Posts Tagged ‘ Innovation ’

The Washington Post: Obama’s call for innovation follows slowdown in most sectors, scholars say

Thursday, January 27th, 2011
Brandon Biegert



Brandon Biegert is an intern at the Public Policy Institute and senior at the University of California, Berkeley majoring in political science.

by Brandon Biegert

PPI Senior Fellow Michael Mandel discusses the need to reinvest in American innovation with the Washington Post reporter Brian Vastag:

Innovation scholars point to a “valley of death” where new technologies go to die. The federal government funds basic research. Private industry commercializes technologies springing from that work. But crossing the chasm between the two can be hugely difficult.

“We have investors with lots of money, and we have entrepreneurs with ideas that can get you across the valley of death,” said Michael Mandel, an economist who tracks American innovation for the Progressive Policy Institute in Washington. “But it’s a lot easier when you have a big winner out there, a gleaming star in the distance.”

Read the full article

State of the Union: Obama Gets Innovation Upside-Down

Wednesday, January 26th, 2011
Michael Mandel



Michael Mandel is the chief economic strategist at the Progressive Policy Institute and the founder of Visible Economy LLC, a New York-based news and education company.

by Michael Mandel

In his State of the Union speech, President Obama spent a lot of time on innovation, regulation, and jobs–that’s good. Unfortunately, in all three cases he got his priorities upside down.

Let’s start with innovation.  I counted how many words the President devoted to different areas of innovation.

  • 2 words for biomedical research, the area where the U.S. is far ahead of the rest of the world.
  • 68 words devoted to extolling the job-creating virtues of space travel and NASA, an agency which currently has no mission unless it gets a lot more money.
  • 113 words for  high-speed-wireless broadband, a worthy goal.
  • 361 words in favor clean energy, a technology where the U.S. has little competitive advantage over the rest of the world.

In other words, Obama spent his time lauding our least competitive areas of innovation, while giving the back of his hand to biomedical research, the area where we have the clear global advantage.

If you think I’m exaggerating, take a look at these two charts.  When it comes to life sciences, the U.S. is way ahead. U.S. companies account for 44% of   R&D spending by life sciences companies around the world in 2010, according to etimates by Battelle/R&DMagazine.  And U.S. government support for health research is unsurpassed, accounting for 70% of  global public sector funding.

On the other hand, the U.S. support for  energy research is mediocre, at best. U.S. companies account for only 25% of global energy R&D spending by businesses.  And in 2008, before Obama took over, the U.S. government funding for energy R&D accounted for only 20% of the global public sector spending on energy R&D.  That’s pitiful.

Here’s what a recent R&DMagazine piece says about U.S. energy R&D:

the level of R&D spending in the U.S. energy sector is small in absolute terms and as a percent of revenue (0.3%) when compared with other sectors. For example, the total amount of private sector investment in all forms of energy research in our portfolio would likely amount to little more than half of the leading life science R&D investor, Merck, or the leading software/IT R&D investor, Microsoft, both of which invested more than $8.4 billion in R&D in 2009.

Mr. President, every time you talk about clean energy creating jobs, you are placing your bet on the wrong horse.  Communications and biosciences are the best bets we have in the near-term.

Now we come to regulation. I’m afraid once again the President started out right, and ended upside-down. He began by explaining how he would get rid of rules that imposed an unnecessary burden (29 words). But then he spends triple the time ( 102 words) defending his administration’s regulatory efforts.  He should have stopped while he was ahead.

Finally, we come to jobs, which were spread through the whole speech. This is my ‘soft’ count of how many times the word ‘jobs’ were mentioned in connection  with various areas of the economy (your count may differ)

  • IT-1
  • Space-1
  • Clean energy –2
  • Education–3
  • Infrastructure –2
  • Exports–4

Exports got the most mentions as a source of jobs—-but no mention of imports, and no mention of the fact that our trade deficit in advanced technology products hit an all-time record in November, going into double digits for the first time.  The reason? Imports of advanced technology products have surged, while exports are basically flat.  Before worrying about exports, we should worry about recapturing some of the jobs lost to imports.

This piece is cross-posted at Mandel on Innovation and Growth

China’s Reverse Robin Hood: Stealing Intellectual Property from the Poor

Wednesday, January 19th, 2011
Scott Andes



Scott M. Andes is a research analyst at the Information Technology and Innovation Foundation.

by Scott Andes

Many of the facts relating to the globalization of intellectual property (IP) theft over the last decade are not debatable.  For example, IP theft has decreased the market share of U.S. firms and destroyed or prevented the creation of millions of U.S. jobs.  While currently 18 million Americas are employed in IP-intensive industries, the U.S. economy loses over $20 billion annually to IP theft and in 2007 IP theft reduced global trade by 5 to 7 percent.

However once one gets beyond a simple fact-based analysis the debate over IP theft becomes more contentious.  Specifically when it comes to policy prescriptions such as the true societal cost of IP theft, enforcement strategies and stakeholders rights, there is significant disagreement.  One of the most contentious elements of IP theft is how to deal with developing countries.  As technology spreads to emerging markets, specifically in Eastern Europe and Asia, faster than legal frameworks to prosecute IP violations, theft has steadily risen.  For example, although emerging markets only account for 20 percent of the software market, they make up 45 percent of software piracy.  China is a particular conspicuous violator.  According to the EU, China remains the number one country in terms of number of seized pirated goods, both in number and volume, at EU borders.  And over 90 percent of video games consumed in China are pirated.

Still many IP opponents like to argue that IP is a plot hatched by the North to keep the South poor.  Countries like China argue that they are poor and technology transfer (much of it forced or stolen) is an integral part of their development strategy.  If IP laws keep developing countries from getting drugs or other IP-based technologies critical to overcoming barriers to growth then an argument could be made that IP laws should change.  Indeed, IP laws are not divinely manifested, but created within a legal geography because society values the creation of knowledge and believes such knowledge ought to be protected in the marketplace.  The question becomes, is this the type of IP violation that is coming from China—a form of redistribution from rich OECD countries to China, a developing nation?

No it is not.  China and other IP violating nations are willing to take IP wherever they can find it, not just pulling a Robin Hood of stealing from the rich to give to the poor.   They will steal from the even poorer to give to the poor.  This point was has hit home to me when I recently met an entrepreneur named Emanuael Narh while in Ghana.  Narh is the CEO of Step Technologies, a small start-up based out Accra that allows customers to monitor their home security system through mobile devices.  Step Technologies came into existence through the Ghana Multimedia Incubator Centre (GMIC), Ghana’s sole IT incubator program.  Narh designed his prototype while still an undergraduate at the University of Ghana and developed it further in his year of compulsory national service where the concept was noticed by representatives of GMIC.  Over the last several years GMIC has provided work space and helped Narh develop his idea to a commercial level, file patent work, find seed funding, and partner with distributors, and two years ago Step Technologies was finally ready to begin manufacturing.  After going through an extensive bidding process a Chinese manufacturing firm won the contract and Step Technologies transferred their technical details and information for production.  However, over the next several months GMIC noticed something peculiar; within the Chinese manufacturer’s supply network in China devices identical to that of Step Technologies’ began to appear in the market without the permission of Step and without paying a licensing fee.

When I asked Narh about what he thought happened he was cautious to not make any accusation without evidence.  He simply said, “We eventually changed manufacturers out of fears our concept was not safe.”  Others I have met with involved in developing Ghana’s IT sector who are aware of Step Technology’s situation were less cautious, telling me flat out, “of course the manufacturer stole the idea.”

Step Technologies’ story is not unique.  China has developed an explicit strategy that holds that it is acceptable to take IP from anywhere in the world, not just from the rich North.  If the victims of Chinese IP theft are from rich countries it is coincidental and if they are from poor countries, then it is collateral damage.  To emphasize the point consider the fact China’s GDP is 192 times greater than Ghana’s and China’s GDP per capita is over seven times greater.  Rampant IP theft from China (as well as other developing countries like Russia) is not some kind of Robin Hood strategy to bootstrap the poor on the backs of those who can afford it, it is a systemic national strategy to use or take whatever from whomever possible.

Leaders throughout Africa are well aware that in order to grow their economies they must move from commodities to knowledge-based enterprises.  Step Technologies is a model for doing so; an Africa entrepreneur, aided by a government-funded incubator program, is eventually competitive in the marketplace.  (By the way, Step Technologies has found another manufacturer and is now in major markets throughout Africa with plans to go global in the next several years).  This is the type of economic development that benefits Africa and the global economy.  Yet the process of creating knowledge-intensive industries is long and difficult and without any potential recourse for IP theft from market-dominating countries the route can be next to impossible.  As one Ghanaian fund manager responded to my question about IP theft from China, “It’s a struggle but what can we do?”

Africa has enough challenges to development, IP theft from WTO nations should not be yet another hurdle.

This piece is cross-posted at Innovation Policy Blog

Where the U.S. is Building Knowledge Capital

Tuesday, December 21st, 2010
Michael Mandel



Michael Mandel is the chief economic strategist at the Progressive Policy Institute and the founder of Visible Economy LLC, a New York-based news and education company.

by Michael Mandel

I’ve been posting about knowledge capital writedowns, so now it’s time for a post on where the U.S. is building knowledge capital.

Let’s start with research and development: R&D is not the only type of knowledge capital investment, but it’s one of the more important parts.  In my upcoming paper “Biosciences and Long-Term Economy Recovery”, I wanted to compare biosciences R&D  in the U.S. with infotech R&D.  (Biosciences, by my definition, includes pharmaceuticals, medical equipment makers, and biotech).

Now, these numbers are not published by the government,  but I was able to take a decent shot  using NSF data. Take a look at the chart below:

By my calculations, the U.S. R&D effort, outside of defense, is divided into thirds–one third biosciences, one third infotech, one third everything else.

I estimate that  biosciences accounts for  approximately $100 billion a year in domestic R&D spending. This includes domestic business spending, nondefense federal spending and nondefense academic spending.

U.S. domestic infotech R&D totals roughly $95 billion, outside of defense. However, my calculations don’t pick up the portion of the government defense R&D that goes into IT-related projects, which would gross it up to $100 billion. For all intents and purposes,  domestic IT R&D is roughly equal to biosciences R&D.

In these two areas–biosciences and IT–it’s likely that the rate of U.S. knowledge capital creation exceeds the rate of knowledge capital writedown. Other areas of R&D? Much dicier.

Note: These are preliminary estimates. I will likely update them in the full version of the paper.

This piece is cross-posted at Mandel on Innovation and Growth

Will 2011 Be a Banner Year for IT Hiring?

Monday, December 20th, 2010
Michael Mandel



Michael Mandel is the chief economic strategist at the Progressive Policy Institute and the founder of Visible Economy LLC, a New York-based news and education company.

by Michael Mandel

The water is building up behind the dam.  More and more, it’s looking like 2011 could be a banner year for IT hiring…isn’t that amazing?

The key piece of evidence:  Online help-wanted ads for computer and mathematical occupations are up 56% over a year ago, and well over their pre-bust peak.  That’s according to data from The Conference Board. *

This category of help-wanted ads includes companies looking for the full range of IT occupations: computer software engineers, computer support specialists, network administrators, web developers, computer programmers and the like.**

On one level, this rise in labor demand is not surprising, since  the communications boom–including mobile, video, social networking, online shopping, and  all sorts of other applications–is driving a commensurate boom in IT spending.   With business spending on computers, software, and communications equipment is now almost 10% above pre-bust levels,  it’s no wonder that companies have an absolute crying need for more skilled IT workers.

So far, however, businesses have been holding off from actual hiring. Data from the BLS suggests that the number of people actually employed in IT occupations has not risen as fast as the want ads.  Employment in computer and mathematical occupations now stands at 3.4 million, well below its recent peak.

My intepretation, though, is that the hiring pressure is gotten strong enough to break the dam, especially with Obama having just signed the new tax bill. Companies have just been waiting to make sure that  the global economy doesn’t fall back into a deep funk again, and a hefty dose of fiscal stimulus is just the thing.

I’m predicting a big jump in IT hiring as soon as the new year starts…and it’s about time.

*The labor demand data is from The Conference Board Help Wanted OnLine (HWOL) data series, http://www.conference-board.org/data/helpwantedonline.cfm

This piece is cross-posted at Mandel on Innovation and Growth

Tom Friedman’s Reading My Stuff on Green Tech and the Military!

Monday, December 20th, 2010
Jim Arkedis



Jim Arkedis is the director of PPI's National Security Project.

by Jim Arkedis

Look, I realize that Tom Friedman gets a lot of guff from the liberal intelligensia.  Matt Taibbi over at Rolling Stone has practically made a second career out of eviscerating Friedman’s sometimes tortured contortions of the Queen’s Tongue.  Certainly, Taibbi scores the odd point: “It’s OK to throw out your steering wheel,” Friedman once wrote about George Bush’s Middle East policy, “as long as you remember you’re driving without one.”  What?

Fair enough.  But Tom, a long-time friend of PPI no less, is an insightful writer who, more often than not, is on the right side of history.  Take his column this weekend on the “U.S.S. Prius“:

Spearheaded by Ray Mabus, President Obama’s secretary of the Navy and the former U.S. ambassador to Saudi Arabia, the Navy and Marines are building a strategy for “out-greening” Al Qaeda, “out-greening” the Taliban and “out-greening” the world’s petro-dictators. Their efforts are based in part on a recent study from 2007 data that found that the U.S. military loses one person, killed or wounded, for every 24 fuel convoys it runs in Afghanistan. Today, there are hundreds and hundreds of these convoys needed to truck fuel — to run air-conditioners and power diesel generators — to remote bases all over Afghanistan.

Mabus’s argument is that if the U.S. Navy and Marines could replace those generators with renewable power and more energy efficient buildings, and run its ships on nuclear energy, biofuels and hybrid engines, and fly its jets with bio-fuels, then it could out-green the Taliban — the best way to avoid a roadside bomb is to not have vehicles on the roads — and out-green all the petro-dictators now telling the world what to do.

Let’s just say I’m happy Tom’s reading my stuff.  Yep, on October 12, I wrote the following piece in the Los Angeles Times on the same topic to mark the 10th anniversary of the bombing of the U.S.S Cole in Aden harbor:

America forgets Oct. 12 as seamlessly as it remembers Sept. 11. Ten years ago today, 17 U.S. Navy sailors were killed and 39 injured in an Al Qaeda attack against the U.S. destroyer Cole in the harbor of Aden, Yemen. The Cole was relatively defenseless during a 24-hour refueling stop when suicide operatives pulled alongside in a small, explosive-laden boat and detonated a charge, ripping a 40-foot hole in the hull.

Though the lessons from 9/11 will be debated for years, Oct. 12′s message is succinct. It is best summed up by Marine Corps Commandant Gen. James T. Conway: “Energy choices can save lives on the battlefield.” The armed forces are searching for next-generation green energy technologies because they provide power at the point of its consumption, which decreases the military’s need to resupply with carbon-based fuels.

Mabus is setting big goals for an energy-independent military. He wants to sail a “Great Green Fleet” by 2016 — a full carrier strike group composed of nuclear and hybrid electric ships, as well as biofueled aircraft. By 2020, Mabus wants half of the Navy’s energy to come from alternative sources.

That’s why the Obama administration should consider a Pentagon innovation fund. A few well-spent dollars would help companies tackle the technological learning curve and reduce costs.

To get to where Mabus wants to go, ideas need cash. The Pentagon may have a truly out-of-control budget, but consider this: Radar, GPS and the Internet all started as military-funded projects. The next green technology could be sitting in a lab somewhere, begging for a few dollars to help produce it on a bigger scale.

With conservatives pushing this climate change denial nonsense, it’s an important point that the military is innovating on green-tech because it can’t wait for the political “debate”.  So much the better as more-and-more mainstream writers pick up on this narrative.

Knowledge Capital Writedown: Wind Turbines

Wednesday, December 15th, 2010
Michael Mandel



Michael Mandel is the chief economic strategist at the Progressive Policy Institute and the founder of Visible Economy LLC, a New York-based news and education company.

by Michael Mandel

On the front page of the NYT this morning, Keith Bradsher gives a perfect example of a knowledge capital writedown, in his story about wind turbine technology being transferred to China by a Spanish company, Gamesa:

Nearly all the components that Gamesa assembles into million-dollar turbines here, for example, are made by local suppliers — companies Gamesa trained to meet onerous local content requirements. And these same suppliers undermine Gamesa by selling parts to its Chinese competitors — wind turbine makers that barely existed in 2005, when Gamesa controlled more than a third of the Chinese market.

But in the five years since, the upstarts have grabbed more than 85 percent of the wind turbine market, aided by low-interest loans and cheap land from the government, as well as preferential contracts from the state-owned power companies that are the main buyers of the equipment. Gamesa’s market share now is only 3 percent.

With their government-bestowed blessings, Chinese companies have flourished and now control almost half of the $45 billion global market for wind turbines. The biggest of those players are now taking aim at foreign markets, particularly the United States, where General Electric has long been the leader.

The story of Gamesa in China follows an industrial arc traced in other businesses, like desktop computers and solar panels. Chinese companies acquire the latest Western technology by various means and then take advantage of government policies to become the world’s dominant, low-cost suppliers.

It is a pattern that many economists say could be repeated in other fields, like high-speed trains and nuclear reactors, unless China changes the way it plays the technology development game — or is forced to by its global trading partners.

Because of Gamesha’s transfer of knowledge capital to China, GE’s knowledge capital has become less valuable, which eventually will affect wages and employment.   Gamesha’s knowledge capital has been less valuable as well, which affects the Spanish standard of living.

The correct policy prescription is for the U.S. to dramatically up our investment in knowledge capital and physical capital.  Dramatically. That may require less support for consumption now so that our children can be better off in the future.

This article is cross-posted at Innovation and Growth

Photo credit: Bonnie Tsang

Senator Warner’s Smart Thinking on Red Tape

Monday, December 13th, 2010
Scott Thomasson



Scott Thomasson is the economic and domestic policy director for the Progressive Policy Institute. Follow @st_ppi

by Scott Thomasson

With Congress about to enact a massive new tax package that may be the last attempt we make at any kind of fiscal stimulus anytime soon, what other approaches should we be looking to for the long-term changes we need to regain our economic vitality?

In this morning’s Post, Senator Mark Warner offers an answer that makes a lot of sense in the cash-strapped, post-stimulus world we find ourselves in: cutting regulatory red tape to invigorate the private sector.  Citing both the enormous compliance costs for businesses as well as the chilling effects regulation can have on  investment and innovation, Senator Warner outlines his legislative proposal for a “regulatory pay-as-you-go” system to curb the steady increase in regulatory burdens on our economy.

Senator Warner’s proposal, which he discussed at PPI’s infrastructure forum in September, is similar to the “one-in, one-out” approach recently adopted in Britain, requiring agencies imposing new regulations to identify existing regulations with the same amount of economic impact to be eliminated.  The idea is that if we are serious about wanting to let the private sector drive economic growth through new investment and innovation, we should at least try to hold the level of regulatory burden constant, rather than expanding it without any effort whatsoever to revisit potentially outdated or poorly designed rules already in place.

PPI has argued for the same idea that our regulatory system needs to be more responsive to the needs of the economy, most notably in recent policy memos by Michael Mandel, who has proposed his own approach of countercyclical regulatory policy.  Like Warner, Mandel suggests that one of the best ways we can encourage job growth and revive our economy is to recognize that government is generally better at choking off innovation than it is at actively promoting it, so the best thing we can do is to be cautious in imposing new rules on the innovative ecosystems in our economy, like the communications sector, that are the best sources of new growth.

Senator Warner is right to model his legislation on the steps taken in the U.K., but the trick is coupling good ideas with the right political leadership to force a cultural shift in the way we think about regulating the private sector.  As Warner points out, British reforms have been years in the making, and they are the product of institutional changes based on improving collaboration and input from business to craft policies that would make Britain more globally competitive.  This effort has crystallized in the last year under the coalition government led by Prime Minister David Cameron, whose dedication to bringing a “new economic dynamism” to his country offer a pretty good lesson in leadership for President Obama to study while he writes his State of the Union speech for January.

In his excellent speech in October, Cameron laid out an actual strategy (!) for growth that included fiscal discipline, increased investments in human capital and infrastructure, a renewed focus on exports and competitive advantage, and an effort to encourage new companies and innovation to drive growth.  Putting aside differences of opinion some may have about Cameron’s fiscal austerity, one thing this speech does offer that Warner and Mandel can both love, and that White House advisors can learn from, is Cameron’s attitude about government regulation:

Successful, high-growth economies are like ecosystems –they are organic, evolve through trial and error and depend on millions, billions, of individual preferences, choices and relationships. Governments can expect to intelligently design all this as much they can expect to intelligently design the Great Barrier Reef.  But what they can do is create an environment in which businesses are confident enough to invest. . . . If we are to get back to strong growth, these profits need to turn into productive investment – and my message to you today is that we are providing the stability for that investment.

PPI strongly supports Senator Warner’s pay-as-you-go proposal as a long overdue approach to modernizing our regulatory system.  Both Warner’s proposal and Mandel’s countercyclical regulatory approach are helpful starting points for a discussion about how to make institutional changes that create a consistent method of scrubbing stale and ineffective regulations out of the system to make way for new rules better tailored to today’s economy.

PPI has supported a number of structural reform proposals to our regulatory system, like creating a review board that periodically submits a list of regulations for repeal to Congress for an up-or-down vote, much like the BRAC base-closure process.  We have also recommended that OMB conduct “innovation impact studies” for new agency rules to measure the regulatory footprint imposed on innovative ecosystems in the economy, the same way we conduct environmental impact studies.  OMB’s Office of Information and Regulatory Affairs (OIRA) would be a natural fit to take charge of such an effort, not only because of its institutional competence in reviewing agency rules, but also because its current Administrator, Cass Sunstein, could seek advice from his friend and co-author of Nudge, Richard Thaler, who serves as a lead advisor to the British government in its regulatory reform efforts.

As usual, Warner brings an invaluable perspective and fresh thinking to the Senate, and Democrats would be smart to showcase his creative thinking the same way Republicans thrust younger members like Paul Ryan into the spotlight.

Senator Warner is right to propose this regulatory PAYGO legislation as a means to boost our economy when our other options for doing so effectively are starting to run thin.  Pointing across the pond for an example of smart reform policy is also dead-on, but perhaps he should also point President Obama to David Cameron’s October speech as an example of smart, strategic leadership.

Genachowski Walks the Tricky Path

Wednesday, December 1st, 2010
Michael Mandel



Michael Mandel is the chief economic strategist at the Progressive Policy Institute and the founder of Visible Economy LLC, a New York-based news and education company.

by Michael Mandel

FCC Chairman Julius Genachowski should be given a measured round of applause for his proposed “rules of the road” for Internet openness. Genachowski addressed the core issues including a basic no-blocking rule and giving telecom providers the right to “reasonable network management.”  And he did so without putting an excessively heavy new regulatory burden on the communications sector.

The truth is, the FCC is walking a tricky path. The broad communications sector that the agency oversees, long-maligned, has turned into a crown jewel in today’s domestic economy—vibrant and dynamic. Yet the FCC has come under pressure to impose strict net neutrality rules—a nutty move that would have been the equivalent of doing invasive surgery on a healthy patient.

Instead, Genachowski and the FCC are following the basic principle of countercyclical regulatory policy — the government should stay away from imposing onerous new regulations on growing and innovative sectors such as communications while the economy is still sluggish.

Between now and the December 21st meeting of the Commission, Genachowski needs to make sure that his rules of the road stay as ‘minimally invasive’ as possible.  Attempts to broaden them, no matter how well-meaning, will have the effect of putting the communications sector on notice that any commercial negotiation, technical decision, or investment strategy could be second-guessed by regulators—not the best way to have rapid innovation or job creation.

Why Some States are “New Economy” States

Wednesday, November 24th, 2010
Scott Andes



Scott M. Andes is a research analyst at the Information Technology and Innovation Foundation.

by Scott Andes

When it comes to innovation-based growth, not all states are equal. Certain states are on the front lines, and are accordingly most likely to lead the way to economic recovery. According to a new report from the Information Technology and Innovation Foundation, the most leading New Economy states all excel at supporting a knowledge infrastructure, spurring innovation, and encouraging entrepreneurship.

The new report, The 2010 State New Economy Index, uses 26 indicators to assess states’ fundamental capacity to successfully navigate economic change. It measures the extent to which state economies are knowledge-based, globalized, entrepreneurial, IT-driven and innovation-based – in other words, the degree to which state economies’ structures and operations match the ideal structure of the New Economy.  Indicators include percent of the population online, fastest growing firms, exports, industry and state R&D among others.

The top five states – Massachusetts, Washington, Maryland, New Jersey, and Connecticut —are at the forefront of the nation’s movement toward a global, innovation-based economy.  Massachusetts has been the top ranked state in all iterations of the report (1999, 2002, 2007 and 2008). The Bay State boasts a concentration of software, hardware, and biotech firms supported by world-class universities such as MIT and Harvard in the Route 128 region around Boston. It survived the early 2000s downturn and was less hard hit than the nation as a whole in the last recession. And it has continued to thrive, enjoying the fourth-highest increase in per-capita income. Washington State  (which ranked fourth in 2007 and second in 2008) scores high due not only to its strength in software (in no small part due to Microsoft) and aviation (Boeing), but also because Puget Sound region has emerged as entrepreneurial hotbed.

Maryland remains third (as it was in 2007 and 2008, as well), in part because of the high concentration of knowledge workers, many employed in the District of Columbia suburbs and many in federal laboratory facilities or companies related to them.  These and the other top ten New Economy states (New Jersey, Connecticut, Delaware, California, Virginia, Colorado, and New York) have more in common than just high-tech firms. They also tend to have a high concentration of managers, professionals, and college educated residents working in “knowledge jobs” (jobs that require at least a two-year degree). With one or two exceptions, their manufacturers tend to be more geared toward global markets, both in terms of export orientation and the amount of foreign direct investment.

All the top ten states also show above-average levels of entrepreneurship, even though some, like Massachusetts and Connecticut, are not growing rapidly in employment.  Most are at the forefront of the IT revolution, with a large share of their institutions and residents embracing the digital economy. In fact, the variable that is more closely correlated with a high overall ranking is jobs in IT occupations outside the IT industry itself. Most have a solid “innovation infrastructure” that fosters and supports technological innovation. Many have high levels of domestic and foreign immigration of highly mobile, highly skilled knowledge workers seeking good employment opportunities coupled with a good quality of life.

The two states whose economies have lagged most in making the transition to the New Economy are Mississippi and West Virginia. Other states with low scores include, in reverse order, Arkansas, Alabama, Wyoming, South Dakota, Kentucky, Louisiana, and Oklahoma. Historically, the economies of many of these and other Southern and Plains states depended on natural resources or on mass production manufacturing, and relied on low labor costs rather than innovative capacity, to gain advantage. But innovative capacity (derived through universities, R&D investments, scientists and engineers, and entrepreneurial drive) is increasingly what drives competitive success.

While lower ranking states face challenges, they also can take advantage of new opportunities. The IT revolution gives companies and individuals more geographical freedom, making it easier for businesses to relocate, or start up and grow in less densely populated states farther away from existing agglomerations of industry and commerce. Moreover, notwithstanding the recent decline in housing prices, metropolitan areas in many of the top states suffer from high costs (largely due to high land and housing costs) and near gridlock on their roads. Both factors may make locating in less-congested metros, many in lower ranking states, more attractive, particularly if their metropolitan areas offer high-quality schools, high-quality and efficient government, and a robust infrastructure.

Perhaps the most distinctive feature of the New Economy is its relentless levels of structural economic change.  The challenges facing states in a few years could well be different than the challenges today.  But notwithstanding this, the keys to success in the new economy now and into the future appear clear:  supporting a knowledge infrastructure (world class education and training); spurring innovation (indirectly through universities and directly by helping companies); and encouraging entrepreneurship.  In the past decade a new practice of economic development focused on these three building blocks has emerged, at least at the level of best practice, if not at the level of widespread practice.  The challenge for states will be to adopt and deepen these best practices and continue to generate new economy policy innovations and drive the kinds of institutional changes needed to implement them.

photo credit: Chantal Wagner

Reviving Jobs and Innovation: The Role of Countercyclical Regulatory Policy – Part I

Tuesday, November 16th, 2010
Michael Mandel



Michael Mandel is the chief economic strategist at the Progressive Policy Institute and the founder of Visible Economy LLC, a New York-based news and education company.

by Michael Mandel

Read the entire memo

Since the Great Depression, the tools of choice for fighting economic downturns have been countercyclical monetary policy and countercyclical fiscal policy. That is, when the economy slowed, economists would recommend cutting interest rates, reducing taxes, and boosting government spending to pump up demand. And for 75 years, those policy measures were enough.

But in the aftermath of the financial crisis, we seem to have almost exhausted the limits of monetary and fiscal policy to create jobs. The Federal Reserve has pushed interest rates down to near zero, although it appears ready to try another round of quantitative easing.

Meanwhile, the federal budget deficit hit $1.3 trillion in fiscal year 2010. In the aftermath of the midterm election victories of candidates who ran against federal spending, it seems politically unlikely that there will be another round of  fiscal stimulus.

Under the circumstances, it may be time to try something new: Countercyclical regulatory policy. That means following a very simple rule: Don’t add new regulations on innovative and growing sectors during economic downturns.

The goal: To encourage innovation and job creation by temporarily abstaining from additional regulation on innovative sectors, and perhaps even temporarily abating some existing regulations on innovative sectors (what I call innovation ecosystems).

The key word here, of course, is ‘temporarily.’ Like countercyclical monetary and fiscal policy, countercyclical regulatory policy is designed to provide a short-run stimulus to the economy by making decisions that can be reversed when the economy improves—the equivalent of a temporary investment tax credit. In other words, countercyclical regulatory policy is not the same as deregulation. It presupposes that regulators stay alert and take care of abuses.

Read the entire memo

How Do You Define the Internet?

Thursday, November 11th, 2010
Richard Bennett



Richard Bennett is a research fellow at the Information Technology and Innovation Foundation, specializing in broadband networking and Internet policy. He has a 30-year background in network engineering and standards.

by Richard Bennett

One of the more interesting comments filed with the FCC in its recent Further Inquiry into Two Under-Developed Issues in the Open Internet Proceeding came from a group of illustrious computer industry stalwarts such as Apple hardware designer Steve Wozniak, computer spreadsheet pioneer Bob Frankston, Stupid Network advocate David Isenberg, and former protocol designer David Reed.

Their comments are worth noting not only because they come from such a diverse and accomplished group of people, but also because they’re extremely hard to follow (one of the signers told me he almost didn’t sign on because the statement was so unclear.) After reading the comments several times, asking the authors for clarification, comparing them to previous comments by a similar (but larger) group known as “It’s the Internet, Stupid,” and to an even older statement by a similar but larger group called the Dynamic Platform Standards Project (DPSP), I’m comfortable that I understand what they’re trying to say well enough to explain.

A Passion for Definition

The author of these three statements is Seth P. Johnson, a fellow from New York who describes himself as an “information quality expert” (I think that means he’s a database administrator, but it’s not clear.) Johnson jumped in the net neutrality fray in 2008 by writing a proposed law under the name of the DPSP and offering it to Congress.

The gist of the thing was to define Internet service in a particular way, and then to propose prosecution for any ISP that managed its network or its Internet connections in a way that deviated from the definition.  Essentially, Johnson sought authority from the IETF’s Internet Standards, but attempted to reduce the scope of the Internet Standards for purposes of his Act. The proposed Act required that ISPs make their routers “transmit packets to various other routers on a best efforts basis,” for example, which precludes the use of Internet Type of Service, Class of Service, and Quality of Service protocols.

IETF standards include a Type of Service (ToS) option for Internet Protocol (IP) as well as the protocols IntServ, DiffServ, and MPLS that provide mechanisms for network Quality of Service (QoS.) QoS is a technique that matches a network’s packet transport capabilities to the expressed needs of particular applications, ensuring that a diverse group of applications works as well as possible on a network of a given, finite capacity.  ToS is a similar method that communicates application requirements to one of the networks that carries IP datagrams, such as Ethernet or Wi-Fi. Packet-switched networks, from the ARPANET days to the present, have always included QoS and ToS mechanisms, which have been used in some instances and not in others. You’re more likely to see QoS employed on a wireless network than on a wireline network, and you’re also more likely to see QoS on a local network or at a network edge than in the Internet’s optical core; but the Internet’s optical core is an MPLS network that carries a variety of private network traffic at specified service levels, so there’s quite a bit of QoS engineering there too.

The purpose of defining the Internet as a QoS-free, “Best-Efforts” network was to prevent network operators from making deals with content providers that would significantly privilege some forms of sources of content over others. This approach originated right after Bill Smith, the former CTO of Bell South, speculated that ISPs might increase revenues by offering exceptional performance to select application providers for a fee. While the service that Smith proposed has a long history in Internet standards (RFC 2475, approved in 1998, discusses “service differentiation to accommodate    heterogeneous application requirements”), it’s not part of the conventional understanding of the way the Internet works.

Defining One Obscurity in Terms of Another

“Best-efforts” (BE) is a term of art in engineering, so defining the Internet in this way simply shifts the discussion from one obscurity to another. BE has at least three different meanings to engineers, and another one to policy experts. In the broadest sense, a BE network is defined not by what it does as much as by what it doesn’t do: a BE network makes no guarantee that any given unit of information (“packet” or “frame” ) transmitted across the network will arrive successfully. IP doesn’t provide a delivery guarantee, so the TCP code running in network endpoints such as the computer on your desk or the mobile phone in your hand has to take care of checking for lost packets and retransmitting when necessary. BE networks are appealing because they’re cheap to build, easy to maintain, and very flexible. Not all applications need for every packet to transmit successfully; a Skype packet that doesn’t arrive within 200 milliseconds can be dropped, for example. BE networks permit that sort of decision to be made by the application.  So one meaning of BE is “a network controlled by its endpoints.”

Another meaning of BE comes from the QoS literature, where it is typically one of many service options in a QoS system. In the Internet’s DiffServ standard and most other QoS systems, BE is the default or standard treatment of all packets, the one the network router employs unless told otherwise.

Yet another definition comes from the IEEE 802 standards, in which BE is the sixth of seven levels of service for Ethernet, better than Background and worse than all others; or the third of four levels for Wi-Fi, again better than Background. When policy people talk about BE, they tend to use it in the second of these senses, as “the standard treatment,” with the additional assumption that such treatment will be pretty darn good most of the time.

Johnson’s FCC filing insists that the Internet, properly defined, must be a best-efforts-only system; all other QoS levels should be considered “managed services” rather than “Internet.” The filing touts a number of social benefits that can come about from a BE-only Internet, such as “openness, free expression, competition, innovation and private investment” but doesn’t explain the connection.

Constraining Applications

One of the implications of this view is that both network operators and application developers must adapt to generic treatment and refrain from relying on differentiated services or offering differentiated services for sale as part of an Internet service.

Unfortunately, the advocates of this viewpoint don’t tell us why they believe that the Internet must refrain from offering packet transport and delivery services that are either better or worse than generic best-efforts, or why such services would harm “openness, free expression, competition, innovation and private investment” if they were provided end-to-end across the Internet as a whole, or where the authority comes from to support this definition. We’re supposed to simply trust them that this is the right way to do things, relying on their group authority as people who have been associated with the Internet in various capacities for a long time. This isn’t engineering, it’s religion.

There is nothing in the Internet design specifications (Internet RFCs) to suggest that providers of Internet services must confine themselves to BE-only, and there is nothing in the architecture the Internet to suggest that all packets must be treated the same. These issues have been covered time and again, and the FCC knows by now exactly where to look in the RFCs for the evidence that this view of the Internet is faulty. The Internet is not a packet delivery system, it’s a virtual network that only works because of the underlying physical networks that transport and deliver packets. This virtual network defines an interface between applications of various types and networks of various types, and as is the case in all abstract interfaces, it may provide least common factor services, highest common factor, or anything in between, all according to the needs of the people and organizations who pay for it, use it, and operate it. As Doc Searls said many years back, nobody owns the Internet, anyone can use it, and anyone can improve it. The capacity for constant improvement is the magic of the Internet.

Myth of the General Purpose Network

If we insist that the Internet must only provide applications with one service option, we doom application developers to innovate within narrow confines.  A generic Internet is effectively optimized for file-transfer oriented applications such as web browsing, email, and media streaming; it’s fundamentally hostile to real-time applications such as immersive video conferencing, telepresence, and gaming. Some of the best minds in the Internet engineering community have labored for past 20 years to devise systems that would allow real-time and file transfer applications to co-exist happily on a common infrastructure, and these efforts are perfectly consistent with the nature of the Internet properly understood.

The central myth underlying the view of the Johnson and his co-signers is the “general purpose network” formulation. This terminology is part of telecom law, where it refers to networks that can support a variety of uses. When adapted to engineering, it becomes part of an argument to the effect that best efforts is the “most general purpose” method of supporting diverse applications and therefore the “best way to run a network.” I think it’s wrong to frame the challenges and opportunities of network and internetwork engineering in this way. I’d rather that people think of the Internet as a “multi-purpose network” that can offer diverse packet transport services suitable for diverse applications.  We want network operators to build networks that serve all applications appropriately at a price that ordinary people can afford to pay. We don’t want consumers to pay higher prices for inefficient networks, and we don’t want to foreclose application innovation to the narrow bounds of legacy systems.

Segregated Systems are Harmful

Systems that allow applications to express their requirements to the network and for the network to provide applications with differentiated treatment and feedback about current conditions are apparently the best way to do this; that’s the general concept of Internet QoS. This has been the thinking of network and internetwork engineers since the 1970s, and the capability to build such systems is embedded in the Internet architecture. The technical people at the FCC who are reading the comments in this inquiry know this.

These arguments seem to endorse a disturbing trend that the so-called “public interest” advocates are now advancing, to the effect that advanced network services must be segregated from generic Internet service on separate (but equal?) physical or logical facilities. This is not good, because it robs us of the benefits of converged networks.  Rather than dividing a coax or fiber into two frequencies and using one for IPTV and the other for Generic Internetting, it’s better to build a fat pipe that provides IPTV and Generic Internetting access to the same pool of bandwidth. The notion of sharing a common pool of bandwidth among multiple users and applications was the thing that started us down the road of packet switching in the first place, and it’s very important to continue developing that notion; packet switching is the Internet’s enabler. Segregated facilities are undesirable.

Integrating Applications and Networks

What we need in the Internet space is a different kind of vertical integration than the kind that was traditional in the single application networks of the past. QoS, along with modular network and internetwork design, permits applications and end users to essentially assemble networks as applications are run that provide them with the level of service they need at the price they can afford. We get to that by allowing applications to explicitly state their requirements to the internetwork, and for the internetwork to respond with its capabilities. Application choice meets the needs of innovators better than by a rigid “one size fits all” formulation.

The Internet is, by design, a platform for both generic and differentiated services. That’s its true legacy and its promise. We don’t need to run into historical blind alleys of myth and prejudice when the opportunity faces us to build this platform out to the next level. As more Internet use shifts to mobile networks, it will become more critical than ever to offer reasonable specialization to applications in a standards-compliant manner. The Internet of the Future will be multipurpose, not generic.

Photo credit: Pixelsior