The Rules of the (Video) Game Have Changed

August 31, 2011

By Michael Hendrix, Research Manager

In anticipation of NCF’s upcoming CEO Leadership Series event with the head of Electronic Arts (EA), a colleague shared with me a video from EA showing their lineup of games for this year.  After watching it, I couldn’t help but thinking that, as with so many things today, the rules of the game are changing.  And this time, quite literally.

As you watch the video below, consider how EA is presenting its games.  It’s hard to spot a television or desktop monitor anywhere.  Instead, the tablet is at the forefront.  There’s been a lot of thought put into how tablets may be changing the publishing industry or music.  What about for the gaming industry?

When I was growing up, you interacted with a game with a controller, mouse or joystick.  Video game developers constantly improved graphics and deepened story lines, all to further immerse you into the environment on-screen.  Armies of graphics designers, story board artists, and writers would craft first-person shooters and simulators over years of development.

Tablet games by necessity are entirely different.  You need no extra devices to play; just a touch, tap or swipe of the finger.  Getting immersed in a game now is more direct and tactile than visual and emotional.  Same result (addiction), just through different means.  And while tablet games may be relatively simpler to make, game developers must deal with a product cycle for tablet apps that’s counted in months, not years.

When EA held a conference call with investors in July, CEO John Riccitiello had this to say about the rise of tablets:

“Most of us on this call recognize that the industry has radically changed and the pace of change has accelerated dramatically.  Gone forever is the 4-to-5 year console cadence that gave developers ample time to invest and retool for the next big wave.   Consider that just 18 months ago there was no iPad, Google was experimenting with Android, and most big games were limited to a single revenue opportunity at launch.  Consider that each of the major consoles now has a controller that encourages users to get off the couch and get into the action.  On smartphones and tablets like iPhone and iPad, the top paid apps are all games.  Recognize that the fastest growing revenue streams for console, PC, smart phones and tablets are all digital.”

If tablet-based games represent the future, game companies will likely need to fundamentally reconsider their approach to product development and marketing.  EA may already be well on the way to doing just that.

Labor and Taxes

August 30, 2011

By Nick Schulz, NCF Scholar

In an earlier post I mentioned that over the next few years the country would engage in a great debate about taxes as well as the future of government social programs. With Labor Day upon us – and with the keen interest in Washington these days on work and job creation — now’s a good time to consider the effect of taxes on labor.

In a path-breaking book on the topic called The Impact of Labor Taxes on Labor Supply, Arizona State’s Richard Rogerson has found that developed countries that increased taxes on labor in order to pay for transfer programs and certain services experienced a sharp decline in work.

“It turns out that what the government does with tax revenues is a very relevant consideration,” Rogerson writes. “When the government uses the revenues either to fund transfer programs or to provide services such as education or health care free of charge, then higher taxes will cause individuals to work less.”

How much less? “The size of these disincentive effects is large,” he says. “By examining the time series data for the United States and several OECD countries since 1960, I conclude that a 10 percent increase in the share of GDP devoted to transfer programs would lead to a decrease in aggregate hours of work in the economy of between 10 and 15 percent. To put this number in perspective, note that any decrease in hours worked of 3 percent or more relative to trend constitutes a large recession. So the magnitude of these effects is indeed very substantial.”

The United States is fortunate to be a nation that cherishes hard work. The nation’s values are reflected in our tax code; the U.S. has not raised taxes on labor very much relative to Europe. This is one reason Americans are willing to work so hard and so productively. Let’s hope on this Labor Day we can get millions more Americans working and soon.

The Decline of American Governance?

August 29, 2011

By Michael Hendrix, Research Manager

Which country was recently ranked by the World Economic Forum as a “lowly 40th for the quality of its institutions, 54th for trust in its politicians, 68th for government waste, and a dismal 87th for its macroeconomic environment” compared to the rest of the world?  If you guessed America, you would be correct.  How did the U.S. get ranked so low?  America rightly boasts world-beating innovation and drive.  Why don’t we have effective governance to match?  To The Economist and its Schumpeter columnist, the reason comes down to two causes: institutional paralysis and economic uncertainty.

Institutional Paralysis

It’s been said that nations tend to fight yesterday’s wars.  Leaders don’t see that the rules have changed until they are in the midst of battle.  So it may be in America’s political environment.

Our political institutions have usually functioned on a fine balance between compromise and division.  The Economist argues though that something fundamental has changed in our institutional arrangement.  We are in a zero-sum, “ideological civil war.”  As each side has escalated and party ranks have been purified, “previously taboo weapons, such as the threat of default,” have been deployed.  The political parties have dug in for the next fight, and the trench line now runs through think tanks, TV studios, and town hall meetings.

To The Economist, institutional paralysis means that America isn’t keeping up with a dynamic world.  Take America’s free trade deals, for instance.  Agreements with Panama, Colombia, and South Korea are at a near standstill in Congress.  Some of these deals were concluded over five years ago.

Look at patent reform too.  Patents on everything but pharmaceuticals reap an annual profit of $4 billion while costing firms over $14 billion in litigation costs.  Here’s what Fareed Zakaria had to say in a recent column:

“Right now, a smart program to rationalize the patent process, which could unleash thousands of start-ups, is languishing in Congress not because of some principled opposition but because of turf battles between congressional committees.”

Zakaria’s solution is to “subordinate politics to a national goal of job creation.”  If The Economist is right though, his conclusion is misguided.  Zakaria must either show how today’s political stasis is fleeting or how trade deals can bypass the institutional paralysis that’s here to stay.  He does neither.

Economic Uncertainty

The greatest victim of this institutional paralysis is clearly the economy itself.  Economic fundamentals aren’t strong to begin with, yet there’s an institutional reason why companies are sitting on $1.9 trillion in cash.  Indeed, some 55% of small businesses in a recent survey by the U.S. Chamber named economic uncertainty as their greatest barrier to hiring (as it should be).  Institutional paralysis means that companies can’t predict what a government that occupies nearly 40% of the economy will do next.  That means added risk to the economy, and risk costs money.

Uncertainty isn’t new in any economy; “for all is but a woven web of guesses.”  John Maynard Keynes devoted a chapter of his General Theory to explaining how we all must invest in the face of constant uncertainty.  Moreover, academics aren’t even sure how to measure uncertainty, even for as much as the term is bandied about.  Measures of uncertainty in governance though are the most closely correlated with levels of investment, and this is where institutional paralysis rears its head again.

Rated by those who are yearning for growth and stability, America is being given a failing grade.  We are not short of aspiration or genius.  Perhaps the greatest deficit then is institutional.  Is this the brave new world of politics?

Posts That Are Driving the Debate

August 26, 2011

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

“The right people in the right place are worth more now than at any point in history.”  So says Reuters’ Felix Salmon from his 30,000-foot view of economic trends.  Human capital is greater and scarcer at the same time.  Unfortunately, too much of the scarcity has to do with onerous laws restricting high-skilled immigration and labor mobility in general.

Catherine Rampell highlights a depressing chart in The New York Times’ Economix blog.  It shows that last month “the share of young people who were employed was just 48.8%, the lowest July on record.”  Rampell also points out how low the labor force participation rate has gotten.  There are many young people out there who are unemployed, and even more who are sitting on the sidelines of the economy.

VoxEU features a very wonky, but very relevant, post by Thomas Meyer of  Deutsche Bank.  Meyer shows how firms that invest in research and development are rewarded by financial markets.  The more active and open the market, the more this is the case.

Clive Crook of The Atlantic assesses the secret to the success of Steve Jobs’ tenure at Apple and offers a cautious take on what the future might hold for the newly Jobs-less company.

Andrew Sullivan, a legendary blogger newly ensconced at The Daily Beast, sparked conversation this week by rounding up a series of commentators who all came to the same conclusion on the fate of the U.S. Postal Service: It’s on the precipice of insolvency and is quickly running out of options.

Growth and Regulation: Caught In the Middle

August 26, 2011

By Michael Hendrix, Research Manager

We are in many ways a nation of the middle class.  This is where America finds some of its greatest innovators and where we place our hope for the future.  Might the same be true for companies?  Warren Stephens, the CEO of Stephens, Inc., sure thinks so.  His recent article in The Wall Street Journal shines a light on what Stephens calls “the forgotten middle.”  That is, the more than 100,000 companies that bring in between $25 million and $1 billion in revenues each year.   If you want to have an idea as to what the Fortune 500 list will look like 50 years from now, it’s in the middle market where you’ll find your answer.

To Stephens, this growth potential is under threat by an “uncertain regulatory and tax environment.” Reporting requirements end up costing firms a pretty penny, cash is hoarded to protect against both market swings and unexpected government intervention, and new laws pose hidden costs all of their own.

Stephens isn’t short of ideas for countering this challenge.  “By designing a set of policy solutions that eliminate obstacles, remove disincentives and reward smart risk-taking by middle market companies, we can reignite our economy and create the kinds of jobs that built this great country.”  It’s unclear though how simple these measures would be in practice or how layering new policy measures on top of old ones will address Stephens’ regulatory concerns.

Nevertheless, Stephens is right to draw our attention to firms that contribute so much to our economic growth and innovation.  Remaining mindful of the middle may be the best way to keep America’s economy on top.

Reasons for Optimism about Job Creation

August 25, 2011

By Nick Schulz, NCF Scholar

There’s a lot of pessimism in Washington about the state of American enterprise. Wild market gyrations coupled with anemic economic growth have policymakers scratching their heads and worrying about the future.

Yet, if there’s one person who clearly sees a brighter tomorrow it’s Silicon Valley’s Marc Andreesen. In a recent article in The Wall Street Journal, he made the bullish case for entrepreneurial growth in America. He documented the ways in which maturing software and information technology platforms are poised to be powerful drivers of new growth and economic dynamism.

Of particular interest were Andreesen’s remarks about the possibility of entrepreneurial innovation in the health care and education sectors. He noted:

“Health care and education, in my view, are next up for fundamental software-based transformation. My venture capital firm is backing aggressive start-ups in both of these gigantic and critical industries. We believe both of these industries, which historically have been highly resistant to entrepreneurial change, are primed for tipping by great new software-centric entrepreneurs.”

Part of my research lately has been on what economist Arnold Kling and I call the New Commanding Heights of the economy — health care and education. These are two areas where consumer demand is growing rapidly and where there is great potential for job growth. Even so, both sectors have been, as Andreesen notes, overly bureaucratic and highly resistant to change. Much of that has to do with outdated government policy, at both the national and state levels. If policymakers want to unleash job creation, these are two sectors ripe for reform. If reform happens, expect a big job boom thanks to these sectors.

After Earthquake, Social Media Shows Value in Emergency Preparedness

August 24, 2011

By Rich Cooper, Vice President, Research & Emerging Issues

Credit: Sean Hackbarth

I’m back in my office building after the great DC Shake of 2011. The earthquake that struck Virginia and surrounding areas was a surreal experience, one I’ve never had and don’t care to repeat any time soon. I was escorting a guest to the fifth-floor elevators in U.S. Chamber of Commerce building when I felt a slight shake. “Well, that’s weird,” I said.

Then the shaking picked up dramatically, and I thought, “Car bomb.” Working a block from the White House will give you thoughts like that, but when I didn’t hear an explosion or a glass-shattering concussion, I knew something else was amiss. I thought for a moment I heard a black swan flapping its proverbial wings.

Three people ran by me heading for the stairwell, one saying, “Get the hell out of here!” In our post-9/11 world, when the building starts shaking and people are running for the stairwell, you move and fast.

Outside, there was an eerie calm. The day was one of those rare DC summer days when the sky was blue, it was not humid, and the air was not choked with smog and stink – it was gorgeous. One colleague remarked as we walked towards our pre-determined rendezvous point, “Kinda reminds you of September 11, doesn’t it?”

Everyone was reaching for their cell phones to see what was happening. Someone finally said, “It was an earthquake! It was 5.8!”

With that announcement, we all tried to reach loved ones via phone and text to let them know that we were OK and to make sure others were too. Not surprisingly, calls could not get out. The phone system was overrun as millions of East Coast residents called family and friends after such an unexpected event.

Another colleague said, “This is just like 9/11 when the phones didn’t work.”

Fortunately for me, texts to my wife and parents did get out, but in the midst of discovering which communication methods did and did not work came the discovery that the one platform that had no problem getting and receiving information was Facebook. It lit up like a Christmas tree with news bulletins and messages from friends checking in on me and reporting what they experienced. Where phones failed social media thrived, and therein lies the lesson.

Social media is evolving and improving at a breakneck pace. Emerging technologies, like social media, offer advantages we would do well to incorporate into our emergency preparedness planning. Naturally, that means businesses and organizations must have an emergency plan to begin with. Too many of us do not. Fortunately, the plans and the tools to execute response efforts in an emergency are readily available, if we will but use them.

The National Commission on Terrorist Attacks Upon the United States (the 9/11 Commission) produced a series of recommendations that improve America’s security posture, resilience and preparedness. In the commission’s report to Congress, it recommended the National Fire Protection Association’s NFPA 1600 as the standard for private sector preparedness. NFPA 1600 is one of many valuable tools that can help businesses and organizations prepare for the unexpected and develop an emergency response strategy that addresses the potential emergencies we can see coming, as well as those we cannot.

Social media has immense value in situations where other communication channels are interrupted. As many of us in DC and elsewhere on the East Coast recognized after the earthquake, while absent phone connection hindered information gathering, social media enhanced it.

Say what you will about the medium of Facebook and social media, it worked in this environment. It gave people a security blanket of sorts that they could “post” what was happening with them and around them. Had the earthquake caused more damage and devastation (recall Japan’s powerful earthquake and tsunami earlier this year), social media could have been a lifeline to people trapped in buildings, a platform for rallying or dispersing employees and colleagues, or any number of other advantages that can mean the difference between life and death, between ruin and resilience.

While I know a lot of emergency managers who swear by it, swear at it, and swear they will never use it, when it mattered, social media worked. In an emergency, that is all that matters.

I have to say I’m proud of the people in my building for knowing what to do and doing it without panic. That kind of response is not inherent. It is learned. Emergency planning is something every business should be pursuing. Certainly the larger companies – like Wal-Mart, Target and others – have plans in place, but America’s smaller businesses remain vulnerable.

The bottom line is that there are templates businesses can turn to, such as the NFPA 1600, the tool kits at Ready Business, the Red Cross’ Ready Rating Program, and others to build an emergency response strategy. There are other recommendations and plans available as well, and as we found after the earthquake, social media can be a huge asset. Many of these plans and the tools that support them are free. No matter the economy, that’s something everyone’s budget can afford. The question is, Can your business afford not to prepare?

Posts That Are Driving the Debate

August 19, 2011

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

The Curious Capitalist blog asked, “Is the economy worse off than in 2008?”  Such a comparison doesn’t seem too far-fetched, what with the recent cascade of bad economic news.  By placing August today side-by-side with August of 2008, things don’t look very rosy now.  The jobs deficit is in many ways worse now due to the long-term unemployed, banks have barely addressed the raft of bad loans on their books, and policy-makers have fewer options for boosting the economy in reply.

Derek Thompson of The Atlantic detailed a “Recovery Lost.”  Thompson said that America faces two key challenges today: A basic lack of growth and a debt crisis in Europe.  If you have time to review his graphs, do so.  They’re rich in detail.  And if you find the post long on negativity, Derek offered some relief of sorts: We don’t have as far to fall economically as we did in 2008, and in the long run we’ll all be enjoying a richer economy.  Or not.

Titled Geography of Jobs, this interactive map of job loss and creation in the United States has to be seen to be believed.  It throws America’s need for job creation into stark relief.  If you’re pressed for time, scroll to 2008 and hit “play.”  In July 2008, everything changes.

Google’s $12.5 billion purchase of Motorola Mobility ignited the blogosphere with attempts to explain the reasons for this investment.  Many commentators focused on the 17,000 patents that Google was acquiring as a part of the deal.  NPR’s Planet Money blog provided some useful context to this patent play, and The New Yorker noted the dear cost of patents for firm’s operating on the cutting edge of technology.

NCF Fellow, AEI Adjunct Scholar, and University of Michigan professor Mark Perry noted how young Americans may in fact be “Luckiest Generation in History” once you account for how far each earned dollar goes today.  To Perry, this is a story of American innovation and prosperity that’s been unduly neglected.

With Texas Governor Rick Perry’s entrance into the Republican race for president, a number of bloggers tried to quantify the extent of Texas’ job creation.  Ryan Avent at The Economist concluded that “Growth Is Texas’ Secret.”  While this conclusion seems far too simplistic at first blush, Avent absorbed a wealth of information to document precisely how Texas’ economy grew and created jobs for millions of workers.  Regardless of how you choose to interpret the political consequences of the data, Avent effectively shows Texas’ key growth secret: migration. “People come because Texas is where the jobs are, and because people come Texas is where the jobs are.”

Taxing Questions

August 16, 2011

By Nick Schulz, NCF Scholar

Between now and the 2012 election the country will engage in a great debate about taxes.  One question in this debate is the extent to which wealthy Americans ought to pay more in taxes. They can afford to pay more, the argument goes, and with the country facing a growing fiscal hole, the wealthy ought to pay more. Warren Buffett, one of the world’s richest men and the greatest investor of his generation, recently advanced this argument in The New York Times.

Other things being equal, this argument has a lot of intuitive appeal. But are other things equal?  In addition to fiscal woes, the country also needs to generate jobs and economic growth.  Indeed, more growth will do a lot to help remedy the fiscal situation.  So what do we know about taxes on the wealthy and the effect on economic growth? Specifically, what do we know about taxes on entrepreneurs, the primary job creators in the economy?

Fortunately there is a lot of research that’s been done on these questions, so it’s useful to review some of it now. In a recent survey of the academic literature, researchers Tino Sanadaji and Arvid Malm found that taxes have a profound negative effect on economic activity. They cite the work of former Obama advisor Christina Romer and her husband David Romer who found that “tax increases appear to have a very large, sustained, and highly significant negative impact on output.”

What of the effect of taxes on jobs? “Princeton Professor Harvey Rosen and co-authors investigated the effect of the personal income tax of business owners on their hiring activity. Business owners who received larger tax cuts expanded their hiring more.”

As my NCF colleague Bret Swanson has noted, the importance of jobs and growth to the broader fiscal picture should not be overlooked.  Consider this chart:

Bret frames the issue nicely:

“A 4% growth rate would mean almost $4 trillion in additional output in the year 2020, $10 trillion more in 2030, $21 trillion more in 2040, and an astounding $38 trillion more in 2050, when the economy would be more than twice as large had we kept growing at 2%. Over this period, with an arbitrarily chosen 20% tax-to-GDP ratio, a 4% growth rate would generate $109 trillion more revenue than a 2% growth rate.

“But 4% is wildly optimistic, you say. Perhaps. The consensus long range projection is just 2.5%. Fine, what if we could bump growth to a measly 3%? We would still generate an additional $25 trillion in tax revenue over the 40-year period. Didn’t the Medicare actuary just tell us the program’s unfunded liability is $24.6 trillion?”

Here’s the bottom line: Any discussion of taxes (or spending) has to include an honest discussion about the effect on economic growth. Some Democrats like to say the country has a revenue problem, so we need to raise taxes.  Some Republicans counter that the country has a spending problem, not a revenue problem.  But the reality is the country has a growth problem. And any policy change – be it on the tax or spending side — needs to be analyzed with respect to its effect on growth.

Posts That Are Driving the Debate

August 12, 2011

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

Derek Thompson at The Atlantic summarized “The 16 Best Ideas to Supercharge Job Creation in One Venn Diagram.”  The title says it all.

Will Wilkinson took to The Economist’s blog Democracy In America to decry the state of America’s patent regime.  He argued that the current system “actively impedes innovation.”

Kenneth Rogoff argued in Project Syndicate that calling our current economic downturn the “Great Recession” is misleading.  It’s more like the “Second Great Contraction,” featuring the sort of prolonged deleveraging last seen in the 1930s.

The Chamber’s own Marty Regalia discussed the link between “Jobs and Growth,” showing why the two are inextricably linked.  He demonstrated why you can’t have long term certainty without removing regulatory impediments in the short term.

Felix Salmon at Reuters built off of an article by Mohamed El-Erian to place the recent stock market swoon in perspective.  Markets are always unpredictable and volatile — the difference between the good years and bad is more a matter of degrees.

Dani Rodrick of Harvard University asked, “Can you get rich without democracy?”  With few (albeit critical) exceptions, he found that political freedom and economic growth go hand-in-hand.

Nate Silver of The New York Times analyzed U.S. GDP stretching back to 1877 and found steady, exponential growth of 3.5% after inflation, with two exceptions: The Great Depression and today.  Beyond simply avoiding recession, America needs above-average growth of 5% from now until 2018 in order to return to long-term mean.