The $1 billion purchase by Facebook of Instagram, a start-up with a hot mobile photo app, was played up by the New York Times as a way for Facebook to stave off competition–”eat the new start-up before it eats you, or before a competitor grabs it.”

However, there’s another way to think about the Instagram purchase. Facebook just sent a strong signal to potential entrepreneurs and venture capitalists: If you have a good idea for an app, or can find someone with a good idea for an, you can get very rich very quickly by being acquired by a Facebook, or a Google, or a Microsoft. All of a sudden starting or financing a new company, with plenty of new employees, looks a lot more appealing.

Continue reading “Why the Instagram Purchase is Good News for App Economy Jobs” →

In a new study published by TechNet, PPI Chief Economic Strategist, Michael Mandel, explains America’s prospering “App Economy”:

“TechNet, the bipartisan policy and political network of technology CEOs that promotes the growth of the innovation economy, today released a new study showing that there are now roughly 466,000 jobs in the “App Economy” in the United States, up from zero in 2007.

“The study … also found that App Economy jobs are spread throughout the nation. The top metro area for App Economy jobs is New York City and its surrounding suburban counties, although together San Francisco and San Jose together substantially exceed New York. And while California tops the list of App Economy states with nearly one in four jobs, states such as Georgia, Florida, and Illinois get their share as well.

“According to our analysis, the App Economy has created roughly 466,000 jobs since the iPhone was introduced in 2007. How big can the App Economy get? That depends in many ways on the future of wireless and social networks. If wireless and social network platforms continue to grow, then we can expect the AppEconomy to grow along with them.”

Read the article and new study here

Republican presidential candidate Mitt Romney has taken a beating over the past few weeks regarding his long tenure at the private equity firm, Bain Capital. After distinguishing himself from President Obama as someone who truly knows how to create jobs, Romney likely did not expect to have his business credentials challenged—let alone by his Republican rivals. Among other things, Bain has been accused of “looting” companies and destroying jobs and lives along the way.

Some have sprung to Romney’s defense, often relying on the idea “creative destruction,” a term coined by economist Joseph Schumpeter several decades ago to describe the persistent process by which entrepreneurs challenge existing companies, often leading to the latter’s demise. Such creative destruction reached new levels in the 1980s, precisely the period now under scrutiny in the Bain recriminations.

Not surprisingly, this controversial issue isn’t new: liberals and conservatives have been quarreling over the economic lessons of the 1980s for twenty years. Wall Street Journal columnist Daniel Henninger argues that, in contrast to the narrative presented in movies like Wall Street, firms such as Bain “saved” the U.S. economy: “This was a historic and necessary cleansing of the Augean stables of the American economy. … It led directly to the 1990s boom years.”

The debate, however, glosses over the long-term economic trends in America that should be of very real concern. Many people have pointed out that the decade from 2000 to 2009 was the weakest in terms of job creation since World War Two. Even leaving aside the recessionary years of 2008 and 2009, the expansion from 2002 to 2007 was the weakest in postwar history—a hedge fund manager interviewed in Michael Lewis’ recent book, Boomerang, describes it as a “false boom.”

What connects the argument over the 1980s with today’s economic challenges? See this chart:

Gross Job Flows
Economists at the Census Bureau and elsewhere have laboriously compiled a detailed breakdown of labor market “flows” over the past three decades. While the United States maintains a relatively high level of job churn, with millions of people changing jobs each quarter (for better or worse), overall job creation has slowed markedly.

There are many reasons for this. One is the falling job contribution of new and young companies, a trend that began prior to the Great Recession. My Kauffman Foundation colleagues, E.J. Reedy and Robert Litan, have documented what they call a trend of companies “starting smaller, staying smaller.”

The fact that new companies start with fewer employees today than they did several years ago probably won’t surprise too many people—technological advances likely account for some of this. Likewise, sectoral shifts in the types of new companies have probably also played a role: construction firms tend to be smaller than manufacturing companies, and many more of the former were started over the past decade. More worrisome is the second part of the research by Reedy and Litan: namely, that young companies are growing more slowly than their predecessors in the 1980s and 1990s.

How can we account for this phenomenon?

For one, demographic trends may be at work: labor force participation has fallen over the past several years and so slower job creation could reflect lower availability of workers, as strange as that sounds at a time when we have millions of unemployed workers. Second, the productivity revolution that began in the mid-1990s has meant lower levels of job creation. Finally, lower job churn doesn’t necessarily reflect poorer labor market outcomes. Some researchers have argued that job tenure among women remains higher than men because of women’s later large-scale entry into the workforce and, since women now account for a much larger share of the workforce, this could suppress turnover.

Whatever the reason, it is clear that an accusatory debate over Mitt Romney and private equity does little to advance our understanding of deeper economic trends and what might be done about them. Given the complex interaction of these larger trends above, we need a far broader dialogue that matches the scale of our economic challenges.

Photo by: Lachicaphoto

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.

Crossposted from Innovation and Growth.

Last month, PPI released a provocative policy brief by Will Marshall, “Labor and the Producer Society,” which argued that the Great Recession and stalled economic recovery mean, “there can be no going back to the old economic model of debt-fueled consumption.” In this, Will is precisely correct. Even as median American income failed to rise over the past two decades, consumption surged because households piled up credit card debt or tapped their home equity. The massive debt deleveraging that typically follows financial crises still has some ways to go, which means that consumption cannot be counted upon to drive economic growth.

The United States, wrote Will, needs to “shift from a consumer society to a producer society.” We need a “new economic strategy that stimulates production rather than consumption; saving rather than borrowing; and exports rather than imports.” While such a shift needs to happen, we need a conception of “producer society” that is somewhat wider than old-line manufacturing, which tends to be the image that comes to mind when talking “production.”

Yet, in some ways, a new producer society is already taking shape all across the country, driven by very real grassroots movements in tinkering, do-it-yourself (DIY) projects, entrepreneurship, and even manufacturing. This is not the producer society of auto assembly or equipment manufacturing. In rural Missouri, a Polish immigrant with a doctorate in physics has founded Open Source Ecology, which creates what it calls the “Global Village Construction Set,” dramatically lowering the barriers to farming, construction, and manufacturing. The idea has clear implications for developing countries, but for a place like the United States, with massive legacy infrastructure and deep pools of engineering talent, the idea of repurposing existing technology for lower cost and better quality is very attractive.

Or take Maker Faire, which bills itself as the “world largest DIY festival.” It is a joyous collection of “makers”: proverbial garage inventors, hobbyists, and people who like to tinker. A Maker Faire held in Detroit several months ago drew 70,000 people! A recent issue of Make magazine, moreover, featured information on how to build your own go-kart. A slightly more formal version of the maker movement is TechShop, which originated in Silicon Valley and has now expanded to Detroit and Raleigh, NC, with additional locations planned. TechShop operates on the subscription model—you pay, say, $100 per month and gain access to cutting-edge equipment such as 3-D printers and laser-cutting machines. Several new companies have already emerged from TechShop. These are the faces of American manufacturing’s future.

But we must expand our notion of “producer” as well. All around the country, thousands of people participate in Startup Weekends throughout the year. This event is exactly what it sounds like: a 54-hour crash-course in pitching ideas, forming teams, building products, and pitching again. Many actual and sustainable companies have emerged from these. To date, most Startup Weekends focus, quite naturally, on software and Web-based businesses. But in the coming months there will be a Startup Weekend focused on 3-D printing and even health services. The idea echoes those of OSE and Maker Faire: rapid learning, lower costs, higher quality.

Startup Weekend participants, moreover, see themselves as builders and creators and, yes, producers. As Marc Andreessen recently emphasized, software is “eating the world,” transforming industries that we previously thought of as far removed from software. If you follow the myriad blogs and opinion pieces in the world of technology entrepreneurship—and if you can look past the persistent claims that we are in a new “tech bubble”—it becomes clear that this is a movement of producers.

Is this enough, however, to save the American economy from a Japanese-style lost decade? Skeptics will rightly assert that these movements of makers and startups are far from sufficient to create jobs for all the unemployed and underemployed. And, the challenges facing the United States in areas like education and health care are deep-seated. We have seen, moreover, that even before the onset of the financial crisis in 2008, new companies were “starting smaller and staying smaller,” a trend that only worsened during the recession.

A full treatment of public policies and private actions that might build on the foregoing movements and fully address the American economic challenges must wait for a future column. We should work, of course, to boost the competitiveness of the “old” producer society, but this will be achieved more through free trade agreements than government-directed investments. But, history teaches that the next economic frontier is born in the depths of recessions. The future being created right now at Maker Faire, in TechShop, and at Startup Weekends is the leading frontier of our next era of economic prosperity.

Photo credit: Laughing Squid