Early Indications October 2008: Information-age Stimulus

As economies around the world continue to wobble in the aftermath of the credit crises, the next American president will be faced with competing calls to "do something" both at home and in a global context. With equity, housing, and credit markets showing weakness in concert, the choices of where to intervene are complex indeed. The lack of ready historical precedents complicates the issue further.

Numerous press reports and blog postings raise the question of whether the current situation parallels the Great Depression. In the U.S., the numbers are thus far convincing in the negative: unemployment has (by official measures) risen to 6%, but this number, while concerning, falls far short of the 23% figure reached in 1932. Equity values are low, but even though the S&P 500 is down roughly 40% from its October 2007 high, that's still only half of the percentage decline registered from 1930-1932. In short, even though few are happy with the current picture, it's a far cry from Depression territory.

That news is hardly comforting to job-seekers, investors, or employees. Despite the magnitude of the Troubled Asset Relief Program package passed by Congress earlier this month, it is unlikely to jump-start a global economy that appears to be in a broad-based slowdown. When the American people, and citizens of the other OECD nations, look to the new president for action, what are the realistic options?

Franklin Roosevelt's reaction to the Great Depression is instructive, not for parallels to the current situation, but for the many differences in the two situations. According to the Library of Congress, the New Deal enacted in 1933 and modified thereafter worked across multiple fronts:

"Based on the assumption that the power of the federal government was needed to get the country out of the depression, the first days of Roosevelt's administration saw the passage of banking reform laws, emergency relief programs, work relief programs, and agricultural programs. Later, a second New Deal was to evolve; it included union protection programs, the Social Security Act, and programs to aid tenant farmers and migrant workers."

Threads of continuity are obvious: banking regulation and Social Security will be very much top of mind in 2009. Beyond those two areas, however, the tools that Roosevelt reached for will likely not be high priorities for President McCain or Obama: migrant agricultural workers, factory laborers, and farmers, whatever their current pain, will not play central roles in the eventual economic recovery.

What investments and other actions by the federal government, then, might help increase economic competitiveness, raise the standard of living for broad segments of the population, and restore confidence and therefore asset values? Given the increase in the size of the services sector (including government itself) since 1933, and given the impact of information technology since about 1950, the levers for today's economy are less obvious, but several areas do stand out. Each of the following determines the employment of large numbers of people, is ripe for investment and innovation, and plays a strategic role in the overall economy. What separates our age from Roosevelt's is how the "real" and financial (as well as physical and information) economies have so quickly grown intertwined.

-Food
Not surprisingly, food is important for numerous other economic sectors. The current U.S. agriculture system is premised on cheap and plentiful petroleum and water. Going forward, nether assumption can be taken as given, which raises the importance of biology -- new seed types -- going forward. These in turn call into question the place and reach of intellectual property protections for life forms.

The food and nutritional policy layer -- governing tariffs, labeling regulations, and food safety and nutrition -- merits a thorough revisiting. Current practices, for example, include prophylactic doses of antibiotics to livestock that are implicated in the rise of "superbugs" such as MRSA and other gram-negative antibiotic-resistant bacteria. Similarly, policies regarding sugar and especially high-fructose corn syrup should be examined in light of potential connections to obesity and diabetes.

At the level of economics, encouraging food as fuel (corn ethanol) is having unintended consequences for both farmers and eaters. Indeed, according to the Lancet (May 17-23 2008), the entire investment climate around food commodities is showing signs that speculation is connected to malnutrition. In short, the CBOT and its kin become a public-health issue: "There is compelling evidence that the recently expanded market in food-commodity derivatives has led to large increases in speculative investment, pushing global food prices far higher than predicted by demand-supply effects." (Pace et al, "Food commodity derivatives: a new cause of malnutrition?" pp. 1648-51)

In the process of improving the outcomes of financial markets, health care, international trade and assistance, and energy, a hard look at the food industry is essential.

-Immigration
Near the core of the United States' identity, history, and tradition of innovation lies the nation's role as a destination of immigrants. Andrew Carnegie used to be the archetype of the immigrant-entrepreneur, but we live today among some extraordinary immigrants.

*Steven F. Udvar-Házy (Hungary) co-founded International Lease Finance Corporation, which with a fleet of 824 is the largest owner of aircraft in the U.S.
*Sergey Brin (Soviet Union) co-founded Google.
*Arno Penzias (Germany) won a Nobel Prize for work done at Bell Labs.
*Jerry Yang (Taiwan) co-founded Yahoo.
*Elon Musk (South Africa) co-founded PayPal; last month, his SpaceX company launched the first privately funded liquid-fueled rocket into orbit.
*Vinod Khosla (India) co-founded Sun Microsystems and later helped nurture many other startups in tech, finance, and energy as a venture capitalist.
*Pierre Omidyar (born in France to Iranian parents) founded eBay and continues to innovate, now in philanthropy.

It is safe to say that few, if any, of the above ventures could have launched, much less succeeded, in these individuals' countries of origin. At the same time, illegal immigration from Mexico and Central America stresses education, medical care, and social services in countless localities. The U.S. will suffer if global brainpower and creativity are locked out, but completely open borders are no longer an option in most countries. Striking a better balance will require courage, negotiating skill, and vision.

-Health care
According to the National Coalition on Health Care, overall health care spending increased at twice the rate of inflation in 2007. Employer premiums have doubled since 2000, compared to cumulative inflation of 24%. Total spending -- $2.3 trillion -- represented 16% of GDP, or $7,600 per person, and is expected to double in the next nine years. Health care finance, malpractice law, and payment processing are ripe for innovation and waste reduction: nobody contends that the U.S.'s current ratio of paperwork to patient care is remotely fair, safe, or effective.

At the same time, many towns suffer from physician shortages as medical school loans, managed care reimbursement schedules, and quality of life issues combine to make practice in many areas unattractive. Pharmaceutical companies, meanwhile, act in economically rational fashion to invest in drugs with high payoff. Lifelong maintenance drugs (think cholesterol, obesity, or certain mental health categories) represent annuity streams, while antibiotics, vaccines, and other high-value categories from an outcomes perspective look insufficiently profitable in prospect to capture significant investment.

Any way you look at it, innovation in health care creates substantial leverage, and is essential given demographic trends. Public-private partnerships, such as philanthropies' and NGOs' efforts to create viable vaccine markets, can be much better coordinated. Information, beginning with public health and outcomes statistics, electronic medical records, and improved claims processing arrangements, will be necessary but far from sufficient.

-Energy
The proximity of solar panels to the semiconductor industry represents but the tip of the iceberg in terms of information intensity. Whether it be solar, wind, new drilling techniques for oil and natural gas, or storage technologies such as batteries and fuel cells, information technology will be front and center in the evolution of the industry. Markets for carbon offsets or other financial instruments, increased software content in battery and hybrid automobiles, and an improved power grid will all rely on significant contributions from IT. At the same time, cloud computing is particularly dependent on an adequate power grid -- see below re: infrastructure.

-Manufacturing
Amidst all the calls for "energy independence" on the oil/import side, an important factor in the current U.S. trade imbalance is manufactured exports. Figures are difficult to come by, for defense-related items are not readily broken out. Fully a third of U.S. total exports go to Canada or Mexico, but it is difficult to determine how much they offset $113 billion in oil and related imports from these two countries. In addition, many totals are deceptive: in automobiles, for example, chassis, components, and other sub-assemblies are "exported" to Canada then assembled in Ontario, at which time the U.S. "imports" the car or truck.

For many reasons, increasing U.S. manufacturing exports makes sense, as does improving the balance of trade where possible by reducing imports. For this to occur, investment in such high-value manufacturing areas as advanced materials (for things like windmill blades; lighter and therefore more fuel-efficient automobiles; and medical devices) should pay dividends. Medical electronics, energy-related systems, and heavy equipment have historically done well in world markets as well. As shipping costs rise, making automobiles for fast-growing nearby markets including Mexico and potentially Brazil presents a golden opportunity.

-Communications
The U.S. lags its peers in broadband deployment by many measures. In Japan, KDDI has announced 1-gigabit fiber to the premise service for about US$50 per month. Policy reform and potentially investment -- think of the equivalent of the Interstate Highway system -- could spur development of such economic engines as telemedicine, remote learning and training, and realistic "telecommuting."

-Education
No Child Left Behind has yet to improve American 15-year-olds' poor performance relative to math and science students in most peer countries: the OECD's Programme for International Student Assessment (PISA) was most recently scored for 2006. The U.S. finished 35th of 70 countries in math, just ahead of Croatia and far behind Finland (#1), Korea (2), and Canada (5). Much like communications, the equivalent of a Manhattan Project to reinvent primary and secondary education would rely heavily on, and improve the nation's performance in, information and technology industries.

For all the effort needed in math and science, the outlook in language and cultural understanding may be worse still. High schools persist in teaching German, Spanish, French, and Latin at a time when Arabic, Russian, and Chinese hold great strategic importance. Furthermore, unlike Europe or even South America, where English is often the de facto language of international discussion, no one can assume that the billions of people who speak these languages natively are in a great hurry to learn English.

Whatever the weaknesses at the K-12 level, the U.S. excels at higher education. At the doctoral level, research universities led by Texas, Michigan, and California are educating the world's research scientists and technologists. According to an annual report compiled by the University of Chicago for the National Science Foundation and five other government agencies, of about 7,500 Ph.D.s granted by U.S. institutions in the physical sciences in 2006, over half went to non-U.S. citizens. In engineering, 64% of the 7,200 Ph.D.s went to non-U.S. citizens. Not surprisingly, China and India -- countries competing with us in the development of such strategic projects as blue-water navies, space weapons, and domestic automobile industries -- led the way.

To get people to study these areas and help restock Northrop Grumman, NASA, and Ford, there needs to be incentive. In the recent past, reward has gone to individuals who innovated in financial services: the Enron Special Purpose Entities lead a list of tools (ending in credit default swaps) which made a small number of people rich but failed to generate widespread growth. Brainpower followed the money, potentially to the detriment of more durable fields of innovation. Think of the broad and lasting impact of such American real-economy inventions as the mobile phone, the Internet, the personal computer, MRI and PET scanning, the laser printer (and indeed the laser), the transistor, and the integrated circuit. Only PET is less than 35 years old. As elsewhere, to fix education, other sectors need to be considered.

-Infrastructure
Whatever the ability of information to move rapidly through fiber or ether, people, goods, and food need reliable infrastructure: roads, ports, airports, and pipes. The American Society of Civil Engineers -- not an uninterested party, to be sure -- graded the country's infrastructure in 2001 and 2005, giving the nation a D, with $1.6 trillion deemed necessary for improvements. Bridges (C) and solid waste treatment (C+) were the relative highlights of an otherwise dismal list.

A coalition of state and local officials has recently been formed to highlight the need. According to New York Mayor Michael Bloomberg, "the governors and the mayors of this country every day see at an operational level bridges that are rusting away, and tracks that can't carry high speed trains, and power transmission lines that can't keep up with demand, and airports that need new runways, and water lines that need backup systems, and sewage plants that leak into the rivers and the oceans."

One problem is that infrastructure spending at the federal level has historically been burdened with non-essential earmarks for things like bike paths: a report by the Department of Transportation Inspector General found over 8,00 such provisions, worth $8 billion, in FY07 federal spending -- 13% of the entire spending plan. Leadership to do better is essential: peace gardens won't get the economy back into gear.

Beyond Subsidy to Synergy

In the recent past, lobbying rather than presidential leadership has driven legislation: the AARP got the prescription drug benefit, the corn lobby got ethanol subsidies and tariffs, the financial sector got a light regulatory hand. The list above, however, illustrates how intertwined the key areas of the economy have become. As the credit crisis highlights, commodity markets (currently regulated separately from financial markets) have become part of a complex, tightly coupled global financial system. Immigration has a huge impact on health care. Health care costs affect the competitiveness of manufacturing companies in global markets.

The list goes on, but shows how merely acting one lobby at a time is a recipe for slow progress at best or disaster at worst. As Ray Kurzweil (another U.S. innovator who is a child of immigrants, by the way) and others have argued, change itself is changing:

"Our forebears expected the future to be pretty much like their present, which had been pretty much like their past. . . . Today, in accordance with the common wisdom, everyone expects continuous technological progress and the social repercussions that follow. But the future will be far more surprising than most observers realize: few have truly internalized the implications of the fact that the rate of change itself is accelerating." (quoted from here)

Accordingly, instead of more of the same old governance, one hopes that the next president leads with a vision of a global, information-age future that addresses complex problems with robust, synergistic actions, rather than being satisfied with delivering trophies to K Street.