Tuesday, September 07, 2010

In a historical sense, innovation is critical to our economic success

First, a joke.  Do you know why you'll never meet a one-handed economist?  Because all economists say "one one hand (long explanation).  On the other hand...

I'm beginning to wonder if all of the answers to all of our problems lie exposed, like bleaching dinosaur bones, somewhere in our immediate past, or whether this time may be somewhat different.  Several noted economists (hence the starting joke) suggest that we need to look to the recent past for answers to our current problems.  Krugman, in the NYT, argues that our situation today is very much like 1938.  We have too little stimulus and a too conservative population.  He quotes the Gallup survey from 1938 where 63% of the population favored tax cuts to speed a recovery, while 15% favored increased government spending.  Things never change.

Another writer actually indicates that no, our situation is really more akin to 1930, not 1933 or 1938. No wonder economics is called the dismal science.

Let's look at this in an entirely different way.  The US economy in the 1930s was still very much based on agriculture and manufacturing - a production economy.  Our agricultural production had fallen (Grapes of Wrath, anyone?) due to the Dust Bowl and terrible tariffs on imports and exports.  Our manufacturing had fallen due to a contraction of the economy and tariffs.  What propelled us out of the Great Depression, finally, was a war.  Our factories and farms starting exporting to the UK, France and Russia as WW II started in 1939 and 1940, and accelerated when we were bombed by the Japanese and entered the war in earnest.

But comparing the situation now to the situation that existed in the 1930s seems like comparing the horse and buggy to the modern automobile.  Yes, they are both for transportation, but use different fuels, have different delivery capabilities, and require different maintenance.

Today, we face a crisis in the financial markets, not unlike the Great Depression, but what will pull us out is not manufacturing jobs or agricultural jobs.  Today agriculture represents less than 2% of our employment base, and manufacturing somewhere near 20% at full production.  That means that 78% of our workforce is employed in service industries, knowledge industries, academia or the government.  In the past, stimulating agriculture and manufacturing could dramatically increase employment, but today that will have only a secondary or tertiary effect on employment.

What we need to do is stimulate the rapid conversion of ideas into new knowledge, new intellectual property, new products and services.  While we could stimulate manufacturing in the past, and need to do that now, we need to accelerate our ability to create interesting and valuable new ideas and intellectual property much faster than most organizations and firms can do so today.  A burst of new products and services based on new ideas will resonate in the US, but can also be easily and readily exported.  And to grow our economy, we need to spur exports.  Again, that's not going to be done to great extent with manufacturing, but with ideas.

What would a stimulus in 2010 look like (looking forward for solutions rather than backward)?

First, either make the Patent Office more efficient and effective by increasing it or completely outsourcing it.  Today the Patent Office is overwhelmed with submissions and can't respond effectively.  Let's put far more resources into helping people protect and commercialize their ideas.

Second, improve technology transfer out of the Federal Government and universities.  Today, many universities and many national labs do a good job of creating new ideas and new technologies, but do a terrible job translating them into commercial products and services.  We need to revamp our technology transfer policies to make them more open, more friendly and more efficient.

Third, recognize that many ideas are now about services and business models.  We need better ways to develop, protect and promote ideas that are conceptual in nature.  This recommendation has to do with documenting the ideas, protecting the ideas and commercializing the ideas.

Fourth, innovation exists where people and ideas meet.  Just as our economy boomed when the national transportation and highway legislation was passed, we need more "infrastructure" for communication, interaction and networking.  A national infrastructure project based on encouraging high speed internet and wireless access could become this century's answer to the highway system in the 1950s.

We could go on - but I'll stop here.  Innovation is more important to pull us out of the recession we are in, and the conditions are far different than they were in previous recessions/depressions.  We need to focus on the innovation investments that can pull us out of the recession and put us on a course for renewal and sustained growth and leadership.  Looking backward for answers is not the right perspective.  We have new problems and we need new thinking to solve those new problems.  If it was good enough for Einstein it should be good enough for us.

PS.  Not long after I wrote this I noticed that John Judis at The New Republic has an article about the similarities and differences between this recession and historical ones.  On the second page of his article he suggests that the Obama administration tried to increase green jobs, and that if the Republicans are elected they'll favor extractive and not-so-green jobs.  As if the options were only "green jobs" versus polluting jobs.  If this is the extent of our options and our thinking, then we are already doomed.
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posted by Jeffrey Phillips at 8:37 AM


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