Race to Innovate

Competitiveness, Manufacturing, and Trade Policy Analysis

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Congress Needs to Prioritize TPA Passage

Today, U.S. Trade Representative Michael Froman will address the 114th Congress regarding the necessity of passing Trade Promotion Authority (TPA) as a predicate for completion of the ambitious U.S. trade agenda. TPA allows the President to “fast-track” trade agreements for approval or disapproval by Congress; essentially, TPA asks the House and Senate to accept or reject a trade agreement, without amendment, within 90 days of its submission to Congress by the President. The process enables the United States to negotiate more beneficial trade agreements with other countries, in part because of the reduction in approval time compared to other pieces of legislation (that often languish in committee markup) and because it incentivizes foreign countries to make good faith trade negotiations with the United States, since they know that Congress cannot rewrite the deal.

Presidents need fast-track negotiating authority because the simple reality is that finding consensus on trade agreements becomes nearly impossible if all 535 members of Congress get a chance to rewrite the terms of trade agreements American officials have spent painstaking years negotiating with multiple foreign partners. And as Representative Froman wrote in a recent Foreign AffairsRead the rest

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Mobile Telecom Offers Enormous Benefits, Finds New Report

Boston Consulting Group and Qualcomm have just released a new report examining the impact of mobile devices on the economy, focusing on the benefits mobile brings to small businesses and consumers in six countries including the United States, Germany, Korea, Brazil, China and India. The authors estimate that mobile technologies increase consumer welfare by the equivalent of 10 percent of total income in developed countries, and 20-45 percent of total income in developing countries. In fact, the total value that mobile brings to consumers is estimated to be more than double the size of the of the entire mobile industry revenue.

These economic gains have been enabled by remarkable technological progress. Global average cost per megabyte has declined from nearly 98 percent between 2005 and 2013, while maximum data speed has increased from ~10 to 250 mbps over the same period. These vast changes in cost and performance have made mobile technology affordable to billions of people around the world. Even so, more technological progress is necessary: 90 percent of mobile technology users report having problems with their connection. 5G and 6G technologies will continue to improve access and connectivity … Read the rest

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Can Competition Hurt Innovation?

A new NBER paper, “Starving (or Fattening) the Golden Goose?: Generic Entry and the Incentives for Early -Stage Pharmaceutical Innovation” (summarized here), asks whether competition from generic drugs disincentivizes research. The authors, Branstetter, Chatterjee and Higgins, find that this does broadly seem to be the case: drug development activity decreases after generic drugs are introduced. This result highlights the important tradeoff between research and consumption. When consumers pay for drugs, intellectual property (IP) policies play a large role in determining how much of that cost goes toward future drug development.

Pharmaceutical markets are risky: drug development takes 12 years from initial pre-trial preparation to bringing a drug to market, and between the complexity of the human body and the extended regulatory approval process only a small proportion of drugs make it all the way to market. Of the ones that do, a small minority make up the large majority of profits.

This riskiness means that policies play a critical role in getting pharmaceutical markets to work correctly: if companies do not have incentives that outweigh the risks, they will not invest in researching new drugs and bringing them … Read the rest

Pill Box

IPRs and Access to Medicines: New Evidence

Intellectual property rights (IPRs) attempt to balance static and dynamic efficiency. By allowing innovators to appropriate a greater share of the value generated from their ideas, IPRs can create incentives for investment in research and development (R&D). With regard to pharmaceuticals for developing countries, incentives for drug development are critical, since many diseases prevalent in developing countries lack appropriate treatments. However, those in the global health community often allege that prices of new innovative drugs under patent make them unaffordable to most people in developing countries because of the absence of generic competition.

Thus, understanding the effects of IPRs on access and affordability are important for researchers, policymakers, and firms. In December 2014, Margaret Kyle and Yi Qian published a new paper investigating this with the National Bureau of Economic Research. Titled Intellectual Property Rights and Access to Innovation: Evidence from TRIPS, the authors examine the effect of pharmaceutical patent protection on the speed of drug launch, price, and quantity in 60 countries from 2000-2013.

The paper begins by noting that though the introduction of IPRs is an endogenous decision taken by policy makers, developing countries were required by … Read the rest

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Everybody Needs STEM Talent

Evidence of the  shortage of Science, Technology, Engineering, and Mathematics (STEM) talent in the United States is plentiful. However, in an effort to stop immigration of high-skilled STEM workers, left wing advocates argue that there is no shortage. A new twist to their argument is to claim that STEM graduates do not always go into STEM fields and therefore are not in short supply. This reasoning falls apart rapidly. First, the U.S. Census Bureau definition of STEM graduates and workers, which is used to make this argument, includes psychology and social science majors, which are not what most people think of when considering STEM occupations. But second, it ignores the glaringly obvious point that in today’s technology-driven economy, all sectors and industries-not just those classified as STEM fields-have a growing need for STEM talent.

To further this flawed argument, the Economic Policy Institute (EPI) has recently launched a new website ostensibly designed to increase transparency into the H-1b and other visa programs, but in function serves to argue that the jobs that are being filled by guest-workers are jobs that American’s would otherwise fill. Unfortunately, the reasoning behind their … Read the rest

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What’s the difference between an engineer and a half-priced TV?

President Obama’s recently announced immigration reforms, which in addition to offering deportation amnesty allow foreign graduates of U.S. universities to stay and work longer, are a step in the right direction for U.S. companies desperate for high-skilled workers with science, technology, engineering, and mathematics (STEM) skills. However, despite overwhelming evidence of a STEM shortage, Hal Salzman, a Research Associate with the Economic Policy Institute,once again claims that workers are available if companies are only willing to pay for them, stating “[Companies] may not be able to find [high-skilled workers] at the price they want. But I’m not sure that qualifies as a shortage, any more than my not being able to find a half-priced TV.”

After reading this, I was able to come up with a few reasons why engineers are not comparable to half-priced TVs, why this analogy falls apart, and one very important similarity which Salzman’s argument overlooks.

First, while the hypothetical TV was half-priced, companies are already paying top dollar for skilled workers. STEM workers earn twice the national average, with a median wage of $78,270 in 2012.

Second, TVs, as consumer goods, are usually not essential. … Read the rest

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Preempting International Harmony: The New British Tax on Overseas Profits

Earlier this month, the United Kingdom announced a new “diverted profits” tax on the profits of foreign companies operating in the United Kingdom. The government’s parliamentary majority will allow the government to implement the tax with few delays. Doing so would be a mistake, however. Although the new tax tries to address a real problem with the implementation of corporate taxes in the modern economy, a new international process led by the OECD already exists to deal with exactly this kind of issue. The effort recently issued a series of major reports and is scheduled to make final recommendations next year. The British government should delay implementation of its new tax so that it can act within a multilateral context designed to deal with the larger issues involved.

The issue of tax competition, like that of inversions, has become confused recently, with both legitimate and illegitimate activity getting thrown into the same category. Despite the unease of some countries, there is nothing illegitimate about a sovereign country lowering its corporate tax rate in order to attract foreign companies. It is immaterial whether in doing so they reduce the size of … Read the rest

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New Evidence from Canada: Tax Policy Does Affect Research Spending

In a new study published by the National Bureau of Economic Research, three economists study the effect of a recent change in Canada’s research and development (R&D) tax credit on subsequent spending by small companies. The question is especially interesting because small firms may lack sophisticated tax advisors, earn few profits and thus have a lower tax liability against which to deduct tax credits, and have a harder time financing the fixed costs that come with additional research.

In “Do Tax Credits Affect R&D Expenditures for Small Firms? Evidence from Canada,” the authors find that firms that qualified for a larger tax credit did spend more on R&D in the following years compared to firms of similar income whose tax situation did not change. They also find evidence that the refundable nature of the credit made a significant difference.

According to the paper, Canadian tax law allows all countries to deduct 100 percent of research performed in Canada from their taxable income. It also provides all firms with a non-refundable tax credit of 20 percent of qualifying expenditures. However, for small- and medium-size companies (determined by the previous … Read the rest

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Piracy is Unstoppable (Like MySpace)

On Tuesday, Swedish officials shutdown the notorious illegal file-sharing website The Pirate Bay, striking a serious blow against the content thieves that have sucked millions of dollars out of the U.S. economy. Rushing to defend The Pirate Bay, however, was Caitlin Dewey, a blogger at the Washington Post focusing on Internet and digital culture. On her the blog The Intersect, she wrote an article alleging that the removal of The Pirate Bay from the Internet will do nothing to stem the rise of online piracy. Indeed, she argues that The Pirate Bay, “has done something a bit more significant, and a bit more permanent, too: It’s made digital piracy a casual, inarguable part of the mainstream.”

First, her argument that because piracy is common today, it will be common tomorrow reflects a surprisingly poor understanding of the history of the Internet (especially for a tech blogger). If there is one lesson from the Internet economy it is that nothing is permanent. This applies not only to website like MySpace, but also online behavior: how often are you instant messaging these days?

Second, by alleging that piracy is an inevitable part … Read the rest

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Think the Trade Deficit Couldn’t Get Any Worse? Think Again

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 … Read the rest