More on government reorganization

In an earlier posting on the State of the Union Address, I drew attention to the President’s plan for government re-organization. Yesterday, the White House announced that Deputy OBM Director Jeffrey Zients to head up the government reorganization efforts. Zients is also currently also the federal government’s Chief Performance Officer (CPO). The announcement noted that “Our first focus will be looking at trade and exports to see how we can better reform these functions to give American companies a leg up in the global economy.”
This is a good step forward. But there are other steps the President can take immediately to push forward the competitiveness agenda.
As I mentioned earlier, Center for American Progress (CAP) published a report outlining a number of process steps the Administration could take to address policymaking on competitiveness. In that earlier posting, I highlighted the coordination and planning activities recommended in the report — based on the national security model. I will come back to those recommendations.
However, the report (A Focus on Competitiveness) also addressed the reorganization question, with the following suggestion:

To address the fragmented responsibility for key competitiveness functions, the president should also ask the National Academies panel to study the needs of interested parties and evaluate an executive branch reorganization plan that could include:
* Creating a Department of Business, Trade, and Technology by combining relevant agencies within the Department of Commerce with trade and business focused agencies and offices, including the Office of the United States Trade Representative, the Small Business Administration, the Export-Import Bank of the United States, the Overseas Private Investment Corporation, and the U.S. Trade and Development Agency. Separate evaluations would determine where to put existing Commerce “administrations” not closely aligned with the new department’s mission. Specifically, these evaluations should assess:

– Whether the National Oceanic and Atmospheric Administration is a better fit in the Interior Department, whose mission includes protecting America’s natural resources and heritage. NOAA distributes environmental information, manages coastal and marine environments, and conducts applied scientific research on ecosystems, weather, climate, and water.
– Whether the Economics and Statistics Administration (including the Bureau of Economic Analysis and the U.S. Census Bureau) should be moved along with other federal statistical agencies to a new crosscutting U.S. Statistical Agency. Another option is to create two separate statistical agencies–one for demographic, economic, and business information, and another for environmental information, leaving other unrelated statistical functions where they are. As these options are being evaluated, we recommend the president issue an executive order that directs the design and implementation of a “virtual” U.S. Statistical Agency. (See box on page 28)

* Creating a more expansive “competitiveness agency” by adding to the new department described above job training and higher education programs from the labor and education departments
* Creating an even more comprehensive competitiveness agency by also including programs that promote science for economic development purposes, such as those in the departments of energy, transportation, and housing, and some science coordination functions from the White House Office of Science and Technology Policy

I doubt very much that the Administration will look to hard at the last two options of an expansive “competitiveness agency” or a super-agency. Those, especially the latter, are probably a bridge too far. President Nixon once tried the super-agency approach, but it never received serious attention.
But the creation of a Department of Business, Trade, and Technology is within the realm of possibility, as is the creation of a U.S. Statistical Agency. Although, the centralization of statistical functions has its own problems and pitfalls (I know — I looked into this back in the 1980’s as part of my role in the last attempt to create a Department of Trade and Industry).
While I may support such as reorganization (and clearly support the Administration looking at the options), let me add a note of caution. No form of reorganization will completely solve the coordination problem. I’ve noted before in the context of both financial regulation and homeland security that we don’t necessarily need to create new hierarchical structure. We need to empower the network.
In that regard, I hope the Administration will look very carefully at the parts of the CAP report I highlighted earlier:
• A Quadrennial Competitiveness Assessment by an independent panel of the National Academies whose objectives are to collect input and information from many sources and perform a horizon scan that identifies long-term competitiveness challenges and opportunities
• A Biannual Presidential Competitiveness Strategy that lays out the president’s competitiveness agenda and policy priorities, and captures the attention and buy-in of cabinet principals
• An Interagency Competitiveness Task Force led by a new deputy at the National Economic Council that develops the biannual strategy, oversees White House coordination of competitiveness initiatives, and monitors their implementation by agencies
• A Presidential Competitiveness Advisory Panel of business and labor leaders, academics, and other experts who assist the administration in developing policy details.
A version of the last point is taken care of with Council on Jobs and Competitiveness. I suspect that the Interagency task force might be in the works. The first two — the assessment and the strategy — can be implemented by Executive Order. In fact, the President can build upon the strategy report mandated in the reauthorization of the AMERICA Competes Act.
Reorganization is tricky and will use up a fair amount of political capital. In contrast, creating a Quadrennial Competitiveness Assessment and a Biannual Presidential Competitiveness Strategy is easy. And I suspect will have a greater long term impact.
The President should go ahead immediately with these two actions. It will show how serious he is about the competitiveness agenda. And it will start the process moving. Otherwise his agenda risks getting bogged down in the seemingly endless debate over budgets and government reorganization.

Canada gets it on manufacturing in the knowledge age.

Canada gets it. Or at least Tony Clement, Canadian Minister of Industry, gets it when it come to understanding that the manufacturing and knowledge economy are one.
Here is a quote fro a recent article in Site Selection magazine:

Asked how important manufacturing continues to be in the digital age, Clement said, “I really do believe we have to continue to make things. When I first came to our department as minister, I found in speeches this false dichotomy between the knowledge economy and the old manufacturing economy. I really altered that message, because to me the two are very much connected. Yes, in ICT, you can move forward on the knowledge economy in and of itself. But the knowledge economy primarily is a means to an end — it’s how you do agriculture, oil and gas, greentech or manufacturing better.”

Amen!

GDP up in 4Q 2010

GDP estimates from BEA for the 4th quarter of 2010 shows that the economy grew by 3.2%. This compares with a 2.6% growth rate in the 3rd quarter. For the entire year, GDP was up by 2.9%. (Remember that this is an “advanced” estimate based on incomplete data, including trade data. It will be revised twice in future months and should be treated accordingly.)
Good news, but there is a worrisome detail in the data on fixed investment. Investment in equipment and software was up, but not as much as previous quarters. This investment grew by only 5.8% in the 4Q, compared with 14.6% in 4Q 2009, 20.4% in 1Q 2010, 24.8% in 2Q 2010 and 15.4% in 3Q 2010. However, almost all of that slow down is in investment in transportation equipment. Investment continues to grow in IT equipment and software and in industrial equipment. In the case of IT equipment and software, investment grew by 20.7% in the 4Q, although investment specifically in software grew by only 6%. Whereas investment in transportation equipment dropped by 9.3% and investment in industrial equipment grew by 4.2%.
Unfortunately, the GDP numbers do not offer any guidance on investment in intangibles other than software. So we do not know whether companies have increased their investment in important areas such as human and organizational capital. But that is a discussion for another time.
Bottom line: the economy seems to be picking up. But not as good as it could be. As the New York Times notes, “While an improvement, the latest output number was slightly below analysts’ expectations of 3.5 percent.” Nor is it anywhere near the levels of previous recoveries at this point in the cycle. So more needs to be done.

Changing nature of innovation – business executive's view

The GE Global Innovation Barometer 2011 – a survey of business executives – is out with some interesting findings:

The “GE Global Innovation Barometer” found that 95 percent of respondents believe innovation is the main lever for a more competitive national economy. But just how to accomplish that will take a uniquely 21st century path, as respondents are prioritizing technology that addresses local needs; looking for innovation from smaller organizations; and pursuing strategic partnerships to make tangible innovation happen. All of these areas are converging as problems are now bigger — which involves a wider system of players.
Beth Comstock, chief marketing officer and senior vice president, GE, said the study illustrates that the rules around innovation are changing. Companies must “embrace a new innovation paradigm that promotes collaboration between all players — big, small, public, and private — fosters creativity, and emphasizes solutions that meet local needs.”

Here is some details:
“Today Innovation is more driven by people’s creativity than by high level scientific research”
27% Strongly agree
42% Somewhat agree
22% Somewhat disagree
6% Totally disagree
“The way companies will innovation in the 21st century is totally different than the way they have innovated in the part.”
39% Strongly agree
36% Somewhat agree
17% Somewhat disagree
5% Totally disagree
And the biggest difference they see is the need for partnerships among several players rather than a single organization.
So, where is the public policy to foster this new paradigm of collaborative, beyond-science-based innovation?

Dun & Bradstreet and the intangible of reputation

Here is an interesting tidbit from BusinessWeek about the future plans for D&B. The credit reporting part of the business has been spun off as Dun & Bradstreet Credibility Corp. The CEO, Jeff Stibel, want to move the company into the business of reputation management. According to the story,

“What we’re trying to do now is show a holistic picture” of what makes a business appear trustworthy, he says. “Credit is just one component…. D&B’s largest competitors these days are Google, Facebook, and Twitter.”
. . .
Credibility Corp.’s first new offering will collect comments and reviews from sites such as Twitter, the Better Business Bureau, Yelp, and Citysearch.
. . .
“Businesses are confused and paralyzed,” he says, “because they don’t know where to start” managing how they are perceived online.

Unfortunately, the same can probably be said for how small businesses manage most of their intangible assets — not just reputation.

Patents (and the State of the Union Address)

There has been a lot of bandwidth wasted (my update of the old “ink wasted”) in reaction to the State of the Union. But here is an interesting side comment worth highlighting. Over at the IAM Blog, Joff Wild takes the President to task for claiming that the US issues the most patent. Joff notes that China issues far many more patents, but there are unexamined design and utility patents.
Now here is where it gets interesting. Joff does on to say:

However, the numbers are not really that important. It would be a huge mistake for the Americans to think that they are and to try to gauge how they are doing based on such a misleading measure. Instead, what matters is that patents being granted enhance the competitive position of their owners, and/or help them raise finance, and/or build new products, and/or enable expansion, and so on. A patent is just a piece of paper until it enables the patentee to do something it would not otherwise have been able to do. If the patents being granted by an office are not enablers then that office is merely spending time and money on handing out worthless pieces of paper. [Emphasis added]

That part I’ve put in bold is especially important — and something we often forget. It is not that patent that has value — but what the patent helps you do. And to push the point even further, remember that a patent is not a right to do something — it is a right to stop others from doing something. And that is a right that can be abused when it does not “enhance the competitive position of their owners, and/or help them raise finance, and/or build new products, and/or enable expansion, and so on.”
So, as we talk about innovation policy — and its subset innovation metrics, let us please try to keep this fundamental point in mind. And thanks to Joff for reminding us.

Daniel Bell

Sad news has come that Professor Daniel Bell has passed away. Bell was an early and profound influence on my thinking through his seminal book, The Coming of the Post-Industrial Society. That book shaped the discussion of our economic transformation for generations of thinkers. And generations of policymakers. If you scratch the surface of the debate over the changing nature of our economy, you will find it is built on the framework constructed by Bell.
While I now disagree with some of the concepts Bell elucidated in his work, I am profound grateful for his contribution. His path-breaking work helped us all better understand the world we live in. May he rest in peace.

Obama plans government re-organization

There was a sleeper issue in last night’s State of the Union. As expected, President Obama spoke of the need to confront our competitiveness challenges through greater investment in innovation (aka R&D), education and infrastructure. But the sleeper proposal was this: government reorganization. And not just reorganization in general, but reorganization tied to increasing American competitiveness. Here is what the President said:

We live and do business in the Information Age, but the last major reorganization of the government happened in the age of black-and-white TV. There are 12 different agencies that deal with exports. There are at least five different agencies that deal with housing policy. Then there’s my favorite example: The Interior Department is in charge of salmon while they’re in fresh water, but the Commerce Department handles them when they’re in saltwater. (Laughter.) I hear it gets even more complicated once they’re smoked. (Laughter and applause.) [Biggest laugh line of the night.]
Now, we’ve made great strides over the last two years in using technology and getting rid of waste. Veterans can now download their electronic medical records with a click of the mouse. We’re selling acres of federal office space that hasn’t been used in years, and we’ll cut through red tape to get rid of more. But we need to think bigger. In the coming months, my administration will develop a proposal to merge, consolidate, and reorganize the federal government in a way that best serves the goal of a more competitive America. I will submit that proposal to Congress for a vote — and we will push to get it passed. (Applause.) [Emphasis added.]

Government reorganization for competitiveness can mean only one thing: redoing the Commerce Department. Granted, there are other changes as well. For example, the Center for American Progress has recommended a number of internal coordinating mechanisms, including a Quadrennial Competitiveness Assessment (see earlier posting). But the big idea is turning Commerce into a Department of Industry and Trade.
As a scarred veteran of the last attempt to reorganize Commerce during the 1980’s, I can attest that such a action will not be easy. There are many permutation to the new structure — although some are better than others. There is no way to completely pull all the competitiveness related programs into one Department (e.g. should worker training programs be in Labor or Education). And there is a lot of vested interests in keeping the familiar structures in place.
Then there will be push from the GOP to not re-organize departments, but eliminate them.
So, I look forward the President’s proposal. And to the debate that will follow. That debate will be set deeply in the context of the debate over spending and investment — as reorganization is a way of answering the critic of “wasteful duplication.”
With the budget and re-organization issues linked at the hip, this sleeper issue could well turn out to be the big issue of the year.

Critiquing competitiveness – and getting it wrong

Every once and awhile commentators who I respect go off track. For example, Ezra Klein’s and Paul Krugman’s comments on competitiveness are just wrong headed.
Klein’s column in today’s Washington Post The problem with competitiveness, and Canada sums up the issue as follows:

In the end, the measure of our nation isn’t in how many competitors see their economies left in the dust, but how many Americans see their incomes raised, their quality of life improved, their children’s future secured. We’re in a race not with China, but with how good we have it now, and how good we can have it tomorrow.

True to a point. After all, the original definition of competitiveness from the President’s Commission on Industrial Competitiveness (Young Commission) 1985 report Global Competition: The New Reality is as follows:

Competitiveness is the degree to which a nation can, under free and fair market conditions, produce goods and services that meet the test of international markets while simultaneously maintaining or expanding the real incomes of its citizens.

Thus, real incomes is an important end goal. And you can read “real incomes” as a surrogate for standard of living.
But I have to fundamentally disagree with how he views the competitive situation. According to Klein:

But the Chinese, by and large, are competing with companies in India, Indonesia, Thailand and Malaysia, because the things those workers make are not, in most cases, the things we make or even the things we want to make.
“China competes on price,” says Robert Shapiro, director of Sonecon, an economic consulting firm. “There isn’t any doubt about that. The United States competes on quality and innovation. That’s how our companies outdo other companies.”

That may have been true a decade ago, but it is absolutely not true today. On the very same page of the Washington Post that printed Klein’s article is this story — Chinese tech giant turns to U.S. courts — about the Chinese company Huawei, the world’s second-largest telecommunications equipment maker [telecommunications?? something that we don’t make or want to make any more??]. Huawei is suing Motorola for breach of intellectual property agreements. As the story notes:

“The case indicates that Chinese firms are climbing up the ladder of production,” said Nicholas Howson, a professor of law at the University of Michigan. “Fifteen years ago we would have said a case like this was bogus. Now, we really don’t know.”

In another example, US states are looking to China for high-speed rail (see earlier posting). China recently entered into an agreement with GE to share aviation technology. As the New York Times story on the deal notes,

The first customer for the G.E. joint venture will be the Chinese company building a new airliner, the C919, that is meant to be China’s first entry in competition with Boeing and Airbus.

High speed rail? Jet planes? Clearly not something we what to make in the US or that we compete with the Chinese on? NOT!
Unfortunately, Klein and Shapiro’s comments reflect an strongly imbedded idea of an international division on of labor: China makes cheap things; US does high-value added production. As I’ve pointed out before, the reality is very different. And even if China (and other countries like India, Indonesia, Thailand and Malaysia) are currently the leaders in cheap manufacturing, they are content to stay in that position forever. Nor is the US the world’s best competitor on innovation and technology. As I depressingly note every month in my analysis of the trade data, our last monthly surplus in Advanced Technology Products was in June 2002 and the last sustained series of monthly surpluses were in the first half of 2001.
So yes, we are in a competitive situation with respect to other countries such as China. And ignoring it doesn’t make it go away.
Then there is Paul Krugman’s piece on The Competition Myth. Krugman has long hated the concept of competitiveness. But he seems to have shifted his argument. Before, he argued that nations don’t compete; companies compete. Therefore there isn’t anything called national competitiveness. Now he argues that competitiveness is just a ruse for America Inc. (where the interests of the American economy is the same as the interests of American companies). I think he was closer to the truth the first time. American companies are the vehicle for national competitiveness — but that competitiveness is important for everyone since workers earn their pay working for companies.
What I find absolute astounding is that Krugman can make the following comment:

Furthermore, while America is running a trade deficit, this deficit is smaller than it was before the Great Recession began.

His cavalier dismissal of the trade deficit is strange. Of course the deficit went down — because demand (i.e. imports) went down. As Krugman has been saying over and over and over again, “it’s all demand.” But when demand come back up — so will the deficit.
Our competitiveness problem started long before the current financial crisis created recession. And Krugman is correct that simply making companies more competitive does not necessarily help the overall economy. That what is so important about the overall definition of competitiveness. There are many ways to improve “competitiveness” — such a drastic devaluation which could also drive down living standards. Thus the importance of the old goal of “maintaining or expanding the real incomes.” But clearly that has not happened for the average American over the past few decades — as Krugman has often pointed out. Instead, companies become competitive through means that did not boost real incomes for many.
Therein lies the difference between company competitiveness and national competitiveness. We need to get back to national competitiveness and we need to get back to that goal of rising incomes.
Actually, we need update it to specifically focus on the standard of living for all. They That will help us understand that competitiveness is a tool — and not an end point. The end point is a prosperous economy for all. Being internationally competitive is how, in a globalized economy, we achieve that goal.

Obama and competitiveness in the State of the Union address

It is widely expected that this evening President Obama will use his State of the Union address to highlight America’s economic competitiveness and the challenges we face. He will call for greater investments in R&D, education and infrastructure. That will touch off a debate over the federal government’s budget and the role of government in the economy. GOP critics are likely to call for less regulation, tax cuts and spending reductions as an alternative means on boosting competitiveness.
However, I fear that both sides may be stuck in an earlier vision of economic competitiveness that is no longer useful as a guide for policymaking (see our earlier paper Info Age: Recast Issues Demand New Solutions). A quarter of a century ago, the United States confronted and overcame a challenge to its economic competitiveness. The U.S. now faces a similar challenge. However, the situation today is different in profound ways while our policy responses are, in many ways, echoes of the 1980s. We need to reevaluate so that we can reformulate appropriate policies.
The global economy has entered a new era. The industrial age was driven by machines and natural resources. This new innovation age is being driven more and more by people and intangibles. Foremost are worker skills and know-how, innovative work organizations, new business methods, brands, and formal intellectual property such as patents and copyrights. Our economy increasingly runs not just on technological advances, but also on ways of expanding consumer choice through more customized products, more individualized service, and greater attention to aesthetics in order to respond to changing consumer tastes.
In the 1980s, the U.S. faced global competition in goods and loss of domestic manufacturing firms; now it faces the fusion of manufacturing and services and the opening to international competition of services sectors once thought immune to such challenges. Then, the operating issues were quality and productivity; now they are customization, speed, and responsiveness to customer needs. Then, the concern was how to build on our successful scientific research system; now we must look for ways to maintain innovation defined broadly, including understanding and harnessing new models of technological and non-technological innovation.
Then, a key concern was creating a flexible and educated workforce; now, in addition, we must foster an educational enterprise that can provide the constantly changing skills required in a knowledge- and information-intensive economy.
Then, the main financial challenge was reducing the cost of capital; today’s equivalent challenge is unlocking the value of underutilized knowledge assets and ensuring the efficiency and stability of the global financial system. Then, the policy problem was raising awareness of the importance of international trade; now it is crafting policy appropriate to a globalized and interconnected economy.
Our focus in the 1980s was on individual firms and industries; now we must find ways of sustaining networks of firms and of adopting new business models. Finally, these problems and challenges, as well as myriad new ideas and technologies, are rapidly sweeping across the domestic and international economy. Their speed requires that U.S. industry, both manufacturing and services–as well as the suppliers of financial, scientific, and human capital–have the capabilities and resources necessary to prosper and grow in this new environment.
Thus, the situation is different from where we were three decades ago. Consequently our policies should be different as well.
In dealing with this new situation we need to go beyond the standard rhetoric of increased spending on public education, R&D and infrastructure on one side and the call for tax cuts and less regulation on the other. Those are simply tools. We need to address what it is we seek to accomplish.
For example, we need to look at how we constantly upgrade the skills and knowledge of our entire population and create a learning society — not just look at the formal education system. We need to look at the process of creating new goods and services (innovation ) — not just R&D. We need to look at the organizational infrastructure that makes our workers and companies competitive — not just the physical infrastructure of road and communications networks. We need to look at how incentives for are created — not just address the tax rates. We need to have a pro-innovation regulatory system — not just less regulation.
But first we need to understand the changes so that can we begin to craft policy responses. The new President’s Council on Jobs and Competitiveness is a good start. Let’s hope it can craft an overall vision on how to address the competitiveness issues of the 21st Century.
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