War – the mother of the tech sector

Bloomberg reports that investment in Israeli technology firms has surged since the start of the conflict in Gaza.

Since the conflict escalated six weeks ago after the abduction of three Israeli teenagers, investors have kicked $598 million into the country’s tech startups. During the time between June 12 and July 24, investing has actually accelerated as the fighting has claimed more than 1,200 Palestinians and 55 Israelis. During a preceding six-week period starting in April, private tech financing was $282 million, according to data compiled by IVC Research Center in Tel Aviv.

This week is set to be the busiest for initial public offerings of Israeli companies in New York in 12 years.

This is happening despite the war – or maybe because of it.

Relative to the country’s size, Israel’s science and technology sector is one of the biggest in the world, in terms of people employed and levels of investment in R&D. As this 2001 paper by Dan Peled noted, it was Israel’s massive defence spending that got its tech industry started.

When viewed in historical perspective, there can be little doubt that the defense sector in Israel had a fundamental impact on the development of this country’s technological and industrial capabilities. For most of its first 50 years, Israel devoted a large share of its resources to defense purposes, putting a high priority on the development of modern armed forces with sophisticated military technologies and equipment, and on the ability to develop and supply these capabilities by its own means. Derived demand from this buildup for highly skilled workers, scientists and engineers affected public resources allocated to universities and research institutions, and accordingly the directions that these institutions emphasized as they expanded. Israel has today a concentration of scientists and engineers in its work force which is among the highest in the world, and a rate of high-tech startups which is high among industrialized countries even in absolute terms. The defense manufacturing industry in Israel accounts for a significant share of its industrial capacity, includes some of its largest corporations, and is considered a major worldwide player in some areas of the defense industry.

As the old saying goes, necessity is the mother of invention. There is nothing like an existential threat for realising a burst of creativity and, more importantly, a large amount of government investment to turn that creativity into innovative products. Israel has been on a war fitting for its entire history. That’s the reason for its powerful technology sector.

I have written before about the technological leaps during my grandmother’s lifetime. We went from wooden aeroplanes powered with car engines and bicycle chains to a rocket visiting another planet and from broadcasting electrical bleeps for a few yards to beaming moving pictures back from space. My grandmother was born shortly before the start of the Boer War and she died just before the end of the Cold War. For most of her life, the western world was either at war or expecting it. It’s no coincidence that the pace of invention and innovation was so rapid.

At the start of the Second World War, both sides were still using biplanes, By the end of it, the jet fighter and the ballistic missile had been invented. The Spitfire, leading edge technology in 1939, was almost obsolete by 1945. Wars, or the threat of them, bring forth innovation.

Nowhere is this more true than in America, the home of most of the world’s high-tech industry. This talk by tech entrepreneur turned academic Steve Blank explains how Silicon Valley got started. He traces the history way back to the Second World War, what he calls “the first electronic war”. The military investment started during the war continued during the Cold War:

The motivation for Silicon Valley in the 1950s and 60s was the Cold War crisis not profit. The country faced a life-and-death struggle and the motivation for entrepreneurship was crisis. The government was funding entrepreneurs with military finance.

Before 1972, says Blank, venture capital funding was tiny. It was defence spending that powered the development of America’s technology firms.

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From the late 1970s, venture capital took military innovations and adapted them for consumer use but with nowhere near the investment that had been required to get these industries started in the first place.

Mariana Mazzucato takes up the story in this TED talk, pointing out that the internet, GPS and much of what makes your smartphone smart was developed by the military. It’s still going on. Tech companies are talking about consumer applications for drones. The machine that was developed for military reconnaissance and remote killing may one day deliver things to your house.

War, then, is good for technological development. Of course, it’s not the killing and destruction itself that leads to innovation. You can do a lot of that with relatively primitive technology. What drives the scale and speed of technological innovation is a massive concentration of investment. It’s just nothing seems to promote quite that level of investment quite like armed conflict, or the fear of it. Of course, it needs entrepreneurs and  private investors to develop the technology and market it for other uses, which is why Russia’s defence spending did not lead to the development of a similar high-tech sector. But, as Steve Blank says, it is the defence industry that primed the pump for America’s massive advance in technology. Once the investment, the infrastructure and the skills were there, others could pile in.

I see articles every day offering tips on innovation and attempting to explain the creative success of certain companies. The main reason why America has created its massive technology sector, with famous firms like Microsoft, Apple and Google, though, is because it has, for some time, been the richest power on Earth, with by far away the highest defence spending. Whatever other explanations you might find for innovation and the growth of technology, war is way ahead of them all.

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Self-employed: Newbies or old-timers, the economics are still dire

The strange story of the rise in self-employment just got stranger. Chris Giles wrote a piece in the FT this week arguing that most of the increase is due not to lots more people becoming self-employed but to lots more people not leaving self-employment who would otherwise have done so. There has, he said, been no surge in the number of people going into self-employment.

This is based on the ONS Economic Forum report which found greater increases in the number of the longer-term self-employed, implying that a lot of people are staying self-employed.

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The Resolution Foundation also found that the slowdown in outflows was a significant factor in the increase in self-employment. However, they still reckoned 72 percent of the post-recession rise was due to people entering self-employment and only 28 percent due to the decline in outflow.

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Someone with more time than I have will no doubt dig into the ONS figures over the next few days and explain this in more detail.

If Chris is right, though, this is an even more bizarre story. It suggests we have had a 700,000 increase in self-employment since the recession mostly because fewer of the self-employed went back to employment or retired.

If that’s the case, you can’t even blame the catastrophic collapse in self-employed earnings after 2008 on there being lots of new people who didn’t know what they were doing. If Chris is right, this is old timers seeing their business shrink, rather than newbies trying to find their feet, under-charging and messing things up.

The same goes for the increase in the number of self-employed tax credit claimants and the steady rise in non-employing and non-VAT paying businesses. If there has been no surge in new entrants, then either a lot of low profit and low turnover businesses are hanging on in there, or a lot more of them have become low-profit and low turnover businesses since 2008.

Whatever has caused the rise in self-employment, one thing is clear. Since the recession, the economics of self-employment have been truly frightening. Chris says we should stop complaining because self-employment boosts tax revenues. It hasn’t done much boosting in recent years though. Despite the increase in numbers of people, the declared income of the self-employed was down by £8bn between 2008 and 2012. This might have improved recently; we won’t really know until we get the next full HMRC stats until January. Michael O’Connor’s chart based on the recent HMRC report suggests self-assessment income (or which self-employment income is a substantial part) continued to fall after 2010, even as the numbers of self-employed rose.

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It may be that self-employed earnings pick up again. The Chancellor thinks he’s going to get bumper revenues next January when the newly flush self-employed pay their taxes. The pay data from the last few years don’t give much cause for optimism though. Even if self-employed earnings are up, it’s difficult to see them making up the ground lost since 2008 for some years yet.

Debates about the reasons for the increase in self-employment and its demographics will rumble on. What we do know, though, is that the economics of self-employment, in terms of earnings, benefit claims and tax revenues, have been utterly dire.

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Public sector v self-employment: A wager

You have probably heard about the wager between Jonathan Portes and Andrew Lilico about how much inflation will rise with economic growth. Not to be outdone, Ben Dellot and I have had a bet about the rise in self-employment and the fall in public sector jobs.

Ben reckons the self-employed will outnumber public sector workers by the middle of 2017.

Self-employment-and-public-sector-employment-2I think he’s wrong for two reasons; the rate of increase in self-employment will slow down as the economy picks up and the government won’t deliver all its planned public sector cuts.

Ben still thinks he’s right, though, and has agreed to take my bet.

Records don’t go back far enough to be able to tell when the self-employed last outnumbered workers in the public sector but it was probably well before most of us can remember. If Ben turns out to be right, it will be a significant social and economic shift.

Neither of us are high rollers so our wager is for slightly less than £1,000. It is, however, index linked. Two pints of beer are at stake as the dice roll on the future of the British labour market.

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No red tape bonfire for trade unions

Simon Wren-Lewis reflects on the different language used about regulation and employment law when the restrictions apply to employees.

Employees are already beset by red tape if they try to improve their working conditions. Now the UK government wants to increase the regulatory burden on them further, by proposing that employee organisations need a majority of all their members to vote for strike action before a strike becomes legal.

Why should laws that apply to employers be regarded as a regulatory burden, but laws that apply to employees are not. Labour markets, alongside financial markets, are areas where the concept of a ‘free’ market uncluttered by regulations is a myth.

The government, although declaring its intention to reduce the burden of employment law, is considering tougher legislation on industrial action and, possibly, an outright ban in some areas. (See previous posts.)

Not that this stance is unusual. According to the most recent OECD report on employment protection, only two other OECD countries have less protection for the individual employee than the UK. Those countries are Canada and the USA.

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Yet, in both, legislation against industrial action is tougher than it is here. In the USA, all federal government employees and most other public sector workers are banned from striking. Canada has bans on strikes in essential services, the definition for which is fairly broad, and its Back to Work law can be used to force even private sector employees to end their strikes.

These governments’ antipathy to regulation disappears when it comes to restricting industrial action. Labour law, it seems, is fine if it’s applied to trade unions. Our government appears to be thinking along similar lines.

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The British economy’s long bath

This was a watershed month for the UK’s slow recovery, with a number of things finally getting back to where they were before the recession. In July, GDP, the employment rate and the number of full-time jobs edged above 2008 levels. The FT did a celebratory piece this weekend with some great charts from Chris Giles.

When you look at the per capita figures, though, things don’t look quite so good. The population has risen since 2008, so, once you divide it up, 2008’s GDP doesn’t go as far.

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The employment figures tall a similar story. The rate might be back where it was before the recession but the net increase in jobs has been almost entirely due to part-time and self employment.

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As Michael remarked:

Put plainly, what it shows is that the recovery of the employment rate to previous levels has been driven entirely by growth in numbers of people who aren’t full-time employees. That doesn’t mean there haven’t been any new full-time employee jobs created, but it does mean that no more have been created than have been lost. The population has grown considerably since 2008, yet the economy has been able to provide additional employment only in the form of part-time employment or self-employment.

Much of this additional employment doesn’t pay very well. Real average earnings are still 10 percent lower than before the recession or, when you include all those self-employed people, probably more than 12 percent lower.

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Apparently, George Osborne thinks he is going to get a big tax boost in January when the self-employed pay their contributions. Given what has happened to self-employment earnings in recent years, though, such a recovery would have to be miraculous. As Philip Inman says:

[A] bigger rise from self-assessment receipts in January 2015 is far from certain. Wages remain depressed and it is not clear how many skilled, well-paid jobs have been created. More importantly, the biggest boost to employment comes from the 700,000 self-employed people who have pushed employment totals to new highs. The Treasury can only guess at their impact. It doesn’t know how many are in low-paid, part-time work. It doesn’t know if they will earn enough to pay tax at all.

The Resolution Foundation’s report last week showed that, seven years after the banking crash, many people are still in considerable financial distress.

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It warned that a rise in interest rates to 3 percent could double the number of households facing difficulty paying off their mortgages. We can’t really talk about a strong economy if a rise to what we used to think of as a low-ish base rate is all it takes to tip a couple of million people over the edge.

What the country needs now is an increase in secure, dependable, basic rate tax-paying full-time employment, of the sort that enables people to provide for their families without the need for in-work benefits. But, as the Migration Advisory Committee noted earlier this month, this is just the sort of employment that has been in decline in recent years.

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Recovery there may be, then, but this is still a country of stagnating wages, high debt and a lot of precarious employment. That isn’t something that is going to be fixed quickly.

Where we go from here is anybody’s guess. Even the people who are paid to understand all this stuff have no idea. Full-time employment seems to be increasing and, if this were a normal recovery, we would expect pay to start rising soon. If the optimists are right and the economy continues to grow at 3 percent per year, things will start to look a lot better. Even the 2015 Dilemma won’t be quite as bad.

So far, though, this has not been a normal recovery so predicting that it will turn into one would be a bit rash. Just because some things have got back to their pre-recession levels, it doesn’t mean we are back to normal. As Frances says, it’s still a bit early to break out the bubbly.

Back in 2009, WPP boss Martin Sorrell predicted a bath-shaped recession; a sharp fall, a bump along the bottom, then a slow rise. If you look at the per capita GDP graph, he was spot on. What he probably didn’t realise at the time, though, was just how long a bath it would be.

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Tony Blair’s leadership

The anniversary of Tony Blair’s election as Labour leader prompted several re-appraisals of the man and his time in power. Even though he has been vilified since leaving office, many on the centre left, and quite a few others too, look back on the Blair era with fondness.

I’ll leave others to talk about his political legacy and whether what he did was right or wrong. Whatever else you might say about Tony Blair, though, he had, and still has, the sort of confidence people look for in a leader. People are drawn to those who appear confident and Tony Blair always did. Blair would have known how to handle Nigel Farage, said Michael White after Nick Clegg’s disastrous attempt to take on the UKIP leader in televised debates.

No-one has any doubt that Nick Clegg believes passionately in the EU but, when faced by a bombastic opponent with a simple message, he just couldn’t win the argument. Something was lacking. Blair, on the other hand, famously tore Farage apart.

Tony Blair had that knack of sounding confident even after he or his side had made a cock-up. He would come on TV and say, “Hey, look….”, after which he would go on to explain that, yes, things hadn’t gone well but, y’know, in the grand scheme of things, we are still on the right track. He pulled it off many times and, on the whole, even after the most vicious tabloid attacks, the polls swung back his way again.

As Bob Sutton says, great leaders are confident even when they are not really sure. Blair had that self-belief that meant, whatever happened, he always reckoned he’d sort it all out in the end. That came across and people bought it. Even after the Iraq invasion. His popularity only collapsed when he started wavering. He wouldn’t say whether or not he would go, then he said he would but he wouldn’t say when. The certainty that had been the hallmark of his leadership was no more. The magic had gone and, with it, the voters.

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Chart via The Economist

One of the stories that got lost during the 2010 elections was how well Labour did in the council polls. As Tony Travers said, if you start from 2006 instead of 2005, there was a swing back to Labour in 2010. This is because, in 2006, Labour’s popularity had crashed spectacularly. The will-he, won’t-he uncertainty at the tail end of the Blair era destroyed the support built up over the previous decade. Blair’s selling point was confidence and, once he stopped exuding it, people deserted him.

That ability to sound confident and turn things round even when you are on shaky ground is something few of today’s politicians seem able to do. David Cameron tries to do the “Hey, look…” thing but never quite pulls it off. Ed Miliband, while perhaps firmer in many of his beliefs than Tony Blair, manages, nonetheless, to come across as very uncertain. No-one looks a match for the likes of Nigel Farage and Alex Salmond, with their easily understandable ‘it’s all crap and it’s all your fault’ messages.

Tony Blair had another swipe at UKIP yesterday, in a speech which got three standing ovations from the many who are still faithful. Some of this is because a lot of people think that, on the whole, most of what he did was right. But there is also a yearning for a style of leadership; a man who said that, even if things go off track sometimes, this is the right way to go, follow me! It may be irrational, people may even know it’s irrational, but they are still drawn to those who appear confident. Tony Blair had that confidence in spades. That, as much as anything else he did, is what won him three elections.

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Austerity: Yesterday’s news. And tomorrow’s!

Compared to previous years, there wasn’t much reaction to the OBR’s Fiscal Sustainability Report. OK, there was a hurrumph from Jeremy Warner, as you might expect, but that was about it. This may simply be because the OBR’s outlook was a little better than last time or, as Jeremy would have it, “not quite as unsustainable as it was a year ago”. But I wonder if something else is going on. Looking at the TV and newspapers recently, it’s almost as though austerity is yesterday’s news. The economy is growing, employment is up. OK, we’re still waiting for pay to rise but, on the whole, the recession is history.

Something else happened over the past year or so, though, which didn’t get much coverage. George Osborne eased off on austerity. Jonathan Portes noticed as did Simon Wren-Lewis and the IFS.

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The government’s original plan to reduce public expenditure by 4 percent in real terms by 2015 (see page 44 of the 2010 budget) is now going to take another 4 years. But the aspiration hasn’t gone away, it’s just been kicked into the next parliament. What we will get, therefore, is back-loaded austerity. The pattern for public services funding is cuts, followed by an easing off, then another set of cuts.

The overall picture looks like this, DEL being spending on public services. (I went into the maths of all this a couple of months ago.)

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Which means this for the NHS.

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Charts via The King’s Fund.

And this for local government.

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Chart via Local Government Association.

The funding problems in local government are like those for the overall public sector in microcosm. After taking out the nationally protected funding for health and schools, there are other services which local authorities are obliged, either by statute or by strong political pressure, to provide. This is, effectively, a further layer of protection. Inevitably, therefore, the cuts fall on those services without it.

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So far, the largest reductions have been made in regulatory areas like planning and in sport and leisure. These are the areas where the fewest people are likely to notice and where the impact of cuts may not be seen for some years.

There’s worse, though. (Come on, you knew there would be.) The LGA’s funding projections on the graph above assume that councils will make efficiency gains of around 2 percent per year and introduce or increase charges for some services.

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This level of efficiency gain should be just about do-able but, even with that, the LGA still reckons there will be a funding gap. It estimates that most councils’ reserves will be used by 2016/17 so, without an increase in funding, some services will simply disappear.

The overall picture, then, is one of back loaded austerity. Not only are the planned cuts over the next parliament bigger, they are likely to feel worse because the easy ones have already been made. To use Giles’s metaphor, if you give blood once, it seems easy. If you are then asked to give blood again and again over a short period, you will start to feel ill. Which is how a lot of public service providers will be feeling over the next few years.

At the moment, though, we seem to be in some kind of phoney war. The pressure has eased, the economy is on the up and no-one is mentioning the A-word. Or, fr that matter, the T-word. It’s as though the remaining deficit reduction has been taken as a done deal.

I know from Twitter that some organisations have been discussing the 2015 dilemma at length. I assume similar debates are taking place across the public sector. Among politicians and in much of the media, though, it really does feel as though austerity is yesterday’s news. It all feels a bit unreal when you look at how much of it is still to come.

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