Fast broadband enables tech job growth in Kansas City

The WSJ has a great article entitled “City’s Tech Pioneers See Strength in Numbers.”  The article discusses how the new ultrafast broadband being built by Google in Kansas City is already encouraging startups.

By the time Google began installing its Fiber service on Tuesday, nearly a dozen startups had moved into a six-block radius—about half packed into two houses—including companies building a search engine for social-network data and security software for smartphones that identifies users by vein patterns in their eyes.

“There was already a movement,” said Adam Arredondo, a shaggy-haired 28-year-old who runs a website for local events out of one of the house’s basements. Google Fiber “was the accelerant,” he said.

If the Kansas City project succeeds, that’s good news for many economically languishing areas across the countries. When we did our report on “The Geography of the App Economy,” we found that app economy jobs were being created in every state, even without the impetus of ultrafast broadband. With the right policies,  there could be a massive economic renaissance built around tech.

That’s also the message coming from a new book by Reed Hundt and Blair Levin entitled The Politics of Abundance–technology can help pull us out of the doldrums, if we follow the right policies. (longer review to follow).

The Real Meaning of Obamacare

Back in 1996, I wrote a book called The High-Risk Society. The book was based on the vision that Americans had to embrace risk and innovation in order to achieve faster growth and long-term prosperity.

An essential part of that vision, however, is the creation of a much stronger safety net.  If we are going to ask Americans to take risks for growth, to accept disruption in return for innovation, they have to be protected from the worst consequences of failure.

In particular, it becomes much harder to take a chance on growth if it means you might lose your healthcare. That’s why Obamacare, despite being ungainly and awkward, is an essential step towards a high-growth economy. People who want to start a new company or join an innovative new enterprise shouldn’t have to worry about whether they will be able to get healthcare. People who want to work halftime and go back to school shouldn’t have to worry about whether a sudden medical problem will throw them in the poorhouse.

Obamacare is a step towards unleashing the creative juices of Americans.  There are lots of problems, of course. We need to ensure that the new Obamacare bureaucracies don’t strangle innovative companies. But now that the basic mechanisms are in place, we can move onto the more important task of empowering innovative and hardworking Americans.

The next choice: A high-growth economy vs long-term stagnation.

As soon as the results of the election are known, President Obama or President Romney will be beset with a list of difficult decisions: What to do about the fiscal cliff, whether to cut the federal deficit, how to implement healthcare reform or how to get rid of it,  whether or how to create jobs.

But the biggest decision facing the next president—and Americans in general—goes far beyond the ‘fiscal cliff’, or any of the machinations which fascinate Washingtonians. Should the United States follow its current path of long-term stagnation, or should we choose a road that likely leads to rapid—but disruptive—growth?

This choice will have huge and resonating consequences. In a slow-growth economy, government leaders must focus on apportioning pain and austerity. The rich and the poor within each country or region struggle over scarce resources, with predictable consequences. We are seeing the face of the stagnant future in Europe now, where country after country are being forced to absorb massive cutbacks. Slow growth means that our children will be poorer than we are.

A high-growth economy is based on innovation and the willingness to strike out into new areas. Rapid growth makes it easier to deal with purely financial problems such as the budget deficit—remember that Bill Clinton was able to produce a budget surplus in the 1990s.  Moreover, innovation challenges the status quo and breaks down the rigid income inequalities.

As you might guess, I favor the high-growth economy and the optimism about the future that comes along with it. But we can’t fool ourselves–innovation is fundamentally disruptive and risky. We’re not just talking smartphones and tablets. The list of potential breakthroughs is long and growing—3D printing to reinvigorate manufacturing, biotech to transform healthcare, nanotech to create new materials. Each of these potential breakthrough technologies can destroy existing businesses and jobs even as they juice up growth.

The high-growth versus stagnation decision does not fit easily into party boxes. There are Republicans and Democrats who favor the status quo and stagnation, just as there are Democrats and Republicans who favor innovation and a high-growth economy.  This lack of ideological clarity explains why the debates barely mentioned the internet or mobile (See here http://www.theatlantic.com/business/archive/2012/10/the-astonishing-obama-tech-boom-that-he-doesnt-want-to-talk-about/263601/).

But now that the election is over, it’s time to press the new president to actually move into the 21^st century, and deal with what will likely be the question that defines the next Administration–what kind of growth do we *really* want?

Republican War On Economic Data is Anti-Business and Anti-Growth

The House Republicans appear to be conducting a war on economic data. They seem to think that defunding data collection is all gain and no loss.

In fact, the anti-data Republicans are really  anti-business and anti-growth. Government spending on economic data collection should be thought of as fully equivalent to investment in long-lasting infrastructure. When we build  highways or  airports,  we expect them to be used by the private sector for economically-valuable activities.   Highways facilitate the sale and use of automobiles, the construction of homes, the transportation of goods. Airports make air transportation possible, fostering all sorts of jobs and growth.

Just like spending on highways and airports,  government investment in  economic data collection provides a long-lasting boost to private sector economic activity and to private sector growth. To give one very simple example: Political polling would be much more expensive and less accurate if the pollsters did not have access to government economic and demographic data. The government data enables the pollers to make sure their sample correctly represents the actual population.

Another example:   Many big investors take economic and demographic trends into account when deciding how to allocate their funds.  The foundational data for these trends comes from the federal government. Less  reliable data means more investing mistakes.

Sometimes governments and politicians might rather hide data. The ACS tells businesses which areas of the country are doing well and which are falling behind, helping them make fewer errors in investment.  This is not such good news for the weak areas, but presumably does improve economic efficiency.  A company such as Walt Disney, for example, would rather locate its theme parks in growing, high-income areas (FYI Walt Disney World is located in the Florida district represented by  Daniel Webster, who has been one of the main ACS bashers).

Like highways and trucks, public sector data and  private sector data  are complementary, not substitutes.  A company can invest in as many trucks as it wants, but those investments will be much more valuable if the government has put into place well-maintained highways.  Similarly, private sector data collection and analysis–say, on the state of the computer industry–almost invariably builds on the foundation of the public data.

One of the big economic advantages of the U.S. may be the quality of our economic data, and more generally the transparency of our economic system.  That’s not a competitive edge we should cede easily.

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.

Only 2 Ways to Save the Economy: Innovation or Inflation

I have a new piece on the Atlantic website. It starts this way:

We have only two ways out of our current global economic mess: innovation and inflation. And as the saying goes, we should hope for the best (more innovation) and prepare for the worst (higher inflation).

Looking across the world, the underlying problem is that borrowers–households and governments–have taken on debt that they can’t afford to pay back, given the current rate of income and economic growth. In the U.S, too many homeowners are struggling with mortgages that far exceed the value of their homes and cannot be repaid from their current incomes. In Europe, Greece and perhaps other countries have issued bonds that they cannot pay back unless growth unexpectedly skyrockets.

Down the road the same principle of matching growth to debt allows us to perceive potential financial crises to come. Young male college graduates, for example, have seen their real earnings plunge by 19% since 2000, with young female college grads experiencing a similar decline. Meanwhile education borrowing has soared, suggesting that we are on the verge of a student loan crisis, where young grads simply cannot pay back their mountain of debt.

And goes on from there.  Take a look.

The Post-Industrial Production Economy

Sometimes when I write about the shift from the consumer economy to the production economy, people assume that ‘production’ equals ‘manufacturing’ .  That’s just not true.  So I asked Mary Adams of  I-Capital Advisors, and co-author of  Intangible Capital,   if she would write a guest post on  ”The Post-Industrial Production Economy.”  She graciously agreed, and here it is. 

In follow-up to Michael’s post on production vs. consumption economies, he asked me to take a crack at describing what the post-industrial production economy will look like. So here goes!

We live at the cusp between the industrial and the knowledge eras. In the U.S., the shift is already very much underway. But there is still much change to come, including in the production economy.

Industrial-ize

To understand what will happen, let’s first look at what happened during the industrial revolution. Yes, mass production and factories drove huge growth. But manufacturing was not the only part of the economy that was created or “industrial-ized.” Education was industrialized to provide large numbers of capable workers. Energy production was industrialized to provide cheap, available power for factories, homes and offices. Agriculture was industrialized to provide reliable, economical food sources. The change affected almost every corner of our society.

This industrialization process occurred under a number of very simple conditions or design constraints. Some of the most important included the availability of relatively cheap energy, the relative lack of importance placed by society on externalities (such as pollution and health risks), the availability of large workforces and continued returns available from mechanization that provides greater and greater returns on the work of employees.

These design constraints began to shift a long time ago in the U.S.For example, we have known for a long time that our patterns of energy and resource use were not sustainable. But rather than rebuilding or remaking our industrial economy, we chose to/had the opportunity to send much of it off shore. If you look at the rise of China in the last 20 years, you will see a replay of the industrialization process, not the end of it.

The Chinese also know that the model they are imitating is not sustainable. But the Chinese have an opportunity to use the model to quickly raise the level of living of their enormous population and generating enough wealth in time to simultaneously invent a new model. Or to follow whomever can invent the new model.

Knowledge-ize

What will the new model look like? Moving into the knowledge era does not mean the rise of services and consumption and the decline of production. Humans will have the same needs to live. Housing, transportation, consumer goods, food, healthcare, education will all remain constants in our economy. These needs require a production sector. But this new production sector will be built under a new set of constraints.

Noahpinion on China and robots

Noahpinion gets what I’ve been trying to say, and says it better than I do in his post, “Are we replacing robots with Chinese people?” Here’s a meaty extract :

I’ve been critical in the past of Mike Mandel’s thesis. After all, productivity gains from outsourcing are real. Suppose I am a guy who designs and builds widgets. Hiring cheap Chinese workers to make my widgets more cheaply boosts my productivity almost the same, in the short term, as inventing a robot to make my widgets more cheaply (minus the small amount I pay the Chinese workers).

BUT…productivity is not the same thing as technology. This is a fact that often gets ignored, since economists tend to treat the two as being equivalent. But they are not. In particular, trade can boost productivity without any new technology being invented. This is what Mandel claims has been responsible for the large productivity gains in the U.S. over the past 10 years. I tend to believe him.

So why should we care whether our productivity comes from robots (technology) or from cheap Chinese labor (trade)? One answer – and I feel like this is what Cowen and Mandel may have been getting at – is that one may crowd out the other. And this brings me to the theory of endogenous growth.

Paul Romer (a physics B.A. like me!) invented the theory of endogenous growth back in the 80s. The idea is that technological progress does not simply arrive out of nowhere, but is a byproduct of economic activity. Since ideas are a nonrival production input (a.k.a. a “public good”), there is no guarantee that the market will produce enough of them. Some growth models may be a lot better at innovation than others, and policy can make a big deal. If we’re not channeling enough of our economic output into the production of new technology, we’ll all be poorer down the line.

And here’s the interesting part. Romer’s first crack at a theory of endogenous growth was this 1987 paper. His model uses this very interesting assumption:

“I also assumed that an increase in the total supply of labor causes negative spillover effects because it reduces the incentives for firms to discover and implement labor-saving innovations that also have positive spillover effects on production throughout the economy.”

In other words, if we suddenly get access to a bunch of cheap Chinese labor, we don’t bother to invent robots. Then tomorrow, when the cheap Chinese labor runs out, we find ourselves without any robots.

Yes. That’s it exactly.

Noahpinion also asks the very good question about what to do next.

 

Productivity “Surge” of 2007-09 melts away in new data

Until this morning, the official data showed that the U.S. productivity growth accelerated during the financial crisis. Nonfarm business productivity growth supposedly went from a 1.2% annual rate in 2005-2007, to a 2.3% annual rate in 2007-2009.  Many commentators suggested that this productivity gain, in the face of great disruptions, showed the flexibility of the U.S. economy.

Uh, oh. The latest revision of the national income accounts, released this morning, makes the whole productivity acceleration vanish. Nonfarm business productivity growth in the 2007-09 period has now been cut almost in half, down to only  1.4% per year.

This revision has political and policy consequences. Back in March, I analyzed the apparent productivity surge and  argued that it was statistically suspect.  I pointed out that:

First, the measured rapid productivity growth allowed the Obama Administration to treat the jobs crisis as purely one of a demand shortfall rather than worrying about structural problems in the economy.  Moreover, the relatively small size of the reported real GDP drop probably convinced the Obama economists that their stimulus package had been effective, and that it was only a matter of time before the economy recovered.

A more accurate reading on the economy would have–perhaps–cause the Obama Administration to spend more time and political capital on the jobs crisis, rather than on health care. In some sense, the results of the election of 2010 may reflect this mismatch between the optimistic Obama rhetoric and the facts on the ground.

Now the productivity surge of 2007-09 has vanished, and so is the pretense that the U.S. economy was able to sail   through the financial crisis with barely any problems.  It’s time to set a new economic course.

Reihan Salam on German Productivity

Germany has been held up as a model for the United States by David Leonhardt and others. Reihan Salam  correctly observes that German offshoring to Eastern Europe has been an essential part of Germany’s apparent success. He also  points out that:

The fall of communism was, as Marin suggests, a positive exogenous shock that proved a tremendous boon the German economy. A 20% increase in productivity is nothing to sneeze at, and I don’t think that David Leonhardt gave the role of offshoring its due in explaining the virtues of the German model.

Of course, the Houseman-Mandel thesis also tell us that German productivity gains, like U.S. productivity gains, might offer less than meets the eye.

Reihan raises a very interesting point which I hadn’t considered. Remember that our recent paper, “Not all productivity gains are the same. Here’s why”, we divided measured productivity growth into three types:

• Improvements in domestic production processes

• Gains in global supply chain efficiency

• Productivity gains at foreign suppliers.

As we noted in the paper, these different types of productivity growth cannot be told apart in the conventional economic statistics. However, the type of productivity growth matters for domestic wages and jobs. For example,  productivity gains from improvements in domestic production processes are more likely to result in rising real wages for domestic factory workers.

We made our argument in terms of the U.S., but it potentially applies to other countries as well. I hadn’t considered Germany until Reihan raised the point, but in fact Germany appears to use a similar import price methodology as the U.S. (see for example Silver 2007) with the potential for similar problems, though I need to take a closer look to make sure.

Here’s something to think about: In a global economy, measured productivity growth in an industrialized country potentially may not measure only the strength of that country’s domestic economy, but also its ability to successfully offshore production to cheaper countries, with implications for domestic wages and jobs.