Jobless claims down

I don’t usually do quick reactions to economic news, but this morning’s drop in new jobless claims is just an additional piece of positive information.  I’m looking for a stronger-than-expected 2011 labor market, powered by hiring in IT, communications and related fields.  Now I just have to figure out what that means for the stock market.

Falling Housing Market is Not Bad News

The drop in housing prices in October has almost uniformly been interpreted as a bad sign for the economy in 2011.  I’d like to offer an alternative viewpoint: I think the drop in housing prices may be a tough but necessary step in the healing process.

Consider this. The false boom of the 2000’s was built on rising home values. Americans borrowed against those high home values, which enabled them to maintain a higher standard of living than they could really afford.  The borrowing flowed into mortgage-backed securities, which were in turn bought by overseas investors, effectively lending America the money to finance the trade deficit.  On a country level, we maintained a higher living standard than we could afford.

We’re still doing it, though now housing, consumption and imports are being propped up by federal government borrowing.  We still haven’t made the big jump to investing in our future–knowledge capital and productive physical capital.

From this perspective, a rise in housing prices is a signal that the “bad money pump” has started again. It means we are falling back into the same bad habits of borrowing money from overseas to finance housing, which in turn is used as collateral for debt to buy imports. We don’t want that!

I’d welcome anyone who would explain to me why  housing prices  are a good signal of the underlying long-term strength of the U.S. economy.

Federal Support for Networking and IT R&D: Much Less than Meets the Eye

Good news:  According to the federal budget,  about $4 billion per year goes for networking and information technology (NIT) R&D. (see here)

Bad news: “The Nation is actually investing far less in NIT R&D than is shown in the Federal budget.

That’s according to an authoritative new report, Designing a Digital Future: Federally-Funded Research and Development in Networking and Information Technology, from the President’s Council of Advisors on Science and Technology. Here’s what they have to say: 

The aggregate NITRD crosscut budget significantly overstates the actual Federal investment in NIT R&D. By leading policymakers to believe that we are spending much more on such activities than is actually the case, this discrepancy contributes to a substantial, systematic underinvestment in an area that is critical to our national and economic security.

And then they go on to say.

Most obviously, a large portion of the “High End Computing Infrastructure and Applications” budget category, which accounts for roughly $1.5 billion of the $4.3 billion NITRD total, is attributable to computational infrastructure used to conduct R&D in other fields, and not to NIT R&D or to infrastructure for NIT R&D.

Beyond this, however, various agencies include in their reports for other NITRD budget categories investments in NIT that support R&D in non-NIT fields. The laudable transparency of NIH’s NITRD grant reporting allowed an expert in NIT at the Science and Technology Policy Institute (STPI) to review the abstracts of the top 100 awards (by award size) in NIH’s 2009 NITRD crosscut for actual NIT R&D content. STPI developed a 14-part coding scheme to categorize the 100 projects. The analysis showed that of the 95 projects with available abstracts, only 4 appear to be making a contribution to actual NIT R&D, such as novel computer science methods, novel simulation methods, or novel system design and computing methods. Another 14 projects could be considered “borderline” although they seem to focus on NIT development alone. The remaining 77 of the 95 projects with available abstracts appear to have no NIT R&D content. (For example, they may involve NIT infrastructure to support biomedical or biochemical R&D, but with no novel NIT R&D contribution.)

<short snip>

In short, STPI concluded that 86% of these awards, by dollar value, have no NIT R&D content; 3% could not be assessed, 9% were judged borderline, and 2% were judged to be making a contribution to actual NIT R&D. Although other agencies do not report NIT R&D spending in sufficient detail to make the same analysis possible, it seems likely that in many cases a similar confusion in classification of NITRD investment occurs.

These findings highlight both the increasing ubiquity of NIT infrastructure for conducting R&D in many fields and the difference between this infrastructure and actual NIT R&D – work that makes a novel contribution to NIT.

I draw two conclusions from this.  First, the U.S. has made and continues to make an enormous bet on biosciences as the  driving force for future economic growth.  That’s shown by our pattern of federal research support.

Second,  if we want to maintain our lead in networking and information technology research, we need to put more federal dollars there. Now.

The Fault Line in U.S-China Trade Policy

The  real question, in U.S.-China trade policy, is which side  U.S.-based multinationals choose.  From a very interesting story in the NYT:

G.E.’s silence is part of a broader Western corporate reluctance to criticize Chinese policies, particularly in public. So eager are multinationals for continued access to the world’s fastest-growing market that they are loath to cry foul even amid evidence that China may be flouting international trade laws.

That reticence has long characterized foreign companies’ dealings with the ascendant China. But last winter and spring, there were signs of a new willingness by American and European multinationals to speak out.

Google said in March that it would shut down its China-based Internet search engine, rather than continue allowing Chinese censorship. The leaders of big companies like G.E., as well as the German giants Siemens and BASF, voiced concerns in early summer about access to the Chinese market.

It briefly seemed that Western companies might take a more coordinated and more assertive position.

But that season of outspokenness seems to have passed, and virtually no companies are now willing to discuss the Chinese trade barriers publicly, executives and lobbyists in Beijing, Hong Kong and Washington said.

I’m going to give a try at estimating the knowledge capital flow from the U.S. to China. It should be illuminating.

Homeland Security and the Regulatory Burden

This morning, Paul Krugman makes an oblique reference to my November post “The Age of Regulation Started Ten Years Ago”.  He writes:

Have you heard the one about how there’s been an explosion in the number of federal regulators? Mike Konczal of the Roosevelt Institute looked into the numbers behind that claim, and it turns out that almost all of those additional “regulators” work for the Department of Homeland Security, protecting us against terrorists.

Yes, protecting us against terrorists, for sure, and doing a good job…but in the process making it more difficult for foreign business execs, scientists, and engineers to enter the country…and slowing down air travel…and  forcing telecom companies to open up holes in their systems….and forth.

I’m not arguing that these actions  are or are not necessary. But many of the mandates created by  Homeland Security are de facto regulations that have imposed an enormous economic burden on the country over the past ten years.

Finally, let me quote what Mike Konczal actually wrote, in response to my piece (my emphasis added) 

 The Bush-era brought you a regulatory state of militarized borders, drug wars, strategically weakened financial regulatory bodies for convenient regulatory shopping, and aggressive use of patents to shut down competition. This is not the regulatory state I fight for.

Bottom line: The economy doesn’t care whether regulations were passed by Republicans or Democrats.  An over-regulated country is not going to be innovative, whether the regulations are red or blue.

American Exceptionalism: Why?

Lee Drutman of PPI takes a close look at American Exceptionalism (I like it capitalized). He writes:

 These days, only 20 percent of Americans think the U.S. has the strongest economy in the world, and only 34 percent expect Americans can get back to the world’s top economy in 20 years. Only 17 percent of Americans are satisfied with the way things are going in the United States.

And yet, despite all this, 80 percent of Americans still believe in America’s unique greatness (73 percent of Democrats, 91 percent of Republicans).

There is a gap here. American exceptionalism is part of our cultural heritage our self-identification. We believe there is something special about our nation. And yet, something is preventing us from achieving its full potential. What is it? No wonder there is so much anxiety.

I’d be interested in a poll that asks people what, in particular, they think makes America uniquely great. Has anyone done something like that?

Social Security Funding Problem Solved

Without anybody realizing it, the Obama Administration may have solved the long-term Social Security problem.  How? By tapping general revenues to fill in the shortfall in the trust fund. 

Oh, you didn’t realize that the historic wall between the Social Security Trust Fund and general revenues had been breached? Neither did I, but I quote from Allan Sloan and Ezra Klein. First Mr. Sloan here:

 Next year, as you probably know, workers subject to Social Security taxes will pay only 4.2 percent of their “covered wages” -wages up to $106,800 – rather than the normal 6.2 percent. This will reduce Social Security’s cash proceeds by $112 billion, according to Congress’ Joint Committee on Taxation.

What impact will this cash shortfall have on the Social Security trust fund? None. Zero. Zip.

How can a $112 billion cut in Social Security revenues not affect the trust fund? Because Treasury will give the trust fund the same amount of bonds it would have gotten had the two-percentage-point tax holiday didn’t exist.

In other words, Treasury isn’t selling bonds to Social Security, it is creating them out of thin air and putting them into the trust fund. The missing cash? Uncle Sam will just borrow $112 billion from somewhere.

And now Mr. Klein here:

The tax deal cuts employee-side payroll taxes by two percentage points in 2011. This won’t harm Social Security, or at least it shouldn’t harm Social Security, because the money will just be replaced by general fund revenues (confused yet?). All in all, that should mean Social Security emerges unscathed.

But some liberals are understandably concerned that the payroll cut will be extended indefinitely. Then Social Security loses part of its long-term funding. And then what? More benefit cuts? Privatization?

I say, bring it on. Cutting payroll taxes and replacing them with general fund revenues is appealing in two ways. First, payroll taxes are much more regressive than income taxes. Second, I’m actually fine with breaking the sanctity of Social Security’s closed funding loop. A lot of liberals disagree with me on this point, but hear me out.

This was a *BIG* deal.  The Obama Administration just gave the Trust Fund $112 billion out of general revenues. Why not do that again when the Trust Fund runs dry? No reason at all.

In fact, breaching the wall between the trust fund and general revenues changes the whole debate over Social Security. The current level of benefits can be funded, if we are willing to raise taxes or cut other items. Or, as many conservatives want, we can fund the creation of private retirement accounts. Whee!