For the past decade or so we’ve chosen to have an economy driven by financial alchemy and debt. Our government gave in to the wishes of the financial services industry and essentially let them write their own regulatory laws. The effects of which we are living with today. Now that we seemed to have, for now, contained the enormous damage of the financial implosion of 08, we must turn to what’s next. I’ve made no secret of my appreciation for former Fed chief, Paul Volcker. Today he wrote an excellent piece explaining, very simply, financial reform. At the cost of 5 minutes of careful reading, you will get an incredibly strong grasp of what needs to get done and why. Highly recommended. The financial crisis is far too important of an event for us to leave this to the “experts” to understand and solve. We all need to be aware and engaged.

The flip side of this is the question of what we want the next few decades of our economy to look like. It can continue to be driven, falsely, by debt, inflated statistics, and other tricks. Or we can work on producing things the world wants again. This article shows that, ominously, China looks like it’s in a really strong position in the clean energy race. Millions of jobs are at stake from the total of next-generation energy jobs. As we’ve seen from other manufacturing sectors, clusters develop and it can be winner take all. We need to invest heavily in R&D -and- manufacturing incentives to ensure that we can incubate these industries fully here and we give them a chance to compete.

Two types of economies here. We’re at at a pivotal time where we can ensure that our financial services sector does the things it’s supposed to without blowing up the real economy and also invest so we have an economy that produces real things of value for us and the world. I think our way forward is pretty clear…

Headlines blared “US Economy Grew at Vigorous Pace in Last Quarter“. Of course, according to our economic statistics, yes, we saw 5.7% annual growth in the US economy. Unfortunately, however, this is just another sign of how detached our Washington statistics are from what’s really going on and why the headlines get it all wrong.

The analysis of the news is pretty much that since businesses kept next to no inventory in Q3, this was a natural adjustment as they had to place orders to replenish stock. I’m not a big fan of looking at GDP numbers to gauge the health of the US. Instead, I look at the middle class. What’s the real unemployment rate, counting those who are underemployed or have given up because there are no jobs anywhere near them (still over 17%). How many people have lost their homes this month and how is that number trending? How many people have fallen behind on their mortgages this month? Are people falling farther behind on their credit card payments? These numbers show no signs of improvement, and any talk of great economic growth his laughable in the face of the vast majority of the country just struggling to get by. After years of manipulation of statistics and foolishness in the general operation of the economy, we now have a detached economy where what you see going on stage has nothing to do with what’s going on behind the curtain.

Senator’s Orrin Hatch (R) and Chuck Schumer (D) are proposing a tax break for companies that hire an unemployed worker. In a nutshell, if a company hires an employee that has been unemployed for more than 60 days, they will not have to pay the Social Security insurance on the worker for the remainder of 2010. More here.

I think this is a good idea. But, frankly, just a good start. How about devising a bill that if a business hires a worker who has been collecting unemployment for longer than 6 months, businesses get a full tax-credit for 6 months equivalent to something like their previous unemployment benefit. The business could not have done layoffs in the past 6 months (to prevent firing people and hiring new workers who have been unemployed to get the tax credit), and in order to keep the credit the worker would have to keep the job for at least 6-months post credit (to prevent using the benefit and then layoffs). This puts people back to work creating value for businesses and, expands our economies productive capacity while also giving people an opportunity to get back to work and prove themselves with a new company. Workers are just looking for a chance. This might just give it to them. Since I don’t have the luxury of a budget office, I pulled my numbers out of the air. You could do the projections to even try and get this to be budget neutral since the revenue from employee taxes might neutralize some of the employer tax benefit that spurred the hiring. Thoughts?

GM today announced plans to build its own electric motors for hybrid vehicles. This is encouraging news, as it keeps engineering, manufacturing, and assembly infrastructure for advanced technology in the United States.

Clearly GM has huge challenges ahead of it (I’ll disclose that, like my whole family, I’ve been loyal to GM – Grand Am, Saturn SL2, Saturn SC2, & now a Buick Lacrosse– but that’s probably more than you care to know) but this is good news for America. If GM is going to turn the corner it will be thanks to advanced technologies that go along with their strides in quality.

Good quotes:

At a news conference in Detroit on Monday, Mr. Stephens compared the importance of G.M. making its own electric-drive motors for hybrid and electric vehicles to producing its own internal combustion engines for today’s gas-powered cars and trucks. He said that by designing and manufacturing electric motors in-house, G.M. “can more efficiently use energy from batteries as they evolve, potentially reducing cost and weight -– two significant challenges facing batteries today,” he said.

G.M. has spent the last seven years engineering its new electric motors at various research facilities in Michigan, Indiana and California. Tooling costs for the Baltimore plant will be covered primarily by a $105 million grant from the Energy Department.

Sadly, many of the most important things that we could do to benefit our long-term interests are also the things that are the least popular (or boring) in the present. An example is the news that the Department of Energy has invested $85M in promising young scientists in the area of clean energy. This is the kind of foundational, game-changing research that we need for the next generation of technologies to be created here. I think this is a great move which compares favorably to our nation’s proud tradition of investing in the future. Great, boring, news.

The watchout here is that we need to be prepared to put the right manufacturing policies in place to ensure that these technologies can be built here, creating American jobs, rather than almost immediately going offshore. If we don’t get these policies in place we will be minimizing the return on our taxpayer investment and giving much of the benefit to foreign countries. I have my fingers crossed and am prepared to fight that fight.

Led by the auto industry, Michigan was once a model for the world. Once the booming industrial metropolis with a vibrant middle class, now casts a dark shadow as a potential sign of what awaits other once industrialized regions. The woes of Detroit, the Big 3, and Michigan have been well documented over the years. This is a good article that talks about some of the things that Michigan is investing in to turn the page, rebuild their economy, and get their people back to work.

These are the gems that stuck out to me from the article:

- TechTown is a great example of a cluster to spur economic growth through a combination of resources, expertise, training, and other support. It’s this kind of ecosystem that has allowed Silicon Valley to lead the world for decades.
- We must focus not only on the development of next-generation technologies but also the manufacturing side. This manufacturing is vital as it holds the key not only sustained development in these technologies but also to the supporting industries that spring up to support it and the production jobs created. Coherent national incentives and policies are critical as states can not go it alone.
- We must continue to support University/private partnerships to spur business investment and creation. Using UM as the anchor, Michigan can leverage the world class talent and research already present to nurture the businesses that will create jobs.
- This will all take time. The article rightly acknowledges that recovery will not happen overnight. This is why it is all the more critical that we get to work today designing the policies that allow for business creation/expansion and good jobs here in America.

Ohio, like Michigan and much of the rest of the country, is hurting right now. The problems in Michigan didn’t develop overnight but were the result of horrible mistakes by a number of stakeholders over decades. Likewise solutions will take years, not months. It is critical that we put aside partisanship and focus on rebuilding the American economy and getting our fellow Americans back to work. This article is a great reminder of what it will take, and what a small part of the process looks like.

America’s best investment is easy. Education.

This summer there was a disturbing article in The New Yorker highlighting how some of the worst teachers in the NYC school system, essentially, couldn’t be fired. Despite grotesquely negligent behavior their contract was protecting them and they were being paid to go sit in a room every day. A snippet:

It’s a June morning, and there are fifteen people in the room, four of them fast asleep, their heads lying on a card table. Three are playing a board game. Most of the others stand around chatting. Two are arguing over one of the folding chairs. But there are no children here. The inhabitants are all New York City schoolteachers who have been sent to what is officially called a Temporary Reassignment Center but which everyone calls the Rubber Room.

These fifteen teachers, along with about six hundred others, in six larger Rubber Rooms in the city’s five boroughs, have been accused of misconduct, such as hitting or molesting a student, or, in some cases, of incompetence, in a system that rarely calls anyone incompetent.

The teachers have been in the Rubber Room for an average of about three years, doing the same thing every day—which is pretty much nothing at all. Watched over by two private security guards and two city Department of Education supervisors, they punch a time clock for the same hours that they would have kept at school—typically, eight-fifteen to three-fifteen. Like all teachers, they have the summer off. The city’s contract with their union, the United Federation of Teachers, requires that charges against them be heard by an arbitrator, and until the charges are resolved—the process is often endless—they will continue to draw their salaries and accrue pensions and other benefits.

As distressing as that snapshot was, this latest news from the president of the American Federation of Teachers is every bit the inspiring.

The president of the American Federation of Teachers says she will urge her members to accept a form of teacher evaluation that takes student achievement into account and that the union has commissioned an independent effort to streamline disciplinary processes and make it easier to fire teachers who are guilty of misconduct.
…
The point is not just to get rid of failing teachers, but to improve the skills and effectiveness of the millions of teachers who show up in the classrooms every day.

A number of studies have shown that excellent teachers make the greatest difference in student outcomes. I can certainly attest to this from my own personal experience. A clear embrace of greater accountability and improved training is a giant step forward to improving our school system.

In an increasingly tough global economic environment for America we must “stack the deck” in our favor every way that we can. Rebuilding an educational system that is the world’s envy is surely the foundation of any plan for our continued prosperity.

Great article in Harvard Business Review by Williy Shih about American manufacturing and the Kindle.

The net of the article is that America can’t manufacture the Kindle (the new ebook reader from Amazon). This is despite the fact that the critical innovative aspects of the Kindle, the software and e-ink technology, were created here in the US. The sub-components and assembly are all handled in Asia and Shih very deftly walks through why this should be cause for concern. Here are my takeaways:

• The Kindle is at the cutting edge of technology. For all the talk about losing old-line manufacturing, the next generation is increasingly never even getting out of the cradle here. I challenge you to walk around Best Buy and find something made in America.
• The Kindle is a great example of fundamental innovation that should have multiplier effects. Meaning, the initial investment in R&D and development in a groundbreaking new project has traditionally, over the past 50+ years been accompanied by a corresponding creation of supporting industries and jobs.  The clearest example would be the automobile industry and the creation of the massive supplier businesses. The creation of these jobs and businesses is still happening. *In Asia.*
• This is a worrying sign that future innovation and R&D investment will bear a substantial part of their long-term reward for foreign economies with a short-term immediate reward for us, the originator. Here Amazon will clearly make the bulk of the reward in the short-term, but as these devices proliferate, the majority of the economic value will be captured in Asia.
• Innovation and iteration on these devices will be, unfortunately for the US, done overseas. Improvements on the manufacturing side will be made in process and improvements to components will be done at the source of the production.

This is exactly the kind of manufacturing that US economic policy should be encouraging investment in since it is high-tech and largely automated component creation/assembly. With real fair trade policies in place we can create a pro-manufacturing environment that allows for “Made in USA” of goods like this, and more importantly, capture the future value of the innovations that come from it and its infrastructure.

Read: The US Can’t Manufacture the Kindle and that’s a problem