Innovation Economics and Competitiveness commentary
Nowhere is today’s highly polarized political climate more visible than in the debate on trade, which has been dominated by two polar opposite viewpoints. The first sees trade as a white knight capable of fixing all our woes, no matter the circumstances, and the second sees it as an evil tyrant that strips people of their wealth. Championed by supply-side economists and fearmongering protectionists, respectively, these rigid articles of faith have crowded out more rational and nuanced analyses. This is unfortunate, because both extremes are wrong, albeit in different ways, and the focus on absolutes makes it almost impossible to seriously discuss or address loss of American manufacturing strength.
Consider, for example, the claims of commentators such as Scott Lincicome and Michael Hicks, who echo the unabashedly pro-free-trade logic of conservative economists like Milton Friedman when they argue that all of our job losses have been lost because of productivity. Hicks writes, “Had we kept 2000-levels of productivity and applied them to 2010-levels of production, we would have required 20.9 million manufacturing workers. Instead, we employed only 12.1 million.”
This assertion relies on a rigid, supply-side economic model that
Perhaps without realizing it, the Obama administration sent Congress another signal that it is not serious about passing corporate tax reform this year, even a narrow bill limited to the international aspect of corporate taxation. Speaking at a conference devoted to the corporate taxation of intellectual property in a global economy, the chairman of the President’s Council of Economic Advisers, Jason Furman, listed several reasons why an “innovation box” (sometimes known as a “patent box”) would be bad policy. The problem is that an innovation box is one of the few serious components of corporate tax reform that has drawn interest from leaders in both parties in Congress. By preemptively ruling it out without proposing a serious alternative, the administration left little room for finding common ground with Congress.
There is widespread agreement that the U.S. corporate tax system is broken. In addition to imposing a significantly higher rate than most of its international competitors, the law taxes U.S. companies on all of their income earned abroad, but only when the income is brought back to the United States. This gives companies a strong incentive to keep foreign profits overseas.
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Looking at job records in the United Kingdom dating back to 1871, researchers as Deloitte have concluded that new technology continually creates more jobs than it destroys. As new technologies are implemented, historical data shows, savings on consumer goods have increased people’s spending power, freeing them to purchase a larger and more diverse basket of goods and services. This demand creates new jobs in expanding industries.
While technology tends to shift jobs between industries, the net effect is that employment goes up. Moreover, the jobs created tend to be jobs in caring, creative, technology, and business sectors, while jobs destroyed are more likely to have been dangerous, dull, and reliant on muscle power. For example, from 1992 to 2014, the number of farmers, company secretaries, metal workers, and typists are all down by more than 50 percent, but the number of nurses has increased by 900 percent. Technology, the report concludes, is a “job-creating machine,” and though up to 35 percent of U.K.
“Technology replaces workers, and we should be very afraid.”
Technological innovation spurs productivity gains, thereby encouraging economic growth. Of that much, we are certain. By studying the linkages between computer use and occupational categories, James Bessen, a professor at Boston University, finds that employment grows faster in occupations that use computers more, as compared to occupations with lower computer use. Occupations that use computers can attribute up to 0.9 percentage points of their employment growth to the use of computers. As a comparison, national employment grew on an average of 1.8 percent during the 1990s.
Why is this important? Naysayers make the case that jobs get eliminated when organizations adopt information technology, like computers. By this logic, occupations that use more computers should see employment grow slower, or even experience negative growth. But Bessen finds that computer use triggers an evolution of skill requirements, thereby increasing the need for some positions while reducing the need for other position within
The U.S. lost more than 5 million manufacturing jobs since 2000 (roughly a 30 percent drop), while nonmanufacturing jobs have grown by 8 percent. Understanding why is critical to developing the right policy response.
Unfortunately, too many apologists for U.S. manufacturing decline argue that manufacturing employment loss is a natural trend. They blindly follow the assumption that as economies get richer they naturally consume a smaller share of manufactured goods and a larger share of services. Therefore, we should expect manufacturing job losses.
New data from the St. Louis Federal Reserve Economic Data should hopefully put an end to these false claims. Recent analysis demonstrates that after adjusting for inflation, the share of real consumption of services has actually decreased slightly after reaching a peak in 1992. At the same time, durable goods manufacturing consumption is growing as a share of total consumption.
Accounting for inflation, services reached a peak of 70 percent of total consumption in the mid-1990s and have since declined to around 66 percent. This is not so different from the late 1950s when services made up 62 percent of total consumption. Meanwhile, the consumption of durable
In recent years what was once seen as crackpot economics has now become close to conventional wisdom: the notion that productivity costs jobs. Economists call this the lump of labor fallacy. As ITIF has written here, here, and here, it’s clear that the jobs problem of today has nothing to do with productivity and that we should not worry about productivity reducing the number of jobs.
But that has not stopped many talking heads and experts from opining that yes indeed, productivity kills jobs. One graph that has gotten and continues to get widespread attention is from Andrew McAfee and Erik Brynjolfsson’s book, The Second Machine Age, that shows that “productivity and employment have become decoupled.” [i]
But as any first-year statistics course will teach you, correlation does not prove causation. In fact, it is easy to get spurious correlations. Here’s one: The divorce rate in Maine is almost perfectly correlated with the per capita consumption of margarine.
In Brynjolfsson’s case, the relationship being examined merely shows two variables that happen to be increasing from 1970 to 2000, but there is no feasible underlying argument about how
What a difference a century makes. No, not in technological innovation, but in technological pessimism. As David McCullough writes in his new history of the Wright brothers, their discovery was met with near universal excitement and optimism, even in the face of setbacks, some of them fatal. Today, a century later, innovation and innovators are more often met with skepticism, approbation, and opposition.
Case in point is from Joe Nocera’s op-ed in The New York Times about Google’s driverless car effort, as part of its Google X project. Nocera relates how John Simpson, head of the nonprofit Consumer Watchdog, bought a few shares of Google stock so he can go to their board meeting to berate Google executives for developing an autonomous vehicle. Simpson noted that Google’s cars have been involved in 11 accidents (although all have been minor and none of them caused by the AV car itself). He also warned that the Google car would steal our privacy. In other words, he berated Google for trying to innovate what could well be one of the most important technological breakthroughs of the 21st century. Indeed, as I wrote
I expected that there would be a lot of critical responses to my argument that Emmanuel Saez had “cooked the numbers,” in his study of income inequality,to show that virtually all of income growth during the “recovery” after the Great Recession went to the wealthiest 1 percent. I had a strong feeling that most people would miss my narrowly framed argument and think that I was belittling the negative effects of inequality on our population. Despite attempts to inoculate myself from this criticism by showing the relatively low share of income held by the top one percent in 1979, various commentators have criticized me on several grounds: not discussing wealth inequality; not seeing the long rise in inequality; picking selective years to make my points; helping the right wing; overemphasizing the effect of transfers because of the rise of Social Security and Medicare and failing to appreciate the difficulties of middle class people and exaggerating the effects on the rich.
I have an odd intellectual history in that I was one of the first researchers to report on rising inequality in the late 1970s and 1980s, yet have for the
Senator and likely presidential hopeful Marco Rubio (R-FL) appeared on last Tuesday’s The Daily Show with Jon Stewart, promoting his new book and weathering an endless stream of jokes about his home state of Florida. While the discussion covered a range of policy ground, we wanted to highlight one comment by Senator Rubio that showed an all too common misunderstanding of innovation and automation.
Rubio said, “The concern I have about the minimum wage increase is that we have been told by the CBO and independent analysts that it will cost certain jobs. And that happens when some businesses will decide that well, you’ve now made our employees more expensive than machines so we’re going to automate. So in 5-10 years it’s going to happen anyway but this will accelerate this process, when you go to a fast food restaurant it will not be a person taking your order, there will be a touchscreen there that you will order from and when you get your order it will be right. [uneasy laughter] But the point is, if you make that person now more expensive than that new technology, they’re going
For a country that has not run a trade surplus since Gerald Ford was in office 40 years ago, the United States is surprisingly optimistic in its widespread belief that the trade deficit is going to eventually correct itself. After all, as tidy macroeconomic models of international trade show, a nation’s trade deficit should lower the value of its currency, lowering the cost of exports and raising the cost of imports, thereby gradually reversing the deficit. After all, the models show that in the long term, current accounts must balance.
As Martin Feldstein, former Chairman of the Reagan administration Council of Economic Advisors, predicts:
“The United States cannot continue to have annual trade deficits of more than $100 billion, financed by an ever-increasing inflow of foreign capital. The U.S. trade deficit will therefore soon have to shrink and, as it does, the other countries of the world will experience a corresponding reduction in their trade surpluses. Indeed, within the next decade the United States will undoubtedly exchange its trade deficit for a trade surplus.”
Unfortunately, Feldstein wrote this in 1987.
Far from his predictions coming true, the U.S. trade