Intel CTO Justin Rattner

says many people underestimate America’s lead in post-graduate education. Intel has found, for example, that the skills of PhDs from Chinese universities that the company has hired do not yet match those of U.S. graduates, he says.

On the other hand, Rattner says, tougher immigration laws are weakening the U.S. advantage as a magnet for students from around the world. Many Silicon Valley companies were founded by foreign students after they got degrees from Stanford, the University of California at Berkeley, Caltech and other U.S. institutions.

“Now we tell them to go home, and don’t come back anytime soon,” Rattner says. Such a policy could have made it impossible for people like Andy Grove, Intel’s Hungarian-born former CEO, to have risen to the top of the U.S. tech scene. “Nowadays we would have packed him up and sent him home,” Rattner says.

Ed Glaeser, William Kerr, and Giacomo Ponzetto have a new paper on “Clusters of Entrepreneurship.”

Employment growth is strongly predicted by smaller average establishment size, both across cities and across industries within cities, but there is little consensus on why this relationship exists. Traditional economic explanations emphasize factors that reduce entry costs or raise entrepreneurial returns, thereby increasing net returns and attracting entrepreneurs. A second class of theories hypothesizes that some places are endowed with a greater supply of entrepreneurship. Evidence on sales per worker does not support the higher returns for entrepreneurship rationale. Our evidence suggests that entrepreneurship is higher when Öxed costs are lower and when there are more entrepreneurial people.

After challenging Andy Kessler over the Google Voice-Apple-AT&T dustup, I should point out some areas of agreement.

Andy writes:

Some might say it is time to rethink our national communications policy. But even that’s obsolete. I’d start with a simple idea. There is no such thing as voice or text or music or TV shows or video. They are all just data.

Right, all these markets and business models in hardware, software, and content — core network, edge network, data center, storage, content delivery, operating system, browser, local software, software as a service (SAS), professional content, amateur content, advertising, subscriptions, etc. — are fusing via the Internet. Or at least they overlap in so many areas and at any moment are on the verge of converging in others, that any attempt to parse them into discreet sectors to be regulated is mostly futile. By the time you make up new categories, the categories change.

Which naturally applies to one of the most contentious topics in Net policy:

Competition brings de facto network neutrality and open access (if you don’t like one service blocking apps, use another), thus one less set of artificial rules to be gamed.

Exactly. Net Neutrality could be an unworkably complex and rigid intrusion into this highly dynamic space. Better to let companies compete and evolve.

Kessler concludes:

Data is toxic to old communications and media pipes. Instead, data gains value as it hops around in the packets that make up the Internet structure. New services like Twitter don’t need to file with the FCC.

And new features for apps like Google Voice are only limited by the imagination.

The Internet is disrupting communications companies. Although yesterday I defended the service providers, who are also the key investors in all-important Net infrastructure, it is true their legacy business models are under assault from the inexorable forces of quantum technologies. Web video assaults the cable companies’ discrete channel line-ups. Big bandwidth banished “long distance” voice and, as Kessler says, will continue disrupting voice calling plans. On the other hand, the robust latency and jitter requirements of voice and video, and the realities of cybersecurity will continue to modify the generalized principle that bits are bits.

Even if we can see where things are going — more openness, more modularity, more “bits are bits” — we can’t for the most part mandate these things by law. We have to let them happen. And in many cases, as with the Apple-AT&T iPhone, it was an integrated offering (the exclusive handset arrangement) that yielded an unprecedented unleashing of a new modular mobile phone arena. Those 100,000 new “apps” and a new, open Web-based mobile computing model. Integration and modularity are in constant tension and flux, building off one another, pulling and pushing on one another. Neither can claim ultimate virtue. We have to let them slug it out.

As I wrote yesterday, innovation yin and yang.

There are two key mistakes in the public policy arena that we don’t talk enough about. They are two apparently opposite sides of the same fallacious coin.

Call the first fallacy “innovation blindness.” In this case, policy makers can’t see the way new technologies or ideas might affect, say, the future cost of health care, or the environment. The result is a narrow focus on today’s problems rather than tomorrow’s opportunities. The orientation toward the problem often exacerbates it by closing off innovations that could transcend the issue altogether.

The second fallacy is “innovation assumption.” Here, the mistake is taking innovation for granted. Assume the new technology will come along even if we block experimentation. Assume the entrepreneur will start the new business, build the new facility, launch the new product, or hire new people even if we make it impossibly expensive or risky for her to do so. Assume the other guy’s business is a utility while you are the one innovating, so he should give you his product at cost — or for free — while you need profits to reinvest and grow.

Reversing these two mistakes yields the more fruitful path. We should base policy on the likely scenario of future innovation and growth. But then we have to actually allow and encourage the innovation to occur.

All this sprung to mind as I read Andy Kessler’s article, “Why AT&T Killed Google Voice.” For one thing, Google Voice isn’t dead . . . but let’s start at the beginning.

Kessler is a successful investor, an insightful author, and a witty columnist. I enjoy seeing him each year at the Gilder/Forbes Telecosm Conference, where he delights the crowd with fast-paced, humorous commentaries on finance and technology. Here, however, Kessler falls prey to the innovation assumption fallacy.

Kessler argues that Google Voice, a new unified messaging application that combines all your phone numbers into one and can do conference calls and call transcripts, is going to overturn the entire world of telecom. Then he argues that Apple and AT&T attempted to kill Google Voice by blocking it as an “app” on Apple’s iPhone App Store. Why? Because Google Voice, according to Kessler, can do everything the telecom companies and Apple can do — better, even. These big, slow, old companies felt threatened to their core and are attempting to stifle an innovation that could put them out of business. We need new regulations to level the playing field.

Whoa. Wait a minute.

Google Voice seems like a nice product, but it is largely a call-forwarding system. I’ve already had call forwarding, simultaneous ring, Web-based voice mail, and other unified messaging features for five years. Good stuff. Maybe Google Voice will be the best of its kind.

There are just all sorts of fun and productive things happening all across the space. It was the very AT&T-Apple-iPhone combo that created “visual voice mail,” which allowed you to see and choose individual messages instead of wading through long queues of unwanted recordings.

But let’s move on to think about much larger issues.

Suggesting we can enjoy Google’s software innovations without the network innovations of AT&T, Verizon, and hundreds of service providers and technology suppliers is like saying that once Microsoft came along we no longer needed Intel. (more…)

Do we really understand just how fast technology advances over time? And the magnitude of price changes and innovations it yields?

Especially in the realm of public policy, we often obsess over today’s seemingly intractable problems without realizing that technology and economic growth often show us a way out.

In several recent presentations in Atlanta and Seattle, I’ve sought to measure the growth of a key technological input — consumer bandwidth — and to show how the pace of technological change in other arenas is likely to continue remaking our world for the better . . . if we let it.

Bandwidth Boom – NARUC Seattle – Bret Swanson – 07.22.09

After the EC antitrust authority today leveled a €1.06 billion fine against Intel, the company’s general counsel Bruce Sewell gave an illuminating interview to CNBC:

We better come up with a better way to restrict the EC’s range of motion on these matters. Sewell called the action “arbitrary.” The CNBC reporters called it a “shakedown.” They’re both right.

Meanwhile, EC competition commissioner Neelie Kroes added insult to injury when she blithely noted that Intel is now supporting European taxpayers.

A huge array of experts in the legal and economic fields quickly denounced the EU “fine,” (Can you really call $1.45 billion a fine?), and raised very serious questions about arbitrary antitrust becoming the chief protectionist tool of the 21st century.

Scholar Ronald Cass said the EC Competition Directorate acted as

prosecutor, investigator, and judge.

Grant Aldonas of the Center for Strategic and International Studies said,

Given the implications for R&D that drives Intel’s investment in both Europe and the United States, it makes little sense to divert these funds to the European Union’s coffers instead.

And as we attempt to emerge from a brutal economic crisis, where unemployment continues to rise, my former colleague Ken Ferree made the crucial macro point:

If you love jobs and economic growth, you have to love the companies that drive the economy and create employment demand.

The global economy cannot function if large nations or regions, like the EU, the U.S., or China, engage in over-the-top punitive actions against any company, let alone one of the most inventive firms of our time. Without engaging in the type of tit-for-tat protectionism that leads to destructive trade wars, we need to find a way to roll back what I called in a recent Wall Street Journal article “Europe’s anti-innovation ‘antitrust’ policy.” Moreover, we should resist letting the EC’s casual intrusiveness seep into our own antitrust jurisprudence, which has for the most part fortunately been more tightly focused on the question of consumer harm. As this excellent article notes, there is some reason to worry we might be sliding in the wrong direction.

Resisting these impulses will promote the global cooperation we need to rebound from the crisis. It will be better for innovative companies. Better for consumers of innovative, life changing products. And . . . better for the citizens, consumers, and entrepreneurs of that too-long underperforming land we call Europe.

In testimony before Congress’s Joint Economic Committee today, Fed chairman Ben Bernanke noted that

In contrast to the somewhat better news in the household sector, the available indicators of business investment remain extremely weak.

But it is these key business sectors that are most important for a U.S. — and global — economic recovery. As important as stabilization of the housing sector is, we are not going to be led out of the recession by another housing boom. Nor should we desire that. We need real productivity-enhancing innovation, which is largely enabled by non-real estate investment and entrepreneurship.

Among the myriad policy actions being taken in Washington this year is a potential overhaul of our communications strategy, under the aegis of the FCC’s new Broadband “Notice of Inquiry.” The first goal of this plan should be to to encourage the continued investment in leading-edge information technologies. Broadband communications especially makes all our businesses in every sector more productive and also connects an ever larger number of citizens, especially those who may be struggling the most in this tough economy, to the wider world, improving their prospects for education, health, and new jobs in emerging industries.

Information and communications technology (ICT) accounts for an astounding 43% of non-structure U.S. capital investment, totaling $455 billion 2008. In this new FCC communications policy review, we should do everything possible to keep this huge source of American growth rolling. Any policy obstacles thrown into the path of our information industries would not only reduce this crucial component of absolute capital investment, which is already under strain, but also diminish and delay all the positive cascading follow-on effects of a more networked workforce and world.

Rich Karlgaard prescribes disruption — and a good night sleep, sans the truffle — to get us moving again:

Residence Inns, Hyatt Places and Holiday Inn Expresses are perfect examples of disruptive technology. They are newer, cleaner and easier to use. They have a simple mission and they fulfill it. They are well-priced and hit the market bulls-eye. Do you really want to pay an extra $200 per day for turn-down service and a chocolate truffle on the pillow … romantic getaways excepted? Whenever I hire a Residence Inn, Hyatt Place or Holiday Inn Express to do a job, I am pleased.

These new mid-market motels are the Charles Schwabs of the hotel world.

Now let us consider a few American industries that are broken or in need of a refresh: health care, banking, automobiles, energy, to name four.

Two new books on health care:

Bionic limbs will be wired directly into the brain; stem cells will patch ailing organs; engineered livers and kidneys will make transplants obsolete. Neural chip implants will be available for the healthy who want to be just a little sharper. (“And if you think doctors will act as ethical gatekeepers and balk at elective brain surgery,” Dr. Hanson writes, “I think you’re wrong.”)

In hospitals of the future “emancipated medical machines” will see problems and correct them expertly, with no need for human input. Doctors and nurses will supervise robots smart and dumb: the smart ones will perform surgery unerringly, while the dumb ones will do all the menial labor, cleaning floors, and lifting and turning patients, “freeing the warm hands of humans to better care for other humans in need.”

Those warm hands will be spending a lot of time tapping keyboards. Already, Webcams and wireless computer technology mean that a single critical-care doctor in a command center can make rounds on dozens of intensive-care patients in hospitals miles away. On the horizon is a worldwide network of health care “nodes,” with instant information on anyone anywhere and keyboard-driven care crisscrossing the globe.

Or, stick with the basics:

the toilet, which many experts credit with a greater impact on disease eradication in developed countries over the last two centuries than any other device or drug on record. In a narrative that spans the primitive privies of China and India and space-age toilet factories of Japan, the British journalist Rose George tells a story every bit as complicated and mind-blowingly high-tech as Dr. Hanson’s.

Michael Malone says Washington is killing Silicon Valley. Among the depressing metrics:

in all of 2008 there have been just six companies that have gone public. Compare that with 269 IPOs in 1999, 272 in 1996, and 365 in 1986.

Citing in particular an amazingly large array of new accounting rules, including but not limited to Sarbanes-Oxley, Malone gets the key problem:

From the beginning of this decade, the process of new company creation has been under assault by legislators and regulators. They treat it as if it is a natural phenomenon that can be manipulated and exploited, rather than the fragile creation of several generations of hard work, risk-taking and inventiveness.

The always excellent Matthew Slaughter with a new study on productivity and innovation:

So how has U.S. productivity grown recently? Unfortunately, very slowly. After averaging 2.7% productivity growth from 1995 through 2002, annual growth of productivity in the nonfarming business sector has slowed dramatically — to just 1.7% in 2005, 1.0% in 2006, and 1.4% in 2007. At this new average rate of under 1.4%, it would take nearly 52 years for average U.S. living standards to double — versus just 26 years at the earlier average. Signs of this slowdown are apparent, particularly in the waning competitiveness of U.S. sectors like automobiles, financial services and information technology.

See my comparison of the state of technology in 2008 versus 1992, when the last Democratic presidential transition took place. 

Today, an average consumer can buy a terabyte hard drive (1 million megabytes), on which she might store her family photos, videos and other digital documents for as little as $109.99. In 1992, a terabyte drive, if such a thing had existed, would have cost $5 million.

Go to Forbes.com for the full article: “How Techno-creativity Will Save Us.”

The frontier is the key to all growth. Dan Henninger rightly worries we are closing it off.

The greatest danger in the current economic crisis is that the United States will lose its historic appetite for risk. The mood now is that risk-taking got us into this mess. Risk, though, is the quintessential American trait that built the nation — from the Battle of Bunker Hill to the rise of the microchip. If we let risk give way to a new ethos of commercial reserve and regulatory restriction, the upward arc of the U.S. ascendancy will flatten. Maybe it already has.

Tom Hazlett tells it like it is:

The real problem entailed by the auto-maker subsidies will never be discussed because it can never be seen. The opportunity cost of shovelling capital to companies such as GM is that companies such as Boeing or United Technologies or Disney or start-ups unknown will be unable to use it to fund their projects. Propping up today’s US car manufacturers means beating down tomorrow’s economic star. In an era of technological leaps, those emergent stars tend to be leapers. The bail-out puts the public’s chips on the former, pulling stakes from innovative rivals.

About 10 days ago I gave a presentation to a D.C. business group on “Innovation: The End? Or a New Beginning?” We got into a discussion of high-end immigration and were in general agreement that we should grant easy green cards to all STEM PhDs educated in the U.S., among other enticements to smart immigrants. One commenter then suggested this was a kind of a zero-sum race between the U.S., China, and India for the world’s human capital.

I replied, however, that the technological, economic, and political advance of China and India is a good thing. Innovation anywhere in the world benefits us, too, if we are open to the global economy. For hundreds of years, North America attracted much or most of the world’s financial and human capital because (1) though imperfect, we were an attractive realm of freedom and (2) much of the rest of the world was so inhospitable to innovation, entrepreneurship, education, and was generally politically intolerant. This massive tilt in our direction is now over. Other parts of the world present more opportunities for entrepreneurship and education, and we’re not going to get all the smart people, no matter how open our immigration laws. Doesn’t mean we shouldn’t try to get the smartest people. Just that there’s going to be lots of innovation and new enterprise in new non-U.S. places, and that overall that’s a good thing.

So I was intrigued when an Economist article on this very topic hit my radar yesterday. Turns out Amar Bhidé of Columbia Business School has written a whole book on the subject: The Venturesome Economy.

So does the relative decline of America as a technology powerhouse really amount to a threat to its prosperity? Nonsense, insists Amar Bhidé of Columbia Business School. In “The Venturesome Economy”, a provocative new book, he explains why he thinks this gloomy thesis misunderstands innovation in several fundamental ways.

First, he argues that the obsession with the number of doctorates and technical graduates is misplaced because the “high-level” inventions and ideas such boffins come up with travel easily across national borders. Even if China spends a fortune to train more scientists, it cannot prevent America from capitalising on their inventions with better business models.

That points to his next insight, that the commercialisation, diffusion and use of inventions is of more value to companies and societies than the initial bright spark. America’s sophisticated marketing, distribution, sales and customer-service systems have long given it a decisive advantage over rivals, such as Japan in the 1980s, that began to catch up with its technological prowess. For America to retain this sort of edge, then, what the country needs is better MBAs, not more PhDs.

A lot to agree with. The addition of China and India to the world economy, with new minds and new centers of research and innovation, make it more likely that new general purpose technologies like the integrated circuit or laser will be invented — maybe the next one will be in the field of biotech or energy, who knows. It will be good for humanity, at least for those open to these inventions and, yes, the commercializers. But how does clustering — like Silicon Valley, where a whole ecosystem of talent, firms, and infrastructure spiral virtuously upward — come into play? Does clustering mean as much as it used to in the age of instant global broadband communication? If technology and the corresponding innovations rapidly diffuse everywhere — and they do — it’s largely a matter of who earns the profits. Who sets the standards. And which governmental jurisdictions get to tax the innovations and entrepreneurs. In nationalist terms, where military and political power derive from economic power, it is largely a competition for tax revenues.

But I think Bhidé, at least in this article (I’ve yet to read the book), still underplays the importance of PhDs or their equivalents who not only make the once-in-a-generation breakthroughs but also do help manufacture and commercialize these inventions. And Bhidé probably overplays the the importance of MBAs, who he says are key to our “consumer” culture. Consumers don’t drive the economy. Entrepreneurs do. Yes, MBAs are good at cleaving consumers from their wallets. But consumption is a function of growth and growth expectations, which depend on entrepreneurial confidence. Supply creates its own demand.

If we had a perfectly globalized, flat, frictionless world — a world of “maximum entropy” — it’s true, the “where” of innovation wouldn’t matter much. And we should basically be shooting for that type of world. After all, I named my blog after it. But until we get there, the “where” of innovation probably matters more than Bhidé would like.

In this game, it’s the farsighted innovators and consumers, who want free trade and tax competition, against the all-too-often shortsighted politicians, who seek the short-term advantage of protectionism, tax gouges (which can only be achieved through tax harmonization cartels), and “energy independence” campaigns. It takes real wisdom to understand that China’s or India’s gain is also our own.

Another plug for Rich Karlgaard’s blog reboot. His first post is about the moment he fell in love with innovation.

Not surprising, perhaps, that the Semiconductor Industry Association would give an award to long-time industry veteran Morris Chang. But the founder of Taiwan Semi played an absolutely crucial role in the history of computers, IT, communications, and anything that touches silicon.

TSMC, of course, popularized the idea of manufacturing chips that are designed by others. Such companies, called foundries, became essential partners to design specialists that save money by outsourcing production.

What people tend to overlook is how the Chinese-born engineer, who spent 25 years at Texas Instruments, helped propel a big American comeback. In the 1980s, Japanese chip makers used manufacturing muscle to hammer companies like Intel and TI. The U.S. manufacturers gradually rebounded, but newcomers such as Qualcomm, Broadcom and Nvidia — which might not exist without foundries — were an equally important factor. 

With the publication of his Introduction to VLSI Systems in the late 1970s, Carver Mead predicted this “fabless” model, splitting the design and manufacturing functions of previously integrated semiconductor firms. Mead had performed the research for Gordon Moore’s profound prediction in 1965 that integrated circuits could — and would — continue doubling in transistor density every 18 months or so for decades into the future. Mead even named this observation-prediction “Moore’s Law.”

Companies that remained integrated all these years — like Intel — have continued to lead in manufacturing technology, finding ingenious ways to sustain Moore’s Law. But the breadth and creativity and economic power of the silicon revolution would not have happened without Morris Chang’s fabless model.

Sergey Brin didn’t think Wikipedia would work. But as Chris Anderson (and, in a linked video, Brin himself) explain, the power of scale offered by the Net often surprises even the savviest Google-founding multi-billionaires.

Intel is ramping its health care strategy with new hardware and software to help home-bound patients. Mobile giant Qualcomm has an array of new ideas for dis-aggregating today’s hefty, expensive, purpose-built machines that only do one or two things into a web of sensors, software, and wireless links. Think “body area network,” or BAN. Both companies are members of the Continua Alliance, a group of companies creating a “connected personal health ecosystem” of interoperable medical technologies. 

This is just the type of medical innovation I wrote about in Friday’s Wall Street Journal — the kind that will transcend many of today’s debates about who is going to pay for the old system. My answer: Nobody will pay for the old system. Create a new system.

Advancing faster than Moore’s Law, hard disk digital storage technologies are are the unsung heroes of the tech revolution. The beat goes on, and a large number of new technologies, from hybrid drives to phase-change ovonics to racetrack memory, promise to match the capacity of digital storage and/or DRAM with the speed of SRAM and other solid state memories. See a big special report from MIT’s Technology Review on all these ”next memory” candidates, and more.

From my article in Friday’s Wall Street Journal:

If Barack Obama ran for president by calling for a heavier hand of government, he also won by running one of the most entrepreneurial campaigns in history.

Will he now grasp the lesson his campaign offers as he crafts policies aimed at reigniting the national economy? Amid a recession, two wars, and a global financial crisis, will he come to see that unleashing the entrepreneur is the best way to raise the revenue he needs for his lofty priorities?

Read the whole op-ed here, and listen to a brief radio interview here.

FedEx founder Fred Smith in The Wall Street Journal:

On free trade:

“I think the best thing the United States could do is to unilaterally disarm. It should open up markets. The agricultural subsidies are terrible. They’re just immoral.”

On taxes:

“If we had a lower corporate tax rate with the ability to expense capital expenditures, guess what? We’d buy more [Boeing] triple sevens. We absolutely have to cut the corporate tax. Our current tax rate is about 38%. Even Germany has a 25% rate.”

On human capital:

“We restrict immigration when we have thousands of highly educated people that want to come to the United States, and some of our greatest corporations [are] crying out that we don’t have the scientific talent that we need to develop the next generation of innovations and inventions . . .”