“Implausible Numbers”: A new paper, plus charts

I’ve been busy putting together a new paper titled “Implausible Numbers: How our current measures of economic competitiveness are misleading us and why we need new ones” It’s accompanied by a Competitiveness chartbook. The two should be read together.

These are draft work-in-progress, so I’d be very interested in getting comments.

R&D in the Budget: Half Full or Half Empty?

The President’s budget calls for flat spending on R&D, adjusted for inflation.

 

Is this good news or bad news? Depends on what your expectations are.  The general reaction was favorable.

Science News wrote:

President Obama sent the research community a valentine of sorts in his proposed 2012 federal budget. Sent to Congress on February 14, the budget was a pledge to fight for increased investment in research and education even as the president committed to a belt-tightening for most segments of federal spending.

Mark Muro and Kenan Fikri at the New Republic wrote:

In sum, whether slightly surreal or not, given the uncertainty of the present environment, it is important and appropriate that the White House has put down a strong marker for investment and growth through innovation even though the 2012 budget dialogue will be focused on cost cutting.

Personally, I’ve got a wait-and-see attitude. I worry that the White House is still in a pro-regulatory mood that will encumber innovation.

The Health-Education Decade

 We might as well put the 2000s to bed completely.  From 2000 to 2010, health sector jobs grew by 3.3 million; Education sector jobs rose by 1.8 million; The rest of economy lost  -7.1 million jobs.

Here’s some more detail if you want it.

Is the Defense Industrial Base Disappearing?

Richard McCormack of manufacturingnews.com writes:

The shift of U.S. manufacturing to foreign nations has become an important issue to the U.S. intelligence community. The Director for National Intelligence is undertaking a National Intelligence Estimate (NIE) on the state of American manufacturing. Growing concern over loss of domestic capability and dependence on foreign nations for key high-tech materials, components and systems has led the DNI office to start such an effort.

I’m glad to hear that, but I certainly hope that the DNI realizes that the manufacturing statistics are pretty much out to lunch.

The New Centrism

I don’t do much politics on this blog, but I feel like I have to say something about the demise of the Democratic Leadership Council, which helped bring Bill Clinton to the Presidency in the early 1990s. A lot of writers have interpreted the end of the DLC as the end of centrism, and a sign that Washington has become completely polarized.

My take is different. To me, we’re moving into a new era of centrist ideas, based around the importance of innovation and investment, creative thinking about regulation and jobs, and a greater appreciation of a global economy built around cross-border collaboration rather than “you-me” economic nationalism.

Rather than the center disappearing, I think we’re going to start seeing both left and right start drawing on ‘new centrist’ ideas. Let me just give a few of them:

*The importance of innovation for driving economic and job growth. When businesses try and innovate, we should reward rather than punish them, especially given the innovation shortfall of the past decade.

*The need to  think about investment in broad terms, including human capital and knowledge capital. Our conventional economic statistics, which measure only physical investment, are giving us a misleading view of the economy.

*The need to understand the true nature of the long-term fiscal and entitlement problem: The long-term rise in medical spending is a total reflection of falling or flat productivity in the healthcare sector. If we can fix that–through a combination of techological advances and institutional change–we can in effect grow our way out of the entitlement problem.

*The importance of rising real wages for young educated workers as a sign of the health of the economy. Real wages for young college grads have been falling since 2000–we cannot operate a modern economy this way, because our young people can no longer afford to pay for the education they need.

*The need to find some way to lessen the burden of regulation without losing touch with our social values. We need a systematic process for examining the thousands of regulations and carefully adjusting or removing the ones that slow down growth, while protecting public health, safety, and the environment.

*The need to think about the global economy in terms of supply chains which cross national borders. The U.S. needs to make sure that we are part of global supply chains and that we are getting our fair share of the benefits.  And we need new measures of competitiveness that take account of the new world.

I’m working on these ideas in affiliation with the Progressive Policy Institute (PPI), where I am Senior Fellow.  Will Marshall, who helped found the DLC so many years ago, is head of PPI, which is vibrant and growing. Please keep an eye on the PPI website here as we aim towards the future.

The Mistaken Assumption Behind Q&A Sites

The NYT has an article this morning about the rise in Q&A sites, like Quora and Stack Exchange. But in my view, there’s a mistaken assumption behind them: That the answers to most or all of your questions exists out there somewhere on the Net or in the brains of experts,  if only you could ask the right person.

My view is the exact opposite: I believe that the set of known answers is very small compared to the set of possible important questions.  Most of what we really need to know requires sustained systematic study. In other words, finding out important new answers is expensive.

I worry that Q&A sites help teach people that answers are cheap (or free).  And then we won’t be willing to spend the money to get the answers to the important new questions.

I could be wrong. But I know  I can formulate many many important economics-related questions for which there is no good answer because no one has done the  right research, because collecting the data is too expensive.  I assume that any subject matter expert can do the same in their own field.

When Did the Innovation Shortfall Start?

I’m responding to the posts by Arnold Kling and Bryan Kaplan critiquing  Tyler’s The Great Stagnation. Let me just throw out some thoughts, from the perspective of someone who thinks that The Great Stagnation is a terrific book.

1. I agree wholeheartedly with Tyler that the current crisis is a supply-side rather than a demand-side problem. That explains why the economy has responded relatively weakly to demand-side intervention.

2. From my perspective,  the innovation slowdown started in 1998 or 2000, rather than 1973–sorry, Tyler.  The slowdown was mainly concentrated in the biosciences, reflected in statistics like a slowdown in new drug approvals, slow or no gains in death rates for many age groups (see my post here),  and low or negative productivity in healthcare (see David Cutler on this and my post here).  This is a chart I ran in January 2010 (the 2007 death rate has been revised up a bit since then)–it shows a steady decline in the death rate for Americans aged 45-54 until the late 1990s.

The innovation slowdown was also reflected in the slow job growth in innovative industries, and the sharp decline in real wages for young college graduates (see my post here). (Young college grads, because they have no investment in legacy sectors, inevitably flock to the dynamic and innovative industries in the economy. If their real wages are falling, it’s because the innovative industries are few and far between).

3. The apparent productivity gains over the past ten years have been a statistical fluke caused in large part by the inability of our statistical system to cope with globalization, including: The lack of any direct price comparisons between imported and comparable domestic goods and services; systematic biases in the import price statistics (see Houseman et al  here, for example); and no tracking of knowledge capital flows. I’ve got several posts coming on this soon.

4. I agree with Tyler that regulation of innovation is a big problem.  That’s why I’ve suggested a new process, a Regulatory Improvement Commission,  for reforming selected regulations.

5. I’m of the view that we may be close to another wave of innovation, centered in the biosciences, that will drive growth and job creation over the medium run.  If we want growth and rising living standards, we need to avoid adding on well-meaning regulations that drive up the cost of innovation.

The Great Stagnation and Evidence-Based Medicine

For me, the Great Stagnation (Tyler’s term) or the Innovation Shortfall (my term) is concentrated in the biosciences. Here we’ve thrown  enormous scientific, corporate and public resources into biosciences, and made tremendous scientific advances.  Yet the prize of cutting-edge treatments seems further and further away.  Take this new study, which started with a simple hypothesis about sepsis, and ended up with a much more complicated picture:

Researchers from Rhode Island Hospital have identified a protein that plays a dual role in the liver during sepsis. The protein, known as RIP1, acts both as a “death switch” and as a pro-survival mechanism. …Ayala says, “We initially hypothesized that RIP1 was involved in the alteration of the apoptotic death pathway to result in a kind of ‘programmed necrosis’ in the liver. What we actually found was an alternative role for RIP1 in the pathobiology of sepsis in the liver — one that also promotes cellular survival.”…..McNeal says, “The function of RIP1 is much more nuanced than we originally thought.”

These are questions that could not be even asked before. And at every step, the answer turns out to be more complicated than  we thought.

But then it occurred to me. If new research is continually suggesting that  things are really much more complicated than  we thought, how much of the medicine we are actually practicing now is correct? A new report suggests that we should be worried:

Even when following medical guidelines to the letter, doctors often use treatments that have little or no scientific support, U.S. researchers said Monday.

They found only one in seven treatment recommendations from the Infectious Diseases Society of America (IDSA) — a society representing healthcare providers and researchers across the country — were based on high-quality data from clinical trials.

By contrast, more than half the recommendations relied solely on expert opinion or anecdotal evidence.

“Despite tremendous research efforts, there is still a lot of uncertainty as to what is the best patient care,” said Dr. Ole Vielemeyer, an expert in infectious diseases at Drexel University College of Medicine in Philadelphia and one of the study’s authors.

Oh, okay. Let me bring the Great Stagnation, the biosciences revolution, and evidence-based medicine into a single framework.

The conventional wisdom was that breakthroughs in understanding the human genome  would provide better treatments within the existing structure of medicine–like  putting better windows or a new floor or more comfortable furniture into an existing house.  The implicit belief is that we could build on existing medical knowledge, add in the new knowledge of the genome, and quickly get to new products.

But what if the main lesson of the  past ten years is that the house itself has rotten foundations and needs to be rebuilt completely?  What if  the biosciences sector can’t afford to take anything for granted from existing medicine because too much of it is not evidence-based?

This is both bad news and good news.  Starting from scratch and rebuilding foundations is obviously a daunting and expensive task. and helps explain why the biosciences sector has struggled to produce breakthrough treatments.  On the other hand, when you are rebuilding foundations, a lot of progress can be made without anything visible from the outside.

I just know I’m going to get a lot of pushback on this hypothesis.  Take your best shot…I’m just thinking it through now, and I’m quite open to new thoughts.

The Real Ireland Question

I like Michael Lewis. I’m envious of his writing and reporting skills–and I really learned a lot from The Big Short.

But I have to say that I was disappointed in his latest Vanity Fair piece “When Irish Eyes Are Crying” on Ireland’s financial collapse.  A well-written and engrossing piece, for sure, but he managed not to fully address one of the greatest puzzles about Ireland’s economy–how did it ever get such a high per capita income *before* the construction boom started? Here’s what Lewis wrote:

At the bottom of the success of the Irish there remains, even now, some mystery. “It appeared like a miraculous beast materializing in a forest clearing,” writes the pre-eminent Irish historian R. F. Foster, “and economists are still not entirely sure why.” Not knowing why they were so suddenly so successful, the Irish can perhaps be forgiven for not knowing exactly how successful they were meant to be. They had gone from being abnormally poor to being abnormally rich, without pausing to experience normality.

Lewis accepts that Ireland went from poor to rich, and then proceeded to fumble it away. But what if Ireland was never really as rich as it seemed? What if the statistics that said “rich” were wrong? Maybe the real problem came earlier.

Let’s start by looking at the numbers. Remember that Ireland was called the “Celtic Tiger’ because it grew so fast in the 1990s.  The chart below has three lines– per capita real GDP in Ireland,  per capita real GNP in Ireland, and per capita real GDP in Germany (a certifiably real economy that makes things).  Per capita real GNP  subtracts out the net income flow of profits out of Ireland–that makes a big difference  because of Ireland’s role as a pharma and electronics production hub by multinationals.

The salient fact is that according to the official stats, Ireland’s real per capita income appeared to reach Germany’s level around 2000, before the construction boom started.  (Construction was important to the economy in 2000, but not dominant like it was later in the decade. Home completions in Ireland totalled around 50,000 in 2000, compared to 93,000 in 2006). That’s really an astonishing run-up. In 1995, Ireland’s per capita income was 25% less than Germany’s. By 2000 Ireland had made up the gap. Truly a Celtic Tiger not to be trifled with.

Now, let’s stop here.  As regular readers of this blog know, I’m very concerned that the conventional economic statistics are systematically mismeasuring national output, because of problems handling trade. Ireland happens to be one of the most open economies in the developed world.  In fact, exports in magnitude are almost as large as GDP, with imports not far behind. (I don’t know who has a more open economy…but it isn’t China).

With exports and imports so large, it only makes sense that changes in exports and imports actually drive growth in Ireland. In fact, everything else–including capital invesment in things like homes–is really a secondary source of growth. 

So I used the data from the Central Statistics Office in Ireland to calculate the contribution of exports and imports to growth. First I started with the supposed period of strong growth, 1995-2000.  You can see that the positive contribution of exports and the negative contribution of imports is enormous.


Here is a similar chart for the 2000-2005 boom period.  Note that exports and imports are still relatively huge, even during the construction boom.

The implication–and you knew I’d get to the implication someday–is that in Ireland, in particular, relative small mismeasurement errors in real exports and/or imports can have outsized effects.

So this Celtic Tiger may have been a Celtic Kitten instead. And the shift from real boom to fake boom may not have been as abrupt as it seemed.

New Innovation Bill

Encouraging innovation is one of the most important things we can do, but it isn’t easy to figure out what would work. But I just saw a very good new proposal that  addresses some key issues.Senators Amy Klobuchar (D-MN) and Scott Brown (R-MA)  have introduced the Innovate America Act. (I’m all for innovation being a bipartisan issue).

Here’s some of the key parts of the proposed legislation.

  • Encourage greater commercialization of Research and Development by expanding the Basic Research Tax Credit to include all industry-funded university research
  • Allow companies to take a flat 30-percent tax credit for donating equipment to high schools and technical and community colleges
  • Fund 100 new Science, Technology, Engineering, and Mathematics (STEM)-focused high schools
  • Incentivize colleges and universities to increase graduation rates for STEM students
  • Remove regulatory barriers for top 20 exporting industries
  • Enforce existing international exporting and importing laws

Frankly, Congress should pass this tomorrow. In part, the legislation is designed to build a better bridge between the universities/community colleges/high schools and industry.  That may be one of the most important things we can do. The old industrial labs system has broken down, except in a few rare companies (Corning, anyone?), and the current education-corporate linkage has not turned out to be a good substitute. The Klobuchar-Brown bill would try to help that. And I love the idea of reducing regulations for top exporting industries.

I would make one amendment, though. When we think about top exporting industries, we should focus on value-added in the U.S. rather than gross shipments.  That way we help industries generate more value and jobs in the U.S.

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