Recession Hits Harder at College Grads Without an Advanced Degree

I’m sure many of you read the  NYT article about the 26-year-old college grad with almost $100,000 in student loans.  The article was fascinating and horrifying, but it didn’t mention a key factor–since the girl in the article graduated in 2005, the  real wages of college grads without an advanced degree have fallen substantially.

 Take a look at this chart.

I’ve plotted median usual weekly earnings of fulltime workers, adjusted for inflation, and indexed to 2001Q1 =1. The dark blue line shows the weekly wages of workers with an advanced degree, while the lighter line shows weekly wages of workers with a bachelor’s degree only.

The real wages for college grads with a bachelor’s have  been in a downswing since 2004.  That offers at least a partial explanation of her problems…she got caught by a weakening labor market for bachelor’s degrees.  

To put it another way–college grads who are clothed with the protection of an advanced degree have on average managed to hold their own during the financial crisis, and even gain ground. Since mid-2007, their usual weekly wages are up by 3.7% in real terms, putting them at their highest level for the past ten years.

‘Naked’ college grads–that is, those without advanced degrees–have not fared nearly so well during the recession. Their real weekly earnings are down 0.7% since mid-2007, and they are well below their 2004 level.

Is this simply supply and demand,  a function of which industries were hit, or is there something else going on?

How much R&D is being offshored? NSF releases new numbers

My view is that we suffer from an “information deficit” rather than an “information overload.”  We know far too little about the important things, and far too much about the unimportant.

One of the notable gaps in our knowledge has been reliable statistics about R&D spending.  The economy  is driven by innovation, but we knew very little about who was doing the innovating and where.  In particular, we had absolutely no idea how much R&D was being offshored by U.S.-based companies.

In order to answer this question and many others,  the National Science Foundation got funding a few years ago for a new survey on business R&D and innovation. I wrote about it in a September 2008 BusinessWeek cover story, Can America Invent Its Way Back?: “Innovation economics” shows how smart ideas can turn into jobs and growth—and keep the U.S. competitive.  (This story is also the answer to a trivia question: What BusinessWeek cover was being delivered to the homes of subscribers when Lehman failed?).

Now the NSF has released the initial results from the new Business R&D and Innovation Survey.  For the first time, we have a good read on how much U.S. businesses are offshoring their R&D—setting up research facilities in other countries. 

It turns out that in 2008, manufacturers did about 20% of their R&D overseas. That’s actually a bit less than I would have expected. Here’s how it breaks down by some industries.

Surprisingly, the industry which has done the most to offshore its R&D is the auto industry,  with 39% of its spending done overseas.  Other industries with a high rate of R&D offshoring  include electrical equipment—that’s lighting, generators, and the like—and info tech hardware.  Pharma had less offshoring than I would have expected.

The survey was incredibly detailed, and there’s a lot more data releases coming in the future that will enable us to figure out the effectiveness of this spending for innovation, and the employment generated.  It’s great stuff…take a look.

[Note: The survey counts R&D done by U.S.-owned businesses, both home and abroad and R&D done by U.S. affiliates of foreign parents I'm pretty sure that in future data releases, we'll get numbers that allow us to separate out the two. ]

No, It’s Not 70% of Economic Activity

I might as well turn this into a monthly feature. In response to today’s personal income report, Martin Crutsinger of AP writes:

Consumer spending is closely watched because it accounts for 70 percent of total economic activity.

No, it doesn’t, Martin. Every time a journalist says that consumer spending accounts for 70 percent of total economic activity, he or she is misleading readers into believing that the U.S. economy cannot grow without the consumer taking the main role (see my earlier posts here and here). 

In fact, the meme “consumer spending accounts for 70 percent of economic activity” pretty much obscures all the major problems with today’s economy.

1) The ’70 percent’ meme blurs the distinction between domestic production and imports, since  a big chunk of imported goods are counted in PCE ; 

2) The ’70 percent’ meme blurs the distinction between household and government spending, since PCE  includes Medicare and other entitlement spending.

3) The ’70 percent’ meme blurs the distinction between household and institutional spending, since personal consumption expenditures includes money spent by nonprofits (best example: Political parties, which are heavily funded by corporations, fall into personal consumption expenditures) 

To finish off this rather post,  I did some calculations on the sources of growth in real PCE since December 2009.

This table shows that 47% of consumption growth since December comes from spending on import-intensive goods.  In particular,  the two biggest increases in spending came for ‘clothing and footwear’ and ‘consumer electronics and IT equipment’, two categories dominated by imported goods.  You can be sure that when Americans step up their spending on clothing, they are creating very few manufacturing jobs in this country.   

Another 13% of consumption growth came in categories where third-party expenditures are important, such as healthcare and nonprofits.

P.S. I’m getting some traction in my fight against the 70 percent meme. See Donald Marron’s post, for example.

One Explanation of the Innovation Shortfall

I’ve just read a very important paper  that I strongly recommend to anyone interested in innovation and growth.  The paper, by Ben Jones, an economist at Northwestern, is called “As Science Evolves, How Can Science Policy?”. Jones documents two crucial points. First, as the length of education and training for a scientists gets longer, the value of a scientific career drops sharply.    

Second, teamwork has been getting more important. For example, on the issue of teamwork, Jones looks at all science, engineering, and social science journal articles published from 1995 to 2005, and shows that team-written papers have far more impact than solo papers.    

Take a look at these two charts, drawn from Jones’ paper.


The first chart shows that team-written papers end up drawing a lot more cites than solo papers, on average, in both science and engineering, and the social sciences. The second chart shows that the “home run” papers are much more likely to come from teams.    

(Related papers include “The Increasing Dominance of Teams in Production of Knowledge” from Science (2007) and “The Burden of Knowledge and the Death of the Renaissance Man: Is Innovation Getting Harder?”)    

Jones then goes on to point out that the current incentive structure in science is struggling  to deal with a world where scientists have to wait so long to get started:    

For example, if careers in finance, management, or law require more static levels of training, then scientific careers will be increasingly costly by comparison. The estimated 6-8 year delay in becoming an active innovator over the 20th century suggests, at a standard 10% discount rate, a compound 45-55% decline in the value to becoming a scientist. This kind of selection effect may not only slow scientific progress but also slow economic growth, should the positive spillovers that follow from idea creation (see Section III) not feature in other white collar careers. The recent finance boom, drawing talented undergraduates into quickly attained,high wage streams, may make this comparison particularly acute.    

[Read more...]

Housing and Jobs

I’ve never been a big  fan of home construction as a driver of economic growth.  Way back in 2005 I wrote a piece for BusinessWeek entitled “The Cost of All Those McMansions” :

whether prices level out, crash, or even keep going up, the housing boom is already having pernicious economic effects. The real problem: the incredible amount of resources — workers, materials, and money — being sucked into home construction and renovation….Residential investment has become a black hole, absorbing a staggering 5.8% of gross domestic product….. housing-driven growth, while creating jobs and lifting wealth, is also distorting the economy, benefiting low-tech commodity sectors rather than the high-tech industries at the heart of America’s competitive strength.

(I know it’s chintzy to self-quote, but please forgive me for now).

Housing construction, although it counts as investment in government statistics, has much less positive impact on long-term growth than other types of investment.

However,   spending on home construction does have one virtue–most of the money goes to domestically-produced goods and services. A calculation by two BLS economists, Carl Chentrens and Arthur Andreassen  (in  a  paper they presented at the 2009 Federal Forecasters Conference) suggests that only 7% of spending on residential investment ‘leaks’ into imports. By contrast, they find that about 21% of nonresidential investment leaks overseas (that makes sense, since so much business investment goes for IT and transportation equipment, much of which has a heavy import component).

That makes new home construction a much better generator of domestic jobs, in the short-run, than other types of spending.   For example, American consumers went shopping for more clothing in the first quarter of 2010. But that uptick of consumer activity sure as shooting didn’t create many clothing production jobs in the U.S.

So if we want job growth–and we do, we do–it’s  going to be tough to get a job recovery without at least some improvement in the housing market.

Synthetic Biology and the Innovation Shortfall

Coincidentally, the same week that Craig Venter announced the creation of an “artificial lifeform”, Newsweek magazine ran a cover entitled “Desperately Seeking Cures: How the road from promising scientific breakthrough to real-world remedy has become all but a dead end.”

This Newsweek story, written by Sharon Begley and Michael Carmichael, is a must-read for anybody interested in understanding the healthcare crisis and, indeed, the economic crisis.  As I have written, life sciences research has been the big bet of the U.S. economy, absorbing a rising share of government and academic research dollars If it had produced a stream of  commercially powerful innovations over the past ten years, the economics of healthcare would have been different. Indeed, I would argue that the current state of the U.S. economy would be much better.

Begley and Carmichael’s article offers an explanation for how undoubted scientific progress in life sciences can coexist with an economically disastrous innovation shortfall. They write:

From 1996 to 1999, the U.S. food and Drug Administration approved 157 new drugs. In the comparable period a decade later—that is, from 2006 to 2009—the agency approved 74. Not among them were any cures, or even meaningfully effective treatments, for Alzheimer’s disease, lung or pancreatic cancer, Parkinson’s disease, Huntington’s disease, or a host of other afflictions that destroy lives.

….judging by the only criterion that matters to patients and taxpayers—not how many interesting discoveries about cells or genes or synapses have been made, but how many treatments for diseases the money has bought—the return on investment to the American taxpayer has been approximately as satisfying as the AIG bailout. “Basic research is healthy in America,” says John Adler, a Stanford University professor who invented the CyberKnife, a robotic device that treats cancer with precise, high doses of radiation. “But patients aren’t benefiting. Our understanding of diseases is greater than ever. But academics think, ‘We had three papers inScience or Nature, so that must have been [NIH] money well spent.’?”

…”NIH has no skin in the game, so they have no inducement to work with a company” to get a discovery from the lab to patients, says Eric Gulve, president of BioGenerator, a nonprofit in St. Louis that advises and provides seed money for biotech startups. “There isn’t a sense of urgency.”

….If we are serious about rescuing potential new drugs from the valley of death, then academia, the NIH, and disease foundations will have to change how they operate. That is happening, albeit slowly. Private foundations such as the MMRF, the Michael J. Fox Foundation for Parkinson’s Research, and the Myelin Repair Foundation (for multiple sclerosis) have veered away from the NIH model of “here’s some money; go discover something.” Instead, they are managing and directing scientists more closely, requiring them to share data before it is published, cooperate, and do the nonsexy development work required after a discovery is made.

It’s a great article…go read it.

And finally, back to synthetic biology.  Will this be the new approach that finally breaks free of the innovation shortfall in life sciences? I can’t tell…but I’m watching Venter closely.

Richard Florida responds

Richard Florida responds to my post A Bad Business Cycle for the Creative Economy here and here (“Brains Still Trump Guns and Oil”). He writes:

Or, you could ask just two simple questions. Which of these two places—Houma, Louisiana or Austin Texas—would you bet on to have higher living standards, higher wages, and higher home price values in the next decade or two? And if you had to choose between Killeen, Texas or the Research Triangle area around Raleigh, North Carolina as a place for you and your family to live, which one would it be?

I know how I’d answer. And I think Mandel would likely answer the same way.

I’m actually staying in good old New Jersey, land of pharma company mergers.

Still, I encourage people to read Richard’s thoughtful pieces. I’m going to come back again after I’ve had a chance to process them some more. For now,  I just want to make a couple of points.  First, an unusual combination of factors in the past decade may have worked against the Creative Economy–an innovation shortfall, combined with a rising cost of energy and the threat of terrorism. If these factors reverse, especially the innovation shortfall, the Creative Economy cities may once again have faster growth. I’m moderately optimistic–when I was recently up in Rochester speaking on innovation and economic development, I suggested that life sciences may still be a good route to prosperity in the future, even if it wasn’t over the past ten years.

However–and this is a big one–we can’t ignore the possibility that the innovation shortfall will continue, that energy will continue to rise in price, and that the military situation will become worse. In this future,  the Creative Economy arguments become less compelling.

Can We Grow Our Way out of Debt?

This post is mostly going to be thinking out loud–I don’t come to a definite conclusion yet. The U.S. faces both a short-term and a long-term fiscal crisis. The short-term problem is the current  gap between government spending and government revenues. Arguably that could go away if the economy recovers.The long-term  fiscal crisis is the gap between anticipated spending on Medicare and Social Security, and anticipated revenues from payroll taxes.

The question on the table: Could an acceleration of U.S. productivity growth (for whatever reason) enable us to grow our way out of the short-term and long-term fiscal problems? Or, more generally, could an acceleration of U.S. productivity growth boost the U.S. national savings rate, enabling us to save our way out of the fiscal problem?

In the past, I’ve answered this question with an resounding yes. I still think it’s yes, but the answer is more complicated than I thought.

The main reason why it should be possible to grow our way out of debt: An  increase in productivity growth–especially one that is not expected–makes the U.S. wealthier and gives Americans higher incomes. One might expect that could increase savings, especially since  higher-income, richer households are more likely to save (see, for example, the Fed’s Survey of Consumer Finances).  Or to put it a different way, income grows faster than consumption can adjust.

The reasons why it might not be possible to grow our way out of debt:

1) Empirical: During the 1990s and early 2000s, productivity growth accelerated, but consumption accelerated more, so that the savings rate dropped and the trade deficit increased.

2) Empirical: The per-capita cost of health care has grown faster than per-capita GDP in the past (see, for example, the CBOs long-term budget outlook).  Assuming that relationship continues in the future, that implies an acceleration of per-capita GDP growth will actually increase the fiscal gap.

3) Legal: Social Security benefits are keyed to average real wages–so if growth accelerates, and wages rise in response,  so do Social Security benefits. That means it is very difficult to grow our way out of Social Security issues.

Let’s take these in reverse order.

3) Definitely true. As I’ve written in the past, the Social Security formula probably needs to be adjusted so that benefits don’t quite track real wages.

2) The long-term excess growth of healthcare costs is very interesting. It’s been variously blamed on institutions that make it hard to control costs;  the excess cost of new medical technologies;  and environmental and social factors (such as increased weight). I personally believe that it represents economic consequences of the innovation shortfall in life sciences that I’ve discussed before–commercially important innovations in areas such as biotech have been few and far between. I would expect that if the pace of successful innovation in the life sciences picks up, that would bring down the rate of growth of health care costs, but there’s no way to test that until it happens.

1) This is the hard one, as far as I am concerned. Take a look at this chart:

I’ve chart ten-year nonfarm business productivity growth against the net national savings rate (productivity growth on the left scale in blue, net national savings rate on the right hand scale in brown). What we see is that the two lines roughly parallel each other, as we would expect, up until the late 1990s. Net savings starts to rise as the productivity acceleration begins. Then, poof,  productivity growth and net savings go in opposite directions. Despite the unanticipated acceleration of productivity–which boosts output per worker–the savings rate collapses.

Taking this chart at face value is bad news for the “grow our way out of debt” thesis. For one, we had a big acceleration of productivity growth, and the debt problem got worse. To put it another way, we produced more output than expected, and savings went down. Second, it’s hard to imagine that we can get productivity growth up much faster than 3% a year.

But let’s think a bit more about what might explain this surprising divergence. Really, there are four possible explanations:

A) Americans might just be profligate, and quickly ramp up their spending when their income increases (this includes healthcare spending, so it takes in #2 above).

B)The derangement of the financial system and the housing market led people to think that they were richer than they really were (the syndrome of the lottery winner who goes broke).

C) Net savings is mismeasured, and we are really saving more than it seems (spending on education, for example, is counted as consumption).

D) Productivity growth is mismeasured, and the productivity acceleration was really less than it seemed.

If American profligacy is the primary problem, then we are probably out of luck…hard to change. If financial excess is the main problem, then financial reform could be a key factor for helping us grow our way out of debt. If underestimates of savings is the main problem, then we have no problem (because the U.S. is really better off than it seems). If overestimate of productivity growth  is the problem, then what happened was that we thought we were richer than we really were, and this led to overspending. (I suspect, for example, that the models for subprime defaults implicitly depended on real wage growth, which is linked to productivity growth).

I personally lean towards D,  as I’ve written before. But like I said, I’m not as sure as I once was that we can grow our way out of debt…and that’s just sad.

Why Financial Jobs Have Fared Relatively Well

I’ve been watching the job numbers in financial services with some degree of surprise.  Considering that the crisis was centered in the financial sector, it’s actually a bit odd that  financial jobs didn’t do worse. Finance and insurance employment is down 8% over the past three years–but the real job crashes came in construction and manufacturing, down 27% and 17% respectively, not in finance.

Now, I can explain why construction went down. But manufacturing’s job loss would have been hard to predict. 

Suppose that I took a time machine back to early 2007.  I tell your 2007-self a recession is coming, and ask you to predict whether manufacturing or finance will have the deeper job decline, based on these three facts:  (a) The U.S. will have the worst financial crisis in the last 80 years (b) Bear Stearns and Lehman will close their doors and (c) mortgage lending will dry up.   I’m sure that very few of you would have expected manufacturing to have much bigger job losses than finance.  

Equally odd, the unemployment rate in finance and insurance, at 7.3%,  is substantially lower than the 10.1% for the economy as a whole. And yes, part of that reflects education, but that doesn’t explain why finance unemployment is substantially lower than the unemployment rate in the information sector, which is also a high-education sector.  

And banks have started hiring again.  JP Morgan CEO Jamie Dimon said a month ago that his bank plans to hire almost 9,000 new employees in the U.S. Citigroup, the most troubled of the large banks, basically kept its employment flat in the first quarter of 2010.

In addition, wages have been rising in the financial sector. Over the last year, hourly wages for all workers rose by 3% in financial services,  roughly double the 1.6% gain for the economy as a whole. And let’s not forget the big profits reported by Wall Street banks for the first quarter.

 What does this all mean?  My theory is that as long as the U.S. is running a big trade deficit,  financial sector jobs are going to do very well.  The rest of the world has to lend large amounts of money to the U.S. to keep the global economy going, and all of that money has to be funnelled through Wall Street, which creats wel page jobs.

In some sense, Wall Street’s gain is proportional to Main Street’s pain.  The big trade deficits means less production at home, but the deficits needs to be financed by  debt–and any debt issuance, including U.S. Treasuries, ends up going through Wall Street.

The End of the Fiscal Stimulus?

Did the first quarter mark the end of the fiscal stimulus?  And will it be enough to work?

People are always trying to judge the fiscal stimulus by whether it creates jobs.  But that was never the real justification for spending all that money.  The theory was that the economy has multiple equilibria–a good equilibrium where everyone is optimistic about the future,  companies invest, and households spend, and a bad equilibrium where everyone is  locked into a mutually reinforcing gloom about the future.  Then a big enough fiscal stimulus can forcibly kick the economy from the bad equilibrium to the good equilibrium.

The key term here is ‘big enough’.  I think of the stimulus as a big booster rocket for the economy. If the rocket is strong enough, it can put a satellite (the economy)  into a stable orbit. Not enough boost,  jobs are created by spending money, but the economy falls back to earth again once the stimulus stops (wow, that was a mixed metaphor, but I’m good with it).  

By this measure, the stimulus can only be judged successful or not after it stops firing.  Or to put it another way, we want to see if the private sector  continues to grow once the government stimulus is removed.

As it looks like tht critical moment has arrived.   Based on the latest BEA data,  the stimulus ran out of fuel in the first quarter, and we’re about to find out whether it gave the economy enough oomph to get back into orbit. 

Take a look at these two charts. First, the government contribution to GDP growth was negative in the first quarter–roughly one-third of a percentage point. This reflects mainly contraction of state and local governments–layoffs and reductions in investment. Basically any new building projects on the state and local level  have been put into the cold freeze.  

But the GDP stats don’t tell the full story, because transfer payments (Social Security, Medicare, unemployment insurance) are not included in the ‘government’ category of GDP. Instead, they show up in personal income.  So I calculated the government contribution to real personal disposable income growth.  That includes the change in government benefit payments and government wages and salaries, minus the change in income taxes and payroll taxes.

Surprisingly–at least to me–the government was a net drag on real disposable income growth in the first quarter of 2010.  A small drag to be sure–roughly 0.2% of disposable income–but certainly not a boost. An increase in benefits was more than offset by an increase in taxes paid.

In other words, the fiscal stimulus pretty much petered out in the first quarter.

So the second and third quarters will be key. Will the private sector be able to use the boost from the stimulus to get back into some reasonable economic orbit? Or will it fall back to earth again in a big splat?

Right now I’m evenly balanced between the optimistic and pessimistic possibilities in the short-run.  I see good signs of life, especially in the communications sector. But I worry about Europe, about cutbacks on state and local level, about trade and borrowing from overseas.  But that’s a different post.



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