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Neoclassical Nonsense

Innovation Economics and Competitiveness commentary

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

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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

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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

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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

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Amateur Political Philosophy

Noted conservative economist and former Romney advisor Greg Mankiw has just written an article with the unabashedly conservative title “In Defense of the One Percent”. The pile-on has already begun, with an excellent takedown at the Economist American Politics blog, and good pieces as well at the left-leaning CEPR and Unlearning Economics.

Mankiw defends the rich because he believes they have brought us value commensurate with their wealth. This is the essence of conservative neoclassical economics: markets allocate value the way that value should be allocated. There are theoretical exceptions to this rule, of course, like rent seeking or other market failures, but real conservatives remain “unconvinced” that such exceptions are to be found in the real world.

Mankiw prefers the idea that markets can still work as intended (optimally allocating resources) without being entirely “fair”: insufficient high-skill workers and “superstar” gains can drive inequality even in perfect labor markets. Mankiw is sympathetic to these arguments because they allow him to claim that everything is working as intended: there’s nothing to see here, the markets are working, please move along.

But wait a minute.

What Mankiw would have

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Is Technological Change Speeding Up? How Can You Tell?


Evidence of technological change is all around us—smartphones, self-driving cars, amazing drug discoveries, and even drone warfare.  With all of this novelty many futurists and other pundits breathlessly proclaim that technological change is speeding up. In  fact, some go so far as to claim that the pace of innovation is not only accelerating, it is accelerating exponentially (which, anyone with a rudimentary understanding of exponents can see, is utter nonsense). Peter Diamandis, author of Abundance: The Future Is Better Than You Think, argues thatWithin a generation, we will be able to provide goods and services, once reserved for the wealthy few, to any and all who need them. Or desire them.”

But is the rate of technological change really getting faster? Other commentators, including some notable academic economists, actually think the opposite—that we have run out of the “easy” technological advances and new breakthroughs will take much more work.

Questions about the rate of technological change may seem trivial—will I get one hoverboard or two?—but getting a handle on an answer is critical because in economic terms, technological change equals economic growth. And growth has powerful implications for

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Robot with Computer Chip

Robots Are Good for Us: Really, They Are!

The Smart Manufacturing Coalition recently conducted a survey of Americans to get their views of whether modernizing factories with advanced technology and automation was a good or bad thing for the economy.

Amazingly, nearly two-thirds of respondents said it either made no difference or actually hurt the economy. Half of those making $35K to $50K actually said it has hurt the economy.

Wow, have these people not taken economics? Do they want to go back to farms with mules and factories with hand files? Have they not read the newspapers about how our manufacturing sector has been decimated by overseas competition?

Well wait, they probably have not read those newspaper articles, not because most people no longer see that they have a civic responsibility to read the news, but because by and large, the media doesn’t write these stories. Rather, they almost always write that when it comes to explaining the decimation of U.S. manufacturing jobs, the cause is automation. In fact, as ITIF and others have shown, the loss of U.S. global competitiveness has accounted for over half of manufacturing job loss over the last decade.

I suppose

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What’s the Right Path for Manufacturing?

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

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The Epistemic Sequester: Budget Cuts Kill an Important Statistical Program

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

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Why the 2000s Were a Lost Decade for American Manufacturing

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,

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