Blogs Driving the Debate

March 9, 2012

NCF curates a weekly list of blog posts that touch on emerging issues affecting the American business community.

Ryan Avent of The Economist looked at the latest jobs numbers and asked, “Is it morning in America?”

Fact: Streaming Netflix movies account for up to 40% of all Internet traffic at peak times.  That’s a colossal amount of bandwidth.  So, Netflix has chosen to invest in the global cloud computing infrastructure rather than a proprietary content delivery system.  The upside is that their investment will benefit every Internet user, regardless of whether they are Netflix subscribers or not.

Gail Tverberg at the The Oil Drum noted how high energy prices are hurting the European economy.  Indeed, the countries with the worst debt crises and highest trade imbalances are most dependent on pricier imported fuels.

With the death of the Space Shuttle and the rise of privatized space flight, we seem to be entering a new era in exploring the world beyond Earth’s atmosphere.  NASA is working hard to keep up, but popular support just isn’t there for large, expensive, publicly-funded space projects.  As Alexis Madrigal points out in The Atlantic, publicly funded space flight was never that popular, even in the heyday of the Apollo space program.

How the iPad could transform the construction industry.  The key point to me is that the iPad is becoming advance for computing, not just an evolutionary one.

The Top 10 States that Trade with China

March 8, 2012

By Michael Hendrix, Research Manager

China is the third largest U.S. export market and is expected to continue the 468% growth in exports that has marked the decade from 2000.  In 2010, America sent China goods worth some $91.9 billion.  Where exactly are these exports coming from?  According to the U.S.-China Business Council, these are the top 10 exporting states in America:

  1. California ($12.5 bn)
  2. Washington ($10.3 bn)
  3. Texas ($10.3 bn)
  4. Louisiana ($6.5 bn)
  5. Oregon ($4 bn)
  6. New York ($3.4 bn)
  7. Illinois ($3.2 bn)
  8. Pennsylvania ($2.7 bn)
  9. Georgia ($2.4 bn)
  10. Ohio ($2.3 bn)

Outside of the bordering countries of Canada and China, you’re not going to find a country where American states export more goods.  The growth in exports over the last ten years is equally amazing, as this chart shows.

Trade issues are often discussed on a national or international stage, but it is at the state level where see the real impact.  From the manufacturing hubs of Rust Belt states like Pennsylvania and Ohio to the fields of eastern Oregon, trade with China appears to be having a profound impact on the growth of states across America.

The Top 10 Global Economic Risks

March 5, 2012

By Michael Hendrix, Research Manager

What do you get when you ask 469 experts from industry, government, academia, and civil society to think up their worst dystopian nightmares?  You get the World Economic Forum’s list of the top fifty global risks.  These seeds of disaster lie in wait just under the surface, nurtured by a lack of safeguards in our increasingly interconnected world.  Excited yet?  You should be, because these are the risks that may temper tomorrow’s rewards.

These fifty risks can be narrowed down to five categories:

  • Economic
  • Environmental
  • Geopolitical
  • Societal
  • Technological

For this blog, it’s the economic risks that merit the most attention.  Keep in mind as you read them not just the probability of these events occuring, but the mechanisms by which they may occur.

Here then are the top 10 global economic risks:

  1. Chronic fiscal imbalances (likely & large impact)
  2. Chronic labor market imbalances
  3. Extreme volatility in energy and agricultural prices (large impact)
  4. Hard landing of an emerging economy
  5. Major systemic financial failure (large impact)
  6. Prolonged infrastructure neglect
  7. Recurring liquidity crises
  8. Severe income disparity (likely)
  9. Unforeseen negative consequences of regulations
  10. Unmanageable inflation or deflation

Four of these economic risks (underlined above) are so-called “critical connectors,” meaning that they have a tremendous, systemic influence on all of the other fifty risks.  All of these connectors in turn orbit around one center of gravity: chronic fiscal imbalances.  Not only that, but every gepolitical and societal risk related to the collapse of governments or of trade is affected by this one fiscal risk.

Simply conjuring up risks isn’t quite enough.  We must know how they could end up shaping our future.  What you want to look for are the “pathways” through which risks manifest into reality.  Labor market imbalances, a society of broken opportunities, and chronically disrupted human and financial capital all fit that bill.  At the end of these pathways stands a decaying and uncertain global economic system.

The accumulation of massive public debts represents then the key global stress point.  All of these other risks become increasingly unmanageable the more that the piling up of debt outruns the ability to pay for it.

After looking at every possible risk nightmare square in the eye, the authors ask the all-important question:  How can fostering entrepreneurship prevent the seeds of dystopia from taking root?   This is where real leadership is needed.  Tackling chronic deficits without the means of economic growth simply means swapping one risk for another.  Our complex world will either blow out that one risk into a host of disasters or provide a resilient and global infrastructure for broad-based growth.  Entrepreneurship has the ability to thrive in risky and complex times.  It’s the pathway through which risks are mitigated into rewards, serving ultimately as a needed source of innovation and growth.

Chronic fiscal imbalances or global entrepreneurship — these are the forces that will define our future.

Blogs Driving the Debate

March 2, 2012

NCF curates a weekly list of blog posts that touch on emerging issues affecting the American business community.

Richard Florida tracked the “rise of the supercommuter” in The Atlantic Cities.

The Economist’s Schumpeter columnist thinks that the “only thing we have to fear is the lack of fear itself” when it comes to Greece’s impending default.  Greece’s default is becoming increasingly inseparable from its own exit from the Eurozone, a disastrous occurrence that people seem far too complacent about.

NCF Fellow Mark Perry wrote on the stunning decline of print newspaper advertising.

Dane Stangler at Growthology takes a close look at the “nuances of job creation.”

Fast Company’s Michael Raisanen pushed back against the increasing tendency today to make strategic decisions based on data alone, arguing that it’s a sure death knell for groundbreaking innovation.

Jon Walton profiled Azerbaijan’s $100 billion city of artificial islands.

Investing in Infrastructure Pays

March 1, 2012

By Michael Hendrix, Research Manager

Associated Equipment Distributors is out with a new report asking, in essence, how much do infrastructure investment pay back in return?

Building a new road, bridge, sewer, or runway is more akin to buying a business asset that generates economic activity and returns revenues to the investor.  For example, our researchers determined that over a 20-year period, generalized public investment generates an accumulated $3.21 of economic activity per dollar spent, which yields $.96 in tax revenues. [emphasis added]

Even in the short term,  ”a dollar spent on infrastructure construction produces roughly double the initial spending in ultimate economic output.”

The problem is that efforts to finance these infrastructure investments have consistently fallen short.  What’s the answer?

The U.S. must seek innovative new funding mechanisms that do not burden rising deficits, and likely must stimulate the private sector.  Programs like public-private partnerships [PPPs], individual and corporate contributions to road financing and user fee lanes are potential mechanisms through which public spending on infrastructure can be supplemented beyond the gas tax.

Our own recent research on public-private partnerships in infrastructure investment came to similar conclusions: “The challenge is pursing an investment strategy that can most effectively repair, upgrade, and expand America’s existing systems and, by extension, support the U.S. economy.”  Indeed, “PPPs give cash-strapped governments additional options for pursing projects that otherwise would not be possible.”

Generations of economists have debated the return on government’s investments.  If we ever see a conclusion to these arguments, the one area that we may see the most agreement on is that investing in infrastructure is worth it.  If that’s the case though, why rely solely on the public sector to finance these investments, let alone to pick who wins and loses from it?

The State of Small Business in America

February 27, 2012

By Michael Hendrix, Research Manager

What is the state of small business in America?  This is an important question to ask for the overall health of the economy and job market, especially since we know that as recently as 2007 young firms were creating two-thirds of all jobs in America.  Unfortunately, recent testimony by Martin Neil Bailey of The Brookings Institution paints a relatively bleak picture for small businesses in America.  According to Dr. Bailey, there’s been a 20% decline in new businesses since the start of the 2008 recession.  What’s more, small business optimism hasn’t really recovered from the depths of the recession, which in turn was the culmination of a seven year overall decline.  For those firms that have gotten off the ground and are hiring, they still struggle to find the right skilled workers for their business.

This information is drawn from testimony by Dr. Baily to the U.S. House of Representative’s Committee on Small Business and the entire presentation is worth reading.  His conclusion that the “Great Recession has hit almost everyone hard” rings a little hollow in the face of overwhelming regulatory obstacles for small businesses.  One thing is true: small businesses are an important part of America’s economy, now and in the future.  Their resilience has been proven time and again, even in the face of economic stagnation.

Blogs Driving the Debate

February 24, 2012

NCF curates a weekly list of blog posts that touch on emerging issues affecting the American business community.

Max Fisher outlined the “next 5 emerging economies that will change the world“:  Turkey, Indonesia, Kazakhstan, Congo, and Mexico.  Just for good measure, he added Nigeria as a “maybe.”

Justin Fox outlined the fourteen articles contributed to the Harvard Business Review by some twenty-one authors on the future of American competitiveness.  Under the “government” header, he looks at taxes, fiscal policy, immigration, trade, and entrepreneurship and innovation.  The “business” section examines how to break Washington gridlock, better educate Americans, address the financial system, build clusters of innovation, and engage with the true costs of outsourcing.

James Hamilton at EconBrowser took a close look at oil prices to try to figure out why the price at the pump is rising.  In short, the reason for rising prices comes down to one word: Iran.

Outsourcing work from the West to the East has been one of the big stories in business for the past few decades.  Today, it seems that nearly every consumer product was made in China, a place where the cost of production is appealingly low.  Alex Tabarrok of Marginal Revolution came across a news item that seems to auger a reversal in this trend.  It appears that some Chinese firms are now starting to outsource to (of all places) Europe.  Tabarrok expects that we’ll see a lot more of this East to West outsourcing in the years to come as China grows in wealth and adapts to having a more consumer-driven economy.

Felix Salmon summarized the Greece bailout package, starting with these words: “Greece is now officially a ward of the international community.”

Whether you agree with him or not, Ryan Avent at The Economist made a series of insightful comments about the contributions that manufacturing does (or does not) make to the American economy.  He’s skeptical that the manufacturing industry is worthy of any special support other than that which would be offered to any other industry, i.e., support for R&D, a simplified tax code, and the like.  Laura D’Andrea Tyson made the equally informed counter-argument in the Economix blog for the unique qualities of manufacturing to, say, the support of general innovation in the economy.

Lean Engineering and the Rise of In-Sourcing

February 22, 2012

By Michael Hendrix, Research Manager

The famed management guru Tom Peters once said, “Do what you do best and outsource the rest.”  Thanks to low costs abroad, many firms have chosen to outsource much of their manufacturing capacity over the past few decades.  It appears that trend may be reversing among many small companies thanks to the advent of “lean engineering” and an assortment of other changes in the global economic landscape.

Wired Magazine recently visited the American manufacturing plant of a company called NBS, which makes fast, efficient servers for SeaMicro, a small startup, to see just how this in-sourcing trend is happening.  The work at NBS is highly specialized and complex, and in SeaMicro’s case running on a low volume of highly valuable products.  SeaMicro could very well have outsourced this work to a large factory abroad, but that simply wouldn’t do.  You see, that company desires control and that’s where lean engineering comes in.

Lean engineering means that SeaMicro has control over each server that makes its way through NBS, including when it’s built (only when the customer places an order) and how it’s tweaked (immediately so, by a SeaMicro engineer from down the street).  This is essentially “just-in-time” manufacturing, but with a focus of cutting out all work that doesn’t produce value for the end customer.  Implementing this sort of an approach to making products is a lot easier in a factory down the street versus one situated halfway around the world.

SeaMicro isn’t alone in this search for control.   In fact, “Over the past two years, 31 percent of the ‘medium-sized’ manufacturing projects that once moved to Asia have now moved them back to North America.”

Making things in America remains costly, but two recent trends are working in this country’s favor.  For one thing, countries like China have seen their wages rise substantially over the last few years.  What’s more, companies are starting to see that outsourcing brings additional costs, like that of shipping, that have become more costly as well.

In-sourcing also enables startups to capture the gains found with proximity, whether it be for rapidly sharing knowledge or enabling partnerships and specialization.   Increased density alone boosts productivity by up to 28%, and when that density results from a greater number of skilled workers the boost to productivity is twice the national average.

Thanks to the development of lean engineering, the rise in prices abroad, and the increasing value of proximity, America is doing what it does best: innovating.  The story of 21st century American manufacturing may be just beginning.

The Economist: Over-Regulated America

February 21, 2012

By Michael Hendrix, Research Manager

According to The Economist, “The home of laissez-faire is being suffocated by excessive and badly written regulation.”  The point is not that America has an overwhelming amount of bad regulation, though the examples of such ill-guided red tape are numerous.  Rather, it is the cumulative effect of regulation that is chocking American free enterprise.

Dodd-Frank is a prime example.  It’s a complex bill layered on top of an already complicated industry.  ”At 848 pages, it is 23 times longer than Glass-Steagall, the reform that followed the Wall Street crash of 1929.  Worse, every other page demands that regulators fill in further detail.  Some of these clarifications are hundreds of pages long.”

Downloading the text of the Dodd-Frank bill yields a PDF file some 2,319 pages in length.  By way of comparison, our NCF Fellow Mark Perry produced a handy list of the top financial reform bills and their length:

  1. Federal Reserve Act (1913) – 31 pages.
  2. Glass-Steagall Act (1933) – 37 pages.
  3. Interstate Banking Efficiency Act (1994) – 61 pages.
  4. Gramm-Leach-Bliley Act (1999) – 145 pages.
  5. Sarbanes-Oxley Act (2002) – 66 pages.

The quantity and complexity of America’s regulatory regime not only adds a burden of cost onto the private sector but a broader sense of uncertainty (which itself is costly).  Back to the Dodd-Frank example, The Economist notes how only 93 of the 400 mandated rules have actually been issued, leaving the financial sector to comply with a law that will remain partially unknown for an equally unclear amount of time.

Dislodging America from its thicket of regulation is first a matter of reducing the number of rules.  Arcane procedures and entrenched interests means that this process won’t be easy, as The Economist shows in a follow-on article.  There’s also the danger that cuts will be imprecise and uninformed, like calling for field surgery with a machete.  This is why transparency will be vital.  Cutting regulation needn’t be as opaque as the process that made them.

Reducing red tape is a good first step.  But we must also take another look at the mindset behind the regulatory process.  Recent studies argue against the increasing specificity of rule-making in America.  Instead, if an area due for regulation is highly complex, the matching regulation ought to be decisively simple.  Dynamic, wealthy economies are necessarily complex — so the overall regulatory regime in such countries should be straightforward and highly adaptive to changing circumstances.

Put another way, a lean and simple regulatory regime is the perfect complement to a healthy economy.

Blogs Driving the Debate

February 17, 2012

NCF curates a weekly list of blog posts that touch on emerging issues affecting the American business community.

Megan McCardle envisioned in The Atlantic a “post-campus America” after MIT announced an inexpensive online certification program called MITx.

Jordan Weissmann (also at The Atlantic) highlighted the best and worst states for high-tech businesses.  Rather than take the cit-based approach of the National Science Foundation at face value, whose research Weissmann is highlighting, I would encourage any reader to look at the overall regions that are most favorable to technology-based companies.  In that light, we see that the mid-Atlantic region is surprisingly strong.

Matt Yglesias considered “the new economics of oil” with today’s expansion of shale oil production.

The Harvard Business Review asked a panel of leading CEOs to describe the greatest threats to U.S. competitiveness.

Jonah Lehrer at Wired asks what Jeremy Lin’s recent success in the NBA teaches about the nature of talent and of identifying gifted individuals to hire.  Unfortunately, even the greatest of meritocracies can’t identify the key predictors of future success.  Even when the evidence of this failure is clear in the NBA, teams often ignore these facts rather than instill “hiring” practices that embrace uncertainty.  In the end, scouting for good players in basketball yields results that are little better than tossing a coin.

Michael Sivy of Time asked, “Are we already planting the seeds of the next financial crisis?”  In the end, his advice is one that rings true no matter the state of the market: exercise “prudence and caution.”