Recession Hits Harder at College Grads Without an Advanced Degree

I’m sure many of you read the  NYT article about the 26-year-old college grad with almost $100,000 in student loans.  The article was fascinating and horrifying, but it didn’t mention a key factor–since the girl in the article graduated in 2005, the  real wages of college grads without an advanced degree have fallen substantially.

 Take a look at this chart.

I’ve plotted median usual weekly earnings of fulltime workers, adjusted for inflation, and indexed to 2001Q1 =1. The dark blue line shows the weekly wages of workers with an advanced degree, while the lighter line shows weekly wages of workers with a bachelor’s degree only.

The real wages for college grads with a bachelor’s have  been in a downswing since 2004.  That offers at least a partial explanation of her problems…she got caught by a weakening labor market for bachelor’s degrees.  

To put it another way–college grads who are clothed with the protection of an advanced degree have on average managed to hold their own during the financial crisis, and even gain ground. Since mid-2007, their usual weekly wages are up by 3.7% in real terms, putting them at their highest level for the past ten years.

‘Naked’ college grads–that is, those without advanced degrees–have not fared nearly so well during the recession. Their real weekly earnings are down 0.7% since mid-2007, and they are well below their 2004 level.

Is this simply supply and demand,  a function of which industries were hit, or is there something else going on?

How much R&D is being offshored? NSF releases new numbers

My view is that we suffer from an “information deficit” rather than an “information overload.”  We know far too little about the important things, and far too much about the unimportant.

One of the notable gaps in our knowledge has been reliable statistics about R&D spending.  The economy  is driven by innovation, but we knew very little about who was doing the innovating and where.  In particular, we had absolutely no idea how much R&D was being offshored by U.S.-based companies.

In order to answer this question and many others,  the National Science Foundation got funding a few years ago for a new survey on business R&D and innovation. I wrote about it in a September 2008 BusinessWeek cover story, Can America Invent Its Way Back?: “Innovation economics” shows how smart ideas can turn into jobs and growth—and keep the U.S. competitive.  (This story is also the answer to a trivia question: What BusinessWeek cover was being delivered to the homes of subscribers when Lehman failed?).

Now the NSF has released the initial results from the new Business R&D and Innovation Survey.  For the first time, we have a good read on how much U.S. businesses are offshoring their R&D—setting up research facilities in other countries. 

It turns out that in 2008, manufacturers did about 20% of their R&D overseas. That’s actually a bit less than I would have expected. Here’s how it breaks down by some industries.

Surprisingly, the industry which has done the most to offshore its R&D is the auto industry,  with 39% of its spending done overseas.  Other industries with a high rate of R&D offshoring  include electrical equipment—that’s lighting, generators, and the like—and info tech hardware.  Pharma had less offshoring than I would have expected.

The survey was incredibly detailed, and there’s a lot more data releases coming in the future that will enable us to figure out the effectiveness of this spending for innovation, and the employment generated.  It’s great stuff…take a look.

[Note: The survey counts R&D done by U.S.-owned businesses, both home and abroad and R&D done by U.S. affiliates of foreign parents I’m pretty sure that in future data releases, we’ll get numbers that allow us to separate out the two. ]

No, It’s Not 70% of Economic Activity

I might as well turn this into a monthly feature. In response to today’s personal income report, Martin Crutsinger of AP writes:

Consumer spending is closely watched because it accounts for 70 percent of total economic activity.

No, it doesn’t, Martin. Every time a journalist says that consumer spending accounts for 70 percent of total economic activity, he or she is misleading readers into believing that the U.S. economy cannot grow without the consumer taking the main role (see my earlier posts here and here). 

In fact, the meme “consumer spending accounts for 70 percent of economic activity” pretty much obscures all the major problems with today’s economy.

1) The ’70 percent’ meme blurs the distinction between domestic production and imports, since  a big chunk of imported goods are counted in PCE ; 

2) The ’70 percent’ meme blurs the distinction between household and government spending, since PCE  includes Medicare and other entitlement spending.

3) The ’70 percent’ meme blurs the distinction between household and institutional spending, since personal consumption expenditures includes money spent by nonprofits (best example: Political parties, which are heavily funded by corporations, fall into personal consumption expenditures) 

To finish off this rather post,  I did some calculations on the sources of growth in real PCE since December 2009.

This table shows that 47% of consumption growth since December comes from spending on import-intensive goods.  In particular,  the two biggest increases in spending came for ‘clothing and footwear’ and ‘consumer electronics and IT equipment’, two categories dominated by imported goods.  You can be sure that when Americans step up their spending on clothing, they are creating very few manufacturing jobs in this country.   

Another 13% of consumption growth came in categories where third-party expenditures are important, such as healthcare and nonprofits.

P.S. I’m getting some traction in my fight against the 70 percent meme. See Donald Marron’s post, for example.

One Explanation of the Innovation Shortfall

I’ve just read a very important paper  that I strongly recommend to anyone interested in innovation and growth.  The paper, by Ben Jones, an economist at Northwestern, is called “As Science Evolves, How Can Science Policy?”. Jones documents two crucial points. First, as the length of education and training for a scientists gets longer, the value of a scientific career drops sharply.    

Second, teamwork has been getting more important. For example, on the issue of teamwork, Jones looks at all science, engineering, and social science journal articles published from 1995 to 2005, and shows that team-written papers have far more impact than solo papers.    

Take a look at these two charts, drawn from Jones’ paper.


The first chart shows that team-written papers end up drawing a lot more cites than solo papers, on average, in both science and engineering, and the social sciences. The second chart shows that the “home run” papers are much more likely to come from teams.    

(Related papers include “The Increasing Dominance of Teams in Production of Knowledge” from Science (2007) and “The Burden of Knowledge and the Death of the Renaissance Man: Is Innovation Getting Harder?”)    

Jones then goes on to point out that the current incentive structure in science is struggling  to deal with a world where scientists have to wait so long to get started:    

For example, if careers in finance, management, or law require more static levels of training, then scientific careers will be increasingly costly by comparison. The estimated 6-8 year delay in becoming an active innovator over the 20th century suggests, at a standard 10% discount rate, a compound 45-55% decline in the value to becoming a scientist. This kind of selection effect may not only slow scientific progress but also slow economic growth, should the positive spillovers that follow from idea creation (see Section III) not feature in other white collar careers. The recent finance boom, drawing talented undergraduates into quickly attained,high wage streams, may make this comparison particularly acute.    

[Read more…]

Housing and Jobs

I’ve never been a big  fan of home construction as a driver of economic growth.  Way back in 2005 I wrote a piece for BusinessWeek entitled “The Cost of All Those McMansions” :

whether prices level out, crash, or even keep going up, the housing boom is already having pernicious economic effects. The real problem: the incredible amount of resources — workers, materials, and money — being sucked into home construction and renovation….Residential investment has become a black hole, absorbing a staggering 5.8% of gross domestic product….. housing-driven growth, while creating jobs and lifting wealth, is also distorting the economy, benefiting low-tech commodity sectors rather than the high-tech industries at the heart of America’s competitive strength.

(I know it’s chintzy to self-quote, but please forgive me for now).

Housing construction, although it counts as investment in government statistics, has much less positive impact on long-term growth than other types of investment.

However,   spending on home construction does have one virtue–most of the money goes to domestically-produced goods and services. A calculation by two BLS economists, Carl Chentrens and Arthur Andreassen  (in  a  paper they presented at the 2009 Federal Forecasters Conference) suggests that only 7% of spending on residential investment ‘leaks’ into imports. By contrast, they find that about 21% of nonresidential investment leaks overseas (that makes sense, since so much business investment goes for IT and transportation equipment, much of which has a heavy import component).

That makes new home construction a much better generator of domestic jobs, in the short-run, than other types of spending.   For example, American consumers went shopping for more clothing in the first quarter of 2010. But that uptick of consumer activity sure as shooting didn’t create many clothing production jobs in the U.S.

So if we want job growth–and we do, we do–it’s  going to be tough to get a job recovery without at least some improvement in the housing market.

Synthetic Biology and the Innovation Shortfall

Coincidentally, the same week that Craig Venter announced the creation of an “artificial lifeform”, Newsweek magazine ran a cover entitled “Desperately Seeking Cures: How the road from promising scientific breakthrough to real-world remedy has become all but a dead end.”

This Newsweek story, written by Sharon Begley and Michael Carmichael, is a must-read for anybody interested in understanding the healthcare crisis and, indeed, the economic crisis.  As I have written, life sciences research has been the big bet of the U.S. economy, absorbing a rising share of government and academic research dollars If it had produced a stream of  commercially powerful innovations over the past ten years, the economics of healthcare would have been different. Indeed, I would argue that the current state of the U.S. economy would be much better.

Begley and Carmichael’s article offers an explanation for how undoubted scientific progress in life sciences can coexist with an economically disastrous innovation shortfall. They write:

From 1996 to 1999, the U.S. food and Drug Administration approved 157 new drugs. In the comparable period a decade later—that is, from 2006 to 2009—the agency approved 74. Not among them were any cures, or even meaningfully effective treatments, for Alzheimer’s disease, lung or pancreatic cancer, Parkinson’s disease, Huntington’s disease, or a host of other afflictions that destroy lives.

….judging by the only criterion that matters to patients and taxpayers—not how many interesting discoveries about cells or genes or synapses have been made, but how many treatments for diseases the money has bought—the return on investment to the American taxpayer has been approximately as satisfying as the AIG bailout. “Basic research is healthy in America,” says John Adler, a Stanford University professor who invented the CyberKnife, a robotic device that treats cancer with precise, high doses of radiation. “But patients aren’t benefiting. Our understanding of diseases is greater than ever. But academics think, ‘We had three papers inScience or Nature, so that must have been [NIH] money well spent.’?”

…”NIH has no skin in the game, so they have no inducement to work with a company” to get a discovery from the lab to patients, says Eric Gulve, president of BioGenerator, a nonprofit in St. Louis that advises and provides seed money for biotech startups. “There isn’t a sense of urgency.”

….If we are serious about rescuing potential new drugs from the valley of death, then academia, the NIH, and disease foundations will have to change how they operate. That is happening, albeit slowly. Private foundations such as the MMRF, the Michael J. Fox Foundation for Parkinson’s Research, and the Myelin Repair Foundation (for multiple sclerosis) have veered away from the NIH model of “here’s some money; go discover something.” Instead, they are managing and directing scientists more closely, requiring them to share data before it is published, cooperate, and do the nonsexy development work required after a discovery is made.

It’s a great article…go read it.

And finally, back to synthetic biology.  Will this be the new approach that finally breaks free of the innovation shortfall in life sciences? I can’t tell…but I’m watching Venter closely.

Richard Florida responds

Richard Florida responds to my post A Bad Business Cycle for the Creative Economy here and here (“Brains Still Trump Guns and Oil”). He writes:

Or, you could ask just two simple questions. Which of these two places—Houma, Louisiana or Austin Texas—would you bet on to have higher living standards, higher wages, and higher home price values in the next decade or two? And if you had to choose between Killeen, Texas or the Research Triangle area around Raleigh, North Carolina as a place for you and your family to live, which one would it be?

I know how I’d answer. And I think Mandel would likely answer the same way.

I’m actually staying in good old New Jersey, land of pharma company mergers.

Still, I encourage people to read Richard’s thoughtful pieces. I’m going to come back again after I’ve had a chance to process them some more. For now,  I just want to make a couple of points.  First, an unusual combination of factors in the past decade may have worked against the Creative Economy–an innovation shortfall, combined with a rising cost of energy and the threat of terrorism. If these factors reverse, especially the innovation shortfall, the Creative Economy cities may once again have faster growth. I’m moderately optimistic–when I was recently up in Rochester speaking on innovation and economic development, I suggested that life sciences may still be a good route to prosperity in the future, even if it wasn’t over the past ten years.

However–and this is a big one–we can’t ignore the possibility that the innovation shortfall will continue, that energy will continue to rise in price, and that the military situation will become worse. In this future,  the Creative Economy arguments become less compelling.