Neoclassical Nonsense

Innovation Economics and Competitiveness commentary

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Immigrant STEM Workers Increase Everyone’s Wages

We’ve posted recently about how our current immigration policy is hurting Silicon Valley. But when the United States lets in more immigrants, what happens? Often it’s not what you would expect.

A new NBER paper by economists at the University of California Davis and Colgate University studies the effect of skilled H1-B immigrants in STEM occupations on more than 200 cities across the country. In cities with more STEM immigrants, wages for college-educated workers went up 7-8 percentage points, wages for non-college-educated workers went up about half as much, and there was no significant effect on employment.

Why this counterintuitive result? Economics 101 says that when the supply of something grows, the price should decrease, not increase. As is too often true, however, Economics 101 in this case tells us very little about the real world. Figuring out cause and effect in many types of markets, particularly labor markets, is tough because economies are not as simple as the textbook models might have you believe.

What actually happens is that when immigrants enter an economy, they do more than just offer their labor at a (potentially) lower price. They increase … Read the rest

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Worry About Slow Productivity Growth, Not Fast Productivity Growth

U.S. productivity growth is stagnating, and if the trend continues it could have a drastic impact on the U.S. economy. Without increasing productivity, the only way for a country to get richer is by working more or borrowing more. Furthermore, productivity is a crucial part of international competitiveness, because it is only by increasing our productivity that we can compete with other countries on cost.

A recent BLS news release does a good job of showing the worrying trends. Productivity growth has been abnormally low since approximately 2006, plummeting through the Great Recession, recovering slightly immediately afterward, and slowing considerably since 2010.

The first graph below (Chart 1) provides historical context back to 2000. There is a clear decline in labor productivity (the dark blue line) and also multifactor productivity (light blue). These are the two most common ways of understanding output growth: labor productivity estimates how much each worker produces and multifactor productivity tells us how much each worker and unit of capital can together invest.

Looking back a bit further in time, the next graph (Chart 2) estimates the amount that different factors contributed to total productivity growth. … Read the rest

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Unsubstantiated attacks on the Ex-Im Bank fail to take flight

A recent review by the Wall Street Journal of a Standard & Poor’s (S&P) credit analysis of Boeing in relation to the U.S. Export-Import (Ex-Im) Bank appears to have missed the point. The article sums up the report with the quote, “We don’t believe that the expiration of Ex-Im’s authorization in September would hurt Boeing’s credit quality or ability to make planned deliveries in 2014 and 2015.” However, this ignores the fact that this statement relates only to planes already in production being prepared for delivery. S&P goes on to conclude that alternative financing sources would not be able to match the demand for Boeing airplanes, and that Boeing would lose out on new orders of aircraft. In addition, it states that the effect of an Ex-Im Bank dissolution on Boeing’s credit quality would be significant, especially in sales to emerging markets or to start-up and financially weak airlines. Judging by 2014 data, Boeing’s new financing needs would total between $7 billion and $9 billion if it lost the support of the Ex-Im Bank.

This ‘misunderstanding’ seems to stem from a desire to portray the Ex-Im Bank—which has been quietly … Read the rest

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Where Do New Products Come From? Insights from a new study of innovation in manufacturing

A recent NBER working paper offers up some interesting new survey data on innovation in U.S. manufacturing industries. Authors Ashish Arora, Wesley M. Cohen, and John P. Walsh surveyed more than 5000 U.S. manufacturing firms in 2010, asking whether or not they brought new products to market in the previous three years.

Most notably, the data shows that the number of truly innovative manufacturing firms is relatively small. In the aggregate, it finds that 43 percent of firms introduced new products in the past three years, but only 18 percent of firms introduced new products that were wholly new to their market. In other words, one quarter of firms, and more than half of firms introducing new products, introduced “imitation” products following the lead of other companies. The percent of firms introducing totally new products ranged significantly between industries, from just 10 percent of firms in the “Wood” and the “Metals” industries, to 44 percent in the “Instruments” industry.

The survey also breaks down the results in a number of interesting ways, including where the innovations originated. It finds that the most common source of innovation is customers. This is … Read the rest

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New Paper Confirms Growth Benefits of R&D

Productivity is one of the most fundamental determinants of our income and overall wellbeing, so the question of where productivity growth comes from is extremely important. There are many different ways to increase productivity, but increases that have a continued impact over time are the most important because accumulated productivity increases end up having a much larger impact than one-off changes.

Economists have understood for years that R&D is an important source of productivity growth. However, it hasn’t been entirely clear whether R&D affects productivity growth in short, one-time boosts, or whether it raises growth rates for longer periods.

A new paper by Italian economists Antonio Minniti and Francesco Venturini looks at data from the U.S. manufacturing sector and concludes that R&D policies have indeed created “persistent, if not permanent” changes in the rate of productivity growth. It also drills down into the type of R&D spending, finding that only R&D tax credits have a long-term impact on the growth rate while R&D subsidies provide just a temporary boost.

These results are good news for both the economy and for policymakers because they show the powerful impact that innovation policies … Read the rest

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If Manufacturing Employment is Dead Then Take a Look at China’s Zombie Apocalypse

Policy-making relies on narratives, and narratives often come from data. Or claim that they do. One story often told by economists—by everyone from Dani Rodrik to Erik Brynjolfsson and Andrew McAfee to James Kynge to Laurence Summers—is that China’s manufacturing sector has been shedding workers since the mid-1990s. This story leads us to believe that something like this is happening:

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This argument ends up as a morality tale with serious policy implications: if even China, manufacturing powerhouse with wages developed countries cannot hope to compete with, is losing manufacturing jobs, then surely manufacturing jobs are obsolete and the U.S. is foolish to try to maintain them—let alone get them back.

Unfortunately, this story is based on a gross misreading of inaccurate evidence. There are three major problems. First, even based on a simplistic look at the data, it’s flat out wrong. Take a look at this chart that shows the actual manufacturing employment in China. (You may note that this chart only goes back to 1998, and that the peak of employment  underlying most claims was in 1996—more on that in a bit.)

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Strangely enough this graph looks nothing … Read the rest

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Robert Gordon’s Cassandra World

The Federal Trade Commission has rules about unfair and deceptive advertising.   Too bad they don’t apply to academic papers, because if they did Robert Gordon would be facing an FTC inquiry.   His new Cassandra-like paper, “The Demise of U.S. Economic Growth”, has little to do with U.S. economic growth.   Rather it is focused on other factors like transfer payments, taxes, and income inequality.  He should have titled his missive “The Demise of Robust After-Tax Income Growth for Low and Moderate Income U.S. Workers.”   But that’s nowhere near as catchy as his chosen title.

Gordon’s new NBER paper restates his slow-growth forecasts from two years ago, which come in turn from his long tradition of dismissing the potential of technology to drive productivity. This time he is careful to label his more controversial “growth headwinds” (slower innovation and continued globalization) as “speculative”.  Still, he fails to make a more convincing argument for an overall growth slowdown. This is partly due to his reliance on assumptions about education, inequality, and globalization, coupled with a fundamental lack of understanding of the nature of 21st century innovation. But it also … Read the rest

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Two Cheers for Martin Baily’s “U.S. Manufacturing”

It was with great interest and mostly pleasure that I read Martin Baily and Barry Bosworth’s new article in the Journal of Economic Perspectives, “U.S. Manufacturing: Understanding Its Past and Its Potential Future.”

The article attempts to analyze recent trends in U.S, manufacturing performance, including output and employment. This is an area ITIF has been working on for a number of years. And in the past, Baily has been skeptical of our analysis, which claimed that U.S. manufacturing was in fact worse off than official statistics, in part because of the overstatement of computers and electronics manufacturing output. So it was with great delight, and some surprise, to see that Baily and Bosworth have now embraced this analysis.  As they note, the fact that measured manufacturing output’s share of GDP has remained stable “is largely due to the spectacular performance of one subsector of manufacturing: computers and  electronics.” In fact, as ITIF showed, they also show that by taking out computers, overall real manufacturing output fell from 2000 to 2011, something that is unprecedented in our almost 250-year history.  They also rightly point out that the massive … Read the rest

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Grasping at Luddite Straws

The current issue of the New York Review of Books features an article by Harvard economist Benjamin Friedman, “Brave New Capitalists’ Paradise’: The Jobs?” which is yet another reminder why we should not let economists make economic policy.

Freidman starts off by rightly pointing to the period from after WWII to the early 1970s as a golden era of low unemployment and high median income growth. He then rightly points to slower income growth over the last 20 years. His solution: less technology and lower productivity.

For Freidman has joined the ever growing neo-Luddite movement in America that mistakenly attributes our economic problems to too much technology and automation. He writes, “New technology that enhances the productivity of labor… means less labor input is needed to produce what was made before.” So far so good. But he goes on to write that “increasingly over the last quarter century, the balance [of less labor for existing goods plus more labor for new goods] indeed appears to have shifted [toward less labor].”

Why? Because “the pace of labor saving technological change has accelerated.”  Okay, let’s stop here. First, of all productivity growth … Read the rest

This is a picture of Ray Kroc's first McDonald's restaurant in Des Plaines IL USA - now a museum.

Let them Eat the Dollar Menu

Making the rounds on the internet this week is a budget tool for McDonald’s employees, put together by McDonald’s and Visa. It’s depressing.

The budget is unrealistic–it neglects costs like gas and food and relies on a person working 74 hours a week at the minimum wage.

Other sites have done a decent job of explaining why it is hard to live off a minimum wage. Let’s take a minute to think about how we got here, though. Why do we have people working for such terrible wages?

Let’s go over a few common explanations. (The first two are not particularly convincing.)

1. McDonald’s is greedy. McDonald’s should pay their workers more.

Well, yes: McDonald’s is greedy. But it’s greedy because it is a legal entity explicitly designed to be greedy—that is, maximize shareholder value. While I’m all for companies paying high wages and getting high value from their workers, and also increasing the bargaining power of workers, currently the trend is clear: corporations will pay wages ” the market will bear”.

2. Consumers are cheap. People need to consume more responsibly.

Are we complicit … Read the rest