Economics

cap-innovation-economy

ITIF hosts Dr. William Janeway

Economist, venture capitalist, and co-founder of the Institute for New Economic Thinking Dr. William Janeway stopped by ITIF this week for a discussion about his new book, Doing Capitalism in an Innovation Economy. Dr. Janeway presented a compelling view of the economy and touched on a number of important issues along the way.

Janeway explained that the government plays a critical role in innovation by providing research funding through institutions such as DARPA and the NIH, by leveraging the buying power of the federal coffers, and by creating policies that encourage business investment in R&D. Economists have long understood that private markets fail to allocate adequate resources to innovation and research: the benefits are too hard for individual corporations to capture. For this reason, policies like the R&D tax credit and public investment in basic research have long been uncontroversial.

Contrary to what recent high-profile failures like Solyndra might lead people to believe, government policies to spur innovation in the United States have had great success. This is apparent in the vast amount of money the private sector has poured into IT and Biotech businesses based on initial … Read the rest

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Decoupling Revisited: Who is reaping the benefits of economic growth?

Economic growth is something that almost everyone agrees is important: it’s how we enlarge the pie so that incomes can rise. Still, it is theoretically possible for the economy to grow with the benefits only going to corporate profits or a few wage earners at the very top. When this happens it is called “decoupling” because wages and productivity stop rising in tandem. Recently, a number of people have been arguing that decoupling is indeed occurring.

However, it turns out that can be more difficult than you expect to determine whether decoupling is happening, and, if it is happening, what might be causing it. Simple graphs can be deceptive: What is meant by wage growth? Should mean or median wage be used? What subset of workers does it make sense to study? Should non-wage benefits be included? Additionally, there may be significant measurement issues associated with certain statistical series, particularly those involving inflation and measurements of value added because of their significant complexity.

Previous work from ITIF has shown that many of the claims of decoupling may be overstated due to the rise in benefits and several other factors. Now, … Read the rest

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“Patent Box” legislation offers unique incentives for R&D

As countries compete for corporate R&D locations–and the attendant jobs and technology spillovers–tax policy is an important tool governments need to be aware of. There are several types of tax policies that attempt to attract R&D: tax credits for R&D spending, special tax allowances for R&D spending, and tax rate reductions on R&D output (usually based on patents). While it is well established that R&D spending and tax allowances tend to increase the quantity of R&D spending, a new paper by UK researchers Ernst, Richter, and Riedel finds that reductions in patent income taxes increase the quality of corporate research. Higher-quality research means effective R&D  that has better benefits for the entire economy.

These research results are good news for the UK, which recently enacted “Patent Box” legislation, giving companies a 50% discount on profits they earn from patents (down to 10% from their planned 2015 overall corporate rate of 20%). Other countries that offer similar tax breaks for patent income include Luxembourg, the Netherlands, and Belgium.… Read the rest

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Universities are Innovation Engines: New Evidence

University spinoffs more innovative, more successful than comparable firms

A new working paper by Swedish economist Andreas Stephan asks whether startups that were born as spinoffs from public universities are more innovative than similar, non-spinoff firms. Using a 2004 survey of East-German firms, Stephan compares the innovativeness of firms as measured by their patent applications and the originality of their patents. Even compared to firms of a similar age, industry, and location, the paper finds that university spinoffs do a better job of innovating.

The obvious lesson here for economic policy is that universities are studying useful things, and that we should have policies that encourage their transition from academic papers to real-world businesses. Business incubation has been on the U.S. national agenda for decades—since at least the passing of the 1980 Bayh-Dole Act—but there is much more that we can do.

For instance, Stephan finds that spinoff firms were more successful due to their collaboration, their proximity to universities, and their ability to get public research grant funding. All three of these traits are easy to translate into policy. Stephan also notes that even those firms that were … Read the rest

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More Evidence that Immigration is Good for Innovation

In the United States the national debate on immigration often overlooks one of its most important effects: its impact on our innovation economy. A new NBER paper by William Kerr highlights the crucial role that immigration plays in national economic growth.

High-skilled immigrant workers, that the United States allows in through the H-1B visa program, make significant contributions to economic growth in a number of ways. First of all, there is a disproportionate amount of “superstar” scientists such as Nobel Prize winners that come from immigrant backgrounds. These scientists make breakthrough contributions that often have enormous impacts on our science and technology and thus ultimately our economic growth. Second, immigration provides a large number of other STEM workers, workers that form the backbone of our productive capacity. Since 1995 immigrants have provided the majority of the increase in stem workers in the United States.

These inflows of workers clearly benefit the economy. The paper finds that “immigration is associated with higher levels of innovation for the United States and that the short-run consequences for natives are minimal.” Long-run consequences are less well understood—high-still immigrants do still compete with U.S. natives … Read the rest

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Chile Catches a Wave to the Future

If those who cannot remember the past are condemned to repeat it, then those who cannot imagine the future will never get there.

Chile is looking toward the future. Their National Innovation Council for Competitiveness (CNIC) recently released a report outlining Chile’s strategy for innovation, Surfing toward the Future (in Spanish). The report is summarized by Irving Wladawsky-Berger at the Wall Street Journal and his personal blog.

CNIC focuses on four areas: education and motivation, biology and life sciences, energy and sustainability, and “development of an innovation culture.” The latter is somewhat vague, but it appears to mean keeping society simultaneously forward-looking and adaptable, able to “ride the waves” of future technologies and societal changes. Wladawsky-Berger quotes the report: “Though the surfers cannot go anywhere they please,  it would be naive to pretend to control the sea,  by remaining in constant harmony with the waves and receptive to what appears, they can find the space of stability and a path forward.”

This is an apt description of the problem of economic planning: bull-headed programs have a way of drowning in the sea of market realities. This is because our … Read the rest

Idaho Research Lab

New Evidence in Favor of Government R&D Funding

A new policy research working paper from the World Bank has combed through recent evidence on government funding for Research and Development, and finds that government funding significantly increases R&D investment. Paulo Correa, Luis Andres, and Christian Borja-Vega’s paper, “The Impact of Government Support on Firm R&D Investments: A Meta-Analysis” analyzes nearly 40 papers published worldwide from 2004-2011.

Although there is a large variation in the type of R&D funding examined, the study methodologies, and location of the studies, the results are clear: government funding boosts R&D spending. The paper tackles another important question as well—whether government spending “crowds out” private sector spending. (Crowding out is the idea that private companies will not invest if the government is doing it for them.) The paper finds evidence of the opposite, however, with data that shows public funding actually incentivizes firms to invest more in R&D.

(photo credit Idaho National Laboratory)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

It's 2010. Where's my jetpack?

Innovation is Still the Answer

In gloomy economic times such as these, we naturally look around for sources of blame. Former saviors make easy targets.

The tech boom of the late 1990s was great for the U.S. economy: GDP rose, unemployment dropped, and median incomes even made their most significant gains since the 1970s. Most people understood this success was due to new technology–and to information technology in particular–and they expected IT to be a main driver of the economy for years to come. Our bold New Economy had arrived, with all the convenience and style of America Online.

But the 2001 recession shook our faith in technology, and in the aftermath of the 2008 financial crisis many have turned on our would-be robotic saviors. Their disillusionment takes on the forms of disappointment, fear, or both.

The disappointed see our IT revolution, chock full of smartphones and big data, and ask, what good has it made in the real world? Recent technologies have changed our lives, certainly, but not with the productive power of previous advances. Instead: we order takeout via the internet instead of the phone; we watch YouTube at work in … Read the rest

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Unintentional Privatization

Conservatives opposed to government spending often argue that the market will do a better job and that public provision of goods crowds out market solutions. In some cases they are right, but there is no guarantee the market will solve the problem. Take the recent example of a government statistical program that was a casualty of this spring’s sequester.

We were disappointed when we learned that the Bureau of Labor Statistics would be shutting down its International Labor Comparisons program, which provides some of the highest-quality comparative international data on labor markets and productivity. Anyone who has worked closely with international data knows that cross-country comparison is no easy task: the multitude of different labor regulations, market types and definitions, combined with the sheer scale of aggregation make the construction of reliable data anything but easy. Important indicators in one country may simply be meaningless in another country.

It appeared for several months that the economics and policy community would just be out of luck. Fortunately, The Conference Board, a non-profit research and advising organization, has just announced that it will continue updating the series and provide the data … Read the rest