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The U.S. government has opened the spigots over the last 6 months or so, pouring endless funds into failing businesses under the headline economic stimulus. Given the speed of the economic deterioration and its global spread, we have been treated to a firefly-like laboratory to test the effects of the stimulus and its ability to stem the tide of financial losses and support failing institutions and industries. The results? $30 Billion more for AIG and tens of billions more for the auto industry with no end in sight.

The reason is straightforward but the implications are difficult to swallow. Innovation, high-speed communication and globalization are disrupting global business and economics at a far faster pace than businesses and organizations can adapt. Business models built on100 years of optimizations are crumbling due to global competition, digital distribution and connectivity and fast-changing consumer habits. Costly modes of production and distribution are being undermined by the spidery digital revolution. And it is all happening at once and quickly.

Let's examine a couple of examples. It is by now no secret (I have been writing about this for 2 years on my blog) that newspapers are failing. If you don't believe me check out www.newspaperdeathwatch.com. However, it is not just newspapers. It is the entire media industry that is beginning to crumble. Television, Newspapers, Magazines, Music, Video etc. It began happening to the music industry first. It got napsterized early. It took longer for blogs, citizen journalism, Craigslist, the Internet, Tivo and changing consumer habits to do it to the newspaper industry. But, be certain, it is a foregone conclusion. Television entertainment and news is built on a cost model that can no longer be sustained. Media outlets can not afford to send trucks and reporters to every location in an era of declining revenues. The days of 100 microphones (duplication of effort) hanging on every sport's star or politicians words are anachronistic. I can find that quote on Twitter, Facebook or the web in almost real time by people who happen to be there. Want to see footage? Try Youtube or some other video site uploaded from a Pure Digital Flip (full disclosure: Benchmark company) camera or Sony Webby (under $200). How can the WSJ compete with crowd-sourced sites like SeekingAlpha or Wikinvest over the long term with bloated cost models. Laying off people will not help these now antiquated industries. What they need is an entirely new cost model and business model. Does anyone seriously think that the US government should "stimulate" the newspaper industry or the music industry with billions of dollars in federal funds?

The automotive industry is no different, yet the federal government is throwing tons of "stimulus" money at it. Today's cars and the current cost of developing, building, manufacturing a car distributing a car are prohibitively expensive and there are clearly too many companies making them. No bailout will solve that fundamental problem. Some people cannot conceive of the U.S. without an automotive industry but trust me, there was a United States of America before Henry Ford and there will be after if we get smart . We need to reconceive not just how cars are built but what means and modes of transportation make sense for Americans. Or more radically, does every American really need to drive or take transportation to work. Maybe we only need cars on weekends?

Think for a second about the costs that the New York Times (NYSE:NYT) and General Motors (NYSE:GM) (and the economy) absorbs when hiring workers into modern companies. There is the salary of the employee, the social benefits, cost of transportation of that employee to work, factory space or desk space. Transportation of that employee to meetings and get-togethers, food and drink and the list goes on and on. In a global world where you can find cheaper employees for mass production or more local sources for information, this makes the traditional corporate model very very expensive. This requires us to rethink how and where we hire workers and it also behooves employees to think about how they provide value to businesses.

In addition, think about what some of these companies sell (at a profit or a loss). The New York times sells you a newspaper. That is a piece of paper with newsprint and ads on it. Ask them what they do and they will tell you that they are in the newspaper business. However, I, the consumer, am only interested in the information which in today's day and age is not necessarily married to the piece of paper. GM sells me a car. What I really need is a way to get around efficiently and effectively (and more cheaply). Here is another funny example with some prices attached. For years the music industry charged us about $10 for an album with 10 songs. Today, iTunes still charges us $1 for a song but the music labels are getting less. However, I am willing to pay $50-$200 to go hear 10-15 songs in a concert. Why? Because i am willing to pay more for a music experience than I am for music. I want to connect to the artist and "fans/friends" who are there. The Music is essentially free at the concert. But the current music industry business model persists.

I previously wrote what I hope was a thought-provoking post on whether we will need banks in the future. It was an attempt to rethink entire industries and what we believe are immutable economic truths. I am arguing here that we need to stop propping up now-failed business models as that is a misuse of taxpayer money. What we need to do is innovate our way out of this problem. We need to innovate products, businesses, industries, business models and employment. It is not a quick fix that politicians want. But it is what is necessary. Music companies need to reconsider what they are selling. Newspapers need to wake up and realize that they are competing with other digital "reporters/bloggers/twitterers" who get to the news faster and cheaper. Car companies are up against cost model bloat, telecommuters, outmoded production methods and the internet all at once.

We need to invest in the innovation that will drive better models for transportation, worker efficiency, media and food. The human dislocation caused by this shift and the crumbling business models is almost too much to bear but bear it we must or we will back failed models to the point that we mortgage our children's 'future forever.

In my next post, some concrete ideas on how to invest in innovation stimulus.

Source: America Needs the Stimulus of Innovation