Photo by Dmitry Avdeev, CC BY-SA 3.0
I attended a conference here in New York yesterday about how to restore America’s economy dynamism. It included a lot of folks including former Bank of England Governor Lord Mervyn King and Nobel Prize winning economist Edmund Phelps.
There were some interesting remarks and I need to dive into some of the actual papers. After doing so I might write more at a future time. But a few things caught my attention at first glance.
The first is how willing multiple of the presenters were to forthrightly say economic concentration, including corporate mergers, was a factor in suppressing growth.
Anton Korinek of Johns Hopkins gave an interesting presentation on the economics of superstars (his paper is here). In his view “information” (digital technology) leads to increasing returns to scale as it is inherently non-rival. Add excludability (provided by IP laws) and you have the makings of natural monopolies. These see significant “superstar” returns reaped, though in theory they will level off once the price reaches the monopolistically optimum level. In his view, in the mid-term we are going to increasingly see an economy geared towards superstar winners.
Thomas Philippon argues that the US has been underinvesting, and declining competition is a big reason why. (This paper appears to be relevant). He notes that, for example, that according to OECD research, the US had less product regulation than Europe during the 1990s, but today it has more product regulation. Interesting stuff here.
Jaana Remes of McKinsey talked about the demographic headwinds making growth tougher. (Quite a bit of our previous economic growth came from population growth and urbanization, two factors now largely played out in the US). I recorded a podcast with her I’ll be posting in the near future.
I also recorded another podcast with Dane Stangler from Startup Genome, who talked about the startup deficit (was well as those who argue that we have plenty of the kind of startups that matter).
There were a couple of popular ideas for improving things. The two big ones focused on missing institutions. In particular, a comparative lack of German style apprenticeship programs and a lack of innovation intermediaries like Germany’s Fraunhofer Institutes.
Again, I may give some of the papers various speakers wrote a read. I thought it was interesting to see economists more or less admitting there are problems.
If “economic dynamism” implies more consumption, then it may not actually be a desirable goal.
Also true of “more parasitic apps”.
I go back to the Cincinnati thread and investors like Nelson Peltz who are hostile to companies investing in R&D. Meanwhile, there is a tax bill making its way through Congress that is hostile to universities and will likely either cut R&D or even make it more in thrall to corporate donors than it already is. And the further interest in cutting government research spending will also have an impact. As does the continuing hostility toward education funding and public schools — the promise of vouchers and charters on a widespread level isn’t even close to being fulfilled, and appears to be a false promise, anyway. Then there’s the focus on protecting dying industries like coal for the sake of some symbolic point. And, back to the tax bill, writing in such a way that people who have money get more, and everyone else in the long run gets squeezed even further. And the end of net neutrality. And employers “not finding workers” because nobody wants to raise wages.
So, basically, if people with money or power aren’t interested in R&D and envisioning a new future, and if the interest is in making sure those who already have money get even more of it, while choking off paths to innovation and advancement for those at all levels of society — is it any wonder growth is suppressed? Is it any wonder the once-mighty engine of American innovation is conking out?
The states and metros are going to have be the ‘laboratories of innovation.’ It ain’t coming from Washington or Wall Street.
@rkcookjr: I’m not sure if I entirely agree with your viewpoint. If anything it sounds like many tech companies are awash in fanciful development spending. I can’t even begin to imagine some of the projects Microsoft and Google have wasted untold millions on, only for nothing to see the light of day.
In P&G’s case, you have to ask an important question: Is pumping R&D into shampoo and body soap likely to result in big payoffs in the 21st century? Maybe, but there’s a lot of risk involved. You’re probably better off letting the small guys innovate and buying up the more successful companies.
The planet is choking on human waste and suffering from ever worsening inequality. I agree that the best strategy is for dinosaur oligarchs to buy “innovative” hair color makers. Like the AM radio ad I heard the other day: “Madison Jones’ or something like that. FEMALE FOUNDED. Because hair color is an important social issue!
It’s Madison Reed and, laugh all you want, but it’s the fastest growing company in a $15 billion category (hair dye) that’s relevant to approximately 85% of the female consumers in the U.S. The company is following in the footsteps of similar branded consumer startups like Warby Parker, Dollar Shave Club, Harry’s, Bonobos and more. Innovation isn’t limited to apps on a mobile platform or enterprise software. Madison Reed didn’t exist before 2013 and already employs abut 100 people. It’s HQ is in San Francisco, partly explained by founder preference as well as the proximity to venture capital.
Mark Hansen makes an excellent point — it’s a good strategy for large legacy consumer giants to pursue innovation through the acquisition of smaller companies that have proven successful in alternative distribution strategies. This has been occurring in the food & beverage sector for over a decade as Coke/Pepsi acquired more than a dozen alternative drink brands and packaged food companies have aggressively pursued organic natural brands.
“Fastest growing” in an industry happens all the time on a low-base startup. Tesla is the “fastest growing” car company. But it’s still well down the list of units/dollars sold and a niche product.
GM, Ford, FCA, VW, Toyota, and Nissan/Renault are not trying to buy Tesla because it’s crazy overvalued based on “growth” instead of fundamentals and actual results.
I’m not sure oligarchs buying up everything is that great of a social trend.
Ok, but maybe the best example isn’t P&G. Maybe it’s the “industrial dinosaur” GE. So instead of research into more-efficient locomotives, or better/lighter/faster MRIs and PET scanners, the activist-investor community is pushing GE to divest and/or “cut overhead spending”.
Incidentally, the same is happening in pharma.
But R&D is a process with (by its nature) an unknown timetable and unknown outcomes and occasional “black swan” moments. Those uncertainties are not amenable to a quarterly earnings focus.
So I guess the “strategy” of earning all their profits from packaging and repackaging various tranches of “debt” isn’t working very well anymore?
I read somewhere that there is zero profit in producing and selling cell phones. All the money comes from selling purchase plans, then packaging and repackaging these “financial instruments” to other vampire squids. It’s spreadsheet diddling all the way down.
Did any of the conference speakers cover the Trump deregulatory agenda? Or is this too taboo to be examined?
No specifically wrt to Trump. Philippon talked about regulation in general, but it’s clear from his Twitter that he viciously hates Trump.