App Economy is ‘job leader’ into the future

Last spring Technet asked me to examine the size of the ‘App Economy’, focusing on the number of jobs being created.  The official job statistics from the BLS were no help, given the speed at which the App Economy was evolving.  Instead, I developed an innovative methodology for using a ’21st century’ database, The Conference Board Help-Wanted OnLine, to track App Economy jobs.

The study, “Where the Jobs Are: The App Economy,”  has just been released by Technet. I found that

 App Economy now is responsible for roughly 466,000 jobs in the United States, up from zero in 2007 when the iPhone was introduced. This total includes jobs at ‘pure’ app firms such as Zynga, a San Francisco-based maker of Facebook game apps that went public in December 2011. App Economy employment also includes app-related jobs at large companies such as Electronic Arts, Amazon, and AT&T, as well as app ‘infrastructure’ jobs at core firms such as Google, Apple, and Facebook. In additional, the App Economy total includes employment spillovers to the rest of the economy

I want to make several points here.

  • In earlier research done for the Progressive Policy Institute, I looked at ‘job leaders’–industries that, coming out of recession,  manage to create new jobs  well before the rest of the economy.  I found that the industries which are the job leaders during a recession tend to be the big drivers of the expansion that follows. So during the recession of 1990-91, the job leaders were infotech services such as software, computer systems design and data processing services, all of which turned out to be big job creators in the tech boom of the 1990s.  Similarly, the job leaders in the recession of 2001 were finance, real estate, and residential construction, signalling the housing and financial job growth from 2001-2007
  • Today, the App Economy is clearly a job leader. It managed to create jobs during the worst recession since the Great Depression, suggesting that the App Economy will be a major driver of  job growth during the coming expansion.
  • The App Economy cross-cuts industries, including  leading internet companies such as Google and Facebook, hardware/software developers such as Apple and Electronic Arts, smaller app developers,  and wireless providers such as AT&T.
  • State and local governments that want to participate in the coming expansion should think about encouraging App Economy jobs. The methodology I used enabled me to identify App Economy jobs by state and MSA. Much more could be done along these lines.
  • The federal government needs to adopt policies to encourage App Economy growth. More about this in my next post.

New Hampshire growth driven by government spending

I have a new piece on Atlantic.com entitled The Truth About New Hampshire: It’s the Government Spending, Stupid. The main point:

But here’s a surprise: The “Live Free or Die” State, having lost much of its manufacturing base, seems to be thriving mostly on a steady diet of government spending and public jobs. For one, government employment in New Hampshire is up 14% since 2000, compared to 6% for the country as a whole.

What’s more, real personal income growth in New Hampshire over the past decade has been driven almost entirely by government spending. Here’s how it breaks down: From 2000 to 2010, real personal income in the state rose by $4.6 billion, in 2005 dollars. Out of that, $3 billion, or 66%, came from the growth of government transfer payments such as Medicare, Medicaid, and Social Security. Another $1.4 trillion, or 31%, came from increased wages and benefits to government employees (numbers are rounded and in 2005 dollars).

In other words, 97% of real personal income growth in New Hampshire from 2000 to 2010 came from government transfer payments and government jobs.

Read the rest.

A Decade of State and Local Gov’t Stagnation

First, a confession. If I was any good at marketing, I wouldn’t be putting up this post on the Wednesday before Thanksgiving, when everyone is more concerned with turkey and traffic than the state of the economy.

But I can’t help myself–I’ve just got to share this chart.

This chart shows that real state and local government output, as measured by the BEA, has been effectively flat since 2001. To put it a different way, the stagnation at the state and local government level started way before the 2007 recession.

What do I make of this? State and local governments are the only large economic entities in the U.S. economy who are not allowed to borrow to meet operating expenses. Households can borrow, companies can borrow, the federal government can borrow–but state and local governments cannot. (Added:State and local governments accounted for only 7% of the rise in domestic nonfinancial debt between 2000 and 2010).

Therefore they have been forced to match their size to the carrying capacity of the individual state and local economies. Hence we see the epic struggle of states such as California to trim their budgets and labor force.

In other words, the state and local fiscal crisis is less a failure of governance (though such obviously exists) and more a sign of weakness in the individual state and local economies going back a decade.

Added: Real state and local output includes investment spending and compensation for state and local employees, adjusted for price changes. It does not include most Medicaid spending (which shows up in personal consumption) and some other small categories of social benefits, such as workers compensation.

Surowiecki Gets Consumption Wrong

What hope is there when one of the top business journalists gets the facts wrong? In his latest New Yorker piece, James Surowiecki makes the classic mistake:

Personal consumption hasn’t shrunk as a share of the economy: in 2010, it accounted for more than seventy per cent of G.D.P., close to where it’s been for the past decade

Let’s break down what’s wrong with this statement. First, the statistical category “personal consumption expenditures” actually includes all sorts of government and nonprofit spending, including almost $1 trillion in Medicare and Medicaid spending, spending by nonprofit private educational institutions, and spending by political parties. None of this money is under the control of ‘consumers’, so there’s no possibility of individuals making the decision to cut back.

The other word that Surowiecki doesn’t mention is imports. When American consumers boost their spending on items such as clothing and electronics, much of that goes to create jobs overseas, not here. It’s devilishly tough to get the exact connection between consumer spending and imports, because the government does not actually track where imports are going in the economy. But the net result is that ‘pocketbook spending’–the amount of money that households control–accounts for much less than 70 percent of economic activity.

This is not just a semantic point. Every time somebody repeats “consumer spending is 70% of GDP’, it reinforces the false idea that U.S. growth is dependent on consumer spending returning. It’s not. I’m surprised that Surowiecki made this mistake, especially given the nature of his piece.

It’s time for me to put out a refresher policy brief from PPI on this.

Countercyclical Regulatory Policy Gains Momentum

The Economist has a nice piece about countercyclical regulatory policy here. The piece ends with:

Just as fiscal and monetary policy vary according to the economic cycle, so perhaps should regulatory policy: lighter when unemployment is high, heavier when it is low. The economics of incorporating employment considerations into regulatory policy is in its infancy. Mr Sunstein calls it a “frontiers question”. Given the sorry state of America’s job market, it is worth answering.

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.

Five Things to Remember

  1. The stock market is not the same as the economy. When the stock market was rising, it didn’t mean the economy was good. When the stock market is falling, it doesn’t mean the economy is bad (see here)
  2. Much of the growth of the federal deficit went to fund economic growth abroad, not in the U.S.  Yes, I know that the official data shows that real imports are smaller today than when the recession started. It’s not true.
  3. The official data are wrong. Real import growth is stronger than the numbers show, productivity and real GDP growth are much weaker. (see here).
  4. The last thing the U.S. needs is another stimulus to consumption. Consumption leaks right out the door as higher imports.
  5. The U.S. should be a production economy, not a consumption economy.  It’s time to stop chasing low consumer prices and focus on investment in physical, human, and knowledge capital. That’s the only path to sustained prosperity.

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.

How much of the productivity surge of 2007-2009 was real?

[This post just grew and grew and grew, until it turned into something  ridiculously long. Sorry about that--I'm probably guilty of blog abuse.   If you want, here's a PDF version. I look forward to comments ]

Summary

In the 2007-2009 period, the U.S. economy experienced its worst recession since the Great Depression. Nevertheless, despite this deep downturn,  the near-collapse of the financial system and unprecedented global economic turmoil,  U.S. productivity growth actually seemed to accelerate in the 2007-2009 period, or at least maintain its previous pace.

The 2007-2009 productivity gain had a major impact on both economic policy and political discourse. First,  it gave the Fed a free hand to feed mammoth amounts of liquidity into the system without worrying about inflation.  Second, it convinced the economists of the Obama Administration that the economy was basically sound, and that the big problem was a demand shortfall. That’s why they expected things to get back to normal after the fiscal stimulus.

However, I’m going to show in this post that the  productivity gain of 2007-2009 is highly suspect.  Using BEA statistics,  I identify the industries that contributed the most to the apparent productivity gain, including primary metals, mining, agriculture, and computers and electronic products. Then I analyze  these high-productivity growth industries in detail using physical measures such as barrels of oil and tons of steel. I conclude  these ‘high-productivity’ industries did not deliver the gains that the official numbers show.

Based on my analysis, I estimate that the actual productivity gains in 2007-2009 may have been very close to zero.  In addition, the drop in real GDP in this period was probably significantly larger than the numbers showed.  I then explore some implications for economic policy.

Overview

I start by giving several  data points.

*From 2007 to 2009,  business productivity rose at a 2.4% rate, according to the official data. By comparison, the productivity growth rate was only 1.2% over the previous two years (2005-2007).

*If you like your numbers quarterly, business productivity grew at a 1.8% annual rate from the peak in 07IV to the trough in 09II.  That’s somewhat faster than the  1.6% growth rate of the previous 3 years.

*Looking at  total economy productivity–real GDP divided by full-time equivalents (FTE)–we see that productivity growth in 2007-2009, at 1.6% per year,  was double that of the previous two years (0.8% per year).

This chart breaks down productivity growth by business cycle, using the official statistics. You can see that the productivity growth of the 2007-2009 period–the worst recession in 70 years–appeared to be basically a continuation of the productivity gains during the boom. You can’t tell from this chart that anything bad happened to the economy.

The strong measured productivity growth during the crisis years reflects a steep drop in employment (-5.7%) combined with an apparently mild two-year decline in real GDP (-2.6%).  Of course, ‘apparently mild’ is still nastier than any post-war U.S. recession, but a 2.6% decline in real GDP translates into a 4.4% decline in per capita GDP, which puts the U.S. at the low end of  financial crises described by Reinhart and Rogoff.

What’s more, the 2007-2009 productivity gain had a major impact on both economic policy and political discourse. First,  it gave the Fed a free hand to feed mammoth amounts of liquidity into the system without worrying about inflation. 

Second, the productivity gains convinced the economists of the Obama Administration that the economy was basically sound and there was nothing wrong with  the ‘supply-side of the economy.  Instead, the Obama Administration concluded that the big problem was a demand shortfall, which is why they expected things to get back to normal after the fiscal stimulus.

Consider this April 2010 speech from Christina Romer, then head of the CEA. She said:

The high unemployment that the United States is experiencing reflects a severe shortfall of aggregate demand. Despite three quarters of growth, real GDP is approximately 6 percent below its trend path. Unemployment is high fundamentally because the economy is producing dramatically below its capacity. That is, far from being “the new normal,” it is “the old cyclical.”

Perhaps more important from a political perspective, the productivity surge  helped convince the Obama economists that the job loss was ‘normal’ in some sense. That is, the rise in productivity suggests that the financial crisis apparently just accelerated the normal process of  making U.S. businesses leaner and more competitive, and there was no structural problem. In fact, that’s what Romer said in her speech:

In short, in my view the overwhelming weight of the evidence is that the current very high — and very disturbing — levels of overall and long-term unemployment are not a separate, structural problem, but largely a cyclical one. It reflects the fact that we are still feeling the effects of the collapse of demand caused by the crisis. Indeed, at one point I had tentatively titled my talk “It’s Aggregate Demand, Stupid”; but my chief of staff suggested that I find something a tad more dignified.

If productivity was rising, then the job loss was due to a demand shortfall and could be dealt with by stimulating aggregate demand. That, in turn, helps explain why the “job problem”  didn’t seem so urgent to the Obama administration, and why they spent more time on other policy issues such as healthcare and regulation.

[Read more...]

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.

Archives

Follow

Get every new post delivered to your Inbox.

Join 64 other followers