of protest about “confidential information.” But, the same cries were heard in the past about giving investors even basic information such as revenues.
On other point on the auction. The IAM blog posting has the follow analysis from Terry Ludlow of Chipworks: “High quality and valuable patents still sell for good prices where there is a valid business proposition – but, no-one is snapping up speculative high risk IP.” I think that is a succinct and insightful statement about the state of the market. Enough said.
David Leonhardt’s piece in today’ New York Times on the various deficit reduction proposals reminds us that the best deficit reduction program is to increase economic growth.
Unfortunately, most of the so-called growth proposals miss a key element — the critical role development and utilization of intangible assets. Yes there is the general hand waving about the need for more R&D and education. But those are only parts of the answer — and highly incomplete and partly missing leading parts at that. They are both throwing money at the inputs to the process of creating and utilizing intangible assets without any attention to the larger whole.
More importantly, there are many other ways in which policy affect the development of intangibles. We have a tax policy that encourages investment in machines and building — but not the people needed to run them or the companies to occupy them. We have a federal budget process that tells us how much we spend on government salaries but not how much we invest in training government workers. We have an economic statistical system that can tells us with great precision how many tons of steel were produced but has no adequate measure of innovation or knowledge creation. We have a corporate reporting and accounting system that can place value on a company’s building but not on their patents.
In other words, we have a government policy geared toward a 2Oth Century model of the economy.
If we are serious about economic growth, here are a couple of very modest suggestions:
1) turn the R&D tax credit into a knowledge tax credit to increase investment in worker education and training. As I have argued repeatedly if we give companies incentives to conduct research or invest in new equipment we should also give companies incentives to invest in their most valuable asset: their workers.
2) look at the entire tax code to see where it helps and where it hinders investments in the development and utilization of intangible assets.
2) expand the Baldrige Award criteria include explicitly metrics for investment and utilization of intangible assets. The name of the Baldride Award was recently changed to emphasis the performance excellence (see earlier posting). However, that is not enough. Part of the power of the Award is its teaching potential. It is a self-administered assessment process. That assessment should go beyond productivity to embrace intangible assets as the new building block for economic growth.
3) expand the MEP Center so that they can explicitly offer service to help companies — especially small businesses — identify, understand, utilize and invest in their intangible assets.
4) create a federal budget analysis of how much the government spends in investment in intangible assets.
5) create better statistical measure of intangible assets — in both government statistics (such as the GDP measure) and corporate reporting.
For the most part, these actions will not cost a lot of money. The exception is the knowledge tax credit. But even that expenditure should be more than offset by the benefit gained to the economy.
These are small steps. But there are steps that can put us on a path to a 21st Century growth economy — one based on sustainable innovation not consumption bubbles.
Here is an interesting rant from and IP strategist (Jackie Hitter) Inventiveness and Patents Do Not Equal Innovation:
Few things infuriate me more than supposed experts who make statements along the lines of “patents are critical to innovation.” I have avoided stating my views widely in this forum because I didn’t want to get into a contest of one upmanship with my patent lawyer peers. However, in the last couple of weeks, several pieces of information have hit my radar screen that make this seem like the right time to go public with my views.
Let my position be very clear: we create a false dichotomy when saying “innovation is not possible without patents.” The issue is much more complex and nuanced than this: in a particular instance, patents may be critical to innovation, but they might also be only slightly important or-likely in the majority of situations-they might be wholly irrelevant to innovation.
Note that Jackie is not anti-IP. She is just anti IP-hype:
Ok, off my soapbox now. I need to edit a patent application for a start-up energy company where strong protection is the end-all, be-all for ultimate success. In short, the amount of effort we input into the patenting process will be exponentially proportional to the value of the innovation in the marketplace. The difference between our company’s patent strategy and that of most others is that we know the difference. I wish we were the rule, rather than the exception.
Her point is simple: patents are part of the innovation system, but only part that needs to be understood in context. And patents are bad measures of innovation.
Those are two points I completely agree with.