| 11.13.13 | How government R&D spending could solve the Fed's dilemma

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November 13, 2013 Sign up for free: Subscribe | Website | Jobs | Mobile Refer FierceCFO to a Colleague This week's sponsor is MorganFranklin Consulting. How Do Companies Plan to Grow in 2014? Fast Forward: A Study for CFOs of Fast Growing Companies is an annual research effort focused on revealing trends and perspectives of finance professionals preparing for smart, accelerated growth. MorganFranklin Consulting looks forward to sharing the report with you in 2014, and appreciates your participation. Participate here. What's New How government R&D spending could solve the Fed's dilemma Whither innovation? News Scan: Microsoft axes employee ranking system OECD misses the boat on intangibles A reality check on Q3 growth An inconvenient truth about executive comp? and much more... News From the Fierce Network: 1. IPOs sport one-day trading pops 2. Giving hedge fund traders an edge 3. Bank of America moves 401(k)plan in house Marketplace > Get Subscriptions to the Leading Finance Magazines for FREE * Post a classified ad: Click here. * General ad info: Click here Today's Top News How government R&D spending could solve the Fed's dilemma By Ronald Fink Comment | Forward | Twitter | Facebook | LinkedIn The question of whether and when the Federal Reserve will begin reducing its monthly asset purchases is getting more attention as a consensus seems to be emerging that the financial markets are in bubble territory. Ultimately, however, the question doesn't go far enough. The problem, as FT Alphaville pointed out on Tuesday, is that we're once again facing the dilemma that dogged Alan Greenspan before the tech bubble burst, and that is what to do when asset prices are high while inflation is low. Some observers, such as Ray Dalio, head of the hedge fund firm Bridgewater Associates, think a perverse form of the law of diminishing returns has set in for the program known as Quantitative Easing, insofar as further asset purchases will have little or no further effect on the real economy, though they might still drive asset prices higher. In the view of Dalio, that means the Fed should begin tapering off its asset purchases sooner rather than later. The issue then becomes what happens to the real economy if the Fed does indeed begin to taper? To be sure, QE may already amount to pushing on a string since the program has had limited effect on consumer demand, yet interest rates have little room to fall further, even after the recent increase in 10-year Treasury rates. After all, the Fed funds rate is still near zero. Yes, the Fed's most dovish member, Minneapolis Fed President Narayana Kocherlakota, argues that it should ease even further by reducing the rate that it pays banks to hold reserves. But surely this can have only a limited effect. Still, it doesn't follow that tightening won't have more of one in the other direction. That brings the discussion back to fiscal policy, which would seem to be a non-starter given political gridlock in Washington, D.C. How about a big new round of infrastructure spending? Forget it, say Beltway insiders. And they're surely right. All that said, a recent paper published by the Levy Economics Institute at Bard College in Avondale-on-Hudson, NY, suggests a way out of this seemingly blind corner. The paper, by the institute's president, Dimitri Papadimitriou, and research scholars Greg Hannsgen, Michalis Nikiforos, and Gennaro Zezza, argues that Congress could and should increase the federal government's spending on research and development, which they contend would encourage the private sector to do the same. And that, in turn, would have an outsized impact on GDP growth by boosting exports. "One option for generating employment in the private sector without an unsustainable financial bubble or boom would be to seek to generate new jobs in export-related industries," the paper observes. The authors argue that a relatively small $160 billion annual increase in government R&D would boost GDP growth to 5.5 percent and lower the unemployment rate below 5 percent by 2016. In contrast, the authors project that the current mix of monetary and fiscal policy would increase GDP growth to merely 3.5 percent and keep unemployment above 6 percent by then. And they note that domestic demand is so slack that it would take much more spending on, say, infrastructure, to achieve the same improvement, which they acknowledge is politically unfeasible. What's more, the paper notes that federal R&D seems to have more support from the private sector, making it an easier sell in Congress. Add the authors: "R & D investment will arrest the long-term decline of the manufacturing sector and return the United States to its past preeminent and competitive position in the high-technology sector." The problem, from our perspective, is that all the focus on QE, pro or con, has drowned out any possible discussion of such alternatives. No wonder companies are sitting on so much cash. For more: - see this Alphaville blog post - see this Zero Hedge blog post - see this Reuters article - see this Levy Institute paper Read more about: Levy Economics Institute back to top Whither innovation? By Ronald Fink Comment | Forward | Twitter | Facebook | LinkedIn Citigroup, Bank of America and Goldman Sachs rank high on a recent list by International Asset Management magazine of the top drivers of intellectual property value, which largely reflects the number of patents they hold. But are big banks really innovative? It sounds to us as if they're patenting business methods, a controversial form of IP that may actually inhibit innovation. But as Ed Weisz, a patent attorney in the New York office of Cozen O'Conner, pointed out to us the other day when we asked him about challenges to Google's Motorola Mobility patents, Congress is considering measures to limit such patents, which could change the make-up of the IAM list. Meanwhile, legislators are also taking aim at so-called patent trolls, entities that obtain or acquire patents simply to sue for infringement by, for instance, requiring them to pick up the legal expenses of defendants if the plaintiffs lose in court or capping defendants' liability. A report released in June by the White House asserts that suits brought by patent trolls have tripled in the last two years, rising from 29 percent of all infringement suits to 62 percent. An article in Wednesday's edition of USA Today, for example, describes how the founder of MyWebGrocer has spent $100,000 in attorney's fees fending off letters from companies claiming the Internet retailer is infringing their patents. But how do you define a troll? Technically, patent trolls are known as "Non-Practicing Entities" or "Patent Assertion Entities" and defined as companies formed with the purpose of threatening or filing suit on the basis of their patent holdings but which don't design, develop or manufacture any products based on them. But is, for example, the consortium made up of Apple, Microsoft and other tech giants known as Rockstar a patent troll? It exists, after all, merely to go after infringement. The indistinct line between patent trolls and innovators has made for some strange bedfellows. As the IP blogger Florian Mueller noted at his site FOSS Patents during recent Congressional hearings on patent legislation, an innovator such as EMC nonetheless supports limits on patent trolls, "but there aren't many companies like EMC who would support weakening patent enforcement." In a recent issue of The American Magazine, published by the think tank American Enterprise Institute, attorney Michael Rosen noted that patent law imposes no production requirement on holders, called the problem of distinguishing trolls from legitimate licensing companies a "bedeviling problem" and warned that efforts to go after trolls could inhibit U.S. innovation and harm consumers. Specifically, Rosen noted that such efforts could have "a chilling effect on patentees with legitimate grievances." Weisz told us that he expected a crackdown on patent abuse nonetheless. What effect that will have on innovation remains to be seen, though it seems to us it may never be determined with any degree of certainty, as it depends on the unanswerable question of whether patents encourage innovation or inhibit it. For more: - see this Techdirt blog post - see this Intellectual Asset Management article - see this USA Today article - see this White House report - see this FOSS patents blog post - see this American Enterprise Institute article Related article: Why Google may soon take an earnings hit from Motorola Read more about: intellectual property back to top News Scan >> Human Capital: Microsoft axes employee ranking system Microsoft is doing away with its much-maligned "stack ranking" system, which forced managers to rank a certain percentage of employees as top, average, and poor performers based on a bell curve, so even good performers would sometimes get bad reviews. Ex-Microsoft workers said the system fostered a negative work environment. In an internal memo, HR chief Lisa Brummel says Microsoft will now place a greater emphasis on "teamwork and collaboration" when reviewing employee performance, and will no longer have a "a pre-determined targeted distribution" for determining employee rewards. The policy change follows a reorganization meant to encourage more collaboration among business units, and reflects some rethinking by Steve Ballmer prior to the end of his reign as CEO. Interestingly, his counterpart at Yahoo, Marissa Mayer is going in the other direction. Read more >> Capital: OECD misses the boat on intangibles The authors of a BNA report recently took issue with the Organisation for Economic Development's conclusion in July that international tax rules are flawed in so far as they rely on arm's length valuations for intangible assets. Critics such as the OECD contend the valuations are too unreliable for purposes of determining whether multinationals are fairly pricing intra-company transactions, and thus paying enough tax in a given jurisdiction. But the BNA report authors, who not coincidentally are the CEO and managing partner of ktMINE, a Chicago-based firm that specializes in IP valuation, disagree, and go so far as to suggest that companies that fail to apply available techniques are not doing proper due diligence. An OECD meeting Tuesday and Wednesday was slated to address such concerns. Read more >> Management: A reality check on Q3 growth In the cold-water department, observers note that celebrations about the surprising strength of Q3 GDP growth were hugely overdone. And the reason for that is much of that strength was due to an inventory build-up. Since companies will have to work those inventories off, Goldman Sachs cut its forecast for growth in the fourth quarter from 2 percent to 1.5 percent. In other words, the Q3 surge of 2.8 percent in GDP is unsustainable. And economist Dean Baker notes that even if a 2.8 percent rate were sustainable, it would still be "pathetic" compared to rates almost twice as high in previous recoveries and far from enough to make up lost ground in terms of unemployment. Read more >> Management: An inconvenient truth about executive comp? This is the first time I've seen executive compensation linked to companies' unwillingness to invest, but it does make logical sense. The usual complaint against outsized compensation is that it isn't linked to share performance. But gadfly analyst Andrew Smithers makes a different point: He contends in his new book that executives are pumping up share prices by taking short-term risk at the expense of long-term growth in order to pay themselves. That's bound to be a contentious point but one worth considering in light of the conventional thinking that companies' lack of spending reflects insufficient demand. Smithers' contention is that growing demand wouldn't change matters much. We're no fans of outsized executive compensation, but it's hard to believe companies would keep sitting on cash if the economy were stronger. Not that we wouldn't mind seeing that proposition tested. Read more >> Management: What GM's move to Singapore says about emerging markets The automaker's decision to shift its Asian headquarters from Shanghai to Singapore underscores the change in expectations for emerging markets. With China, along with the other members of the BRICs, showing slowing growth, consultants such as the Boston Consulting Group say multinationals should focus on Thailand, Malaysia and Indonesia. GM says its move will help give its international operations, its second-largest source of profit last year after North America, a "renewed identity."  Read more On a related note, the rebound in North American auto sales will soon run up against a shortage in tooling capacity, according to a study, as the recession eliminated a third of U.S. tool shops and in those remaining, the average worker is 52 years old. Read more Briefly noted: > FX fixing investigation expands to 15 banks (how many more could there be?). Article > Dan Loeb gently takes stake in FedEx, says he "likes" the company. Article > AMR-US Airways divestments could reshape industry and maybe even lower fares. Article > SEC says exchanges making good progress on tech fixes (whatever they might be). Article > Obama's nominee for CFTC chief has big shoes to fill. Article > Cooper Tire says Delaware Chancery Court decision threatens M&A landscape. Article > Judge to Corzine: No, stuff doesn't just happen. Article > Vodafone to boost spending. Article > Shale's effect on oil supply likely to be brief (confirming what we already knew). Article > M&A write-downs fall from last year's record level. Article > Fed paper compares modern debt market to South Sea bubble. Article > More U.S. companies are selling bonds in euros to take advantage of cheaper rates. Article > The aerospace industry also faces a greying workforce, with the average age for aeronautical engineers 47. Article > Email scammers are now pretending to be your CEO. Article And finally … Global Aviation Holdings may have set a new record for the number of times a single company has filed for Chapter 11 protection. Marketplace * Post listing: Click here. * General ad info: Click here. > Get Subscriptions to the Leading Finance Magazines for FREE Mercury Magazines offers top Finance titles for Free to professionals. No Credit Card Required. Stay Ahead in your Industry. 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