State Broadband Index

Technet has just released its 2012 State Broadband Index. The new report, with principal author John Horrigan, “rates the states on  indicators of broadband adoption, network quality,  and economic structure as a way of taking stock of  where states stand.”

This index is important for understanding the economic and technological competitiveness of different states. The top state is Washington, followed by Massachusetts and Delaware. The worst state was Arkansas, alas.

And of course, I’d be remiss if I didn’t mention that our “App Intensity Index”  (from The Geography of the App Economy) was used as one of the inputs to the index.




Why Bill Gross is Wrong: Innovation and Long-term Returns on Equity

Bill Gross of Pimco has just written a piece where he argues that the real return on stocks in the future will be much lower than the long-term historical average of 6.6%:

Yet the 6.6% real return belied a commonsensical flaw much like that of a chain letter or yes – a Ponzi scheme. If wealth or real GDP was only being created at an annual rate of 3.5% over the same period of time, then somehow stockholders must be skimming 3% off the top each and every year. If an economy’s GDP could only provide 3.5% more goods and services per year, then how could one segment (stockholders) so consistently profit at the expense of the others (lenders, laborers and government)?

He then goes on to argue that:

The Siegel constant of 6.6% real appreciation, therefore, is an historical freak, a mutation likely never to be seen again as far as we mortals are concerned.

In a world of slow innovation, Gross is likely to be correct.  The economy grows slowly, and it becomes difficult to justify compensating risk capital if risks are not paying off.

The calculation changes, however, if we have big disruptive innovations. Big disruptive innovations offer risk on both the upside and the downside. On the upside, disruptive innovations create a wave of high-growth companies that drive the stock market higher. On the downside, disruptive innovations offer the distinct possibility of driving existing companies out of business, once again accentuating risk.

Innovation also makes diversification across a portfolio of large stocks a much less appealing prospect, since much of the stock gains will come from small companies that grow quickly. Investors therefore have to take more risk to capture the returns, whether they like it or not.

In this view of the world, an investment in the stock market becomes a bet on innovation. Do you think that the U.S. or the global economy has another wave of disruptive innovation coming? Then buy stocks. But if you think that we are stuck in permanent stagnation mode, then stay away from the stock market.

Anti-Innovation Bias in the New York Times

The headline on the New York Times “Green” blog post read “A Limit to Gains From Genetically Engineered Cotton.”   Sounds dark and foreboding, doesn’t it?

In fact, the research study cited by the blog post was  a highly-positive long-term study of the value of genetically engineered cotton in India.  The study closely examined the yields on small farms in India and concluded:

Building on unique panel data collected between 2002 and 2008, and controlling for nonrandom selection bias in technology adoption, we show that Bt has caused a 24% increase in cotton yield per acre through reduced pest damage and a 50% gain in cotton profit among smallholders. These benefits are stable; there are even indications that they have increased over time. We further show that Bt cotton adoption has raised consumption expenditures, a common measure of household living standard, by 18% during the 2006–2008 period. We conclude that Bt cotton has created large and sustainable benefits, which contribute to positive economic and social development in India.

Now, I ask you…does that study sound like it deserves a post with a negative headline?

A better, more accurate headline would have been “Genetically modified cotton shown to raise long-term living standards for small farmers in India. ”   An item on the Nature website, based off the same study, used the headline, “Genetically modified cotton gets high marks in India.”

Or, if you want the forward spin, “Can new technologies keep farm incomes rising in India?”  Or,  “Should activists rethink opposition to GM crops?”

This is not just nitpicking.  The only way out of our current economic malaise is innovation–innovation in IT, innovation in biosciences, innovation in energy.  From that perspective, an anti-innovation bias at the NYT is also anti-growth and pro-stagnation.


Why Bash Innovative Google?

Let me get this straight.  The communications boom is finally reviving the U.S. economy. There’s an incredible wave of startup activity and excitement around smartphones, mobile apps, broadband wireless. Jobs are being created, and the economy feels alive again.  Sounds like a great time to be celebrating our success, doesn’t it?

Yet the Federal Trade Commission has apparently decided that it’s a good time to go after Google, one of the key leaders of the communications revolution. And, oh yes, incidentally one of the most  innovative companies in the world.  Are these guys serious?

According to a front page story in the NYT this morning, “[f]ederal regulators escalated their antitrust investigation of Google on Thursday by hiring a prominent litigator, sending a strong signal that they are prepared to take the Internet giant to court.”  The story went on to say “the core question is whether power was abused.”

But when I look at Google, I see a company that has nourished the open-source Android platform, almost singlehandedly creating the only major competitor to  Apple’s iPhone ecosystem. I see a company that provides free services that a vast number of Americans use every day.

And I see that a company, frankly, that has helped make it cool for college students to be techie again, rather than simply gravitating to Wall Street and financial jobs.

I’m not defending all of Google’s actions, by any means. A company that  innovative is always going to be stepping on hidden land mines–it’s unavoidable.

But innovation has been the major force driving the communications boom, and Google has been a major source of that innovation. The FTC should open its eyes to the big picture here and think macro, rather than micro.  The Obama Administration should be encouraging innovative companies like Google, not attacking them.



Lessons from Bell Labs

In today’s NYT, we’ve got an important article lauding Bell Labs, with the headline “True Innovation: We should emulate Bell Labs, which took the long view, with a preference for usefulness.” Jon Gertner writes:

…we idealize America’s present culture of innovation too much. In fact, our trailblazing digital firms may not be the hothouse environments for creativity we might think. I find myself arriving at these doubts after spending five years looking at the innovative process at Bell Labs, the onetime research and development organization of the country’s formerly monopolistic telephone company, AT&T.

Why study Bell Labs? It offers a number of lessons about how our country’s technology companies — and our country’s longstanding innovative edge — actually came about. Yet Bell Labs also presents a more encompassing and ambitious approach to innovation than what prevails today. Its staff worked on the incremental improvements necessary for a complex national communications network while simultaneously thinking far ahead, toward the most revolutionary inventions imaginable.

Indeed, in the search for innovative models to address seemingly intractable problems like climate change, we would do well to consider Bell Labs’ example — an effort that rivals the Apollo program and the Manhattan Project in size, scope and expense. Its mission, and its great triumph, was to connect all of us, and all of our new machines, together.

Gertner is the author of the forthcoming “The Idea Factory: Bell Labs and the Great Age of American Innovation.”  He goes on to talk about how innovation was structured at Bell Labs, and what we can learn from it.It’s a really good piece. Gertner does a deep dive on issues that I just touched on in my December 2011 paper  “Scale and Innovation in Today’s Economy”. The key is that in their own way, big companies can be just as innovative as small companies, and perhaps more so.  We may need a return to the era of big, systematic innovation.

Lessons from the App Economy

My latest column is entitled “What the App Economy Can Teach the Whole Economy.”  Take a look.

Yglesias responds to PPI scale and innovation paper

Matt Yglesias has responded to my paper on scale and innovation with his piece “Small Is Still Beautiful: The trendy—and wrong—new argument that because big businesses innovate better, we should let them become monopolies.”

Well, I’ve been accused of many things over the years (how about “Nostradamus of the New Economy“?). But no one has ever called me trendy before.

Let me break down my argument into three statements.
–Innovation is the most important force driving long-term growth.
–Current economic trends suggest that big companies can in some circumstances have an innovative edge over small companies.
–If antitrust regulators care about long-term growth and competitiveness, they should factor the innovative potential of large companies into their calculations, rather than simply assuming small companies are more innovative.

Matt seems to agree with statements 1 and 2. But then he freaks out about statement 3, accusing me of encouraging monopolies.

Least persuasive of all is his idea that the health care, education, and energy sectors are “large-scale integrated systems” and that the need to transform those sectors should lead us to relax our vigilance about competition. If anything, these are sectors of the economy where we should be exceptionally worried that lack of competition is creating dysfunctional results. Higher-education incumbents use accreditation rules to stymie potentially disruptive competition, and health care markets remain fundamentally localized, with lack of hospital competition driving higher prices.

Here Matt has completely missed my point. Yes, education and health care suffer from a lack of competition. But partly what protects incumbents is the very interlockedness of the sectors. Small disruptive firms get co-opted into the existing system, which includes the government in both education and health care. I am arguing that the only companies that can challenge the existing status quo successfully have to have enough scale and heft.

On a broader level, Matt’s argument is implicitly founded on the belief that we have *enough* innovation. In Matt’s world, it’s more important to discourage market power than to encourage new technologies. In that sense, this post follows logically from his “The Crisis We Should Have Had Had” post (here and my response here). In Matt’s world, the U.S. innovation/productivity machine is doing just fine, and the only problem is “a pretty banal monetary crunch.”

Matt’s view is shared by most of the economics and policy establishment. This “pro-complacency” assessment leads to the belief that the U.S. competitive position is fine. The right-wing version of the pro-complacency position says that the only thing that we need is a smaller budget deficit and less government in general. The left-wing version says that all we need is to regulate the financial sector a bit more and pump a lot more monetary and fiscal stimulus into the economy.

But in the end, it’s complacency that is the big danger.