Neoclassical Nonsense

Originally posted on IndustryWeek.

Recently, I wrote about how the 2000s were a lost decade for U.S. manufacturing. Ensuring that the 2010s are not more of the same will require a robust national manufacturing policy to help producers in America become much more productive and innovative. Unfortunately, to date, Washington has not embraced such a policy.

The key question is why?

One reason is that there are three major camps in manufacturing policy and only one puts a national innovation agenda at the top of the list.

Camp 1: Manufacturing Doesn’t Matter, So No Need for a Manufacturing Policy

These advocates have a clear policy message regarding U.S. manufacturing. Don’t do anything specifically to help manufacturing. The reason? Manufacturing doesn’t matter. The members of this camp are numerous. Kenneth Green, a resident scholar at the conservative American Enterprise Institute (AEI), writes: “As long as China is selling us the products we need, the location of manufacturing isn’t really that critical for the economy.” Meanwhile, Columbia University’s Jagdish Bhagwati dismisses anyone who says manufacturing is important as suffering from a “manufacturing fetish,” while economic columnist Robert J. Samuelson writes that … Read the rest

After already slashing R&D funding, the Sequester is about to deliver another kick in the teeth to American competitiveness: it’s going to sharply reduce our ability to measure it. This one comes courtesy of the Bureau of Labor Statistics, which announced last month that the sequestration has forced it to eliminate its International Labor Comparisons (ILC) program, a neat little database that adjusts foreign data to a common framework, allowing you to compare the traded sector health and competiveness of the United States against that of other countries.

This may not sound like much, but in the nerdy world of competitive analysis economics, it’s huge. No one else provides this data to the same extent as ILC. The OECD does a bit,^[i] but their data are rife with warnings about the perils of cross-country comparison among their indicators. Moreover, the OECD has little-to-no data on the big boys such as China and India, which renders its data useless for any “big picture” comparisons of our competitive health. Other organizations, such as the UN Industrial Development Organization, provide limited competitiveness data that is vastly incomplete.

In contrast, the ILC … Read the rest

Originally posted on IndustryWeek.

In my inaugural article I tried to make the case for why Washington should care about manufacturing (Reason: it’s the key traded sector for the U.S. economy.)

But once one accepts the importance of manufacturing, the next question is how is the manufacturing sector doing? Is U.S. manufacturing healthy and not in need of a national manufacturing policy or is it in trouble and in need of smarter policies?

One key indicator to answer this question is change in the number of manufacturing jobs.

America lost 5.7 million, or 33%, of its manufacturing jobs in the 2000s. This is a rate of loss unprecedented in U.S. history—worse than in the 1980s, when BusinessWeekwarned of deindustrialization and worse than the rate of manufacturing job loss experienced during the Great Depression.

While U.S. manufacturing has clawed back, regaining about half a million of those lost manufacturing jobs since 2010, there’s little doubt that the 2000s constituted the worst decade for manufacturing employment in the Republic’s history.

Moreover, the recovery of manufacturing jobs is actually worse than in most prior recoveries.

In response to these statistics, … Read the rest

I understand that experts are not the only ones who have the right to comment on complex policy issues. And that experts are sometimes wrong and often ideological in their views. But at least with experts, they have spent time studying the evidence before offering their advice to policymakers. Alas, the same cannot be said of some Sunday newspaper columnists. Case in point, pieces by op-ed writers in the Post and the Times.

The first comes from Tom Friedman who makes the claim in “No to Keystone. Yes to Crazy” that “Nothing would do more to clean our air, drive clean-tech innovation, weaken petro-dictators and reduce the deficit than a carbon tax.” Really? As ITIF has shown, many European nations have a defacto carbon tax in excess of $400 a ton (ala their massive gas taxes) – a carbon tax 20 times higher than anything that is remotely politically possible in the United States and they have even fewer electric cars than we do. Carbon taxes don’t drive the kind of breakthrough zero carbon innovations the world so desperately needs; they lead businesses to tweak existing … Read the rest

Not content with publicly contradicting the President that hired her once, Christina Romer is at it again, criticizing the President’s minimum wage proposal. Romer first criticized the President for having the audacity to say that manufacturing was more important than say, retail trade. For Romer, the former head of the President’s Council for Economic Advisers (CEA) under Obama, this was apostasy. Didn’t Obama know that all industries are equal and picking manufacturing for support was industrial policy? And with this latest critique, Romer is joining on the neoclassical pile attacking the President’s proposal to raise the minimum wage; which if you are a card carrying neoclassical economist is mandatory, or else they don’t let you attend the next AEA meeting.

Of course, as I pointed out, neoclassical economists like Romer analyze the minimum wage through the lens of their narrow and misleading doctrine, leading them to believe it distorts markets and leads to fewer jobs. But from an innovation economics perspective, a modest increase in the minimum wage will boost productivity and will not lead to net job losses. Romer would instead have government expand the earned … Read the rest

Originally posted on Ideas Lab.

With the iPhone 5 in stores and a new iPad Mini on the way, we seem to be in an era when innovation blossoms on a daily basis. Yet despite these much-ballyhooed examples, America could be achieving far more innovation if not for a growing anti-innovation “neo-Luddite” movement. Named after Englishman Ned Ludd, whose followers destroyed textile machines at the beginning of the Industrial Revolution, today’s neo-Luddites view innovation not as a force for progress to be encouraged, but as something to be stopped, regardless of the benefits innovation brings.

A generation ago, neo-Luddites were firmly ensconced in Europe, providing Americans with amusement and occasional frustration. Only in Europe could a government (the Swiss) restrict research into bioengineered plants because plants have “feelings” which deserve respect. Where else but in France would protesters uproot genetically modified grapevines at the National Institute for Agronomic Research while others “boss-napped” managers who had the temerity to announce layoffs when sales plunged.

If Europe embraces the “precautionary principle,” when it comes to innovation, America historically has embraced the “anticipatory principle.” Indeed, it’s hard to image Walter Ehret’s stirring 1950’s musical pageant “Our Country ‘Tis of Thee,” being written in Europe when … Read the rest

Manufacturing has been the focus of much attention lately — a key theme of President Barack Obama’s Inauguration and State of the Union addresses and the subject of numerous recent books and articles. But why does manufacturing matter? Why should Washington in particular care? Most commentators miss the real reason.

And getting the answer right is imperative because many economists, like Nobel Laureate Gary Beckerand Columbia’s Jadish Bhagwati, persist in trying to convince policy makers that America can thrive without manufacturing, and in fact would be better off without it.

Here are some reasons that don’t really matter.

Manufacturing is inherently better than services.

The notion that making a widget is better and more ennobling than selling it or marketing it is simply wrong. Both produce income and output.

Manufacturing jobs pay more.

Sure, but manufacturing jobs pay just $2.50 more per hour than the average of $30.44 for all U.S. jobs. And despite the much-ballyhooed creation of some 500,000 manufacturing jobs over the past two years, many of the new jobs are on tiered wage scales and pay around $15 per hour. If we tie the … Read the rest

In his State of the Union Address president Obama proposed that Congress increase the minimum wage to $9.00 per hour.

Almost immediately a chorus of opposition based on neoclassical economics emerged, arguing that such a change would kill job creation. As former Bush Administration economist Greg Mankiw notes, “there is 79 percent agreement among his peers that a minimum wage increases unemployment among young and unskilled workers.” But let’s be clear, what Mankiw really means to say is a 79 percent agreement among neoclassical economists.

The neoclassical economic argument against the minimum wage is grounded in the view that if a worker and employer agree on a wage then this wage level must be welfare maximizing for both of them and by definition for society. The only thing a government regulated price for labor can do is distort labor markets and lead to less, not more economic welfare.

In fact, a higher minimum wage would spur economic growth, while also increasing economic fairness.

First, here’s why the President’s proposal won’t kill jobs. The argument among neoclassical economists on the minimum wage is too narrowly focused on microeconomics. In other words, … Read the rest

I had the pleasure of presenting, along with Marvin Ammori, at last week’s State of the Net Conference on the economic impact of the Internet and how to maximize it.  Among the points I made on the impact:

• The Dot-com domain makes global economy $1.5 trillion larger and will add $3.8 trillion annually to the global economy in 2020 – more than the total GDP of Germany
• IT workers contribute significantly more to productivity than non-IT workers and IT has more impact on productivity than non-IT capital
• Between 2001 and 2011, jobs  in IT occupations increased 22% while non-IT jobs were stagnant. Between 2007-2011, jobs declined 4.5%, while IT jobs up 6.8%, contributing $37 billion to the economy.

Among the points I made on how to maximize its impact:

• First, we should recognize that Internet freedom does not mean Internet anarchy. In other words we should promote Internet innovation and free speech, but also work to limit Internet crime (like malware and copyright theft).
• Second, we need to get a clearer overall framework to guide Internet policy. Right three competing narratives compete for attention: Abdicate, Regulate, Facilitate. Abdicate says that

… Read the rest