Pent-up Labor Demand Continues to Build

The latest release of The Conference Board Help-Wanted Online data shows a big jump in online want ads in January.

This gap between want-ads and hiring is evidence of pent-up labor demand. I believe that it will spill over into large-scale actual hiring in 2011.

A Shrinking Nonoil Trade Gap? Really?

I’m going to talk about Friday’s GDP report. But first, two  questions to test your knowledge of the last ten years of U.S. economic history .  

1. According to the official statistics, the share of non-oil goods imports in the U.S. economy is   ______ today than it was in 2000.

a. Higher

b. Lower


2. Over the past ten years real GDP has increased 18%, according to the BEA. Over the same period, the real trade deficit in goods, ex imported oil, has increased by how much, according to the official statistics?

a. 5%

b. 18%

c. 30%

 Write down your answers, and don’t peek at the data! (you can tell that I’ve been hard at work revising my economics textbook)

[Read more...]

PPI on the SOTU (more initials FTW!)

Take a look at these posts on the State of the Union from the Progressive Policy Institute. Some good stuff here:

If last night was the opening gambit in the 2012 campaign, it hints that Obama understands that the two keys to getting re-elected – a centrist politics and an economic recovery – are linked. What he also needs to understand is that he’s going to have to keep hammering on the same themes if he wants them to stick.

… the best line of his speech–“We do big things”–was probably the most forceful testament to American greatness and world leadership of the Obama presidency. It was an effective reminder that despite the impasses our politics so routinely produce that our calling is at the head of the world’s pack, and for a damn good reason.

People are often frustrated that they don’t hear the specifics about what government should do. …the fact remains that the broad, often simplistic pronouncements we heard last night still do push the ship of state in one direction rather than another.  And the fact also remains that the gulf between hard policy and the politics of policy can be perilous.

Innovation-related comments on the SOTU

From the Christian Science Monitor:

‘America’s greatest economic strength, compared to its competitors, is its commitment to liberty, or the freedom to innovate and compete. Communist-run China adopted that economic model in 1979 and still hasn’t quite absorbed it with its state capitalism.

From Ezra Klein:

And without knowing what Obama is actually asking from Congress, it’s hard to know what his vision amounts to. Yes, it would be good “to out-innovate, out-educate, and out-build the rest of the world,” and yes, public policy has a role in helping us do that. But a small commitment to public investment is very different than a big commitment to public investment.

From Congressman Rob Bishop (R-UT):

However, while the President is calling for ‘new levels of research and development that haven’t been seen since the Space Race’ his Administration is also calling for the termination of our nation’s manned space program- a program whose science and technology research is an essential component of our nation’s missile defense program.  Terminating this program, including the Constellation program, would cede our leadership in space exploration over to countries like China, Russia and India.  Again, ironically, these are the same countries that, as he noted tonight, are rising as global leaders in innovation and technology.  It would be counterproductive to abandon our role as leaders in space exploration.

From Rob Atkinson of ITIF:

ITIF applauds the President’s call for tax reform but urges the Administration and Congress not be lulled into the simpler-is-better trap. ITIF has long argued that effective corporate rates are too high and that valuable credits, such as the R&D credit are too stingy. However, a complex economy sometimes benefits from a complex tax system. Computer chips are different from potato chips and they shouldn’t be taxed the same way. New machinery and equipment is different from housing and they shouldn’t be taxed the same way. ITIF has urged the creation of a new corporate competitiveness tax credit that would include a much more generous credit for research and development, and a credit for business investments in workforce training and new capital equipment, especially software


From Marshall Auerback:

Consider the solar industry, which represents a perfect microcosm of the challenges the US now faces in regard to China. Beijing’s command economy policy makers are piling subsidy on top of subsidy to make China’s domestic market and domestic production the largest in the world. Its state-controlled banking system under government directive is financing capacity equal to a multiple of world demand on lending terms that make no sense for an industry with this much competition and flux.

The Chinese solar industry has been able to drive down solar product prices to levels that are too competitive for the most automated U.S. producers using the most advanced technology. As a result, the U.S. solar industry, including Evergreen, upon which President Obama has placed such high hopes, is departing the U.S. for facilities elsewhere, including facilities joint ventured with favored Chinese companies.

This encroachment by the Chinese into the global market for solar products is not occurring because China has especially low labor costs. It is not occurring because China has more advanced technology. It is occurring because China’s command economy can force fixed investment in priority industries through a broad array of non-market means.


From Bruce Nussbaum, “What’s Wrong With America’s Innovation Policies

China’s brilliant “Fast Follower” innovation policy is generating the biggest transfer of technology in history. A combination of state-driven policies is driving this policy — requiring Western companies to partner with Chinese firms to do business; demanding transfer of the latest technologies in exchange for access to markets; favoring “indigenous innovation” in government purchasing; fencing off green and other industries from foreign competition; offering low-interest state-bank loans to local champions. This industrial policy is at odds with WTO standards, but is a boon to Chinese economic growth and a long-term threat to U.S. global competitiveness.

Obama Gets Innovation Upside-Down

In his State of the Union speech, President Obama spent a lot of time on innovation, regulation, and jobs–that’s good. Unfortunately, in all three cases he got his priorities upside down.

Let’s start with innovation.  I counted how many words the President devoted to different areas of innovation.

  • 2 words for biomedical research, the area where the U.S. is far ahead of the rest of the world.
  • 68 words devoted to extolling the job-creating virtues of space travel and NASA, an agency which currently has no mission unless it gets a lot more money.
  • 113 words for  highspeed-wireless broadband, a worthy goal.
  • 361 words in favor of clean energy, a technology where the U.S. has little competitive advantage over the rest of the world.

In other words, Obama spent his time lauding our least competitive areas of innovation, while giving the back of his hand to biomedical research, the area where we have the clear global advantage.

If you think I’m exaggerating, take a look at these two charts.  When it comes to life sciences, the U.S. is way ahead. U.S. companies account for 44% of   R&D spending by life sciences companies around the world in 2010, according to estimates by Battelle/R&DMagazine.  And U.S. government support for health research is unsurpassed, accounting for 70% of  global public sector funding.

On the other hand, the U.S. support for  energy research is mediocre, at best. U.S. companies account for only 25% of global energy R&D spending by businesses.  And in 2008, before Obama took over, the U.S. government funding for energy R&D accounted for only 20% of the global public sector spending on energy R&D.  That’s pitiful.  

 Here’s what a recent R&DMagazine piece says about U.S. energy R&D:

the level of R&D spending in the U.S. energy sector is small in absolute terms and as a percent of revenue (0.3%) when compared with other sectors. For example, the total amount of private sector investment in all forms of energy research in our portfolio would likely amount to little more than half of the leading life science R&D investor, Merck, or the leading software/IT R&D investor, Microsoft, both of which invested more than $8.4 billion in R&D in 2009.

Mr. President, every time you talk about clean energy creating jobs, you are placing your bet on the wrong horse.  Communications and biosciences are the best bets we have in the near-term.

Now we come to regulation. I’m afraid once again the President started out right, and ended upside-down. He began by explaining how he would get rid of rules that imposed an unnecessary burden (29 words). But then he spends triple the time ( 102 words) defending his administration’s regulatory efforts.  He should have stopped while he was ahead.

Finally, we come to jobs, which were spread through the whole speech. This is my ‘soft’ count of how many times the word ‘jobs’ were mentioned in connection  with various areas of the economy (your count may differ) 

  • IT-1
  • Space-1
  • Clean energy –2
  • Education–3
  • Infrastructure –2
  • Exports–4

Exports got the most mentions as a source of jobs—-but no mention of imports, and no mention of the fact that our trade deficit in advanced technology products hit an all-time record in November, going into double digits for the first time.  The reason? Imports of advanced technology products have surged, while exports are basically flat.  Before worrying about exports, we should worry about recapturing some of the jobs lost to imports.  

Taking Bets on the State of the Union

Really, two bets:

1) Will Obama mention ‘innovation’ and ‘jobs’ in the same sentence?

2) Will Obama mention biosciences–pharma and medical devices–as a source of innovation and jobs, or will he just focus on energy?

I know, I know, the second one is a compound bet, but what the heck.

Post-speech response:  Innovation and jobs did show up in the same sentence. Biosciences as a source of innovation and jobs was basically ignored.

Right Diagnosis, Wrong Prescription: New Medical Research Center

Back in June, I argued that the most significant economic event of the past decade was “the failure of the Human Genome Project to  thus far deliver medically significant results.”  I was soundly attacked at that time by all sorts of people, some of  arguing that I was an idiot because there was plenty of innovation in the biosciences, and others arguing that I was an idiot because biosciences didn’t matter that much.

Now NIH has woken up and realized that the research breakthroughs in genonomics have not translated into cutting edge medicines. But rather than address the real problems–including excess regulation at the FDA–the decision was made to create a new government agency in competition with the drug companies. From today’s NY Times piece.

The Obama administration has become so concerned about the slowing pace of new drugs coming out of the pharmaceutical industry that officials have decided to start a billion-dollar government drug development center to help create medicines.


Creating the center is a signature effort of Dr. Collins, who once directed the agency’s Human Genome Project. Dr. Collins has been predicting for years that gene sequencing will lead to a vast array of new treatments, but years of effort and tens of billions of dollars in financing by drug makers in gene-related research has largely been a bust.

As a result, industry has become far less willing to follow the latest genetic advances with expensive clinical trials. Rather than wait longer, Dr. Collins has decided that the government can start the work itself.

Dr. Collins, this is so not the right move. Why not put some of your prestige towards untangling the regulations that make it more and more expensive for drug companies to get approvals?

Education-Based Inequality Increased In 2010

I usually don’t like graphs with lots of lines, but this one is too important to pass up.

This chart shows median weekly wages for full-time wage and salary workers, adjusted for inflation, and indexed to 2000 (the data comes from the BLS   “usual weekly earnings” series). There are three things to take away from this chart. 

*First, the wage gap between holders of advanced degrees and everyone else widened in 2010.

*Second, workers with advanced degrees have done much  better than everyone else over the medium run,  both since 2000 and since the Great Recession started in 2007. For example, since  2007,  real weekly wages for advanced degree holders have risen by 3.8%, compared to a 0.1% decline for holders of bachelor’s degrees only.

*Third, over the past ten years, the pay for a bachelor’s degree has more or less tracked the pay for high school grads. 

Now, within advanced degree holders, the pay inequality has widened as well. Take a look at this chart. The top decile–that is, the dividing line between the top 10% of advanced degree holders and everyone else–has risen 13% over the past ten years.  The median and the third quartile (top 75%) has risen by 3-4%, while the bottom 25% of advanced degree holders is actually down since 2000.

Innovation Shortfall Thesis Gains Another Fan

I still find many people who instinctively recoil when I talk about the innovation short fall as a prime cause of today’s economic problems. But see this  interview with hedge-fund billionaire Peter Theil (hat tip to Arnold Kling)

My orthogonal take is that the whole thing happened because there was not enough technological innovation. It was not really the fault of the borrowers or the lenders; the problem was that everybody had tremendous expectations that the country was going to be a much wealthier place in 2010 than it was in 1995, and in fact there’s been a lot less progress. The future is fundamentally about technology in an advanced country — it’s about technological progress. So a credit crisis happens when the technological progress is not as good as people expected. That’s not the standard account of the last decades, but that’s the way I would outline it.
People were expecting house prices to go up 8 percent a year. That would be quite possible in a society where the GDP was growing tremendously and where there were tremendous gains in efficiency and technological innovation. But we’re not having that much innovation and, because of that, the housing bubble was unrealistic. It’s also possible that the housing bubble was very deeply linked to the tech bubble. The tech bubble was about extrapolating technological gains; it turned out that the gains didn’t materialize as quickly, or at all, and then people went back to housing and back to credit to get the 8 percent returns. But housing and credit still depend on an underlying society that is progressing, and that sort of progress was not actually happening. So, if the tech bubble was fake, then the housing bubble would almost certainly have to be fake. The real root of the problem is always technology.

Compare that to my 2009 cover story in BusinessWeek, Innovation Interrupted:

While Wall Street’s mistakes may have triggered the financial crisis, the innovation shortfall helps explain why the collapse has been so broad.

See also my recent policy pieces for the Progressive Policy Institute, which link the innovation shortfall to the persistent job weakness (for example, here)

Added: I see that Tyler Cowen is about to come out with a minibook on the innovation shortfall, entitled The Great Stagnation. I didn’t know the book was coming–but the fact that Tyler dedicates the book to me won’t stop me from writing a positive review.

Controlled and Uncontrolled Exports of Knowledge Capital

This post is me simply thinking out loud. So if you like tidy posts with a beginning and an end, just skip this one.

I’m thinking about cross-border flows of knowledge capital, which really screw up our interpretation of the trade statistics. In particular, the cross-border flows of knowledge capital make it really hard to understand the real meaning of our trade deficit with China.

Take this situation. An unnamed U.S. manufacturer, with fairly advanced technology,  wants to produce airplane parts in China where the manufacturing costs are cheaper. In order to do this, the manufacturer must transfer proprietary knowledge about the design of the parts, the materials, and the manufacturing process to the Chinese factory.  The parts are then shipped back to the U.S. , showing up as an import of airplane parts.

There are two extreme  possibilities (and plenty in between)

a) The factory is owned by the U.S. manufacturer. The knowledge capital is exported to the Chinese factory, and then imported again, as embodied in the airplane parts. There is no spillover of knowledge capital to the broader China economy.

b) The factory is owned by a Chinese manufacturer who is sophisticated enough to learn from the knowledge capital, and apply it to the production of other aerospace parts, to be sold on the broader export market. Moreover, the knowledge capital becomes part of the knowledge set of all the companies in the region. In this case, the imported knowledge capital fully spills over to the Chinese economy.

In case (a), call this a controlled export of knowledge capital. It looks like we are importing airplane parts, but in fact we are mostly importing our own knowledge capital. If we correctly accounted for knowledge capital in the trade accounts–i.e. if the Chinese factory paid full royalties for all the U.S. knowledge capital being used–it would look like our trade deficit was a lot smaller. The difference would also show up as a combination of a higher profit margin for  domestic airplane manufacturers, higher profit margins for airlines, and lower costs for air travellers. Presuming perfect competition in China, all of the gains from the shift overseas are captured by the downstream members of the supply chain.

In case (b), call it an uncontrolled export of knowledge capital. The imports of airplane parts would look exactly the same, but the rest of the economic system would be very different. Chinese manufacturers would become effective competitors to U.S. manufacturers in the market for airplane parts. This would drive down the prices that U.S. manufacturers could charge–not just for the original part, but for other parts as well.

In case (b), we would still have the original flow of knowledge capital to the factory, and the flow back in imports. Additionally,  it’s as if we gave a gift of knowledge capital to the Chinese economy for which we were not paid.

What happens when you give a gift of knowledge capital? In a world of monopolistic competition, if you give a gift of knowledge capital to one of your competitors, your profit margin unambiguously falls. In this case, the sum of corporate profits and improvements in consumer welfare would drop.

So in order to assess the true trade deficit  with China, we need to know (1) the value of the goods we are importing, (2) the exports  of knowledge capital from the U.S. to China necessary to produce those goods, and (3) whether those exports of knowledge capital are controlled or uncontrolled.

The iPhone is probably an extreme case, where Apple does a good job of keeping its exports of knowledge capital under control. Other companies? Not so much.

I welcome any and all comments and criticisms. My goal is to build up a more sophisticated framework for thinking about global trade, including knowledge capital flows.





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