Innovation and job creation: The role of 4G

Over the years, I’ve written repeatedly about the role of innovation in creating jobs. Industries with stagnant innovation lose jobs to more dynamic competitors, while innovative industries lead the jobs parade.  For example, in July 2010 I wrote a paper entitled “The Coming Communications Boom? Jobs, Innovation and Countercyclical Regulatory Policy”, where I argued that the communications sector is going to be the jobs leader in the current expansion:

Today, the broad communications sector is an innovation success story in an otherwise sluggish economy. And that success feeds on itself. The Internet companies have access to bigger potential markets as the broadband providers deepen and extend their networks. The broadband companies benefit from innovative applications that drive traffic and demand. And the applications developers, small and large, are able to take advantage of new capabilities.

This interconnected and self-reinforcing collection of industries is reminiscent of the early stages of past booms, which were never driven by a single industry. In this case, the employment expansion of several communications-related industries, despite the overall weak labor market, is a sign that the broad communications sector is going to be a leader in the coming recovery.

Now there’s a new study from Rob Shapiro and Kevin Hassett  which provides confirmation of this thesis, as it applies to 4G.

we find that the adoption and use of successive generations of cell phones from April 2007 to June 2011, supported by the transitions from 2G to 3G, led to the creation of more than 1,585,000 new jobs across the United States. Moreover, every 10 percentage point increase in the penetration rate of 3G and 4G phones and devices occurring as we write today — in the last quarter of 2011 — should add 231,690 jobs to the economy by the third quarter of 2012.

 This implies that accelerating the rate of 4G adoption, in whatever way possible, can accelerate job creation. Good stuff!

Yglesias responds to PPI scale and innovation paper

Matt Yglesias has responded to my paper on scale and innovation with his piece “Small Is Still Beautiful: The trendy—and wrong—new argument that because big businesses innovate better, we should let them become monopolies.”

Well, I’ve been accused of many things over the years (how about “Nostradamus of the New Economy“?). But no one has ever called me trendy before.

Let me break down my argument into three statements.
–Innovation is the most important force driving long-term growth.
–Current economic trends suggest that big companies can in some circumstances have an innovative edge over small companies.
–If antitrust regulators care about long-term growth and competitiveness, they should factor the innovative potential of large companies into their calculations, rather than simply assuming small companies are more innovative.

Matt seems to agree with statements 1 and 2. But then he freaks out about statement 3, accusing me of encouraging monopolies.

Least persuasive of all is his idea that the health care, education, and energy sectors are “large-scale integrated systems” and that the need to transform those sectors should lead us to relax our vigilance about competition. If anything, these are sectors of the economy where we should be exceptionally worried that lack of competition is creating dysfunctional results. Higher-education incumbents use accreditation rules to stymie potentially disruptive competition, and health care markets remain fundamentally localized, with lack of hospital competition driving higher prices.

Here Matt has completely missed my point. Yes, education and health care suffer from a lack of competition. But partly what protects incumbents is the very interlockedness of the sectors. Small disruptive firms get co-opted into the existing system, which includes the government in both education and health care. I am arguing that the only companies that can challenge the existing status quo successfully have to have enough scale and heft.

On a broader level, Matt’s argument is implicitly founded on the belief that we have *enough* innovation. In Matt’s world, it’s more important to discourage market power than to encourage new technologies. In that sense, this post follows logically from his “The Crisis We Should Have Had Had” post (here and my response here). In Matt’s world, the U.S. innovation/productivity machine is doing just fine, and the only problem is “a pretty banal monetary crunch.”

Matt’s view is shared by most of the economics and policy establishment. This “pro-complacency” assessment leads to the belief that the U.S. competitive position is fine. The right-wing version of the pro-complacency position says that the only thing that we need is a smaller budget deficit and less government in general. The left-wing version says that all we need is to regulate the financial sector a bit more and pump a lot more monetary and fiscal stimulus into the economy.

But in the end, it’s complacency that is the big danger.

Obama Administration makes crucial pivot on trade and jobs.

Moving into the 2012 election season, the Obama Administration is making a critical  pivot in its political and economic narrative on trade and jobs. During his Midwest trip this summer,  Obama extolled American workers as the most productive in the world,  and talked about free trade treaties as the solution to the job problem. The implication was that nothing was wrong, and the return of jobs was only a matter of time.

But the White House has just issued a new report entitled “Investing in America: Building an Economy That Lasts”  that tells a very different story. The new report starts by saying:

Over the past decade, real business investment in production capacity stagnated.     Economic growth in the U.S. relied far too heavily on an unsustainable boom in residential and commercial real estate fueled by an unchecked financial sector.    The bubble created by this boom distorted our economy and undercut the international competitiveness of our products and services.    Companies increasingly chased low‐cost labor outside of the U.S., moving their manufacturing production, and some of their services, like call centers and software development, abroad.

The report points to the stagnation in business investment, the rising trade deficit, and falling manufacturing employment as real problems.

The dramatic decline in the level of manufacturing employment after 2000 signaled that something fundamental had change

This is an extremely important report, both politically and economically. Economically it points to trade as a major reason for job loss. In particular, it makes the point that the boom pushed up production costs above sustainable levels.

Politically, the report positions Obama in favor of  taking effective steps to bring jobs back to the country. This is a much better stance to run against a Republican like Mitt Romney, since one way that private equity firms cut costs is by outsourcing production overseas.

To me, this report appears to reflect the influence of the new CEA head, Alan Krueger. Krueger, a labor economist, has a realistic idea of how trade has affected the U.S. labor market.

I would suggest that for its next step, the White House should support the idea of a Competitiveness Audit, which identifies the industries where insourcing makes sense, and points out places where more work needs to be done. This would be relatively cheap way of improving the speed of insourcing, and getting more jobs created here more quickly.

Matt Yglesias: Wrong Crisis?

Matt Yglesias thinks that my Washington Monthly piece is talking about the crisis that “we should have had,” not the crisis we actually had.

I think sections of Tyler Cowen’s The Great Stagnation are about the crisis we should have had, that Michael Spence’s The Next Convergence is largely about the crisis we should have had, Joe Stiglitz’ recent Vanity Fair article is basically about the crisis we should have had, Michael Mandel’s piece on the myth of American productivity is about the crisis we should have had. I can name others. There’s no particular ideological tendency grouping these people together, since if we were facing a big profound crisis then it would be the case that we need big profound answers that can support a range of different ideological positions. Indeed, I would say that an awful lot of the Obama agenda has been about efforts to address the crisis we should have had. That’s why long-term fiscal austerity is important and why there was no “holy crap the economy’s falling apart, let’s forget about comprehensive reform of the health, energy, and education sectors” moment back in 2009.

But this is not the crisis we’re having. Interest rates are low. Headlines tell us that “U.S. Factories Could Suffer From Dollar’s Appeal”. I’m inclined to think that we will, at some future point, face the crisis we should have had and it will need to be addressed in complicated ways. But the crisis we’re having is, for all its horror and scale, a pretty banal monetary crunch—the natural rate of interest is below zero, nomimal rates can’t go below zero, and the Fed won’t act to push real rates lower.

I don’t understand Matt’s argument. He cites low interest rates as evidence for his side. However, we would expect a slow growth, low-innovation crisis to push interest rates lower, since there would be fewer good opportunities for investment.

The other issue is that the economy is not behaving the way we would expect a high-productivity, high-innovation economy to behave. One example: real wages for new college grads have been falling for a decade, even before the recession. That shouldn’t happen if there were growing innovative industries for them to find jobs in.

The Myth of American Productivity

I have a new article in the Washington Monthly entitled The Myth of American Productivity. Take a look.

 

 

Can Insourcing Be A Major Source of Job Creation?

Can insourcing  be a major source of job creation for the U.S.?  The answer is yes, with a caveat. Widespread insourcing–or import recapture, as I like to call it–won’t happen without some help from government policy.  In particular, the main role of the government is to provide better data about the relative cost of insourcing vs outsourcing.

Why would better statistics help create new jobs in the U.S. and accelerate insourcing?  The reason is hysteresis. Hysteresis is defined as  a “lag in response”  when the forces acting on a situation have changed.  Originally hysteresis worked in favor of keeping jobs in this country, because businesses didn’t want to switch their production to a country thousands of miles away, even if it might be cheaper.But now, with production firmly established in China, India, Mexico, and other low-cost countries,  hysteresis is working against the U.S.

As a result,  even if production costs have converged, there are three big obstacles to bringing  jobs back to the U.S.

First, it is expensive to switch suppliers, especially for noncommodity purchases. Contracts have to be negotiated, the quality of the product has to be checked,  suppliers have to be integrated into a supply chain.  Wal-mart would rather work with suppliers that it already has been doing business with.

Second,  it may be expensive and time-consuming to recreate a production ecosystem here in the U.S., especially if an industry has been hollowed out.   That is,  if you want to start making shoes in the U.S.,  it’s easier if you have a repairman in the area who knows have to fix shoe manufacturing machinery.

Third, it may be expensive for small and medium-size companies to determine if switching suppliers will raise or lower costs. That’s especially true if all of their current suppliers are in one country.   Big multinationals can afford to run studies on relative costs of the different countries, but small and medium businesses cannot.

One cheap way of boost insourcing is for the Bureau of Labor Statistics to provide better data about the relative costs of production in the U.S. versus production overseas. The BLS already collects information on import prices and domestic production prices, but it doesn’t compare the two.

Assuming that production costs really are converging,  better information would make it easier for companies to justify the decision to bring jobs back to this country. Right now the safe decision for executives is to continue sourcing from China and India, since they are generally accepted to be ‘low-cost’ countries.  It’s like they used to say, you can’t get fired for buying from IBM.  It’s the same today–execs can’t get fired for buying from China and India, because everyone assumes that prices are lower there.

In November 2011 PPI proposed a Competitiveness Audit, to be done by the BLS, to help boost insourcing of jobs.  For each industry, the Competitiveness Audit would compare import and domestic prices, and give a sense about the size of the gap and whether it was widening or narrowing.  This information would be crucial for identifyng the industries where insourcing makes sense. The Competitiveness Audit would also give executives a sense of security that they were making the right decision by bringing back jobs.

A Competitiveness Audit is a good way of accelerating the rate of insourcing. The goal here is to overcome hysteresis and inertia, and create a sort of bandwagon effect of jobs moving back to this country.  Better information is essential to create new jobs.

Why Obama Needs A Competitiveness Audit

President Obama is talking about ‘insourcing’…bringing jobs back into this country again. That’s great.

But can insourcing really create enough jobs to make a difference? That depends on how on whether  the U.S. is becoming competitive in a  broad range of industries, or whether it’s a limited phenomenon.

That’s why PPI has proposed a Competitiveness Audit as an essential part of a job-creation strategy.

The Competitiveness Audit will compare the price of selected imports with the comparable domestically produced goods and services. That will tell us the size of the ‘price gap’ between imports and domestic production.

The initial results of the Competitiveness Audit will enable us to identify industries that are globally competitive (domestic prices are below import prices, so the price gap is negative); industries that are currently uncompetitive (domestic prices are significantly above import prices); and industries that are ‘near-competitive’ (domestic prices only slightly above import prices).

The results of the Competitiveness Audit will enable businesses and economic development agencies to target their insourcing efforts to industries that are ‘near competitive’, where a bit of government help could make a big difference.

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