issue: Economy

State of the Union: Winning the Future and Winning 2012

Posted on by The Progressive Policy Institute

Last night, President Obama used the phrase “win the future” as the primary motif of his speech. But clearly, on his mind was also very particular future: the 2012 election.

Right now, that future looks bright. His approval ratings are back above 50 percent; independents are deciding they like him after all, and there is no particularly strong challenger standing out in the Republican field.

If last night was the opening gambit in the 2012 campaign, it hints that Obama understands that the two keys to getting re-elected – a centrist politics and an economic recovery – are linked. What he also needs to understand is that he’s going to have to keep hammering on the same themes if he wants them to stick.

On the positioning front, voters seem to be responding well to the new centrist Obama, who actually looks a lot like the old centrist Obama that voters elected in 2008: a president who went out of his way to show that he was not interested in being a partisan warrior and was open to working with Republicans and even including a few Republican ideas here and there.

The political events of the last two months – an especially productive lame-duck session of Congress, plus a nice moment of reflection following the tragic events in Tucson – have played to Obama’s strengths and allowed him to slip back into the role that I suspect he always wanted to play: leader of all the American people, not just the Democrats.

To the extent that Obama continued his centrist politics last night – cobbling together ideas from both sides – he should continue to maintain a wide appeal.

The bigger challenge is the state and trajectory of the economy. If unemployment is falling, businesses are creating jobs, and people feel rosy about a better tomorrow, Obama is practically unbeatable.

And while national economies are complicated beasts that defy presidents, there is certainly more to do than just stand aside and cheerlead. To the extent that the Obama administration can implement the proposed program of investments in infrastructure, education, and clean energy, as well as increasing exports, this should create jobs.

But more significantly (from a political sense), it creates a narrative that things are getting better, that America is building a future we can be proud of. It’s the same smiling horse of hope that Obama rode into town on that got every so jazzed up in the first place.

Some of this can happen at the executive level. But a lot of it requires some congressional participation.

Unfortunately, if the post-SOTU chatter is any indication (and it probably is), Republicans are not budging from their small-government old-time religion. Generally, they are generally laughing off Obama’s speech as so much misguided hot air. Even the lines that were supposed to make inroads with Republicans seem to have fallen flat among those they were intended to soften up.

Obama may by temperament prefer the bargaining chip approach (we’ll take one of your ideas and hope you vote for the thing), but at some point, he’s going to have to play a little more hardball. The only way Republicans come around to supporting some “investments” is if they feel that there will be a price to pay come next election of they don’t.

Obama started to do this last night by appealing to a national sense of purpose, and posing our challenge in us-versus-them terms. “We need to out-innovate, out-educate, and out-build the rest of the world.” He called it a “Sputnik moment.”

Obama is going to have to keep making his case to the American people in a more sustained and forceful way than he’s ever done. He’s going to have to keep hammering on the rhetoric that if we don’t take investing in the future seriously, we may as well kiss our role as a global leader goodbye.

And this is where positioning and performance come together. By framing his agenda in a way that puts America’s global competitiveness at the forefront and pulls ideas from both sides, he’s putting pressure on the Republicans to come along. And if they do, and the policies improve economy as predicted, it’s a double-bonus for Obama.

It’s a political gamble, but it’s a smart one. Now here’s hoping that Obama has the discipline to stick with it, and give this strategy the sustained effort it deserves.

State of the Union: Republican Response Preaches to the Choir

Posted on by The Progressive Policy Institute

If Rep. Paul Ryan’s response to the State of the Union Address was intended to broaden support for his party’s agenda, or actually “respond” to the President’s speech, I suspect it failed.  Ryan offered, instead, a base-friendly reinterpretation of the “state of the union” that made downsizing government not just an end in itself, but the answer to every problem.

Obama’s own proposals were brushed away in the response with the claim that “investment” just means “spending,” and that government needs to get out of the way and let the private sector take care of our needs.  Actually, Ryan barely alluded to the current economic challenge, other than to say it wasn’t fixed by the 2009 stimulus legislation.  Obama devoted much of his speech to a recitation of small, tangible ideas for what the federal government can do to promote private-sector growth and national competitiveness.  Ryan’s response contained just one idea: limited government.

In a brief response, to be sure, nobody should expect a detailed agenda.  But Ryan used about half his words for dog whistles to conservative activists.  There were references to the Founders’ Original Intent, beloved (however selectively) of Tea Party folk, and to the Declaration of Independence, which is the document whereby conservative legal beagles try to sneak divine and natural law into the constitutional design.  Ryan’s brief list of legitimate functions for government included “protecting innocent life,” a shout-out to the anti-abortion movement.  Gold bugs were treated to a ritualistic invocation of the importance of “sound money.”  And Ryan even appealed to the nasty, Randian underside of conservative hostility to “welfare” by citing a vague fear that America is turning “the social safety net into a hammock, which lulls able-bodied people into lives of complacency and dependency.”

As for the tone of the response, Ryan certainly did not reciprocate Obama’s constant pleas for bipartisan cooperation, instead treating the overthrow of every Obama policy of the last two years as the starting point for his party’s policy.

I’ve written elsewhere that Obama’s speech may have represented a clever trap to expose Republican extremism by embracing remarkably modest initiatives keyed to public sector roles in economic growth that most Americans have supported for decades.  If so, Ryan walked right into that trap, and showed it’s the GOP who are now vulnerable to the charge that they are talking about everything other than the economy, and have no ideas for fixing it other than indiscriminate attacks on government, taxes, and regulations.

But there’s more: Those conservatives who didn’t think Ryan gave them enough red meat had the opportunity to tune into a second GOP response, on behalf of the Tea Party Express, from the noted fire-breather Rep. Michele Bachmann of MN.   She omitted even Ryan’s meager bipartisan grace notes, and lurched from a cartoonish chart of unemployment rates to a set of dubious anecdotes about the crushing burden of regulations on “job creators” (the new conservative word for “corporations”).  As she closed her remarks, her choice of the Battle of Iwo Jima as the best metaphor for America’s current position was appropriately puzzling.

Like other State of the Union addresses, this one is best understood as a framing device for future conflict and cooperation between the two parties.  Judging by the GOP response(s), that party is determined to pursue confrontation with the goal of seeing how much damage it can do to the size and strength of the federal government.  The economy has become just an afterthought.  

Grading the State of The Union: A Solid B+

Posted on by The Progressive Policy Institute

Last week, the Progressive Policy Institute released a Memo to President Obama, which contained 10 Big Ideas for Getting America Moving Again. How did the President’s speech match up to our recommendations?

Overall, he did quite well. Eight of our ten ideas were largely consonant with proposals included in the address, and the future-oriented rhetoric echoes the language in our memo. We also appreciate his willingness to look to both sides of the aisle to find solutions.

However, we were disappointed that he did not discuss the sluggish housing market, and that he did offer any ideas to address the roots of the partisan rancor in Washington.

Our overall grade: B+

Here’s a proposal-by-proposal scorecard:

 

1. Removing Obstacles to Growth: A Regulatory Improvement Commission

 

We proposed: A periodic review process conducted by a Regulatory Improvement Commission, modeled loosely on the BRAC Commissions for military base closures.

The President said: “To reduce barriers to growth and investment, I’ve ordered a review of government regulations.”

Analysis: The President clearly understands that we need to prune obsolete and ineffective regulations and stimulate economic innovation and entrepreneurship. But agency self-review is inadequate.

Grade: A-

2. Internal National Building: A National Infrastructure Bank

 

We proposed: Smart, innovative financing solutions that enable us to restore the backbone of our economy. A well-structured National Infrastructure Bank can play this role by leveraging public dollars with the participation of private-sector investors.

The President said: “The third step in winning the future is rebuilding America.  To attract new businesses to our shores, we need the fastest, most reliable ways to move people, goods, and information — from high-speed rail to high-speed Internet.”

Analysis: Making infrastructure one of five sections of the speech gave it real prominence. But the President needs to do more than just propose “that we redouble those efforts.”   He needs to lay out a mechanism to do that rationally, and to identify clear funding for it. A National Infrastucture Bank could accomplish that.

Grade: A-

3. A Way to Pay for High-Speed Rail

We proposed: Restructuring the Highway Trust Fund into a Surface Transportation Trust Fund that recaptures its original mission—to build and maintain an efficient national transportation network—and updates that mission to reflect 21st-century priorities, including upgrades to our passenger and freight rail systems.

The President said: “Within 25 years, our goal is to give 80 percent of Americans access to high-speed rail. “

Analysis: We applaud the President’s full-throated commitment to high-speed rail. However, he’s going to need to figure out a way to pay for it. We suggest he read Mark Reutter’s excellent memo on how to finance high-speed rail.

Grade: A-

4. Restoring Fiscal Discipline in Washington

 

We proposed: Restoring fiscal discipline in Washington by trimming the $1.1 trillion in outdated tax expenditures, capping domestic spending (including defense), eliminating supplemental defense budgets, and slowing mandatory expenditures by reducing benefits for affluent retirees.

The President said: “Starting this year, we freeze annual domestic spending for the next five years… we cut excessive spending wherever we find it –- in domestic spending, defense spending, health care spending, and spending through tax breaks and loopholes… we should also find a bipartisan solution to strengthen Social Security for future generations…we simply can’t afford a permanent extension of the tax cuts for the wealthiest 2 percent of Americans.”

Analysis: The President clearly gets the seriousness of the looming debt crisis, but understands the difference between smart cuts and needed investments. But he could have come out more strongly in favor the Fiscal Commission’s work, and he only paid lip service to entitlements.

Grade: B+

5. Setting National Targets: A Balanced Energy Portfolio

We proposed: A national Balanced Energy Portfolio with a target fuel mix allocated into thirds by 2040: one third of our electricity generated by renewable resources, one third by nuclear power, and one third from traditional fossil fuels.

The President said: “By 2035, 80 percent of America’s electricity will come from clean energy sources.  Some folks want wind and solar.  Others want nuclear, clean coal and natural gas.  To meet this goal, we will need them all — and I urge Democrats and Republicans to work together to make it happen.”

Analysis: The President is thinking big, but also recognizing that nuclear and natural gas need to be part of any energy mix.

Grade: A

6. Greening the Pentagon: An Energy Security Innovation Fund

We proposed: An Energy Security Innovation Fund, housed in the Pentagon, to help companies bridge the gap. Such a fund would leverage public dollars with private money to support research and deployment of the most promising green products.

The President said: “We’re telling America’s scientists and engineers that if they assemble teams of the best minds in their fields, and focus on the hardest problems in clean energy, we’ll fund the Apollo projects of our time.”

Analysis: The next clean energy breakthrough is going to require support from the government. But Obaa should look beyond the Department of Energy and recognize that the military can be a fertile source of innovation, too.

Grade: A-

7. Bringing Public Education into the 21st Century

We proposed: To radically transform public education by growing charter schools, ending teacher tenure as we know it, spurring a network of “Innovation Zones”, and creating a “Digital Teacher Corps”.

The President said: “Our schools share this responsibility.  When a child walks into a classroom, it should be a place of high expectations and high performance.  But too many schools don’t meet this test.”

Analysis: Education is clearly the key to our ability to “win the future,” and the President understands this. We support his Race to the Top program and the call for more bright young people to go into education. But we also hope he thinks more creatively about radical new ideas for 21st century education, embracing the possibilities of charter schools, digital education, and “innovation zones.”

Grade: A-

8. Lifting Housing Markets: One Million Homeowner Vouchers

We proposed: An innovative way to jump-start the housing market would be for the federal government to provide a million vouchers that allow low-income renters to become homeowners.

The President said: (Nothing)

Analysis: Surprisingly, the President failed to mention the sluggish housing market, which many economists believe is one of the leading factors holding back an economic recovery.

Grade: F

9. Align Innovation and Immigration

We proposed: Aligning innovation and immigration by providing a citizenship path for foreign students with advanced technical degrees and illegal immigrants’ children who are interested in national service.

The President said: “I strongly believe that we should take on, once and for all, the issue of illegal immigration… I know that debate will be difficult.  I know it will take time.  But tonight, let’s agree to make that effort.  And let’s stop expelling talented, responsible young people who could be staffing our research labs or starting a new business, who could be further enriching this nation. “

Analysis: The President deserves points for having the courage to bring up immigration reform. But he clearly gets it: our global competitiveness depends on continuing to be a magnet for the world’s best and brightest.

Grade: A

10. Taking Power from Special Interests: A Fair Way to Finance Elections

We proposed: A hybrid Fair Elections system introduced by Sen. Dick Durbin (D-Ill.) to allow federal candidates to choose to run for office without relying on large contributions by using federal money to match small donations.

The President said: (Nothing)

Analysis: Campaign finance reform is not on the agenda, and the President does not seem particularly interested in putting it there. This is too bad. A great way to break the partisan rancor in Washington would be change the way politicians get elected to office. As long as congressional campaigns are privately funded, and as long as the big donations come primarily from ideologues and special interests, pragmatic candidates are going to have a tough time raising the resources they need to get started, and a difficult time winning in all-important low-turnout primaries.

Grade: F

Conclusion:

Overall, it was a great speech. It laid out the problems that we face as a nation, and provided a vision of an America that invests smartly in the future, building infrastructure, providing educational opportunities, and remaining a magnet for the best and brightest in the world, and all in a way that could move us past partisan divides.

State of the Union: Obama Gets Innovation Upside-Down

Posted on by The Progressive Policy Institute

In his State of the Union speech, President Obama spent a lot of time on innovation, regulation, and jobs–that’s good. Unfortunately, in all three cases he got his priorities upside down.

Let’s start with innovation.  I counted how many words the President devoted to different areas of innovation.

  • 2 words for biomedical research, the area where the U.S. is far ahead of the rest of the world.
  • 68 words devoted to extolling the job-creating virtues of space travel and NASA, an agency which currently has no mission unless it gets a lot more money.
  • 113 words for  high-speed-wireless broadband, a worthy goal.
  • 361 words in favor clean energy, a technology where the U.S. has little competitive advantage over the rest of the world.

In other words, Obama spent his time lauding our least competitive areas of innovation, while giving the back of his hand to biomedical research, the area where we have the clear global advantage.

If you think I’m exaggerating, take a look at these two charts.  When it comes to life sciences, the U.S. is way ahead. U.S. companies account for 44% of   R&D spending by life sciences companies around the world in 2010, according to etimates by Battelle/R&DMagazine.  And U.S. government support for health research is unsurpassed, accounting for 70% of  global public sector funding.

On the other hand, the U.S. support for  energy research is mediocre, at best. U.S. companies account for only 25% of global energy R&D spending by businesses.  And in 2008, before Obama took over, the U.S. government funding for energy R&D accounted for only 20% of the global public sector spending on energy R&D.  That’s pitiful.

Here’s what a recent R&DMagazine piece says about U.S. energy R&D:

the level of R&D spending in the U.S. energy sector is small in absolute terms and as a percent of revenue (0.3%) when compared with other sectors. For example, the total amount of private sector investment in all forms of energy research in our portfolio would likely amount to little more than half of the leading life science R&D investor, Merck, or the leading software/IT R&D investor, Microsoft, both of which invested more than $8.4 billion in R&D in 2009.

Mr. President, every time you talk about clean energy creating jobs, you are placing your bet on the wrong horse.  Communications and biosciences are the best bets we have in the near-term.

Now we come to regulation. I’m afraid once again the President started out right, and ended upside-down. He began by explaining how he would get rid of rules that imposed an unnecessary burden (29 words). But then he spends triple the time ( 102 words) defending his administration’s regulatory efforts.  He should have stopped while he was ahead.

Finally, we come to jobs, which were spread through the whole speech. This is my ‘soft’ count of how many times the word ‘jobs’ were mentioned in connection  with various areas of the economy (your count may differ)

  • IT-1
  • Space-1
  • Clean energy –2
  • Education–3
  • Infrastructure –2
  • Exports–4

Exports got the most mentions as a source of jobs—-but no mention of imports, and no mention of the fact that our trade deficit in advanced technology products hit an all-time record in November, going into double digits for the first time.  The reason? Imports of advanced technology products have surged, while exports are basically flat.  Before worrying about exports, we should worry about recapturing some of the jobs lost to imports.

This piece is cross-posted at Mandel on Innovation and Growth

The Right Growth Formula

Posted on by The Progressive Policy Institute

The specter of economic decline is haunting America. President Obama seeks to banish it by making jobs and U.S. competitiveness the centerpiece of his State of the Union report to Congress tomorrow. This sets the stage for a critical contest between dueling theories about how America can get its economic mojo back.

Over the weekend, Republicans flooded the media with preemptive strikes against Obama’s expected calls for boosting public investment to spur growth. “With all due respect to our Democratic friends, any time they want to spend, they call it investment, so I think you will hear the president talk about investing a lot Tuesday night,” GOP Senate leader Mitch McConnell told “Fox News Sunday.” “This is not a time to be looking at pumping up government spending in very many areas.”

True to form, Republicans have a very simple theory for rekindling jobs and growth: Cut federal spending. That’s why they’ve tapped their leading fiscal hawk, House Budget Committee Chairman Paul Ryan, to respond to Obama’s speech. And Rep. Michele Bachmann will offer an unofficial, “Tea Party” riposte to the President online.

Now, I’m all for fiscal discipline. I’ve chided progressives for posing a false choice between deficit reduction and economic growth. Restoring fiscal stability is an essential ingredient of any credible plan for robust growth.

But cutting spending by itself won’t help us rebuild our infrastructure (which is the foundation for productivity), strengthen our comparative advantage in science and technological innovation, or produce a highly skilled workforce. As virtually all serious economists recognize, these are tasks for government.

Yet today’s Republicans are so besotted by anti-government populism that you can’t even count on them to be good capitalists anymore. Perhaps conservative think tanks should organize seminars to reacquaint House Republicans with Adam Smith, whose defense of laissez faire economics did not blind him to government’s responsibility to supply public goods like roads, ports and education. As he wrote in the Wealth of Nations:

The third and last duty of the [government] is that of erecting or maintaining those public institutions and those public works, which, although they may be in the highest degree advantageous to a great society, are, however, of such a nature, that the profit could not repay the expense to any individual or small number of individuals, and which it therefore cannot be expected that any individual or small number of individuals should erect or maintain.

As PPI maintains in Getting America Moving Again, a new Memo to President Obama, it will take both more public investment and more dynamic markets to reinvigorate our economy. We need to boost spending on research and commercialization of new inventions. We also need to boost spending on modernizing the nation’s transport and energy infrastructure – for example, by building high speed rails and smart grids that can accommodate clean energy generation. This can and must be done within a new framework for restoring fiscal stability that cuts tax expenditures, caps spending on defense and domestic programs, and most importantly, slows the unsustainable growth of the big entitlement programs.

At the same time, we also need to revamp archaic tax and regulatory policies that dampen incentives for economic innovation and entrepreneurial risk-taking. To that end we have proposed a base-closing style commission charged with culling the accumulation over time of burdensome rules and regulation.

In truth, neither party’s economic orthodoxies are equal to the challenge facing our country. That’s why President Obama needs to challenge both sides tomorrow to unite behind a bold plan for a national economic resurgence.

The History of Retrospective Regulatory Review

Posted on by The Progressive Policy Institute

As part of President Obama’s executive order on “Improving Regulation and Regulatory Review,” he called for agencies to conduct ”Retrospective Analyses of Existing Rules,” and to “modify, streamline, expand, or repeal” the ones that are ”outmoded, ineffective, insufficient, or excessively burdensome.”

Definitely moving in the right direction….but the key is how to implement this requirement in a way that works. Unfortunately, the track record of agencies performing such mandatory retrospective analyses on their own rules is not dissimilar to the results of doctors conducting surgery on themselves.

I quote from a 2007 GAO report entitled ”Reexamining Regulations: Opportunities Exist to Improve Effectiveness and Transparency of Retrospective Reviews.”

Every president since President Carter has directed agencies to evaluate or reconsider existing regulations. For example, President Carter’s Executive Order 12044 required agencies to periodically review existing rules; one charge of President Reagan’s task force on regulatory relief was to recommend changes to existing regulations; President George H.W. Bush instructed agencies to identify existing regulations to eliminate unnecessary regulatory burden; and President Clinton, under section 5 of Executive Order 12866, required agencies to develop a program to “periodically review” existing significant regulations.17 In 2001, 2002, and 2004, the administration of President George W. Bush asked the public to suggest reforms of existing regulations.

For the mandatory reviews completed within our time frame, the most common result was a decision by the agency that no changes were needed to the regulation. There was a general consensus among officials across the agencies that the reviews were sometimes useful, even if no subsequent actions resulted, because they helped to confirm that existing regulations were working as intended.

Our limited review of agency summaries and reports on completed retrospective reviews revealed that agencies’ reviews more often attempted to assess the effectiveness of their implementation of the regulation rather than the effectiveness of the regulation in achieving its goal.

Agencies reported that the most critical barrier to their ability to conduct reviews was the difficulty in devoting the time and staff resources required for reviews while also carrying out other mission activities.

Most agencies’ officials reported that they lack the information and data needed to conduct reviews. Officials reported that a major data barrier to conducting effective reviews is the lack of baseline data for assessing regulations that they promulgated many years ago. Because of this lack of data, agencies are unable to accurately measure the progress or true effect of those regulations.

Agencies and nonfederal parties also considered PRA [Paperwork Reduction Act–MM] requirements to be a potential limiting factor in agencies’ ability to collect sufficient data to assess their regulations. For example, EPA officials reported that obtaining data was one of the biggest challenges the Office of Water faced in conducting its reviews of the effluent guideline and pretreatment standard under the Clean Water Act, and that as a result the Office of Water was hindered or unable to perform some analyses. According to the officials, while EPA has the authority to collect such data, the PRA requirements and associated information collection review approval process take more time to complete than the Office of Water’s mandated schedule for annual reviews of the effluent guideline and pretreatment standard allows.

This last one is especially fun, and shows up over and over again in the literature on retrospective regulatory review. Basically, the OMB has to review and approve data collection by the government, which means that collecting data to prove that a regulation doesn’t work requires more paperwork.

This piece is cross-posted at Mandel on Innovation and Growth

Photo Credit: hashmil

China’s Reverse Robin Hood: Stealing Intellectual Property from the Poor

Posted on by The Progressive Policy Institute

Many of the facts relating to the globalization of intellectual property (IP) theft over the last decade are not debatable. For example, IP theft has decreased the market share of U.S. firms and destroyed or prevented the creation of millions of U.S. jobs. While currently 18 million Americas are employed in IP-intensive industries, the U.S. economy loses over $20 billion annually to IP theft and in 2007 IP theft reduced global trade by 5 to 7 percent.

However once one gets beyond a simple fact-based analysis the debate over IP theft becomes more contentious. Specifically when it comes to policy prescriptions such as the true societal cost of IP theft, enforcement strategies and stakeholders rights, there is significant disagreement. One of the most contentious elements of IP theft is how to deal with developing countries. As technology spreads to emerging markets, specifically in Eastern Europe and Asia, faster than legal frameworks to prosecute IP violations, theft has steadily risen. For example, although emerging markets only account for 20 percent of the software market, they make up 45 percent of software piracy. China is a particular conspicuous violator. According to the EU, China remains the number one country in terms of number of seized pirated goods, both in number and volume, at EU borders. And over 90 percent of video games consumed in China are pirated.

Still many IP opponents like to argue that IP is a plot hatched by the North to keep the South poor. Countries like China argue that they are poor and technology transfer (much of it forced or stolen) is an integral part of their development strategy. If IP laws keep developing countries from getting drugs or other IP-based technologies critical to overcoming barriers to growth then an argument could be made that IP laws should change. Indeed, IP laws are not divinely manifested, but created within a legal geography because society values the creation of knowledge and believes such knowledge ought to be protected in the marketplace. The question becomes, is this the type of IP violation that is coming from China—a form of redistribution from rich OECD countries to China, a developing nation?

No it is not. China and other IP violating nations are willing to take IP wherever they can find it, not just pulling a Robin Hood of stealing from the rich to give to the poor. They will steal from the even poorer to give to the poor. This point was has hit home to me when I recently met an entrepreneur named Emanuael Narh while in Ghana. Narh is the CEO of Step Technologies, a small start-up based out Accra that allows customers to monitor their home security system through mobile devices. Step Technologies came into existence through the Ghana Multimedia Incubator Centre (GMIC), Ghana’s sole IT incubator program. Narh designed his prototype while still an undergraduate at the University of Ghana and developed it further in his year of compulsory national service where the concept was noticed by representatives of GMIC. Over the last several years GMIC has provided work space and helped Narh develop his idea to a commercial level, file patent work, find seed funding, and partner with distributors, and two years ago Step Technologies was finally ready to begin manufacturing. After going through an extensive bidding process a Chinese manufacturing firm won the contract and Step Technologies transferred their technical details and information for production. However, over the next several months GMIC noticed something peculiar; within the Chinese manufacturer’s supply network in China devices identical to that of Step Technologies’ began to appear in the market without the permission of Step and without paying a licensing fee.

When I asked Narh about what he thought happened he was cautious to not make any accusation without evidence. He simply said, “We eventually changed manufacturers out of fears our concept was not safe.” Others I have met with involved in developing Ghana’s IT sector who are aware of Step Technology’s situation were less cautious, telling me flat out, “of course the manufacturer stole the idea.”

Step Technologies’ story is not unique. China has developed an explicit strategy that holds that it is acceptable to take IP from anywhere in the world, not just from the rich North. If the victims of Chinese IP theft are from rich countries it is coincidental and if they are from poor countries, then it is collateral damage. To emphasize the point consider the fact China’s GDP is 192 times greater than Ghana’s and China’s GDP per capita is over seven times greater. Rampant IP theft from China (as well as other developing countries like Russia) is not some kind of Robin Hood strategy to bootstrap the poor on the backs of those who can afford it, it is a systemic national strategy to use or take whatever from whomever possible.

Leaders throughout Africa are well aware that in order to grow their economies they must move from commodities to knowledge-based enterprises. Step Technologies is a model for doing so; an Africa entrepreneur, aided by a government-funded incubator program, is eventually competitive in the marketplace. (By the way, Step Technologies has found another manufacturer and is now in major markets throughout Africa with plans to go global in the next several years). This is the type of economic development that benefits Africa and the global economy. Yet the process of creating knowledge-intensive industries is long and difficult and without any potential recourse for IP theft from market-dominating countries the route can be next to impossible. As one Ghanaian fund manager responded to my question about IP theft from China, “It’s a struggle but what can we do?”

Africa has enough challenges to development, IP theft from WTO nations should not be yet another hurdle.

This piece is cross-posted at Innovation Policy Blog 

Photo Credit: Nick Humphries

 

 

 

 

 

 

Chinese-U.S. Exchange Rates and Knowledge Capital Flows: Why We Feel Poorer

Posted on by The Progressive Policy Institute

The short summary:   The Chinese policy of buying dollars can be best understood as an indirect purchase of U.S. knowledge capital–technology and business know-how.  That, in a nutshell, is why we feel poorer today. Unless the Obama Administration understands the link between the undervalued yuan and the global  flows of knowledge capital,  negotiations with China are doomed to fail.

Viewed in the usual economic light, Chinese exchange rate policy in recent years looks like a gift to the U.S..   By buying up dollars to keep the yuan low, China–still a poor country– is effectively lending money to the U.S.–still a rich country–to buy Chinese products.  According to the official statistics, the U.S. has run a cumulative $1.4 trillion trade deficit with China since 2005. But over the same period, Chinese ownership of  dollar-denominated financial assets in the U.S. has risen by $1.3 trillion.

To put it another way, the conventional statistics seem to be saying that  the U.S. is getting $350+ billion a year in cheap clothing, electronics products, and toys at no real cost today.  What’s not to like?

But if this explanation was really correct–if  that purchase of dollars  was a gift from China–the U.S. would  be feeling happy and prosperous right now.  We have received all of these cheap goods and services, without having to give up very many of our own resources.

But of course, the U.S. doesn’t feel rich and happy right now–we feel poorer, while the Chinese are feeling more prosperous. How can we explain this?

The  reason why the Chinese purchase of dollars seems like a gift is  because we have a 20th century statistical system trying to track a 21st century  global economy. We can do a decent job tracking the flows of goods and services and a passable job tracking financial flows.  But there is no statistical agency tracking global knowledge capital flows–and that’s where the real story is. Take a look at this diagram.

The first three boxes represent the conventional view: The U.S. gets cheap goods and services, and then pays for them by selling financial  assets.

But that leaves out the  the transfer of knowledge capital  from the U.S. to China. In effect, the Chinese purchase of dollars is a mammoth subsidy for the transfer of technology and business-know into China.

Consider this. When China keeps the yuan low, that’s an inducement for U.S.-based companies to set up factories and research facilities in China, both for sale in China and for imports back to the U.S. .  And that, in turn, requires a transfer of  technology and business know-how from the U.S. to China.

My favorite example is furniture makers.  Over the years, U.S. furniture makers had accumulated this vast storehouse of knowledge–for example, how to make  coatings on dining room tables that are less likely to chip or discolor from heat or liquids. That’s one of the differences between a low-quality and a high-quality table.

As the manufacturing of furniture was offshored to China, the knowledge capital had to be transferred as well.   And that, in turn, helped turn the Chinese furniture industry into a global exporting powerhouse.

Now, let’s stop and make  three points here. First, we need to compliment China. It is not easy to absorb knowledge capital from the outside and make good use of it.  Frankly, all sorts of other countries could have tried the same exchange rate trick, and it wouldn’t have worked for them.

Second, the transfer of knowledge capital to China doesn’t mean that the same knowledge capital  disappears in the U.S. However, our knowledge capital  does become less valuable because there is more global competition–and that’s why we feel poorer. (see my earlier post on the writedown of knowledge capital)

Third, what’s needed from Washington is a sophisticated  response that both focuses on rebuilding our own knowledge capital, while at the same time slowing down the exchange-rate knowledge capital pump. More to come on this.

crossposted at Mandel on Innovation and Growth

White Voters vs. Obamacare

Posted on by The Progressive Policy Institute

House Republicans want to repeal health care reform in the worst way, even if it means doing what they slammed President Obama for doing last year: taking their eye off Americans’ economic travails.

They’ve convinced themselves that health reform is a drag on recovery, even though its main provisions won’t kick in for several years. They also claim a popular mandate to undo reform, even though polls show the public evenly divided on the issue.

There is one significant voter block, however, that strongly backs repeal: white voters, and especially white blue collar voters. Health care, unfortunately, is an issue that illuminates a deep racial/ethnic fissure in American politics.

As Ron Brownstein reports in a fascinating National Journal analysis of new exit poll data, 56 percent of white voters back repeal, while an overwhelming majority of minority voters favor either expanding or maintaining Obama’s reforms.

It’s already been widely reported that white voters backed Republican candidates in last year’s midterm 60-37 percent. That’s the lowest percentage Democrats have garnered from white voters since modern polling began. Brownstein’s analysis sheds new light on those voters’ attitudes toward Obama’s policies and government’s role in general. For Democrats and progressives, it’s not a pretty picture:

  • Three fourths of minority voters, but only 35 percent of whites, approve of Obama’s performance.
  • Whites are strongly skeptical of expansive government: 63 percent say government is doing too many things best left to people and businesses. An almost identical percentage of minorities say government should do more to solve problems.
  • Whites give priority to reducing government deficits; minorities to more public spending to create jobs.
  • Nearly half of whites who voted in the midterm identified themselves as conservatives.
  • Blue collar (non-college graduates) whites form the hard core of skepticism toward Obama and his party. They backed GOP candidates by 2-1.
  • Democrats were only competitive among whites in 2010 in two demographics—college-educated women and under 30-voters.

It’s always a mistake to over interpret the results of a single election, but it’s been a very long time—the post-Watergate election in 1974—since Democrats won an outright majority of the white vote. The defection of blue collar Democrats, the mainstay of the grand old New Deal coalition, also is old news.

Margins matter, of course, and Obama will have to narrow the racial-ethnic chasm to win reelection in 2012, even as he re-energizes his base of minority and young voters, and college women. But electoral calculations aside, the appearance of what Brownstein calls a new “color line” in U.S. politics isn’t good for the nation’s political soul. Progressives need to engage white voters more directly on questions about the size and role of government. We should be serious about making government more accountable, about enabling citizens and communities to do more for themselves, and about reining in runaway federal deficits and debts. But we should also stand firmly for public activism to rebuild America’s productive capacities, particularly our run-down infrastructure, curb out-of-control medical costs and make the promise of equal opportunity real for all citizens.

Obamacare, in fact, is a good place to start that conversation. Progressives ought to be open to refinements and improvements (especially strengthening its cost containment provisions), while remaining resolute in defending the core achievement of extending, at long last, basic health protection to all Americans. After all, blue collar white voters are not natural allies of health insurance companies. They have as much interest as anyone else in having access to affordable care, not losing coverage if they get injured or sick or change jobs, keeping their kids covered through age 26, and in encouraging medical providers to charge based on the quality, rather than quantity of care they deliver.

Progressives should also take the opportunity to remind white voters that Obamacare is no alien import from Canada or Europe, but a national version of Romneycare – the comprehensive coverage approach pioneered in Massachusetts with the full support of that notorious socialist, then-Gov. Mitt Romney.

It’s time, in short, to bring the health care debate down from the level of ideological abstraction – the only level on which conservatives can win – to the concrete realities facing U.S. families struggling with soaring health costs and spotty coverage.

A Bizarre Labor Market (with data)

Posted on by The Progressive Policy Institute

Two old coinsAs we start the New Year, we face what is perhaps the most unpredictable and bizarre labor market I can remember. This morning the Conference Board released the December Help-Wanted Online report, which apparently shows a sharp increase in labor demand over the past year in most occupations. However,  the BLS  employment by occupation data shows no corresponding gain, even in occupations with soaring want ads.  Nor does the unemployment by occupation data show any corresponding movements. I have my own thoughts about what the data means, which I’ll share below. But first let me present the full array of data, by occupation,  so you can make your own judgments. The first column of data in the table below is the Supply/Demand Rate, as calculated by the Conference Board. That indicates the ratio of unemployed workers to ads, so a small number is better.  The second column is the change in online ads over the past year, as measured by the Conference Board, so a big number shows that demand has ramped up. The third and fourth columns are the changes in occupational employment and unemployment over the past year, respectively, as measured by the BLS. The ordering of occupations by supply/demand rate feels more or less right. But when it comes to the link between changes in demand, employment, and unemployment, there’s little  consistency. We’ve got occupations with soaring demand and no gains in employment (management, transportation).  We’ve got occupations with good supply/demand ratios and no gains in demand (health practioners).  And so forth and so on. *************************************************

A Bizarre Labor Market
Supply/Demand yr/yr percentage change**
Rate* Want Ads Employment Unemployment
Healthcare practitioner and technical 0.3 2% -1% 8%
Computer and mathematical 0.4 27% -3% 21%
Life, physical, and social science 0.8 40% 4% -3%
Architecture and engineering 1.0 47% 1% -18%
Management 1.4 56% -3% -5%
Legal 1.5 -6% 1% -32%
Business and financial operations 2.1 6% 2% 10%
Community and social services 2.3 19% -8% 6%
Arts, design, entertainment, sports, and media 2.6 9% -1% 12%
Healthcare support 2.6 2% 0% 7%
Sales and related 3.5 -2% 2% -1%
Office and administrative support 3.9 21% 0% 3%
Installation, maintenance, and repair 4.0 36% 3% 3%
Education, training, and library 4.3 22% -1% -7%
Personal care and service 5.5 8% 5% 14%
Transportation and material moving 7.4 61% 2% -2%
Protective service 8.0 34% 1% 36%
Food preparation and serving 9.2 26% 2% 6%
Production 10.8 59% 10% -6%
Building and grounds cleaning and maintenance 14.1 39% -2% 0%
Farming, fishing and forestry 28.4 38% 2% 52%
Construction and extraction 29.7 31% -8% -15%
*Supply/demand rate, calculated by the Conference Board, is the number of unemployed workers
divided by number of want ads based on latest data.
**December 2009-December 2010 for online wants ads, November 2009-November 2010 for other data
Data: The Conference Board, Bureau of Labor Statistics
Calculations: South Mountain Economics LLC

************************************************* My interpretation: The labor market is getting ready for a massive rise in employment over the next year,  as companies finally start hiring for positions they’ve been advertising for. We’ll find out soon. This piece is cross-posted at Mandel on Innovation and Growth

Where Regulation Did and Did Not Intensify, 2000-2010

Posted on by The Progressive Policy Institute

As Republicans go on the attack about excessive regulation under the Obama Administration, it’s worth noting two things. First, the regulatory state started growing under President George Bush, as I showed in my posts The Age of Regulation Started Ten Years Ago and Homeland Security and the Regulatory Burden.  Homeland Security accounts for roughly 90% of the increase in federal regulatory employment over the past ten years.

The second point is that the growth of regulation over the past ten years has been quite uneven, even outside of Homeland Security. Take a look at the chart below.

You can see that workplace and the environment has lagged in terms of regulatory employment. Just something to keep in mind.  Some of the big gainers were the FDA, the SEC, and the NRC.

This piece is cross-posted at Mandel on Innovation and Growth

Too Soon to Tell About FCC Rules

Posted on by The Progressive Policy Institute

I had hoped to write a simple post giving thumbs up or down to yesterday’s FCC ‘net neutrality’ rule-making. Alas, I can’t, yet.

Let me explain. I judge their actions by applying the principle of countercyclical regulatory policy: In recessions, the government should refrain from imposing heavy-handed regulations on innovative, growing sectors. The goal is to keep the communications innovation ecosystem growing and healthy.

From that perspective, the three basic rules that the FCC approved are fine: Transparency, no blocking of legitimate websites, and no “unreasonable discrimination” by wired broadband.

The key here is the transparency provision, which gets little attention. If we look back at the wreckage of the financial boom and bust of the 2000s, the big problem was not financial innovation. Rather, the big mistake made by the financial regulators was not pushing for more information about the decisions being made by Wall Street. That would have enabled regulators to put up a stop sign before things got out of hand.

Learning from that bad example, an intelligently-enforced transparency provision for broadband providers—requiring them to release “accurate information regarding the network management practices, performance, and commercial terms of its broadband Internet access services”—would go an awfully long way to deterring abusive practices without interfering with innovation.

If the FCC had just stopped with its three rules, we could be heading for the best of all possible worlds …where the communications innovation ecosystem keeps growing, the providers earn enough profits to allow them to keep investing, but where transparency helps encourage them to be good stewards and not to be too greedy.

But not content to leave well enough alone, the FCC appears to have added a lot of extra verbiage to the order that muddies the waters,  to the point where I can’t even figure out what they are trying to achieve. I say ‘appears’ because all we have so far is excerpts from the text, rather than the full text itself.

If regulators can’t make rules that are clear and straightforward, it’s a sign they shouldn’t be doing it. I wait eagerly for the actual text of the order.

This piece is cross-posted at Mandel on Innovation and Growth

Where the U.S. is Building Knowledge Capital

Posted on by The Progressive Policy Institute

I’ve been posting about knowledge capital writedowns, so now it’s time for a post on where the U.S. is building knowledge capital.

Let’s start with research and development: R&D is not the only type of knowledge capital investment, but it’s one of the more important parts.  In my upcoming paper “Biosciences and Long-Term Economy Recovery”, I wanted to compare biosciences R&D  in the U.S. with infotech R&D.  (Biosciences, by my definition, includes pharmaceuticals, medical equipment makers, and biotech).

Now, these numbers are not published by the government,  but I was able to take a decent shot  using NSF data. Take a look at the chart below:

By my calculations, the U.S. R&D effort, outside of defense, is divided into thirds–one third biosciences, one third infotech, one third everything else.

I estimate that  biosciences accounts for  approximately $100 billion a year in domestic R&D spending. This includes domestic business spending, nondefense federal spending and nondefense academic spending.

U.S. domestic infotech R&D totals roughly $95 billion, outside of defense. However, my calculations don’t pick up the portion of the government defense R&D that goes into IT-related projects, which would gross it up to $100 billion. For all intents and purposes,  domestic IT R&D is roughly equal to biosciences R&D.

In these two areas–biosciences and IT–it’s likely that the rate of U.S. knowledge capital creation exceeds the rate of knowledge capital writedown. Other areas of R&D? Much dicier.

Note: These are preliminary estimates. I will likely update them in the full version of the paper.

This piece is cross-posted at Mandel on Innovation and Growth

Will 2011 Be a Banner Year for IT Hiring?

Posted on by The Progressive Policy Institute

The water is building up behind the dam.  More and more, it’s looking like 2011 could be a banner year for IT hiring…isn’t that amazing?

The key piece of evidence:  Online help-wanted ads for computer and mathematical occupations are up 56% over a year ago, and well over their pre-bust peak.  That’s according to data from The Conference Board. *

 

This category of help-wanted ads includes companies looking for the full range of IT occupations: computer software engineers, computer support specialists, network administrators, web developers, computer programmers and the like.**

On one level, this rise in labor demand is not surprising, since  the communications boom–including mobile, video, social networking, online shopping, and  all sorts of other applications–is driving a commensurate boom in IT spending.   With business spending on computers, software, and communications equipment is now almost 10% above pre-bust levels,  it’s no wonder that companies have an absolute crying need for more skilled IT workers.

So far, however, businesses have been holding off from actual hiring. Data from the BLS suggests that the number of people actually employed in IT occupations has not risen as fast as the want ads.  Employment in computer and mathematical occupations now stands at 3.4 million, well below its recent peak.

My intepretation, though, is that the hiring pressure is gotten strong enough to break the dam, especially with Obama having just signed the new tax bill. Companies have just been waiting to make sure that  the global economy doesn’t fall back into a deep funk again, and a hefty dose of fiscal stimulus is just the thing.

I’m predicting a big jump in IT hiring as soon as the new year starts…and it’s about time.

*The labor demand data is from The Conference Board Help Wanted OnLine (HWOL) data series, https://www.conference-board.org/data/helpwantedonline.cfm

This piece is cross-posted at Mandel on Innovation and Growth

Really? Ireland/Iceland/Greece Outperform Germany?

Posted on by The Progressive Policy Institute

Is it true that the three basket-case countries of Europe–Greece, Ireland, and Iceland–have outperformed Germany on real GDP and productivity growth? Or do the implausible official numbers demonstrate the bankruptcy of the global economic statistical system?

I was nosing through the just-released OECD Economic Outlook (top secret project, don’t ask), and I noticed something very interesting.  The Outlook includes forecasts through 2012 for all sorts of macroeconomic variables,  so we can now look at a 15-year time period (1997-2012) which includes the ten years of  tech+housing boom (1997-2007) and the five years of the financial bust. Here are two charts comparing the strongest economy in Europe, Germany, with the three basket cases, Greece, Ireland, and Iceland. We’re looking at real GDP growth and total economy labor productivity growth:

and

These charts show that the three basket-case countries of Europe–Greece, Ireland, and Iceland–substantially outperform Germany during the boom years, which is to be expected (blue bars).  For example, Greece had productivity growth averaging 2.4% per year from 1997 to 2007, compared to only 1% per year for Germany.

What is more surprising is that  Greece, Ireland, and Iceland continue to outperform Germany, even when we factor in  the 5 years of the bust, including forecasts through 2012 (the red bar).  For  example, average real GDP growth in Iceland is projected to be 2.7% annually over the 1997-2012 time period, almost double the 1.4% growth rate of Germany.

What can we make of these disparities? After all, we economists have been trained to believe that productivity growth is an essential measure of the health of an economy. Here are four possible explanations:

  1. OECD forecasters have drunk too many bottles of wine, leading to overoptimistic forecasts
  2. Five years post-bust is too short: The basket-case countries will be suffering for many years.
  3. Boom-and-bust beats slow-and-steady in the long-run.
  4. The usual way of measuring Gross Domestic Product overestimates  both debt-fueled growth (Iceland, Greece) and growth fueled by supply chains (Ireland).

As anyone who has been reading me for a while knows, I lean towards #4.  I think there’s a first-order problem with the way we measure GDP growth, because trade–including flows of knowledge capital–is being incorrectly counted, or not counted at all.   That’s a big gotcha, since bad macro data have and will distort decision-making by policymakers,corporate leaders, and investors.

This piece is cross-posted at Mandel on Innovation and Growth

Knowledge Capital Writedown: Wind Turbines

Posted on by The Progressive Policy Institute

On the front page of the NYT this morning, Keith Bradsher gives a perfect example of a knowledge capital writedown, in his story about wind turbine technology being transferred to China by a Spanish company, Gamesa:

Nearly all the components that Gamesa assembles into million-dollar turbines here, for example, are made by local suppliers — companies Gamesa trained to meet onerous local content requirements. And these same suppliers undermine Gamesa by selling parts to its Chinese competitors — wind turbine makers that barely existed in 2005, when Gamesa controlled more than a third of the Chinese market.

But in the five years since, the upstarts have grabbed more than 85 percent of the wind turbine market, aided by low-interest loans and cheap land from the government, as well as preferential contracts from the state-owned power companies that are the main buyers of the equipment. Gamesa’s market share now is only 3 percent.

With their government-bestowed blessings, Chinese companies have flourished and now control almost half of the $45 billion global market for wind turbines. The biggest of those players are now taking aim at foreign markets, particularly the United States, where General Electric has long been the leader.

The story of Gamesa in China follows an industrial arc traced in other businesses, like desktop computers and solar panels. Chinese companies acquire the latest Western technology by various means and then take advantage of government policies to become the world’s dominant, low-cost suppliers.

It is a pattern that many economists say could be repeated in other fields, like high-speed trains and nuclear reactors, unless China changes the way it plays the technology development game — or is forced to by its global trading partners.

Because of Gamesha’s transfer of knowledge capital to China, GE’s knowledge capital has become less valuable, which eventually will affect wages and employment.   Gamesha’s knowledge capital has been less valuable as well, which affects the Spanish standard of living.

The correct policy prescription is for the U.S. to dramatically up our investment in knowledge capital and physical capital.  Dramatically. That may require less support for consumption now so that our children can be better off in the future.

This article is cross-posted at Innovation and Growth

Photo credit: Bonnie Tsang