My Review of Tyler Cowen’s New Book

Tyler Cowen’s new book, The Great Stagnation, is terrific. If you want to understand what’s going on with the economy, you should buy it right now. In fact, buy two.

Oh, oh, I’m supposed to write more? Ok.

I should start by saying that if I was still writing for BusinessWeek, I would never be allowed to review Tyler’s book, because he cites me copiously and even graciously dedicates it to “Michael Mandel  and Peter Theil, who have blazed the way.”  (Thank you!) But the fact is, The Great Stagnation is so important and so readable that I’m going to violate every possible  conflict of interest rule.

Since 2009, I’ve been arguing that there’s an innovation slowdown which is the root cause of many of our current economics ills (See here for the  June 2009 BusinessWeek cover story, “Innovation Interrupted”)*.  Since then I’ve been writing and blogging about the  innovation shortfall thesis. (For example, in March 2010 I wrote a policy memo for the Progressive Policy Institute titled “Why the Jobs Crisis is Actually an Innovation Crisis”)

That’s why I was so pleased to see Tyler’s new book. He incorporates my original innovation shortfall thesis–which mainly focuses on technological change over the past decade–into a much broader argument that stretches back forty years. What’s more, he does a great job of making his case in clear terms (readable!). Tyler argues:

…the American economy has enjoyed lots of low-hanging fruit since at least the seventeenth century, whether it be free land, lots of immigrant labor, or powerful new technologies. Yet during the last forty years, that low-hanging fruit started disappearing, and we started pretending it was still there. We have failed to recognize that we are at a technological plateau and the trees are more bare than we would like to think. That’s it that is what has gone wrong….there are periodic technological plateaus, and right now we are sitting on top of one, waiting for the next major growth revolution.

Why is Tyler’s “technological plateau”  so important? It gives you a coherent explanation of how we got into this mess. Tyler writes:

In essence, we’ve been making plans—whether consciously or not—as if we would have ongoing productivity growth of 3 percent or more, along with the asset prices that would accompany such a boom. When you combine plans based on 3 percent gains with a reality of much inferior performance, sooner or later you get a crash.

In other words, it was a collective misperception of current growth rates.

We were all, more or less, overconfident. It gets increasingly harder for me to escape the conclusion that many millions of people were complicit, whether intentionally or not.

Going forward, Tyler raises several important questions.  How do we encourage technological progress? How do we manage slow growth? And if and when we get a new round of technological breakthroughs, how do we manage those?  These are his suggestions

  • Raise the social status of scientists
  • Be part of the solution to the current rancor, not part of the problem. Don’t demonize those you disagree with.
  • Have realistic expectations.
  • Be ready for when more low-hanging fruit actually arrives because sometimes low-hanging fruit is dangerous
  • Be prepared for a recession that could last longer than we are used to.

Let me comment on two of these. First, the point about raising the social status of scientists. In his state of the union address, President Obama made a big deal about innovation. But he did not highlight a single current scientist. Instead, he featured two brothers,  Robert and Gary Allen, who own a  Michigan roofing company.  Good politics–but perhaps not the right message to kids.  

Second, don’t demonize those you disagree with. The point Tyler is making that politics becomes a lot harder in a slow-growth economy, where expectations have to be ratcheted down.  The center has a real purpose.

Finally, Tyler wrote this book in a short Kindle e-book format. It’s worth getting a Kindle just to read his book –I did!

Stem Cell Research Ruling and Growth

I’ve been writing about countercyclical regulatory policy as a way of boosting U.S. economic growth and innovation. The latest judicial move against stem cell research, though, is just the opposite.  Just to quote from an old colleague of mine at BW, Bruce Einhorn

Asian countries are well-positioned to benefit from the latest setback for stem cell research in the U.S. During the Bush years, countries such as Singapore and China took advantage of the U.S. ban on embryonic stem-cell research by providing a more welcoming environment for scientists to work. See, for example, this story I did back in 2005 about Asian efforts to capitalize on the U.S. ban. Describing what he called the “astonishing” progress made in Asia, Robert A. Goldstein, chief scientific officer at New York-based Juvenile Diabetes Research Foundation International, told me then that many Asian governments were asking themselves: “Since the U.S. doesn’t seem to be taking a lead role, why don’t we?”

With Obama’s election and his easing of restrictions, that question became moot as the U.S. got back in the game. Now, though, the Aug. 23 ruling by U.S. District Judge Royce Lamberth halting U.S. funding for embryonic stem-cell research is a reminder of the uncertainty surrounding the issue in the States. Even if Judge Lambert’s ruling is overturned on appeal, what happens if Sarah Palin, Newt Gingrich, or some other conservative Republican defeats Obama in 2012? Count on a new executive order banning research before the Inauguration Day balls are even over. There’s almost zero chance of any such change in policy in Singapore, China, or other Asian countries aspiring to be centers of stem cell research.

If the U.S. wants to grow, making research harder is not the way to do it.

Innovation television show

A bit ago I taped a PBS show on the innovation shortfall–part of  a thoughtful series called Ideas in Action with James Glassman. It’s airing this week, and you can see it here.

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…]

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.

Has Venture Capital Failed America?

I’m at the Kauffman economic bloggers forum in Kansas City (you can view it on a live webcast if you want). One of the great joys of this forum is that it gives me a chance to meet people I otherwise would not come across, including Robert Cringeley, who is best known for his technology writings, but who also writes interesting stuff about finance. Here’s what he recently wrote on venture capital:

…let’s take a look at how venture capital has failed America….

The big VC hangover today was caused by this simple misunderstanding.  Firms thought they could scale-up their businesses and make even more money as a result.  If your $100 million venture fund is replaced by a $1 billion fund, why not just make every deal 10 times as big?  Because it doesn’t work that way.  Companies are over-capitalized.  Good deals are passed-over because they can’t absorb enough cash.  Money is wasted.  Founders are inevitably discarded and  alienated.  The rusted hulks of failed and over-funded startups are often forced to merge just to hide the real carnage.  Everybody ends of hating everybody else and that’s where we are today.

I think the venture capital industry  has been hit by the innovation shortfall.  Over the past ten years, the VCs put a lot of money into start-ups  that they thought was going to work.  Big bets in areas like biotech, MEMs and a variety of other cutting edge assets.

Unfortunately, the number of  big innovative wins over the past decade has been comparatively low, and the successful IPOs comparatively few.  To some unknown degree, there is a shared responsibility–a combination of government regulation that suppressed useful innovations; problems in the VC industry that led to funding the wrong companies; and bad coin flips on the technology, which meant that some things that we thought were going to work, didn’t–at least not yet.

The Innovation Shortfall Thesis spreads

My ‘innovation shortfall’  thesis has shown in up in Time magazine, of all places.  Michael Lind writes, in a piece called “The Boring Age”:

We like to believe we live in an era of unprecedented change: technological innovation is proceeding at a rate with no parallel in all of human history. The information revolution and globalization are radically disruptive. Just as Barack Obama would like to be a transformational President, so the rest of us like the idea that we live in a thrilling epoch of transformation. But the truth is that we are living in a period of stagnation.

Surprisingly, this stasis is most evident in an area where we assume we are way ahead of our predecessors: technology.

Next question: Will we recognize if and when the innovation shortfall ends?

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