Biosciences and Growth

Over the medium-term, I regard biosciences–pharma, medical devices, broader applications of biotech–as one of the key 2 or 3 drivers of U.S. economic growth. The elements are all lined up: Great science, skilled workers, enormous potential demand. So 5-10 years from now,  we’re  likely to be reading about the founder of some hot biosciences firm joining Mark Zuckerberg  as the latest multizillionaire.

But in the short-term: Oh, lordy. The latest blow comes from the recent decisions to ban the diabetes drug Avandia in Europe and greatly restrict its use in the U.S.  Let me quote from Derek Lowe, a pharma researcher:

 The whole PPAR story looked like a great way to affect metabolic disorders and plenty of other diseases as well: cancer, inflammation, cardiovascular. That is, if we could just manage to understand what was going on. But we didn’t. Once we all figured out that nuclear receptors were involved and got busy on drug discovery on that basis, we didn’t help anyone with any diseases, and we didn’t make any profits. Big piles of money actually disappeared during the process, never to be seen again.

Megan McCardle adds:

There is a fundamental misunderstanding of the way that a modern economy drives innovation.  People tend to think in terms of a “eureka!” moment–a blockbuster idea or product that springs full blown from the head of Zeus, and then exists forever.  But in fact, an enormous amount of productivity improvement is driven by tiny, continuous, incremental change.  This is true of treating childhood cancer, it is true of drug discovery, and it is true of Toyotas.

The State of Young College Grads

The 2009 income figures came out today, and I immediately gravitated to my favorite barometer for the state of the economy: The earnings of young college grads–that is, mean earnings for full-time workers, ages 25-34,  with a bachelor’s only.

I consider these workers to directly reflect the health of the U.S. economy. If young college grads are doing well, that means there is a demand for high-skilled labor, and there’s an incentive for young people to get an education.  But if young college grads are doing poorly, wow…that economy is not on a sustainable path.

Take a look at the chart above, which plots tuition and fees at 4-year colleges, public and private nfp, against the earnings of young college grads, male and female. The results show that college costs have kept rising, while the real earnings of young college grads have gone down since 2000. In particular, since the recession started in 2006,  real tuitions and fees have skyrocketed, while real earnings have plummeted.

This helps explain why college debt has become so much more onerous for students….wages have not risen as fast as college costs.

A Statistical Profit Puzzle

I’m going to warn you right up front. This post is being written on the Saturday evening of Labor Day weekend. I’ve had a tough day (don’t ask).  I’m writing about a topic that no one is going to care about, but is in fact very important.

Let’s start: The Bureau of Economic Analysis publishes quarterly statistics on “corporate profits” and “corporate profits of domestic industries.”  Corporate profits of domestic industries are used to calculate Gross Domestic Income, which is should be equal  to Gross Domestic Product.   (To see a little discussion of GDI, see this James Hamilton article and here).

Here’s the question: Suppose a U.S. company discovers that the cost of importing a good or service is less than the cost of buying it from a domestic producer (or making the good or service itself).  The executives of the company decide to boost profits by offshoring production of that good or service. 

Should that increase in profits be treated as an increase in “corporate profits of domestic industries”? And by extension, should that count as an increase in GDI? And by extension, GDP?

Discussion beneath the fold.

The FCC and the Jobs Report

On Wednesday the FCC announced that it was going to put off tightening regulations on broadband providers.  Today, the  Bureau of Labor Statistics announced that private payrolls rose by 67K  in August, a gain mostly due to an increase of 45K in healthcare and education, two sectors that are heavily government supported.

Indeed, over the past year, the rest of the private sector, outside of healthcare and education, has lost jobs.

However, there are pockets of strength. One such pocket is in the communications sector,  where employment wireless communications, Internet companies  (think  Google), and custom computer programming services (think apps developers)  are up over the past year. This is a sign that this sector may be one of the leaders in the recovery.

From that perspective, the FCC made exactly the right decision when it postponed imposing new regulations on communications.  At a time when there are so few economic bright spots,  it would be a serious mistake to take a regulatory hammer to a growing sector.

There’s a sign that the FCC is recognizing these imperatives. In the statement released on Sept. 1, the FCC said:

in light of rapid technological and market change, enforcing high-level rules of the road through case-by-case adjudication, informed by engineering expertise, is a better policy approach than promulgating detailed, prescriptive rules that may have consequences that are difficult to foresee

But there’s a broader principle here. As I have suggested, the Obama Administration needs to think in terms of countercyclical regulatory policy. Regulations are essential for making the market economy work, but timing is essential–not just in communications, but in biosciences, environment, education, and a whole host of different areas. Overly enthusiastic regulation in a deep downturn is not the way for fast and healthy growth.