Bad News from Personal Income Report

In today’s personal income report from the BEA,  real personal consumption was up by 0.3%, which according to many commentators was a sign that the economy was improving. Bloomberg had a short piece with the headline:  

U.S. Stocks Rise as Consumer Spending Boosts Economic Optimism

But I look at the numbers and say something very different. I see that real personal income, leaving out transfer payments, fell in February for the second straight month.  So I would have written the headline a different way:

Consumers Keep Spending Because the Government is Giving Them Money

 The private sector shows no sign yet  organically generating growth.  That is to say, the real personal income generated by jobs and private businesses and investments is falling, once we omit the effect of government transfer payments, such as  unemployment insurance, Social Security, Medicare, and Medicaid. Here’s a little graph:

Not a good sign, by my lights.

Diamonds are a state’s best friend

According to the Census Bureau,  diamonds were New York State’s biggest goods export  in 2009 ($7 billion), followed by “paintings, drawings, and pastels by hand”

Interestingly enough, diamonds were also New York State’s biggest import in 2009, at roughly $10  billion.

The Growing Gap between Govt and Private Sector Benefits

When I was out in Kansas City at the Kauffman Foundation’s Economic Bloggers Forum,  Mish Shedlock of  the blog Global Economic Trend Analysis made a persuasive case that state and local finances were completely broken because gov’t workers were overpaid compared to the private sector. ( See here for one of his posts on the subject).

Mish got me thinking…So I decided to assemble some BLS data on the subject.

Not to mince words, here’s the payoff chart,  that compares the benefits of state and local workers with private sector workers. (These figures are adjusted for inflation, and indexed to 2001I=100).

Yowza! Somewhere in 2004, the world changed, and we didn’t realize it.  Employers in the private sector put a lid on the cost of benefits (which includes healthcare, retirement, vacation, and supplemental pay of all sorts).  Meanwhile the cost of benefits in state and local govt jobs just kept rising, with barely any break, both before and after the financial bust.  This is not good

To put it another way, the benefits gap between the public and private sectors has widened sharply since 2004.


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Has Venture Capital Failed America?

I’m at the Kauffman economic bloggers forum in Kansas City (you can view it on a live webcast if you want). One of the great joys of this forum is that it gives me a chance to meet people I otherwise would not come across, including Robert Cringeley, who is best known for his technology writings, but who also writes interesting stuff about finance. Here’s what he recently wrote on venture capital:

…let’s take a look at how venture capital has failed America….

The big VC hangover today was caused by this simple misunderstanding.  Firms thought they could scale-up their businesses and make even more money as a result.  If your $100 million venture fund is replaced by a $1 billion fund, why not just make every deal 10 times as big?  Because it doesn’t work that way.  Companies are over-capitalized.  Good deals are passed-over because they can’t absorb enough cash.  Money is wasted.  Founders are inevitably discarded and  alienated.  The rusted hulks of failed and over-funded startups are often forced to merge just to hide the real carnage.  Everybody ends of hating everybody else and that’s where we are today.

I think the venture capital industry  has been hit by the innovation shortfall.  Over the past ten years, the VCs put a lot of money into start-ups  that they thought was going to work.  Big bets in areas like biotech, MEMs and a variety of other cutting edge assets.

Unfortunately, the number of  big innovative wins over the past decade has been comparatively low, and the successful IPOs comparatively few.  To some unknown degree, there is a shared responsibility–a combination of government regulation that suppressed useful innovations; problems in the VC industry that led to funding the wrong companies; and bad coin flips on the technology, which meant that some things that we thought were going to work, didn’t–at least not yet.

Mystery chart 1

This is the first in our series of mystery charts, where I give you a chart and you guess what it is. I’ll make it easy–multiple choice.

Here’s the chart:

Is this chart:

a) the real wages of production workers

b) the profits of tech companies

c) the price of imports from China (as reported by the BLS).

d) the price of homes in Illinois

Answer beneath the fold. No peeking!

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The Innovation Shortfall Thesis spreads

My ‘innovation shortfall’  thesis has shown in up in Time magazine, of all places.  Michael Lind writes, in a piece called “The Boring Age”:

We like to believe we live in an era of unprecedented change: technological innovation is proceeding at a rate with no parallel in all of human history. The information revolution and globalization are radically disruptive. Just as Barack Obama would like to be a transformational President, so the rest of us like the idea that we live in a thrilling epoch of transformation. But the truth is that we are living in a period of stagnation.

Surprisingly, this stasis is most evident in an area where we assume we are way ahead of our predecessors: technology.

Next question: Will we recognize if and when the innovation shortfall ends?

Tyler Cowen and Healthcare Innovation

In today’s NYT, Tyler Cowen identifies the key point about healthcare reform (my emphasis added):

It’s time to consider which forms of managed care — relabeled, if necessary — are likely to maintain the flow of innovation while keeping costs under control.

I would go further.  Civilization has moved forward because of innovations that cut costs and extended capabilities simultaneously.  The current structure of healthcare seems to be producing ‘innovations’ that raise costs and don’t actually increase life expectancy.  I think that the main goal of healthcare reform should be to extend coverage and give more incentives for innovations that actually cut costs while producing better results.

Thinking about Import Penetration

Please excuse this very very wonky post. I’m going to be thinking out loud here about import penetration, and working out an example.

Here’s the starting question: When consumers start buying and retail sales goes up, how much of that added purchasing power stays in the United States and how much goes overseas as imports?

The answer is not obvious. But even the right question is not obvious either.

Let’s look at a simple example.  Suppose that American consumers are buying 10,000 dining room tables annually from American furniture factories. Each dining room table leaves the factory door at a producer cost of $1000.  Along the way,  the costs of trucking and distribution add another $1000,  so the price to the consumer is $2000 per table.

Now let’s suppose that after a few years, half the dining room tables sold in the U.S. are made in China (5000 out of 10000). The reason why?  Chinese factories can produce and deliver the tables cheaper—it costs $700 per table to make the table, ship it across the Pacific, and put it on a truck at the Port of Los Angeles.  After that, the same $1000 in domestic trucking and distribution costs apply, so that the table is sold for $1700.

Question: How much of the U.S. market have the imported tables taken? (This is another way of asking: If retail sales of tables goes up,  how much of the extra spending will leak abroad).

a) 50%




e) all of the above

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The Speed of Technological Progress

For an example of how difficult it is to predict the speed of technological progress, let’s take a look at an article in today’s NYT (my emphasis added):

…common diseases, like cancer, are thought to be caused by mutations in several genes, and finding the causes was the principal goal of the $3 billion human genome project. To that end, medical geneticists have invested heavily over the last eight years in an alluring shortcut.

But the shortcut was based on a premise that is turning out to be incorrect. Scientists thought the mutations that caused common diseases would themselves be common. So they first identified the common mutations in the human population in a $100 million project called the HapMap. Then they compared patients’ genomes with those of healthy genomes. The comparisons relied on ingenious devices called SNP chips, which scan just a tiny portion of the genome. (SNP, pronounced “snip,” stands for single nucleotide polymorphism.) These projects, called genome-wide association studies, each cost around $10 million or more

The results of this costly international exercise have been disappointing. About 2,000 sites on the human genome have been statistically linked with various diseases, but in many cases the sites are not inside working genes, suggesting there may be some conceptual flaw in the statistics. And in most diseases the culprit DNA was linked to only a small portion of all the cases of the disease. It seemed that natural selection has weeded out any disease-causing mutation before it becomes common.

So now scientists are adopting a new approach.

In the last few months, researchers have begun to conclude that a new approach is needed, one based on decoding the entire genome of patients.

The new reports, though involving only single-gene diseases, suggest that the whole-genome approach can be developed into a way of exploring the roots of the common multigene diseases.


Dr. Reid said the HapMap and genomewide association studies were not a mistake but “the best we could do at the time.” But they have not yet revolutionized medicine, “which we are on the verge of doing,” he said.

Dr. Goldstein, of Duke University, said the whole-genome sequencing approach that was now possible should allow rapid progress. “I think we are finally headed where we have long wanted to go,” he said.

Sorry for the lengthy excerpt.  If I looked, I could find similar or stronger quotes from other scientists after the human genome was first sequenced, talking about an imminent revolution in medicine.

The question is–now that we know one approach doesn’t work,  have the odds of this new approach working? What are the odds that these scientists are right, and we are on the verge of a medical revolution?

I’m all in favor of technological revolutions. I’m just trying to apply the Black Swan perspective, which suggests that the space of possible scientific investigations is so big that eliminating one approach as failed doesn’t notably raise the possibility of success with a new approach.

I don’t mean this as a critique of science or scientific method.  Rather, I’m assessing this from the top-line economic perspective.  The knowledge that one approach has failed counts as new information. Does this new information raise or lower our assessment of future growth?

Where Does Obama Get His R&D Stats?

Speaking to the Business Roundtable on February 24, Obama said:

To spur the discovery of services and products and industries we have yet to imagine, we’re devoting more than 3 percent of our GDP to research and development -– an amount that exceeds the level achieved at the height of the space race

 Who the heck is feeding the President his numbers? If anything, when the data for  2009 and 2010 national R&D finally come out, these figures  may turn out to be the worst in years.

The last published number on national R&D spending from NSF puts government, business, and academic spending on R&D at roughly 2.8% of GDP, less than the 2.9% in 1964.  

We know that government spending on R&D went up between 2008 and 2010, but the gain was less than a tenth of a percentage point of GDP. 

The real problem is that corporate and academic spending on U.S. R&D is almost certainly falling.  How fast? We don’t know.  But the combination of pharma mergers, auto company cutbacks, and the movement of  R&D facilities overseas suggests a sharp cutback in U.S. R&D spending.

In fact, the number of engineers and scientists employed in the U.S. contracted by 5.0%  in 2009, a much bigger decline than the 3.8% drop for the U.S. workforce as a whole.

Obama was sounding complacent, when he should have been sounding the alarm.



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