Fix the Dome

It dominates the Washington skyline. It is the symbol of representative democracy. And it is leaking. And dangerous. And Congress can’t get its act together to fix the Capitol Dome.
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In the middle of the Civil War – when the nation’s very existence was called into question – Abraham Lincoln committed valuable resources from the war effort to finish building the Capitol Dome. As pictured below during Lincoln’s first inaugural, work on the Dome began in 1855 and was still underway at the beginning of the war. Some questioned the appropriateness of continuing with the project. But Lincoln said finishing the Dome was “a sign we intend the Union shall go on.”
Are we now in the process of ignoring Lincoln’s wisdom? Have we paralyzed and shrunk government so far that Congress can’t even fix its own roof? That we can’t invest in one of the most important symbols of democracy? What does that say about our ability to invest in other important activities?
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Fuel economy regulations and innovation

I have long argued that regulations can be used to push innovation. Here is a case in point: the Administration’s recent announcement raising fuel economy standards to an average of 54.5 miles per gallon by 2025. As a story in the Washington Post notes, the new standards have the car makers’ support:

“Customers want higher fuel efficiency in their cars and trucks, and GM is going to give it to them,” said Greg Martin, General Motors’ executive director for communications. “We expect the rules to be tough, but we have a strong history of innovation, and we’ll do our best to meet them.”

The Post story goes on to note that some innovations will come from outside the auto makers themselves:

Some future changes may have less to do with the engine than what surrounds it. Alcoa’s chief sustainability officer, Kevin Anton, said that making a car body entirely out of lightweight aluminum rather than steel automatically boosts its fuel efficiency by 10 percent.

Thus, the new regulations may spur an ecosystem of innovation. That can only be good for the U.S. economy, good for companies and good for consumers.
Here is hoping that policymakers (and would-be policymakers now running for office) get the message.

Our flawed human capital system

A couple of postings last week commented on issues in the U.S. labor market. Follow on that same theme, I recently came across an article at Knowledge@Wharton that raises a number of interesting points on how the labor market is failing as a means of fostering human capital. The article (“Why Good People Can’t Get Jobs: Chasing After the ‘Purple Squirrel'”) is an interview with Peter Cappelli whose new book (Why Good People Can’t Get Jobs) takes on the issue of the “skills gap”:

I think the story that one hears, particularly around the policy community, is that employers can’t find the people they want to hire because schools are failing and kids aren’t coming out with the right academic degrees and the right knowledge. If you actually look at the data from employers themselves when they report problems they’re having with recruiting, they never talk about academic skills as being near the top of the list. In fact, their complaints have been consistent for the 30 years or so that I’ve been looking at this. And their complaints are the ones, frankly, that older people always have about younger people — they’re not conscientious enough, their workplace attitudes are not diligent enough, they don’t want to work hard enough — those sorts of things. They’re not actually looking for young people out of school at all.
When you look at what they want, they want experience — everybody wants somebody with three to five years’ experience. What they’re really after are the skills that you can’t learn in a classroom, that you can only learn by doing the job itself. So, the craziness about the hiring requirements is that in most cases, employers are looking for somebody who is currently doing exactly the same job someplace else.

What companies are doing, says Cappelli, is searching for the “purple squirrel” — the unique, unusual, and perfect candidate.
Part of failure is institutional in the companies:

I think that part of the story is that the HR departments have been gutted over the last 20 years. Particularly in this recession, there’s a lot of downsizing, but especially in HR. The training departments are largely gone out of most companies, and a lot of the recruiting functions are gone as well.

Cappelli also makes an important point on understanding the value of intangible assets:

the internal accounting systems in most organizations are so poor that they can’t tell what it costs them to keep a position vacant.

If Cappelli is correct in his analysis, then we need to re-think our approach to labor market policy. Attacking the perceived lack of workforce skills has been the centerpiece of public policy. But if that is not really the problem, then we need to re-focus on what we can do to create incentives for companies to increase in-house worker training. As I have argued before, we need a knowledge tax credit that would apply to company expenditures on worker training and education — just like the R&D tax credit applies to expenditures on research activities. Better for companies to create their own “purple squirrels” than wait around to that elusive creature to show up on the doorstep.

Is the changing workplace diminishing human capital?

Following up on yesterday’s posting on the changing labor market, here is an interesting report from Knowledge@Wharton, “Declining Employee Loyalty: A Casualty of the New Workplace.” The article reinforces my earlier point that the relationship between employer and employee have changed:

“Firms have always laid off workers, but in the 1980s, you started to see healthy firms laying off workers, mainly for shareholder value.” In their announcements of pending staff cutbacks, “firms would say, ‘We are doing this in the long-term interest of our shareholders,'” [Wharton management professor Adam] Cobb notes. “You would also see cuts in employee benefits — 401(k)s instead of defined benefit pensions, and health care costs being pushed on to employees. The trend was toward having the risks be borne by workers instead of firms. If I’m an employee, that’s a signal to me that I’m not going to let firms control my career.”

Other factors are clearly at play as well:

[Wharton management professor Matthew] Bidwell suggests another dynamic behind the changing employer-employee relationship. Many of the things employers did to increase employee loyalty — at least up until the 1980s — were done not to encourage higher productivity and job satisfaction, but to keep the unions out, he says. “Companies were very worried about unions and the possibility of strikes. They treated their employees well so they wouldn’t join a union. But that is no longer the case. Unions are on the decline. It’s easy to quash them if they try to organize. So some managers might not care as much about employee loyalty as they used to.”

If that is the case, and companies truly have reversed course on trying to retain employee loyalty, then our economic is headed for a much bigger problem than a fiscal cliff. We are head for a human capital cliff. And it will be harder to recover from that loss of a key intangible asset.

Changing labor market

Sebastian Mallaby has an interesting piece in the FT – “The US labour market doesn’t work

A quarter of a century ago, the US workforce was a wonder. Laid off in one corner of the economy, Americans quickly landed jobs elsewhere. But over the past decade, a profound change has come about.
. . .
Technological change has reduced opportunities for low-skilled men and a lousy school system has failed to equip them for this challenge.

Mallaby cites a recent IMF paper, Fiscal Policy and Employment in Advanced and Emerging Economies, and summarizes the policy prescriptions from that work. Interestingly, the paper views the current employment situation as I do: both cyclical and structural. However, The IMF paper puts the structural issues squarely on policymakers: “deep-rooted weaknesses in labor market institutions and fiscal policies.” Mallaby and the IMF paper focus on areas such as payroll taxes, welfare programs and unemployment insurance — all important areas. Whereas I have tended to focus on the changing nature of the economy itself.
Apropos those changes, I would take issue with the implied analysis in Mallaby’s piece that the root cause is technological change. Yes, we have seen a rise in the importance of worker skills and a decline in the incomes of lower skilled workers. But that is only part of the story. The nature of work and the relationship between employer and employee has changed. I would also dispute that the changes have come in the last decade.
As I have argued elsewhere, these changes go back 30 years. The recession of the early 1980’s was the first recession of the I-Cubed Economy where workers were not placed on temporary layoff but permanently fired. As companies were downsized, involuntary part-time work was the response of people downsized.
This was part of the switch away from the industrial economy. In the industrial economy, temporary lay-offs were the way of buffering the labor force from cyclical downturns. Workers were kept around for the next upturn — with either union-based or government-based unemployment payments to maintain family income until the recall.
In the I-Cubed Economy, that process has disappeared. Workers have to find new jobs — often in new industries. Cyclical downturns now lead to structural changes.
Unfortunately, after 30 years we apparently still have not learned that lesson. And our public policies — such as unemployment insurance and worker training — have suffered.

How to liquidate an intangible-based company – the case of Digg

One of the persistent issues with utilization of intangible assets is what to do if the company fails. How do you liquidate intangibles? Here is Farhad Manjoo’s summary of what happened to the old Digg (in his review of the new Digg in Slate):

Digg’s staff was hired by the Washington Post Co. (which also owns Slate). The firm’s patents were purchased by LinkedIn. And the name and website were sold to Betaworks, the New York tech incubator that created a number of successful social media sites, including Bitly, Chartbeat, and TweetDeck. The Post Company and LinkedIn paid millions for Digg’s team and patents, but it was the amount that Betaworks paid for Digg’s domain that won headlines: just $500,000.

FYI – the reason given for the low sales prices of the domain name was that Betaworks had a strategy for reviving the site that the owners/founders of the old site approved.
So, the assets were divided into human capital, technology and brand — and each went separate ways. Interesting.

Cashing in on (and utilizing) a government intangible asset – the Pentagon

In previous postings I’ve noted that government agencies, especially the military, license out their brand and logos. Here is another example of revenue from a government asset. According to a story in today’s Washington Post (“On the big screen, Pentagon wants accuracy”):

The practice of supporting films is so ingrained that the Pentagon has a price list online for military hardware leased out to approved films.
An hour’s rental of an airborne command post — which in the event of nuclear war would serve as Air Force One — costs $72,000 for a movie the Pentagon wants to support. A B-1B long-range bomber costs $50,529 an hour, and an F-16 fighter goes for $10,181 an hour. The budget-minded could rent a training glider for as little as $89 an hour.

But the real pay-off for the military is in the publicity it gets from these films. As the story notes:

Film historian Lawrence Suid said that before the 1960s, virtually every American film about the U.S. military had official support, from advice on a script to the use of military hardware and installations.
In his book “Guts and Glory,” Suid noted that the Pentagon benefits from movies when recruiting and by informing the public and Congress about its activities.
The effectiveness of movies as a recruiting tool has never been quantified, but Suid notes that films helped each branch of service rehabilitate its tattered image after Vietnam. And it is no accident that many of the movies the Defense Department supports are blockbusters, which attract teenagers, many of them approaching or at the age at which they can volunteer for service.

And the Pentagon knows this:

“In World War II, virtually every American had a friend or relative in the service,” [Philip Strub, director of the Pentagon’s entertainment media office] said. “That’s not the case today. A much smaller percentage of the country has a direct tie to the military, so for many Americans what they learn about the services comes through film. ”
Some of the films that have received support would be familiar to most moviegoers: “Top Gun,” “The Killing Fields,” “Judgment at Nuremberg,” “From Here to Eternity,” “Jurassic Park III,” “Invaders From Mars” and “It Came From Beneath the Sea.”
“We could never hope to buy that level of exposure,” Strub said.

That is a perfect case of leveraging your intangible assets.