Growthology

"Global Entrepreneurship Week's A-List Ambassadors"

From Market Watch:

"From California's governor and Britain's prime minister to hip-hop legends, TV stars and renowned innovators, entrepreneurial celebrities are lending their fame and support as ambassadors of Global Entrepreneurship Week. . . .             Global Entrepreneurship Week ambassadors have signed on to promote, support and participate in events during the Week. Because each ambassador is different, so is his or her involvement -- Gov. Schwarzenegger, for example, is kicking off the Week with Carl Schramm, CEO and president of the Kauffman Foundation, in Los Angeles, and P. Miller (formerly Master P) is a keynote speaker at a hip hop and entrepreneurship event in Kansas City, Mo."

The results from a Kauffman-funded project with the Information Technology and Innovation Foundation (ITIF) are in. Which states are the best to handle the coming "New Economy" (after the current market downturn)?

Massachusetts, Washington, Maryland, Delaware, New Jersey, Connecticut, Virginia, California, New York and Colorado.

Just how did they come up with those states?

ITIF considers 29 factors in determining which states are the most - and least - "New Economy." These indicators included, among other things, start-up activity, education, venture capital investment, IPOs, patents and alternative-energy.

Those data points were then grouped into five meta categories that the ITIF says embodies the New Economy: knowledge jobs, globalization, transformation into a digital economy, technological innovation capacity and economic dynamism.

"The index is a composite of variables," said [Rob] Atkinson [President of ITIF]. "But economic dynamism, which measures factors such as the number of fast-growing gazelle companies and value of IPOs, is more important than, say, globalization or a digital economy at influencing the new economy leadership.

How does your state stack up?  Click here to find out!

R&D Recession?

The journal nature asks in an online column what the recession will mean for R&D spending, with special attention to energy research and the venture capital scene:

If history is any guide, the worldwide research enterprise could survive this downturn comparatively well. Total research and development (R&D) spending by both government and industry rose at a fairly steady rate through major recessions in the early 1980s and 1990s, as well as through the 'dot-com' bust in the early 2000s.

...

Japan, for example, has dipped in and out of recession since an asset bubble burst in the late 1980s. But Hayashi Towatari, the head of the science ministry's science and technology policy bureau, points out that Japan has maintained one of the highest rates of R&D investment as a proportion of gross domestic product (GDP) in the world — 3.62% in 2007. The science budget is currently flat, he says, and seems unlikely to grow anytime soon given the economic turmoil. But even so, he says, Japan is committed to the idea that science will build the economy

To be honest, the example of Japan may not be the best. Many critics of Japan would suggest it's economic growth would have been much higher with a greater focus on institutitonal reform and less on centralized investment strategies.

Creative Destruction for GM

I have been trying to think of the number of ways of interpreting federal dollars that will be used to rescure General Motors.  Here are a handful:

A. Bad capitalism (e.g. the worst kind of state-corporate collusion).
B. A bailout of the UAW's ridiculous contracts.
C. Another slap in the face of the small business community of Michigan.
D. A plan to keep America's automobile industry from ever REALLY recovering.

Despite the hype, a bailout for GM is not about protecting the economy. All the workers that will be supposeduly saved by keeping GM afloat should talk to the airline workers of the last three decades, where company after company has gone bankrupt. If we want to keep automative jobs in the U.S., then we have to let GM get reorganized, even if that means chopped up into pieces so that new entrpreneurial firms can rise from the ashes. And don't try telling us that now is the worst time to lose all these jobs. Please. That's an excuse to never act. A recession is when these things happen.

If Congress really cared about Michigan or the automotive industry in America, it would let GM face the music. The business model is flawed, and every year that a flawed automotive industry is propped up, it is another year lost. Do you think Toyota or Honda want to see GM saved?  Yes!  They would love nothing more than to keep that kind of competitor around indefinitely.

A revolution in the U.S. auto industry -- real change -- can happen, but it requires real change. No more zombies in Detroit. I think Michigan has suffered enough from the corporate-labor cabal, and it's long overdue to let the free market work a turnaround. David Brooks makes a number of similar points in this column today, as if Joseph Schumpeter himself were writing:

Granting immortality to Detroit’s Big Three does not enhance creative destruction. It retards it. It crosses a line, a bright line. It is not about saving a system; there will still be cars made and sold in America. It is about saving politically powerful corporations. A Detroit bailout would set a precedent for every single politically connected corporation in America.

As for President-elect Obama, this is a serious test of what kind of capitalist he really is. A "good" capitalist that supports little guys (taxpayers, future generations, small businesses) or a "bad" capitalist that supports special interests (big business, organized labor, anyone with a lobbyist). I have high hopes for the Obama presidency, but his team has to understand that it literally won't get any easier to do the right thing than it is right now.  Every month that goes by, political concerns for the 2010 mid-terms and 2012 re-election will weigh more heavily (not just on him, his team, or his allies in Congress, but on the whole system). Now is the time for the nation to take its medicine. So if Obama opts for the easy, short-term things now, there is no turning back.

The best thing Washington could do in this situation is this. Nothing.

Global Entrepreneurship Week Starts Early, Nearly Everywhere.

Here we are in The Kansas City Star, the Black Engineer, and at Arizona State University. We're also mentioned in Singapore! These will be just the first of many posts to arrive in the coming days. Bo Fishback summarizes the intent of Global Entrepreneurship Week best in the Kansas City Star.

“It’s an experiment to see if you can really flip the switch in millions of people over the course of a week,” said Bo Fishback, vice president of entrepreneurship at the Kauffman Foundation. People who succeed at starting successful businesses are infected with an “entrepreneurial bug,” Fishback said.

Everyone at Kauffman engaged with the launch, with lots of heavy global travel to promote it.  I am actually packing bags today for a 9-day trip. I'm probably only person who will speak at two launch events on Monday morning ... on two sides of the international date line.

I start in Seoul, South Korea on Monday morning, then catch a flight to Hawaii, then back to Los Angeles. I am eager to participate, but also praying a snowstorm doesn't hit home while I am gone. That has happened way too many times, and the spouse stopped thinking it was ironically humorous a few trips ago.  Yikes!

Reading for the trip:

• Discovery, a Memoir by Vernon L. Smith
• The Genesis of Industrial America by Maury Klein
• Closing the Innovation Gap by Judy Estrin
• Bowls, Polls, and Tattered Souls: Tackling the Chaos and Controversy that Reign Over College Football by Stewart Mandel
• Knowledge and Wealth of Nations by David Warsh (re-reading)

Bad, Bad News on Consumption

Did you know that personal consumption expenditures (PCE) never declined during the 2001 recession? It was a surprise to me when I assembled an extended "GDP Constructed" chart.  See below.

This time around, forward-looking consumers appear to anticipate a severe drop in their future wealth and possibly income. As my macro source says, "Bad, bad news." The sharp drop in Q3 2008 consumption as a component of growth sticks out (rather, down) quiteabnormally, and recent history suggests it is. Just another reason to anticipate a much tougher recession in 2009 than recent memory.

DiCecio and Gascon, researchers at the St. Louis Fed, say this:

All recessions since the early 1950s, except the one in 2001, included a contraction in personal consumption expenditures (PCE). Because roughly 70 percent of the country’s GDP can be attributed to PCE on goods and services, any contraction in consumption expenditures weighs heavily on economic growth.

Even though growthology.org readers know that consumption is a poor measure of long-term growth potential (for that, we have to look at production), it is undeniably a barometer of short-term growth. Thus the Fed scholars note that we can look at upcoming monthly data from BEA with more attention than normal:

Unlike the other components, PCE estimates are also released monthly as part of the BEA’s “Personal Income and Outlays” report.

My concern: Policymakers need to be very, very careful not to make this situation worse by killing off productivity growth. The recession will be ugly, but remember that economic growth occurs naturally if you don't suffocate your economy in bubble wrap. Every effort to cushion workers, bail out failing firms, and "stabilize" prices will gum up the wheels of progress. Permanently.

* * *

Menzie Chinn at Econbrowser has a very interesting analysis of cosumption trends. Durables consumption is much lower than services consumption as a percentage of GDP. Relative prices of durables have grown slower relatively, even as consumption of durables has grown faster, again relatively. This seems relevant to the "future of jobs" meme. In any case, Menzie's analysis is preliminary and worth watching. As the man says, do check out the charts!

I'm trying to fit some regressions now, to make some guesses about how consumption will move in the future, based on guesses about GDP and net wealth. I haven't got very far, but at the very least, I can share some interesting pictures.

Kauffman's President, Carl J. Schramm, in The New York Times

Might as well quote this one in its entirety before we reach Global Entrepreneurship Week. Dr. Litan also makes a cameo and you get to see the history of the Kauffman Foundation.

November 11, 2008
Helping America Keep Its Innovative Edge
By STEVE LOHR

BY now, a thick pile of recent books and expert reports warns that the United States is losing its innovative edge, and a poorer future for the nation beckons unless the trend is reversed. With the American economy in a wrenching downturn, the innovation imperative seems more pressing than ever. Is there a role for foundations in advancing an innovation agenda? And, if so, what?

Definitions of innovation vary widely, but in the current context a crucial distinction needs to be made between invention and innovation. Invention is coming up with the breakthrough idea, and foundations focused on science and technology typically support those ambitious quests, from H.I.V. vaccines (the Gates Foundation) to hyper-efficient cars (the X Prize Foundation). Innovation is the process that translates knowledge into economic growth and social well-being. Invention is science, innovation is economics.

In universities, interest in “innovation economics” is surging. And foundations, experts say, could help advance innovation research.

“Innovation itself is a field in need of innovation,” said John Kao, a former professor at the Harvard Business School and an innovation consultant to governments and corporations. “What we really need is more original thinking about how innovation works in society, and that could come from the philanthropic sector as well as universities.”

Others make grants in the innovation field, but the Kauffman Foundation has made the broadest commitment. Its support and focus in recent years are helping push “innovation” from being a vague admonition in policy speeches to the basis for a growing discipline of serious research. The Kauffman Foundation was established in 1966 by Ewing Marion Kauffman, a pharmaceutical entrepreneur and owner of the Kansas City Royals. A self-made man, Mr. Kauffman, who died in 1993, wanted his philanthropy to promote entrepreneurial activity and education.

The foundation, based in Kansas City, Mo., has assets of $2 billion and still broadly pursues the founder’s mission, but it has evolved considerably. In 2002, Carl J. Schramm, an economist and lawyer, became its president. At the time, Mr. Schramm recalled, the foundation focused on trying to persuade business schools to begin entrepreneurship programs. Today, by contrast, the foundation is one of the nation’s largest private supporters of economic research in universities.

The climate for innovation, Mr. Schramm said, is vital in determining whether entrepreneurs succeed or fail. “We try to foster a deeper understanding of the innovation process,” he said “and that is our leverage point to help stimulate economic growth, create new jobs and wealth.”

Soon after he arrived, Mr. Schramm recruited Robert E. Litan, the director of economic studies at the Brookings Institution, to head Kauffman’s research program. Mr. Litan, who joined in 2003, recalled that his assignment was to expand and improve the foundation’s research, and sponsor more work by mainstream economists. Recent grants went to Edmund S. Phelps, a professor at Columbia University and winner of the Nobel Prize in Economic Science in 2006, and William Baumol of New York University, a pioneer in applying economic theory to entrepreneurs.

The Kauffman Foundation often supports data-intensive research. For example, the Kauffman Firm Survey is a study of nearly 5,000 companies that were started in 2004. The survey will follow the fledgling firms over the years, seeking factors of success or failure. Each participant initially answered more than 100 questions. The research, Mr. Litan said, is the economic equivalent of the Framingham Heart Study, the landmark health survey begun in 1948 to examine the causes of heart disease. The Kauffman survey data, he noted, has already been used by more than 100 academic researchers. Kauffman, along with the National Science Foundation, is building a database that tracks government-sponsored research for science and engineering and links it with company start-ups, patents and other data. One goal of the research is to identify the characteristics of “star innovators,” scientists who are most effective in ushering research advances into the marketplace.

Kauffman’s research into technology transfer from universities suggested that formal programs tended to ignore many inventions and discoveries that could have commercial potential. So the foundation set up a Web site and database, the iBridge Network, where scientists and engineers from 40 universities have posted 3,000 inventions, from software to chemical compounds. “It’s an eBay for ideas,” Mr. Schramm said.

Kauffman has also begun a Law, Innovation and Growth program, which will make $10 million in grants over the next five years. The research, Mr. Litan explained, will look at how copyright, patent and other laws affect innovation. In 1960s and 1970s, scholars like Guido Calabresi and Richard Posner made it standard practice to begin looking at legal issues through the lens of formal economic analysis. The Kauffman program, Mr. Litan said, seeks to “generate and grow a whole new generation of scholars” who explore the interaction of the law and innovation. “It’s a big-think initiative,” he said. “That’s what foundations can do.”

Picturing Deconstructed GDP Growth, Q3

This is my belated Q3 GDP growth deconstructed charts. As a bonus, I put together a chart comparing this quarter to the average figures for GDP components dating back to 1947.

Analysis: Inventory rebound was what we hoped for, and the continuing good news on both sides of net exports is nice (and probably on its next to last legs), but the collapse in consumption is severe. Notice also the the drag of residential fixed investment was negative but improving until this quarter when it worsened again.

The 600

I noticed the Kauffman Foundation has a new ad campaign: an open letter to President-elect Barack Obama.  The hook is the image of 600 (thousand) American entrepreneurs in 2008 -- those who create the bulk of new jobs.

After the link, check the videos by my colleagues Bob Litan and Carl Schramm.

A lot of people will read this.  I hope the next President is one of them.

"The trick is to thread the needle"

In a Boston Globe article a few days ago - "Economy will be the driving force" - I was quoted as saying that President-elect Obama has to be careful about just how much he regulates the economy.

....economists caution Obama to not overreach and impose too much regulation on the financial sector. Ultimately, they said, growth depends on a flexible economy in which capital flows freely and investors take risks needed to fuel innovation.

"The trick is to thread the needle," said Robert Litan, vice president of research and policy at the Kauffman Foundation of Kansas City, which studies and promotes entrepreneurship. "You need to fix the system, and keep it safe, but not make it so rigid that it deters risk taking."

The bank bail out will work, but it will take time.  Here is another quote of mine in the The Wall Street Journal (sorry, but I think this one is firewalled at the source):

"Every bank that is getting a government injection will want the government off their backs," said Robert E. Litan, a senior fellow at the Brookings Institution and vice president of research and policy at the Kauffman Foundation. "This program has been structured deliberately to give maximum incentive to the banks to buy the government out at the earliest possible date. The ball is in the banks' court, not the government's court."

BitTorrent, Harbinger of a Tech Downturn?

In this latest financial downturn, many market analysts have said that technology companies look to be okay. BitTorrent begs to differ, searching as it is for both a business model and a new mission. What are the implications?

From The New York Times's blog,

Today BitTorrent informed about half its employees, or 18 people, that they were being let go, according to a person familiar with events inside the company. That is in addition to a 20 percent staff reduction in August. In addition, a co-founder, Ashwin Navin, said yesterday that he was leaving the company, although he informed the board of directors of his exit in March.

A person with knowledge of BitTorrent’s plans also said the company would soon close its BitTorrent Entertainment Network, once conceived — and covered in the press — as a rival to iTunes. The company, with its remaining 20 employees, will focus on BitTorrent DNA, a content delivery network that helps media and video game companies distribute their products cheaply over the Internet.

It seems problematic for the company to actually turn a profit. Although the company has struggled to find its market niche, BitTorrent is actually used heavily. The Pirate Bay, a popular and semi-legal downloading site, now includes nearly 25 million peers.

Ashwin Navin, BitTorrent's former CEO, will be starting a start up incubator with several other Silicon Valley types from YouTube on down. Even as most pundits focus on the capital side of capitalism, the growth side of capitalism with its churning labor markets and innovative entrepreneurs continues unhindered.

Last month, my good friend (and GMU professor) Garett Jones surveyed the bailout mania rampant in Washington, DC and muttered the funniest line of the season: "Creative destruction, it was fun while it lasted." I tend to agree in spirit, but don't think mere national governments can stop human ingenuity. Oh, but they'll try ...

The Countdown: Global Entrepreneurship Week starts in 7 Days

One week from today, the world is set to celebrate entrepreneurs during Global Entrepreneurship Week.  There are 698 activities in the USA, thousands more abroad. Russell Simmons is involved! All of us at Kauffman are travelling the globe in support (I'm heading to Asia). It's going to be huge, and I am honestly pretty fired up about it.

If you have not already planned on participating in one of the competitions, attending one of the speeches, or joining some local speednetworking, check out the activity hub at http://www.unleashingideas.org/.

Bob Litan Quoted in WSJ

Our colleague, Bob Litan, was quoted in Bret Swanson's WSJ op-ed, criticizing the coming Obama administration's economic plans,

As economist Bob Litan of the Kauffman Foundation says, "Government can't compel growth." But Mr. Obama's plans -- "card check" legislation to allow workers to unionize a workplace without a secret ballot election; curbing free trade; a government-led "green economy"; and higher tax rates on capital and entrepreneurs -- do not reflect his campaign's deep trust in individuals.

Picturing Rising Unemployment

Today's Employment Situation report from the BLS is bad news. The spike in the unemployment rate of recent months continues unabated. On the one hand, this looks a lot like previous recessions -- the first chart compares the current spike relative to month zero (assuming the recession is dated as beginning in April 2008) to the 3 most recent recessions. On the other hand, the 6-month change rate is higher than previous recessions (second chart). Do you really think the U.S. economy has bottomed out?

It's Global Trade That'll Help America's Interests

Virtually all economists of every stripe will tell you that trade between two individuals (or nations) is good for both, else it wouldn't occur. Still, foreigners are easy to scapegoat, so trade among nations is not nearly as warmly regarded among the voting public as it is among economists. Despite some early anti-trade rhetoric, Senator Obama was quick to backtrack very early in the general election campaign towards a position supportive of trade. And yet, it was not "free" trade, but a new kind of "conditional" trade that has become increasingly popular.

Just a day after the U.S. election, Asian leaders warned Mr. Obama about neo-protectionism. Read the full story by Dune Lawrence at Bloomberg.com:

To Asian ears, Obama's calls for tougher labor and environmental rules and steps to reduce the U.S. trade deficit sound like thinly veiled protectionism, just as a global financial crisis makes exports more crucial than ever.

Surin Pitsuwan, secretary general of the Association of Southeast Asian nations, said that Asia is "facing the challenges together rather than running away individually. All of us have concerns about protectionism."

All of us here in America ought to be concerned as well.  Professor Burton W. Fulsom, Jr. of Hillsdale College in Michigan points out that trade restrictions don't work in his new (and so far) masterful book, New Deal or Raw Deal: How FDR's Economic Legacy Has Damaged America. (Listen to an audio interview with the author.)

The Great Depression was worsened by the Smoot-Hawley Tariff, "the largest tariff hike in U.S. history." Foreigners retaliated against the tariffs and refused to buy American exports, forcing companies to close throughout the country. Car and track sales were 5.3 million in 1929, but only 1.8 million in 1933.

My Opinions on the Financial Crisis and Capitalism Itself

I've been around talking about the financial crisis so I haven't been able to blog as much I would like. Nevertheless, here's a rundown of what I've been up to these past few days.

On October 20, I chatted with Harold Bradley, chief investment officer at Kauffman Foundation, and John MacDonald, vice president and treasurer at the Hall Family Foundation. The event was co-hosted by the Council on Philanthropy and the Kauffman Foundation. Watch the discussion here.

On October 23, I attended an event at the U.S. Chamber of Commerce with Carl J. Schramm, the president of Kauffman, and Dr William Baumol of Yale University (we co-authored the book, Good Capitalism, Bad Capitalism). You can watch our discussion here.

Advice for President Obama

Business Week panel says the single best way to help entrepreneurs is ... wait, who is this guy?

Election? Today!? You Can't Be Serious.

In a few hours, I'll sit down with a bag of popcorn to watch one of my favorite American spectacles: presidential election returns. This is one of the few professional sports that we get to play and spectate. The best part is that admission is free (though I've learned the price afterwards can be steep).

New technology has changed the game of elections, and not just campaigning. Starting in 1996, but accelerating in recent years, is a behavior of mine that my spouse calls the "TV-PC shuffle," which involves jumping up from the couch during commercial breaks and running to the computer room to check CNN.com (now fivethirtyeight.com or bloglines.com). Amazingly the rolling ticker on the TV screen is not up-to-date enough.

No matter who wins, I think it is important to share some words of wisdom with them: You are in very big trouble. In case you haven't been keeping score, the national debt that was built up carefully over the last 216 years was basically doubled in October. Good luck with that.

The last few men in your position (yes, honey, all men) - that is, leaders of the one of the most irresponsibly budgeted governments on Earth - have been able to use of a new-fangled ATM made in Beijing. It offered very low loan rates using our very own currency. Apparently that machine is now malfunctioning and you may not be able to get any relief from it during your administration.

As an alternative, we at growthology.org have been heartened to hear both candidates discuss a potential lucrative new source of funds: wealthy U.S. taxpayers! Rampant greed has fattened a lot of wallets in Manhattan and Silicon Valley, and you can compel those folks to fork over their gains pretty easily. There may be one glitch in plan, noted by that cantankerous Robert Samuelson ... the gains have disappeared.

In 2001, the richest 1% owned 34% of stocks and mutual funds, estimates economist Edward N. Wolff of New York University. Let's see. Since the market's high in October 2007, stocks are down (through Oct. 31) 38%, or $7.5 trillion, reports Wilshire Associates.

That will mean lower capital gains taxes, because capital gains — profits on the sale of stocks and other assets — will plunge. In recent years, capital gains taxes have been running at $100 billion or more. That amount could drop sharply, even if the top rate on capital gains were raised from 15% to its pre-2003 level 20%.

...

In 2005, the richest 1% of Americans had 18% of total income and paid 28% of all federal taxes, says the Congressional Budget Office. Their income won't grow much. Even if higher tax rates increase government revenues, the effect will be less than before.

Judged only by economic inequality, the financial crisis is a godsend. It will probably narrow the gap — though still vast — between the rich and everybody else. But what good will that do? Economic inequality also declined in the Great Depression. The country wasn't better off.

All the more important to raise tax rates now before the money totally dries up and gets created in some other financial mecca! And all those loony kids who want to invent cool new tech companies and make millions? We think they should be happy just making the technology, and forego the millions.

Look, I'm an optimist. Tonight is going to be a historic and really fun night. It's a party. It's a time to be hopeful. And tomorrow is going to be the reality check, kind of like a hangover, but with a really big tab. Within the first half year of 2009, the next President will look us in the eye and tell us that the idea of the lucky rich paying all our bills was ... well ... a joke.

But the punchline is a serious talk about how this nation needs to tighten its belt, how the government will have to spend less. We have been waiting our whole lives for that.

Want some popcorn?