Yesterday’s meeting of the Council on Jobs and Competitiveness saw a long list of expensive and long-term recommendations, but one important idea was missing that could help generate new jobs cheaply and quickly: A Competitiveness Audit. A Competitiveness Audit will help identify which industries are competitive, near-competitive, or not competitive, so we can target future public and private investments in a way that will stimulate the economy and create jobs that are competitive internationally.
Right now we have no concrete data on U.S. competitiveness – in other words, we are flying blind. It’s incredible that for all of the data swirling around the internet, for all the information being pumped out of statistical agencies and for all of the numbers people worldwide have immediate access to, we do not have basic information on how U.S. prices compare to foreign-made prices for comparable items. We can find out Celine Dion owns about 3,000 pairs of shoes but have no clue how much a piece of furniture made in North Carolina compares to a similar piece being imported from China.
President Obama’s new “insourcing” initiative, launched last week, gets right to the heart why we need a Competitiveness Audit. Tackling the issue of restoring competitiveness head-on is a welcome commitment from the Administration, but we need more data to tackle it successfully. Finding ways to insource production (recapture imports) in a way that expands U.S. exports and restores U.S. competitiveness will be extremely challenging, if not impossible, if we don’t know where to look. After all, what good is investment if it goes toward an industry that has little chance of being recaptured, like clothing? The last thing America needs is to spend valuable investment dollars that get us to the same place as that Alaskan bridge: nowhere.
If the Administration is serious about encouraging insourcing and restoring competitiveness, something PPI’s Chief Economic Strategist Michael Mandel noted in a recent blog could create many U.S. jobs, then it’s important to get it right. Effectively targeting investment to encourage innovation and revitalize manufacturing is the right way to move forward. Conducting a Competitiveness Audit is the first step.
The job market for new college graduates is healing, but very slowly. The unemployment rate for new college grads was 7.4% in the 12 months ending November 2011, just the same as a year earlier (by our definition, ‘new college graduates’ are people aged 21-26 with a bachelor’s only). That’s up from 3.9% in 2007, according to our tabulations of the Current Population Survey.
And for today’s college grads, a lack of jobs is not the worst of their problems. They are getting the short end of the stick, and the stick is just getting shorter as college costs creep ever higher. Over the last decade, the average amount of student debt for college graduates increased by a staggering 25%, in constant dollars. Yet the reality is this is not surprising, given how tuition costs have skyrocketed in the last ten years. According to the Department of Education, tuition costs and fees across all four-year colleges and universities increased by 32 percent from 2000-2010, with public institutions showing an average increase of 40 percent, all in constant dollars. Families are struggling to keep pace, which lead to two-thirds of 2010 college grads taking on debt before they even finished school.
What’s more, as student debt for young college graduates becoming a bigger burden, their real wages are falling. Over 2000-2010, average wages for full-time workers aged 25-34 with only a Bachelor’s degree fell by 15% percent, after adjusting for inflation. The same jobs their peers got just ten years earlier are paying less. So, just as college is getting more expensive, graduates are less able to pay for it.
This is an inconvenient truth that cannot be wished away. College grads are an important segment of the advanced skill workforce that we are relying on to get America moving again. Instead we find too many them living in tents, spending valuable time wondering how Adele could feasibly “set fire to the rain” instead of developing the next cancer treatment, the next manufacturing technology, or the next software designed to protect America’s borders. If they can’t find work, then where does that leave the rest of us? Perhaps we’ll all be living in tents, playing Hacky Sack and Frisbee, sooner than we think. Like it or not, this truth is here, and until we address it college grads will only become more frustrated and more disconnected. With good reason.
For new college graduates, the world is their oyster. Without many of the real-world burdens the rest of us face, they can do anything they set their mind to.
That is, unless they start their careers staggering under a pile of student debt. It would appear that student debt is one rather onerous real-world burden bestowed upon college graduates the day they are handed their diplomas—and this burden is causing them more stress now than at any point in the last decade.
Using data on average student debt and wages for young college grads, PPI has calculated the Payback Stress Index. This new measure enables us to quantify, for the first time, the increasing burden of student borrowing for today’s college graduates.
Based on the Payback Stress Index, PPI finds that paying off college debt was 58% more economically stressful for students who graduated in 2010 compared with students who graduated in 2000. Specifically, we calculated how long it would take to pay back the average student loan, given the average earnings of full-time workers aged 25-34 with only a bachelor’s degree. We then indexed that calculation to what the average repayment time was in 2000, assuming an interest rate of 6 percent, and assuming that the representative college graduate paid 5 percent of earnings at each repayment. The chart below of PPI’s Payback Stress Index maps the rise in financial stress facing each class of college graduates.
Climbing Stress Mountain, No End in Sight
The Payback Stress Index allows us to compare different graduating classes within a single framework. To be sure, the PPI Payback Stress Index works with averages, and uses certain assumptions that may not hold true for every graduate—each college graduate with a student loan has their own repayment term and some were able to take on no debt at all. We’re also assuming real earnings don’t change throughout the repayment period, which affects how long it takes to repay student loans.
Still, the sharp climb in student debt payback stress has no end in sight—leading young college graduates to wonder when, or if, they will ever make it to the top and come down the other side. It’s no wonder the younger generation has started giving the traditional benefits of going to college a second thought.
Can insourcing be a major source of job creation for the U.S.? The answer is yes, with a caveat. Widespread insourcing–or import recapture, as I like to call it–won’t happen without some help from government policy. In particular, the main role of the government is to provide better data about the relative cost of insourcing vs outsourcing.
Why would better statistics help create new jobs in the U.S. and accelerate insourcing? The reason is hysteresis. Hysteresis is defined as a “lag in response” when the forces acting on a situation have changed. Originally hysteresis worked in favor of keeping jobs in this country, because businesses didn’t want to switch their production to a country thousands of miles away, even if it might be cheaper.But now, with production firmly established in China, India, Mexico, and other low-cost countries, hysteresis is working against the U.S.
As a result, even if production costs have converged, there are three big obstacles to bringing jobs back to the U.S.
First, it is expensive to switch suppliers, especially for noncommodity purchases. Contracts have to be negotiated, the quality of the product has to be checked, suppliers have to be integrated into a supply chain. Wal-mart would rather work with suppliers that it already has been doing business with.
Second, it may be expensive and time-consuming to recreate a production ecosystem here in the U.S., especially if an industry has been hollowed out. That is, if you want to start making shoes in the U.S., it’s easier if you have a repairman in the area who knows have to fix shoe manufacturing machinery.
Third, it may be expensive for small and medium-size companies to determine if switching suppliers will raise or lower costs. That’s especially true if all of their current suppliers are in one country. Big multinationals can afford to run studies on relative costs of the different countries, but small and medium businesses cannot.
One cheap way of boost insourcing is for the Bureau of Labor Statistics to provide better data about the relative costs of production in the U.S. versus production overseas. The BLS already collects information on import prices and domestic production prices, but it doesn’t compare the two.
Assuming that production costs really are converging, better information would make it easier for companies to justify the decision to bring jobs back to this country. Right now the safe decision for executives is to continue sourcing from China and India, since they are generally accepted to be ‘low-cost’ countries. It’s like they used to say, you can’t get fired for buying from IBM. It’s the same today–execs can’t get fired for buying from China and India, because everyone assumes that prices are lower there.
In November 2011 PPI proposed a Competitiveness Audit, to be done by the BLS, to help boost insourcing of jobs. For each industry, the Competitiveness Audit would compare import and domestic prices, and give a sense about the size of the gap and whether it was widening or narrowing. This information would be crucial for identifyng the industries where insourcing makes sense. The Competitiveness Audit would also give executives a sense of security that they were making the right decision by bringing back jobs.
A Competitiveness Audit is a good way of accelerating the rate of insourcing. The goal here is to overcome hysteresis and inertia, and create a sort of bandwagon effect of jobs moving back to this country. Better information is essential to create new jobs.
PPI Chief Economic Strategist Michael Mandel explains in the Atlantic how government spending is responsible for nearly all of the income and job growth in New Hampshire, contrary to what GOP presidential candidates might say:
New Hampshire, scene of the upcoming GOP presidential primary, seems like the perfect illustration of the Republican low-tax philosophy. With no state income tax and one of the lightest tax burdens in the U.S., New Hampshire enjoys an 8.3% poverty rate, the lowest in the country, and an unemployment rate of only 5.2% as of November, far below the national rate.
But here’s a surprise: The “Live Free or Die” State, having lost much of its manufacturing base, seems to be thriving mostly on a steady diet of government spending and public jobs. For one, government employment in New Hampshire is up 14% since 2000, compared to 6% for the country as a whole.
What’s more, real personal income growth in New Hampshire over the past decade has been driven almost entirely by government spending. Here’s how it breaks down: From 2000 to 2010, real personal income in the state rose by $4.6 billion, in 2005 dollars. Out of that, $3 billion, or 66%, came from the growth of government transfer payments such as Medicare, Medicaid, and Social Security. Another $1.4 trillion, or 31%, came from increased wages and benefits to government employees (numbers are rounded and in 2005 dollars).
To most Americans, fiscal responsibility is a question of political morality. If Democrats allow the debate to be framed as a choice between more deficit spending and debt reduction, they lose
Much to the perplexity of US liberals, the politics of debt reduction dominated Washington in 2010, despite a faltering economic recovery.
No one was more incensed by the seeming illogic of this than Paul Krugman. The influential New York Times columnist railed often against “premature austerity” and urged President Obama instead to open the spigots of federal spending. It was the standard Keynesian prescription, but it betrayed a political tin ear. To a public alarmed by large-scale public borrowing and spending, it sounded like throwing good money after bad.
After 2007, US budget deficits ballooned as the Bush and Obama administrations spent heavily to bail out the big banks (plus insurance and auto companies) and counter the worst recession since the 1930s. The federal deficit, $469 billion in 2008, zoomed to an eye-popping $1.3 trillion in 2011. Coming on top of the Bush tax cuts and two costly wars, this emergency spending pushed the US national debt over 70% of GDP.
Had this torrent of spending – reinforced by generous doses of monetary “easing” – unlocked business investment and cut the jobless rate, all might have been forgiven. But it didn’t, and public apprehension about exploding debts amid a jobless recovery rose steadily, reaching a crescendo in the 2010 elections. Republicans swept House races and, lashed on by the Tea Party, stormed into Washington determined to cut government down to size.
Thus 2011 became a year of fiscal brinkmanship. First the government was almost shut down last spring when budget talks broke down. Then came the summer showdown over raising the debt ceiling, which ended when Obama blinked and agreed to GOP demands for spending cuts rather than let America default on its debts for the first time ever. In the fall, a bipartisan “supercommittee” that was granted extraordinary powers to rein in deficits failed to reach agreement, triggering automatic domestic spending cuts in 2013.
Despite such nips and tucks, US leaders thrice failed to come to grips with the structural causes of America’s debt crisis: tax revenues well below historic norms, and the rapid growth of public health and pension costs as the baby boomers throng into retirement. This ensures that the debate over how to control the national debt – $15 trillion and growing – will be front and centre in the 2012 presidential election.
The public’s top priorities are jobs and reviving US competitiveness. But fiscal discipline also matters to most voters, especially the moderates and independents who hold the balance in close races. Only by embracing both goals can progressives forge an electoral majority in 2012. If Obama and the Democrats allow the fiscal debate to be framed as a choice between more deficit spending or debt reduction, they lose. If instead they champion fiscal restraint and focus the debate on the fairest and most growth-friendly way to achieve it, they can win.
That’s because Republicans have painted themselves in a corner by refusing to raise any new tax revenue to help solve the debt crisis. Americans don’t relish paying higher taxes, but they do want their elected leaders to work together to solve the country’s problems. House Republicans have repeatedly put their anti-tax dogma before their responsibility to govern, and have seen their public approval ratings tumble as a result.
In contrast, Obama appears eminently reasonable in calling for “shared sacrifice”, which in practice means reducing the debt with a mix of spending cuts and tax revenues. He has also put Republicans on the defensive for opposing tax hikes on the rich, even to pay for tax relief for working families.
But Obama can’t let his own party off the hook, either. If Republicans are in denial about the need for higher revenues, Democrats have yet to get serious about the other side of the fiscal equation – slowing the unsustainable cost growth of the big “entitlement” programmes: Medicare, Medicaid and Social Security. Washington has promised more to future retirees than it can afford to pay; the government recently put the funding gap at $34 trillion, many times larger than the entire US economy.
There’s nothing “progressive” about denying hard fiscal facts, yet many liberals cling to the habit of opposing any cuts in future benefits – even for wealthy Americans – as a breach of faith, if not a plot to kill social insurance in America. Not only is this stance blind to demographic and budget realities, it’s morally dubious as well.
If benefits for the elderly are deemed untouchable, then Congress will have to either raise taxes on everyone, including working families, or cut domestic spending to the bone, or both. Domestic spending (including defence) has already borne the brunt of the spending cuts agreed to last year. It is only 12% of the budget, but it includes all the key public investments progressives should be for – in infrastructure, education and workforce skills, science and technology – not to mention public health and safety and measures to alleviate poverty. To shield entitlements from cuts is, in effect, to give priority to retirees’ consumption over strategic investments in a more prosperous and equitable society.
There is little mystery over what it will take to solve America’s debt crisis. President Obama’s own Fiscal Commission says $4 trillion in debt reduction over the next decade is necessary to stabilise the national debt at around 60% of GDP. Hitting that ambitious target will require a political “grand bargain” in which Republicans accept increased tax revenues, and Democrats agree to trim benefits for affluent retirees in the future. Unfortunately, Obama’s reluctance to endorse his Commission’s blueprint has left his own party as well as the public in doubt about the depth of his commitment to fiscal stabilisation.
As the presidential race begins in earnest, Obama will come under growing pressure to offer bigger and more specific ideas for spurring economic growth and shrinking the national debt. He needs a concrete plan for restoring fiscal responsibility gradually, through a combination of tax and entitlement reform, while also boosting public investment. Properly sequenced, a “cut and invest” approach can attenuate the dilemma Krugman and others point to – the collision between the stimulative effect of public spending (and tax cuts) and the contractionary impact of fiscal retrenchment.
Adopting a 10-year framework for debt reduction will reassure nervous investors that Washington is determined to get its borrowing under control and protect the nation’s credit. By cutting debt service payments, it will redirect public spending from consumption to productive investment. It will reduce America’s dependence on foreign lenders (especially China) and rebuild the nation’s “fiscal reserve” so that it can borrow to meet future emergencies or downturns without plunging into Greek-style levels of debt.
The economic case for providing certainty about debt reduction is compelling. But most Americans don’t wear green eyeshades; for them, fiscal responsibility is a question of political morality. They see the nation’s runaway debt as emblematic of a corrupt political class that doles out slices of the public weal to privileged interests and rent-seekers in return for campaign contributions. The image of a bloated state that lives beyond its means powerfully buttresses the anti-government populism that resonates not only with Tea Partiers but also with the independent voters that progressives need to win back this year.
The good news for Obama is that the demands of economic growth and fiscal rectitude point in the same direction – away from America’s old economic model of debt-fueled consumption, towards a new progressive growth strategy based on higher levels of investment, faster innovation and expanded production.
Among the many casualties of the 2007-2008 financial meltdown were small businesses. As the financial system virtually shut down, millions of small business owners across America found themselves unable to get the credit they desperately needed to run their businesses, let alone expand. As a result, thousands of otherwise flourishing firms were forced into bankruptcy or closure, with thousands of American jobs lost.
While this credit freeze has begun to thaw, one critical group of small businesses—firms with fewer than 50 workers—are still at risk of being left behind. These smallest of small businesses provide as much as 30 percent of all private-sector employment. Yet because of their small size, they are much less likely to benefit from government small business loan programs, and they are less likely to win loans from big commercial banks. For this group, the credit crunch is a serious impediment to their success. Many of these businesses relied on personal assets, such as home equity, for financing. But with the crash in home prices, those resources have evaporated. Instead, many smaller businesses rely almost exclusively on risky and expensive credit cards to finance their firms, if they can get credit at all.
Smaller businesses clearly need more options for getting credit, and credit unions, which already help many small borrowers finance their self-employment and small business ventures with personal loans, lines of credit, and limited business loans, could be an ideal source of credit for these underserved entrepreneurs. However, credit unions are blocked from offering as much help as they could because of an arbitrary and outdated cap on the amount of small business lending that credit unions can do. Bipartisan proposals to increase this limit—such as the ones offered by Sens. Mark Udall and Susan Collins and Reps. Ed Royce and Carolyn McCarthy—would help credit unions fill the “credit gap” that these smaller businesses face. It would also be a sensible and cost-effective way to jumpstart the job creation our country urgently needs.
AT&T is a big company, which perhaps explains why federal regulators are ganging up to block its proposed merger with T-Mobile. Big must be bad, right?
That’s certainly the view of consumer advocacy groups, which routinely oppose business mergers as threats to competition. They seem to have the ear of the Federal Communications Commission, which announced last week that it would join the Justice Department in opposing the deal, citing concerns about job losses and higher consumer prices.
But there’s another important group of stakeholders that regulators should be listening to: AT&T’s workers. They are urging the government to take a broader view of the merger’s potential impact on U.S. investment and competitiveness.
At a time of shrinking private sector union membership, it’s worth noting that the company’s 42,000 wireless workers are represented by the Communications Workers of America (CWA). The union issued a report this month strongly supporting the company’s acquisition of T-Mobile as a spur to innovation and a job-creator.
Such arguments merit attention, if only because it’s not often that you find a successful U.S. company in synch with its unionized workforce. Beyond that, however, there are compelling economic reasons for regulators to start looking at proposed mergers through the eyes of America’s producers, not just its consumers.
President Obama, fresh from a tour of the Asia-Pacific, articulated them in a recent radio address. “Over the last decade, we became a country that relied too much on what we bought and consumed,” he said. “We racked up a lot of debt, but we didn’t create many jobs at all.” Reviving U.S. competitiveness, he said, will require Americans to focus more on building things than buying them. Obama also called for “restoring America’s manufacturing might, which is what helped us build the largest middle-class in history.”
Opponents say CWA backs the merger because it has its eyes on T-Mobile’s workers, who aren’t organized. But the union’s analysis of the $39 billion deal emphasizes AT&T’s plans to boost capital investment in the wireless broadband sector. It cites think tank estimates that such investment could produce up to 96,000 new jobs, not including another 5,000 jobs the company promises to bring back to the United States from overseas.
AT&T has said it will merge its networks with those of T-Mobile, and invest an additional $8 billion to expand its 4G LTE wireless broadband infrastructure. It also has pledged to retain T-Mobile’s non-managerial workers. The CWA report asserts that, absent the merger, T-Mobile is headed toward extinction. Having been cut loose by its parent company, Deutsch Telecom, it lacks the capital to acquire spectrum and build its own 4G network.
Opponents of the merger—including AT&T’s competitors as well as consumer groups—say the merger would give the telecom giant too much market power and lead to higher prices. Regulators ought to carefully weigh such claims. But as a forthcoming PPI report argues, mergers and acquisitions among dynamic, high-tech companies often have the effect of spurring more innovation. In the fiercely competitive telecommunications sector, prices for wireless services—voice, text, and data—have been trending downward, even as quality of these services has improved dramatically.
Even so, low consumer prices aren’t the only public interest at stake here. More important is expanding investment—in technological innovation, a highly skilled workforce and world-class infrastructure. This is the only way to make U.S. companies and workers more competitive in global markets that does not entail lowering our standard of living.
As the Progressive Policy Institute has documented here, the telecom sector is leading a dynamic wave of innovation in mobile telephony and broadband that is creating good jobs in the United States. That’s no mean achievement at a time when unemployment is stuck at 9 percent—and about twice that if you take into account people who have given up looking for jobs.
While other corporations chase cheap labor by moving production offshore, we have dubbed communications companies like AT&T, Verizon and Comcast “Investment Heroes” because they are making huge bets on the American economy. Surely that’s something government regulators ought to factor into their decisions.
Our country needs a new model for economic growth that emphasizes production over consumption, saving over borrowing, and exports over imports. Such a shift is essential not only to rebuild the great American job machine, but also to rebalance a global economy that has become overly dependent on U.S. consumers.
It’s time once again for America to be a global center for production—and we need federal regulators to get with the program too.
Right now policymakers are grappling with the implications of slow economic growth in the United States and the rest of the industrialized world. One response is austerity—cutting back on spending, accepting reduced living standards, and slowly digging out from the mess.
A better option, though, is innovation, which accelerates growth, creates new jobs, and makes U.S. products and services more competitive world-wide. Innovation has the potential for raising incomes, an especially important task given that real median household incomes have fallen more than 10 percent since the beginning of the recession.
While innovation can come from any industry, the technology sector is particularly important, as it has been the main source of growth and innovation in the economy for the past 35 years. The locus of innovation started with the personal computer in the late 1970s and 1980s; shifted to software and the internet in the 1990s; and now has moved to mobile, search, and more broadly communications, where U.S. companies are world leaders. Today’s technological advances have facilitated the emergence of innovation “ecosystems,” or platforms on which many different companies can build products or provide services.
The growth of tech companies stems from a combination of organic growth and business acquisitions, driven by the rapidity of innovation. It’s a virtuous circle, where successful technology companies pay large sums for small startups, which in turn induces the formation of more startups. For that reason, technology acquisitions need not diminish competitiveness, even as they accelerate innovation and job growth. Indeed, as we will see later in this paper, periods of high levels of acquisition have also been periods of rapid job growth.
One question is whether there is anything that government policy can do to encourage technology innovation in the short run. The answer is probably not—while the government does have plenty of long-term levers, such as spending on basic research and investment in science and engineering education, there are few ways to speed up innovation over the next year. On the other hand, government policy is actually quite capable of discouraging innovation in the short-run, through outdated regulation and restrictive antitrust policy that does not take the importance and uniqueness of the technology sector into consideration.
Antitrust policy, as applied to the technology sector in its current form, can impede the virtuous circle of nurturing innovation through startups and acquisitions. By slowing down or blocking acquisitions, antitrust policy can limit the exit routes for startups, potentially reducing their value and making it less attractive for investors to put their money into the next round of innovative new companies.
This paper will explore the role of technology acquisitions in encouraging innovation, facilitating economic growth, stimulating jobs, and enhancing our quality of life. First, this paper examines past trends in technology acquisitions, establishing that waves of industry acquisitions have been an integral part of the rapid innovation in tech since the 1980s. We focus in particular on the post-2005 acquisitions by major tech firms.
Second, we examine the question of whether technology acquisitions facilitate innovation, and in particular high-impact innovations. In fact, the benefits to the rest of the economy are connected to the speed at which potential innovations are moved to market and scaled up. This is because the value created from rapid technological innovation is distributed across all users of the new technology.
Further, this paper will show that periods with high levels of acquisitions generally also tend to be periods of rapid employment growth. This is not meant to be an assertion of causality, but to rather argue that tech acquisitions are part of the same innovative process as employment growth.
To summarize: (1) when done correctly, acquisitions in the technology sector can and have encouraged innovation by bringing new products to market faster and more effectively; and (2) acquisitions and innovation in the technology sector are positively associated with economic growth and job creation. What’s more, mainstream economic theory associates sustainable economic growth in the long-term with constant innovation and technological progress. Looking at technology acquisitions from this perspective provides a different framework from which to assess the potential implications of excessive antitrust regulations, and current antitrust policy.
Can government policy encourage technology innovation in the short run? Probably not—while the government does have plenty of long-term levers, such as spending on basic research and investment in science and engineering education, there are few ways to speed up innovation over the next year.
Rather, government policy is actually quite capable of discouraging innovation in the short-run, through outdated regulation and restrictive antitrust policy that does not take the importance and uniqueness of the technology sector into consideration.
While innovation can come from any industry, the technology sector is particularly important, as it has been the main source of growth and innovation in the economy for the past 35 years. Technological advances over the last decade have facilitated the emergence of innovation “ecosystems,” or platforms on which many different companies can build products or provide services, in which mergers and acquisitions have played a large part. Moreover, a unique feature of the technology sector is that the constant innovation companies need to stay profitable creates new markets and keeps competition active.
However, antitrust policy its current form does not recognize these characteristics. Instead, current application of antitrust regulations can impede the virtuous circle of nurturing innovation through startups and acquisitions. By slowing down or blocking acquisitions, antitrust policy can limit the exit routes for startups, potentially reducing their value and making it less attractive for investors to put their money into the next round of innovative new companies. In this regard antitrust policy has the potential to slow the speed of technological innovation, even though the benefits to the rest of the economy are connected to the speed at which new innovations are moved to market and scaled up.
In Innovation by Acquisition: New Dynamics of High-tech Competition, we explore the role of technology acquisitions in encouraging innovation, facilitating economic growth, and stimulating jobs. Specifically, we examine the question of whether technology acquisitions facilitate innovation, and in particular high-impact innovations. We argue that, when done correctly, acquisitions in the technology sector can and have encouraged innovation by bringing new products to market faster and more effectively.
What’s more, we find that acquisitions and innovation in the technology sector are positively associated with economic growth and job creation, an important consideration as we struggle to devise new, cost-effective ways to stimulate the economy and create jobs.
Looking at technology acquisitions from this perspective provides a different framework from which to assess the potential implications of excessive antitrust regulations, and current antitrust policy.
Conventional wisdom these days says that small is better when it comes to innovation and putting new ideas into practice. Large enterprises are typically thought of as hidebound defenders of the status quo, dominating by market power and brute force rather than technological and innovative prowess.
Yet reality is far more complicated than this simple small versus big distinction. As we all know many common-sense beliefs turn out to be only partly true, or not to be true at all.
In this policy memo we will reconsider the link between scale (size) and innovation. After 20 years where startups have rightly dominated the innovation headlines, we will show that the pendulum may be swinging back. As a result, there are reasons to believe that scale may be a plus for innovation in today’s economy, not a minus. We will then relate scale to government policy, U.S. competitiveness and prosperity.
In this policy memo we will reconsider the link between scale (size) and innovation. After 20 years where startups have rightly dominated the innovation headlines, we will show that the pendulum may be swinging back. As a result, there are reasons to believe that scale may be a plus for innovation in today’s economy, not a minus. We will then relate scale to government policy, U.S. competitiveness and prosperity.
The now-heretical idea that scale is an advantage for innovation actually dates back more than 60 years. Back then, Harvard economist Joseph Schumpeter, the inventor of the term ‘creative destruction’, suggested that large-scale firms were “the most powerful engine of progress.” Following after his work, economists developed what came to be known as the “Schumpeterian Hypothesis.” The first part of the Schumpeterian Hypothesis was the argument that bigger firms have more of an incentive to spend on innovation than a smaller one. For example, if we compare a company that manufactures 50 million t-shirts a year versus one that manufactures 10,000 t-shirts a year, the larger company is much more like to spend the big bucks needed to develop and test a new process for dyeing the t-shirts.
The second part of the Schumpeterian Hypothesis is the observation that companies with more market power might also be more willing to invest in innovation. The argument is that if a firm in an ultra-competitive market innovates, the new product or service is quickly copied by rivals, so that the gains from innovations are quickly competed away. Conversely, a firm with market power has the ability to hold onto some of its gains from innovation, so it may pay to invest in product or other improvements.
Together, these two conjectures are among the most controversial and most widely studied of economic theories. Economists and business experts have generated a long series of theoretical papers, econometric analyses, case studies, and anecdotal reports, examining the impact of scale on innovation.
After all this research, we can summarize the economic evidence for and against the Schumpeterian hypothesis in two words: It depends. Part of the problem is that innovation influences scale, as well as vice versa. A successful and innovative small or medium-size company will often grow to be a successful and innovative large company, which perhaps dominates its market because of its very success.
At the same time, the link between scale and innovation, positive or negative, depends on the economic environment. In this policy memo, we will suggest that the current U.S. economy is dealing with a particular set of conditions that will make scale a positive influence on innovation. First, economic and job growth today are increasingly driven by large-scale innovation ecosystems, such as the ones surrounding the iPhone, Android, and the introduction of 4G mobile networks. These ecosystems require management by a core company or companies with the resources and scale to provide leadership and technological direction. This task typically cannot be handled by a small company or startup.
Second, globalization puts more of a premium on size than ever before. A company that looks large in the context of the domestic economy may be relatively small in the context of the global economy. In order to capture the fruits of innovation, U.S. companies have to have the resources to stand against foreign competition, much of which may be state supported.
Finally, the U.S. faces a set of enormous challenges in reforming large-scale integrated systems such as health, energy, and education. Conventional venture-backed startups don’t have the resources to tackle these mammoth problems. Only large firms have the staying power and the scale to potentially implement systemic innovations in these industries.
We finish this policy brief with some observations about scale, innovation, and government policy. In particular, we raise questions about whether an aggressive policy of filing antitrust actions against America’s key technological leaders is really the optimal course for improving U.S. competitiveness, raising living standards, and boosting job growth in the U.S.
In 2004, Google made headlines by “going public,” raising $1.7 billion in what was then the biggest initial stock offering since the heady days of the tech boom. Next spring, Facebook is expected to make its debut with a $10 billion initial public offering (“IPO”)—one of the largest ever.
Dreams of a splashy IPO may spur many entrepreneurs, but in reality, fewer and fewer companies are going public. While the stock exchange has long been the fastest and easiest way for companies to finance their growth, reaching the public market is getting tougher for emerging companies.
Thanks to a combination of legislative, regulatory, and technological changes, going public is more expensive, more burdensome, and less appealing than in the past—especially for younger, smaller, and less sexy companies that aren’t expected to become Google-sized blockbusters. One recent study puts the average cost of going public at $2.5 million, plus ongoing annual costs of $1.5 million a year to keep up with paperwork and regulatory requirements.
The result has been a drought in IPOs and a crisis in access to capital for young companies seeking to grow. From 1991 to 2000, the U.S. stock markets saw an average of 530 IPOs every year.Since then, the average annual number of newly-minted public companies has plummeted to about one-fourth that number.In 2009, just 61 companies went public.Moreover, the number of public companies listed on U.S. stock exchanges shrank from 8,000 in 1995 to 5,000 in 2010.
But at the same time that going public has become tougher for younger companies, outdated rules are forcing some firms to either go public prematurely—or else radically curtail their growth to stay private. The problem is an outdated cap on the number of shareholders that a company can have before it’s essentially required to go public. The so-called “500 shareholder rule”—first promulgated in 1964 to define the “public” companies in need of regulatory oversight—now poses a significant hurdle to growth for many companies. These firms may not be ready or don’t want to go public but have few other options for raising capital because they can’t expand their investor pool. Thus, some companies nearing the 500-shareholder threshold may face an unpalatable choice: either bear the financial and regulatory costs of going public or forego opportunities for growth.
By raising the shareholder threshold to 1,000 or 2,000, as policymakers such as Sens. Tom Carper and Pat Toomey and Rep. David Schweikert have proposed, younger companies will have more room to grow, invest and create jobs, as well as more flexibility before making the plunge into going public. Coupled with other efforts to fix the broken IPO market, an amendment to this rule could give younger and smaller companies a much-needed boost toward growth.
Amending this rule would also be an important step in modernizing and reorienting the nation’s overall regulatory scheme toward promoting innovation—an effort that is crucial to America’s future economic renewal.
Conventional wisdom these days says that small is better when it comes to innovation and putting new ideas into practice. Large enterprises are typically thought of as hidebound defenders of the status quo, dominating by market power and brute force rather than technological and innovative prowess.
Yet reality is far more complicated than this simple small versus big distinction. As we all know many common-sense beliefs turn out to be only partly true, or not to be true at all.
In this policy memo we will reconsider the link between scale (size) and innovation. After 20 years where startups have rightly dominated the innovation headlines, we will show that the pendulum may be swinging back. As a result, there are reasons to believe that scale may be a plus for innovation in today’s economy, not a minus. We will then relate scale to government policy, U.S. competitiveness and prosperity.
In this policy memo we will reconsider the link between scale (size) and innovation. After 20 years where startups have rightly dominated the innovation headlines, we will show that the pendulum may be swinging back. As a result, there are reasons to believe that scale may be a plus for innovation in today’s economy, not a minus. We will then relate scale to government policy, U.S. competitiveness and prosperity.
The now-heretical idea that scale is an advantage for innovation actually dates back more than 60 years. Back then, Harvard economist Joseph Schumpeter, the inventor of the term ‘creative destruction’, suggested that large-scale firms were “the most powerful engine of progress.” Following after his work, economists developed what came to be known as the “Schumpeterian Hypothesis.” The first part of the Schumpeterian Hypothesis was the argument that bigger firms have more of an incentive to spend on innovation than a smaller one. For example, if we compare a company that manufactures 50 million t-shirts a year versus one that manufactures 10,000 t-shirts a year, the larger company is much more like to spend the big bucks needed to develop and test a new process for dyeing the t-shirts.
The second part of the Schumpeterian Hypothesis is the observation that companies with more market power might also be more willing to invest in innovation. The argument is that if a firm in an ultra-competitive market innovates, the new product or service is quickly copied by rivals, so that the gains from innovations are quickly competed away. Conversely, a firm with market power has the ability to hold onto some of its gains from innovation, so it may pay to invest in product or other improvements.
Together, these two conjectures are among the most controversial and most widely studied of economic theories. Economists and business experts have generated a long series of theoretical papers, econometric analyses, case studies, and anecdotal reports, examining the impact of scale on innovation.
After all this research, we can summarize the economic evidence for and against the Schumpeterian hypothesis in two words: It depends. Part of the problem is that innovation influences scale, as well as vice versa. A successful and innovative small or medium-size company will often grow to be a successful and innovative large company, which perhaps dominates its market because of its very success.
At the same time, the link between scale and innovation, positive or negative, depends on the economic environment. In this policy memo, we will suggest that the current U.S. economy is dealing with a particular set of conditions that will make scale a positive influence on innovation. First, economic and job growth today are increasingly driven by large-scale innovation ecosystems, such as the ones surrounding the iPhone, Android, and the introduction of 4G mobile networks. These ecosystems require management by a core company or companies with the resources and scale to provide leadership and technological direction. This task typically cannot be handled by a small company or startup.
Second, globalization puts more of a premium on size than ever before. A company that looks large in the context of the domestic economy may be relatively small in the context of the global economy. In order to capture the fruits of innovation, U.S. companies have to have the resources to stand against foreign competition, much of which may be state supported.
Finally, the U.S. faces a set of enormous challenges in reforming large-scale integrated systems such as health, energy, and education. Conventional venture-backed startups don’t have the resources to tackle these mammoth problems. Only large firms have the staying power and the scale to potentially implement systemic innovations in these industries.
We finish this policy brief with some observations about scale, innovation, and government policy. In particular, we raise questions about whether an aggressive policy of filing antitrust actions against America’s key technological leaders is really the optimal course for improving U.S. competitiveness, raising living standards, and boosting job growth in the U.S.
Can government policy encourage technology innovation in the short run? Probably not—while the government does have plenty of long-term levers, such as spending on basic research and investment in science and engineering education, there are few ways to speed up innovation over the next year.
Rather, government policy is actually quite capable of discouraging innovation in the short-run, through outdated regulation and restrictive antitrust policy that does not take the importance and uniqueness of the technology sector into consideration.
While innovation can come from any industry, the technology sector is particularly important, as it has been the main source of growth and innovation in the economy for the past 35 years. Technological advances over the last decade have facilitated the emergence of innovation “ecosystems,” or platforms on which many different companies can build products or provide services, in which mergers and acquisitions have played a large part. Moreover, a unique feature of the technology sector is that the constant innovation companies need to stay profitable creates new markets and keeps competition active.
However, antitrust policy its current form does not recognize these characteristics. Instead, current application of antitrust regulations can impede the virtuous circle of nurturing innovation through startups and acquisitions. By slowing down or blocking acquisitions, antitrust policy can limit the exit routes for startups, potentially reducing their value and making it less attractive for investors to put their money into the next round of innovative new companies. In this regard antitrust policy has the potential to slow the speed of technological innovation, even though the benefits to the rest of the economy are connected to the speed at which new innovations are moved to market and scaled up.
In Innovation by Acquisition: New Dynamics of High-tech Competition, we explore the role of technology acquisitions in encouraging innovation, facilitating economic growth, and stimulating jobs. Specifically, we examine the question of whether technology acquisitions facilitate innovation, and in particular high-impact innovations. We argue that, when done correctly, acquisitions in the technology sector can and have encouraged innovation by bringing new products to market faster and more effectively.
What’s more, we find that acquisitions and innovation in the technology sector are positively associated with economic growth and job creation, an important consideration as we struggle to devise new, cost-effective ways to stimulate the economy and create jobs.
Looking at technology acquisitions from this perspective provides a different framework from which to assess the potential implications of excessive antitrust regulations, and current antitrust policy.
Right now policymakers are grappling with the implications of slow economic growth in the United States and the rest of the industrialized world. One response is austerity—cutting back on spending, accepting reduced living standards, and slowly digging out from the mess.
A better option, though, is innovation, which accelerates growth, creates new jobs, and makes U.S. products and services more competitive world-wide. Innovation has the potential for raising incomes, an especially important task given that real median household incomes have fallen more than 10 percent since the beginning of the recession.
While innovation can come from any industry, the technology sector is particularly important, as it has been the main source of growth and innovation in the economy for the past 35 years. The locus of innovation started with the personal computer in the late 1970s and 1980s; shifted to software and the internet in the 1990s; and now has moved to mobile, search, and more broadly communications, where U.S. companies are world leaders. Today’s technological advances have facilitated the emergence of innovation “ecosystems,” or platforms on which many different companies can build products or provide services.
The growth of tech companies stems from a combination of organic growth and business acquisitions, driven by the rapidity of innovation. It’s a virtuous circle, where successful technology companies pay large sums for small startups, which in turn induces the formation of more startups. For that reason, technology acquisitions need not diminish competitiveness, even as they accelerate innovation and job growth. Indeed, as we will see later in this paper, periods of high levels of acquisition have also been periods of rapid job growth. Continue reading “Innovation by Acquisition: New Dynamics of High-tech Competition”→
The end of the calendar year always means an assortment of “temporary” policies are approaching expiration, including some (e.g., upward revision of reimbursement rates for Medicare providers, and a “patch” to avoid imposition of the Alternative Minimum Tax on new classes of taxpayers) that happen every year. And then there are other expiring provisions central to the Obama administration’s efforts to deal with the recession, most notably unemployment benefits for the long-term unemployed, and last year’s major “stimulus” measure, a temporary Social Security payroll tax cut.
With the collapse of the deficit reduction supercommittee and an uncertain future ahead for the “automatic sequestrations” of spending that are supposed to subsequently occur, leaders in both parties are especially sensitive at the moment about taking steps on either the spending or revenue side of the budget ledger that add to deficits. But some of the “fixes” mentioned above are political musts, while others are highly popular or scratch particular ideological itches. It will be interesting to see whether conservative activists wind up taking a hard line against deficit increasing measures, and indeed, against any cooperation with Democrats so long as their own demands for “entitlement reform” and high-end tax cuts are ignored.
The payroll tax cut is an especially difficult subject for conservatives. While it will be easy for them to reject Senate Democratic proposals to pay for an extension of the cut with a surtax on millionaires, it is certainly possible, as Senate Republican leader Mitch McConnell has acknowledged, to “pay for” this tax cut with spending cuts, perhaps even some that Democrats would consider supporting.
Some conservatives, however, view any deal with Democrats on this and any other fiscal issues as a deal with the devil. One of McConnell’s deputies, Sen. John Kyl, has argued that the payroll tax cut hasn’t boosted the economy (i.e., it is not targeted to “job creators,” the wealthy) and should be subordinated to tax cut ideas that supposedly do. In an argument that is getting echoed across Wingnut World, RedState regular Daniel Horowitz suggests that GOPers make any payroll tax cut extension conditional on a major restructuring of Social Security, which of course ain’t happening.
Since virtually all the end-of-year measures under discussion will boost the budget deficit, and there are limited noncontroversial “offsets” available (mainly “distribution” of new savings attributed to the drawdown of troops in Iraq and Afghanistan), the key question will be which ones conservatives choose to pick a fight over and which ones slide quietly past the furor on unrecorded voice votes and last-minute agreements. If congressional Republicans seem to be acting in too accommodating a manner, it would not be surprising to see GOP presidential candidates using them as foils for their own claims to the “true conservative” vote as the January 3 Iowa caucuses grow ever nearer.
For the umpteenth consecutive week, the presidential contest remained full of surprises and volatility. Herman Cain’s campaign, already losing steam after his poor handling of both sexual harassment/assault allegations and the most recent debates, took perhaps a terminal blow from a new, credible-sounding allegation (made, interestingly enough, via a local Fox station in Atlanta, not some precinct of the “liberal media”) of a long-term adulterous affair. While Cain is again denying he did anything wrong, conservatives are not rushing to his defense this time, and the general feeling is that his campaign is done.
If Cain actually withdraws, it has long been assumed he would endorse Mitt Romney. But as a new analysis by Public Policy Polling showed, Cain’s supporters are very, very likely to move virtually en masse to Newt Gingrich, whose star continued to rise last week. His big news was an endorsement by the New Hampshire (formerly Manchester) Union-Leader, that sturdy right-wing warhorse of GOP politics. This step immediately makes Gingrich the most formidable rival to Mitt Romney in the Granite State: the Union-Leader does not simply endorse and ignore candidates; it can now be expected to undertake a virtually-daily bombardment of front-page editorials defending its candidate and treating his intraparty opponents (particularly Romney) as godless liberal RINOs.
But the impact of the endorsement goes far beyond New Hampshire, given the Union-Leader’s reputation for the most abrasive sort of wingnuttery. It materially helps him solidify his reputation for conservative ideological regularity, which is about to be brought into serious question by all the other campaigns, which are doubtless sorting through their bulging oppo research files on the talkative former Speaker, trying to decide which lines of attack are most lethal.
So far the he’s-not-a-true-conservative attack on Gingrich has been largely limited to his new, dangerous positioning on immigration, unveiled in a recent debate. Gingrich has been quick to stress that his proposal for a “path to legalization” for some undocumented workers does not involve citizenship, and denies its beneficiaries any government benefits whatsoever. But Iowa’s highly influential nativist champion Steve King has already branded Newt’s plan with the scarlet A-word of “amnesty,” and Michele Bachmann is trying to draw a new line in the sand suggesting that true conservatives favor deportation of every single “illegal.”
At this point, the presidential contest appears to be something of a race between Gingrich and his past words and deeds. There is a small window between now and the period immediately before and after Christmas (when something of a truce is imposed) when his opponents can try to bury him as a flip-flopper, an inveterate bipartisan, and a guy whose personal life (not just his marriages and divorces, but his finances) has been less than godly. If they don’t get their act together to do so, he’s looking very strong in Iowa, and even if he loses to Romney in New Hampshire, Gingrich is currently sporting large polling leads in South Carolina and Florida. Particularly for those candidates (Perry, Bachmann, Santorum; Ron Paul is in something of a class by himself) still hoping to seize the mantle of the true-conservative-challenger-to-Romney after Iowa, it’s getting close to desperation time.
Yesterday’s meeting of the Council on Jobs and Competitiveness saw a long list of expensive and long-term recommendations, but one important idea was missing that could help generate new jobs cheaply and quickly: A Competitiveness Audit. A Competitiveness Audit will help identify which industries are competitive, near-competitive, or not competitive, so we can target future public and private investments in a way that will stimulate the economy and create jobs that are competitive internationally.
This article is part of a a series of international responses to 
AT&T is a big company, which perhaps explains why federal regulators are ganging up to block its proposed merger with T-Mobile. Big must be bad, right?
The end of the calendar year always means an assortment of “temporary” policies are