Wednesday, December 21, 2011

Comments on Three Articles by Michael Mandel

Michael Mandel is the chief economic strategist at the Progressive Policy Institut.

"There Are Only 2 Ways to Save the Economy: Innovation or Inflation"
 It all comes down to this: We have to match growth to debt. If we can't create miracles from growth, we have to consider inflation to reduce the value of our debt
Of course, there are combined strategies. If for example, we could combine a growth rate of three percent per year, achieved through innovation and investment, with three percent per year inflation, the nominal value of the GDP would be doubled in 12 years. If that could be accomplished with no growth in the nominal value of the debt, the debt to GDP ratio would be cut in half to an acceptable level.

I lived in Chile at a time when its inflation was running above 20 percent per year. That level of inflation is very destructive. One aspect is that it becomes difficult if not impossible to find investments that yield enough to beat the inflation. Money goes abroad, people consume more, or they hoard.

It turns out to be hard to measure inflation. Different goods and services go up in price at different rates (especially as governments intervene to impose price controls on things absolutely required by the poor). So the inflation rate is an average of actual rates. Since it is not possible to measure the rates of inflation of everything, governments use "market baskets" of goods and services. In Chile, there were adjustments in pensions, salaries and other values in accord with the measured rates of inflation. Thus the adjustments depend on the choice of the market basket used. At our time there, newspapers would have articles on the composition of the market basket and average people would discuss that economic minutia in some detail.

"Scale and Innovation in Today’s Economy"
(T)he link between scale and innovation, positive or negative, depends on the economic environment. In this policy memo, we will suggest that the current U.S. economy is dealing with a particular set of conditions that will make scale a positive influence on innovation. First, economic and job growth today are increasingly driven by large-scale innovation ecosystems, such as the ones surrounding the iPhone, Android, and the introduction of 4G mobile networks. These ecosystems require management by a core company or companies with the resources and scale to provide leadership and technological direction. This task typically cannot be handled by a small company or startup.

Second, globalization puts more of a premium on size than ever before. A company that looks large in the context of the domestic economy may be relatively small in the context of the global economy. In order to capture the fruits of innovation, U.S. companies have to have the resources to stand against foreign competition, much of which may be state supported.

Finally, the U.S. faces a set of enormous challenges in reforming large-scale integrated systems such as health, energy, and education. Conventional venture-backed startups don’t have the resources to tackle these mammoth problems. Only large firms have the staying power and the scale to potentially implement systemic innovations in these industries.
 There is a difference between innovation and invention. Companies can innovate by inventing a new product or process and then commercializing it, but they can also obtain the rights to a new product or process from outside the firm and then commercialize it.

Indeed, large companies almost always combine both strategies. They have internal research and development programs, but they adopt new things from outside as well. Big firms buy small firms for their technology or their technological expertise all the time. Indeed, the American economy seems to work well by having a vibrant sector of small firms based on invention and large firms based on commercialization of innovations. Firms also license technology from other firms and steal innovations. Think about generic pharmaceutical firms that begin to manufacture new drugs as soon as they come out of the patent protection afforded to their inventors.

"Innovation by Acquisition: New Dynamics of High-tech Competition" (with Diana G. Carew)
Right now policymakers are grappling with the implications of slow economic growth in the United States and the rest of the industrialized world. One response is austerity—cutting back on spending, accepting reduced living standards, and slowly digging out from the mess.

A better option, though, is innovation, which accelerates growth, creates new jobs, and makes U.S. products and services more competitive world-wide.  Innovation has the potential for raising incomes, an especially important task given that real median household incomes have fallen more than 10 percent since the beginning of the recession.
While innovation can come from any industry, the technology sector is particularly important, as it has been the main source of growth and innovation in the economy for the past 35 years.
This article points out that while there is little that government can do to stimulate invention in the short run, it can stimulate innovation by doing things such as revising anti-trust policy to allow firms to more easily acquire technology by acquisitions.

The authors would no doubt be the first to insist that since governments can really only promote invention by long term policies, they should begin those long term policies promoting technological education and fundamental research and development as soon as possible.

So too, the authors would probably agree that while the technology sector is especially important, we should not neglect innovation in other industries.

I would add to the prescription, seeking technology transfer from abroad. That is a major route for innovations in developing nations, including by creating co-ventures with firms owning the intellectual property rights. I suspect U.S. corporations have done too little scanning of foreign technologies and aquisition of technologies from abroad, and the government could indeed help in that scanning and in promoting approaches to acquisitions.

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