All posts by Justin Hicks
Let’s consider an analogy. Consider a sports franchise. This franchise has the best playbook, best players in the lineup and arguably great management (staff and coach). This team has a great fundamental game, and recently won 3 national championships. But the team faces a problem; their super-stars are getting older, and some are in the process of moving on. New players are still interested in playing for the team because of their recent success, but there is a strange problem facing the team.
They spend a significant amount of their money and time training newly drafted team members. But just as the athletes are hitting their prime, the team always seems to trade their up-and-coming stars to other franchises for their most inexperienced players. They still have a few of the older, well-known players, but they aren’t retaining any of their up-and-coming talent. So, where do you think this franchise is headed?
It’s pretty clear that a successful team’s lineup needs to have players in all phases of their career so that there is a smooth transition. Without this, you end up like my basketball team during the first decade of the 2000′s; … Read the rest
Today, prominent economist Paul Krugman posted an op-ed on the negative impacts of technology and productivity gains on the economy. Krugman claims that the economy is “deeply depressed” and that this can be primarily attributed to two sources: (1) losses of jobs due to technology driven productivity gains and (2) monopolists capturing all the profit for themselves.
For his second point, Krugman cites as evidence that “recent college graduates had stagnant incomes even before the financial crisis struck.” Unfortunately, this dismisses the work done by Hanushek and Helpman that has revealed that quality of education is the key, not number of years of education. The fact is quality of education has fallen over time at both the primary and tertiary levels, while quantity has increased specifically at the tertiary level. As of a 2006 study, among U.S. college seniors, just 34, 38 and 40 percent were proficient in prose, document, and quantitative literacy, respectively. Therefore, the average wage that a college graduate receives should be dropping in real terms. It’s not about power-struggles, it is about lack-of-skills.
Krugman goes on to claim “that technology has taken a turn that places labor … Read the rest
Recently, I wrote a piece outlining the big-benefits from big-pharma, and this last week another working paper hit the NBER stands highlighting even more starkly the real effect drug vintage is having on human life-expectancy. No, we aren’t talking about immortality, but wouldn’t you like to have another 4 months to live with your friends and family? That is exactly what Frank Lichtenberg of Columbia University found was the increase in life-expectancy that can be directly attributed to the increases in drug vintage experienced between 1996 and 2003.
Lichtenberg, using exceptional data from individual patient records, “investigate[s] whether patients using newer drugs in a given year remain alive longer than patients using older drugs, controlling for many important patient characteristics.”
He finds that “between 1996 and 2003, the mean vintage of prescription drugs increased by 6.6 years. This is estimated to have increased life expectancy of elderly Americans by 0.41-0.47 years. This suggests that not less than two-thirds of the 0.6-year increase in the life expectancy of elderly Americans during 1996-2003 was due to the increase in drug vintage. The 1996-2003 increase in drug vintage is also estimated to have increased annual … Read the rest
The single most important question regarding the future of the U.S. economy is whether productivity growth will be robust going forward. Recently there has been vigorous debate over this question, with some like MIT’s Erik Brynjolfsson arguing for robust, and others like George Mason’s Tyler Cowen arguing for stagnation. The newest foray into this debate comes from Northwestern’s noted economist Robert J. Gordon, through a non-peer-reviewed working paper published by the National Bureau of Economic Research (NBER) entitled “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds.” Gordon’s paper has received widespread attention for his provocative thesis that U.S. productivity growth is essentially over and that the average American will be no better off, and likely worse off in the future. No wonder neo-classical economics is called the dismal science. Luckily, innovation economics can be called “hopeful” science, for as I will explain; I believe Gordon’s thesis is fundamentally wrong.
Gordon’s paper is framed in two parts. First he argues that productivity growth (output per hour) in the recent past has been weak and will cascade towards zero and remain there for the foreseeable future. Second, he asserts … Read the rest
As we approach the end of 2012, the currently expired U.S. R&D tax credits are being altogether ignored by the media, and generally ignored by policy makers. Nothing has been done this year to ensure that firms will receive the same benefits as in the past. This leaves firms guessing as to whether or not they should increase or decrease their investments in R&D, or move them abroad. The evidence on the effectiveness of R&D tax incentives continue to mount. In the latest edition of New Economics Papers in Technology and Industrial Dynamics, another compelling analysis by Bond & Guceri, “Trends in UK BERD after the Introduction of R&D Tax Credits,” shows that R&D tax incentives not only bolster business investment in R&D, but businesses respond even more than previously predicted by Bloom et al. The analysis shows that especially in high-tech manufacturing, the R&D tax credit causes a substantial increase in R&D, which provides further evidence that a permanent R&D tax credit is needed here in the United States.
The study shows that when R&D costs are treated more favorably by the tax code than capital investment, firms … Read the rest
The pharmaceutical industry certainly doesn’t suffer from a lack of detractors. Many claim that “Big-Pharma” is simply in it for the money, and that they’ll push new drugs simply to boost profits, even if the drugs aren’t appropriate for the consumer. Others argue that we should eliminate intellectual property protections to get lower price drugs, since there isn’t really that much innovation that has a real impact happening anyway.
However, before throwing the pharmaceutical industry under the bus, it is critical to understand the relationship between pharmaceutical R&D, new drugs and human health impacts. And in fact, a recent study finds that the related drugs brought to market are having a bigger positive effect than you might think. Frank Lichtentberg, a professor at Columbia University and published by the National Bureau of Economic Research, finds that an increase in drug proliferation year-over-year (drug vintage) leads to increased life expectancy. From 2000 to 2009, the study finds that life-expectancy increased by nearly two years, purely as a result of new drugs brought to market. They also find that of the 9-year difference in average life-expectancy between the top-5 nations and … Read the rest
Prices Aren’t Everything, Especially when Markets Fail: A Critique of the Mainstream’s Take on the Fed’s Bulletin on Family Finances ’07-’10
The Encyclopedia Britannica, under its definition of the price system states that “Prices are an expression of the consensus on the values of different things.” Unfortunately, mainstream neoclassical economic analysis buys into this notion. The underlying belief is that prices tell us everything we need to know. As a result, the neoclassical economics myopic focus on price, blinds them to what is happening in the real economy and as such, leads policy makers to miss key things going on in the economy.
A case in point; most economist and policy makers were not able realize that the rapid run-up stock market values in the late 1990s (the so-called dot-com bubble) was in fact a bubble that they did not reflect underlying value. Likewise during the early and mid-2000s the run up in housing prices was seen by most economists as an underlying reflection of value, based upon supply and demand (which can never be wrong). This holds true on the downside as well. A prime example is the recent Federal Reserve’s bulletin: Changes in U.S. Family Finances from 2007 to 2010. If supposed real value went … Read the rest
If there is one thing we can agree upon, it’s that there is little agreement about the nature of the current global economic crisis. Everyone has their own view it seems. Case in point is yesterday’s op ed in the Washington Post by columnist Robert Samuelson. When looking to spur recovery, Samuelson points out, “we live in a world of broken models;” a statement perhaps everyone can agree with.
Based upon this statement, it would seem that a logical response would be to actually change the model when proposing solutions to our current economic problems. Unfortunately, the rest of Samuelson’s piece is centered upon a model of the economy from the 1960s that has proven quite inadequate in explaining sustainable growth as well as job creation (along with numerous other flaws).
Samuelson goes on to summarizes that since consumption is down, government can’t increase spending, the private sector won’t invest and we can’t export, we are doomed to stagnation. His “three possible solutions” are derived from the “broken model” itself. It’s no wonder that he is left without a viable solution and claims that “there is no longer a … Read the rest
There is no doubt that the U.S. economy has not performed well in the last few years or even in the last decade as a whole. As ITIF has pointed out, we lost a larger share of our manufacturing jobs in the last decade than we did in the Great Depression and we rank 43rd of 44 nations in the rate of progress in innovation-based competitiveness. So, it may not have come as a surprise that a week ago, the Federal Reserve released a report showing how U.S. family wealth and income declined from 2007 to 2010. However, most mainstream media sources took a single statistic (changes in median wealth) from the over 80 page bulletin and ran away with the wrong message.
When calculating the median wealth (assets minus liabilities), the Survey of Consumer Finances includes perceived unrealized gains as reported by those surveyed. And though there certainly was a decline in real output and consumption during the ’07-’10 period, the real changes in family wealth did not dropped nearly as far as those who gleaned onto the change in median wealth purport. The Fed’s bulletin … Read the rest
In an era of ever tightening budget constraints, some, especially some conservatives now argue that federal funding for research is not critical for innovation. They claim that the private sector will make up for any losses in innovation resulting from a reduction in federal funding of R&D. In the latest edition of the Journal of Policy Analysis and Management (devoted to the examination of science policy and innovation), two scholarly articles clearly rebut this view.
Furman et al. argue that even modest science policy shifts can have a significant influence on the composition of research as well as the pattern of international R&D collaboration. They find that following the United States’ 2001 policy, which banned the federal funding of human embryonic stem cell research (hESC); U.S. production of hESC scientific research lagged 35 to 40 percent below anticipated levels. In other words, cutting federal funding for particular areas of science R&D results in significantly less innovation in that area.
At the broader level, Blume-Kohout presents similar results. However, this study relates to the benefits of increasing federal research support to research output. Specifically, it is revealed that increasing NIH funding … Read the rest