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Neoclassical Nonsense

Innovation Economics and Competitiveness commentary


Policy by “Sunday Drivers”

I understand that experts are not the only ones who have the right to comment on complex policy issues. And that experts are sometimes wrong and often ideological in their views. But at least with experts, they have spent time studying the evidence before offering their advice to policymakers. Alas, the same cannot be said of some Sunday newspaper columnists. Case in point, pieces by op-ed writers in the Post and the Times.

The first comes from Tom Friedman who makes the claim in “No to Keystone. Yes to Crazy” that “Nothing would do more to clean our air, drive clean-tech innovation, weaken petro-dictators and reduce the deficit than a carbon tax.” Really? As ITIF has shown, many European nations have a defacto carbon tax in excess of $400 a ton (ala their massive gas taxes) – a carbon tax 20 times higher than anything that is remotely politically possible in the United States and they have even fewer electric cars than we do. Carbon taxes don’t drive the kind of breakthrough zero carbon innovations the world so desperately needs; they lead businesses to tweak existing

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President Obama at budget meeting Roosevelt Room

Another Reason Presidents Shouldn’t Appoint Neoclassical Economists to the CEA

Not content with publicly contradicting the President that hired her once, Christina Romer is at it again, criticizing the President’s minimum wage proposal. Romer first criticized the President for having the audacity to say that manufacturing was more important than say, retail trade. For Romer, the former head of the President’s Council for Economic Advisers (CEA) under Obama, this was apostasy. Didn’t Obama know that all industries are equal and picking manufacturing for support was industrial policy? And with this latest critique, Romer is joining on the neoclassical pile attacking the President’s proposal to raise the minimum wage; which if you are a card carrying neoclassical economist is mandatory, or else they don’t let you attend the next AEA meeting.

Of course, as I pointed out, neoclassical economists like Romer analyze the minimum wage through the lens of their narrow and misleading doctrine, leading them to believe it distorts markets and leads to fewer jobs. But from an innovation economics perspective, a modest increase in the minimum wage will boost productivity and will not lead to net job losses. Romer would instead have government expand the earned

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Frame Breaking in 1812

Revenge of the Luddites

Originally posted on Ideas Lab.

With the iPhone 5 in stores and a new iPad Mini on the way, we seem to be in an era when innovation blossoms on a daily basis. Yet despite these much-ballyhooed examples, America could be achieving far more innovation if not for a growing anti-innovation “neo-Luddite” movement. Named after Englishman Ned Ludd, whose followers destroyed textile machines at the beginning of the Industrial Revolution, today’s neo-Luddites view innovation not as a force for progress to be encouraged, but as something to be stopped, regardless of the benefits innovation brings.

A generation ago, neo-Luddites were firmly ensconced in Europe, providing Americans with amusement and occasional frustration. Only in Europe could a government (the Swiss) restrict research into bioengineered plants because plants have “feelings” which deserve respect. Where else but in France would protesters uproot genetically modified grapevines at the National Institute for Agronomic Research while others “boss-napped” managers who had the temerity to announce layoffs when sales plunged.

If Europe embraces the “precautionary principle,” when it comes to innovation, America historically has embraced the “anticipatory principle.” Indeed, it’s hard to image Walter Ehret’s stirring 1950’s

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The Real Reason Why Washington Should Care About Manufacturing

Manufacturing has been the focus of much attention lately — a key theme of President Barack Obama’s Inauguration and State of the Union addresses and the subject of numerous recent books and articles. But why does manufacturing matter? Why should Washington in particular care? Most commentators miss the real reason.

And getting the answer right is imperative because many economists, like Nobel Laureate Gary Beckerand Columbia’s Jadish Bhagwati, persist in trying to convince policy makers that America can thrive without manufacturing, and in fact would be better off without it.

Here are some reasons that don’t really matter.

Manufacturing is inherently better than services.

The notion that making a widget is better and more ennobling than selling it or marketing it is simply wrong. Both produce income and output.

Manufacturing jobs pay more.

Sure, but manufacturing jobs pay just $2.50 more per hour than the average of $30.44 for all U.S. jobs. And despite the much-ballyhooed creation of some 500,000 manufacturing jobs over the past two years, many of the new jobs are on tiered wage scales and pay around $15 per hour. If we tie the

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Cash and W2 form

Minimum Wage/Maximum Growth

In his State of the Union Address president Obama proposed that Congress increase the minimum wage to $9.00 per hour.

Almost immediately a chorus of opposition based on neoclassical economics emerged, arguing that such a change would kill job creation. As former Bush Administration economist Greg Mankiw notes, “there is 79 percent agreement among his peers that a minimum wage increases unemployment among young and unskilled workers.” But let’s be clear, what Mankiw really means to say is a 79 percent agreement among neoclassical economists.

The neoclassical economic argument against the minimum wage is grounded in the view that if a worker and employer agree on a wage then this wage level must be welfare maximizing for both of them and by definition for society. The only thing a government regulated price for labor can do is distort labor markets and lead to less, not more economic welfare.

In fact, a higher minimum wage would spur economic growth, while also increasing economic fairness.

First, here’s why the President’s proposal won’t kill jobs. The argument among neoclassical economists on the minimum wage is too narrowly focused on microeconomics. In other words,

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HTTP Arrow

My State of the Net Comments on the Importance of the Internet to Economic Growth

I had the pleasure of presenting, along with Marvin Ammori, at last week’s State of the Net Conference on the economic impact of the Internet and how to maximize it.  Among the points I made on the impact:

  • The Dot-com domain makes global economy $1.5 trillion larger and will add $3.8 trillion annually to the global economy in 2020 – more than the total GDP of Germany
  • IT workers contribute significantly more to productivity than non-IT workers and IT has more impact on productivity than non-IT capital
  • Between 2001 and 2011, jobs  in IT occupations increased 22% while non-IT jobs were stagnant. Between 2007-2011, jobs declined 4.5%, while IT jobs up 6.8%, contributing $37 billion to the economy.

Among the points I made on how to maximize its impact:

  • First, we should recognize that Internet freedom does not mean Internet anarchy. In other words we should promote Internet innovation and free speech, but also work to limit Internet crime (like malware and copyright theft).
  • Second, we need to get a clearer overall framework to guide Internet policy. Right three competing narratives compete for attention: Abdicate, Regulate, Facilitate. Abdicate says that
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Countries in Financial Recession Graphic

No Structural Change in the Economy: Are You Kidding

Image: Countries in Recession as of 2009. Red indicates countries officially or unofficially in recession.

There is a booming cottage industry among neoclassical economists to explain the Great Recession and unprecedented lagging US economic recovery as simply a function of the business cycle. The view is that this is just a deep down cycle and if we are patient all will be well. They believe this of course because the very nature of neoclassical economics cannot acknowledge structural change in economies.

The latest addition to this group-think comes from neoclassical economists Edward P. Lazear and James R. Spletzer in a non-peer reviewed article in the NBER Journal titled The United States Labor Market: Status Quo or A New Normal?. They argue that “[T]he current recession does not appear fundamentally different from prior ones, except that it is worse.”

And their logic behind such a claim? They claim that the relative decline in U.S. manufacturing jobs has been under way for a half century. Wow, this is truly stunning. U.S. manufacturing employment declined by just 2 percent in the 1990s, but as ITIF has pointed out, it fell by

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Immigration Policy: Is the U.S. the International Champ, or Chump?

Let’s consider an analogy. Consider a sports franchise. This franchise has the best playbook, best players in the lineup and arguably great management (staff and coach). This team has a great fundamental game, and recently won 3 national championships. But the team faces a problem; their super-stars are getting older, and some are in the process of moving on. New players are still interested in playing for the team because of their recent success, but there is a strange problem facing the team.

They spend a significant amount of their money and time training newly drafted team members. But just as the athletes are hitting their prime, the team always seems to trade their up-and-coming stars to other franchises for their most inexperienced players. They still have a few of the older, well-known players, but they aren’t retaining any of their up-and-coming talent. So, where do you think this franchise is headed?

It’s pretty clear that a successful team’s lineup needs to have players in all phases of their career so that there is a smooth transition. Without this, you end up like my basketball team during the first decade

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Man Digging Hole in Ground

Spoons: For Eating From the Trough of Growth, or for Digging a Pointless Hole?

Today, prominent economist Paul Krugman posted an op-ed on the negative impacts of technology and productivity gains on the economy. Krugman claims that the economy is “deeply depressed” and that this can be primarily attributed to two sources: (1) losses of jobs due to technology driven productivity gains and (2) monopolists capturing all the profit for themselves.

For his second point,  Krugman cites as evidence that “recent college graduates had stagnant incomes even before the financial crisis struck.” Unfortunately, this dismisses the work done by Hanushek and Helpman that has revealed that quality of education is the key, not number of years of education. The fact is quality of education has fallen over time at both the primary and tertiary levels, while quantity has increased specifically at the tertiary level. As of a 2006 study, among U.S. college seniors, just 34, 38 and 40 percent were proficient in prose, document, and quantitative literacy, respectively. Therefore, the average wage that a college graduate receives should be dropping in real terms. It’s not about power-struggles, it is about lack-of-skills.

Krugman goes on to claim “that technology has taken a turn that

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No More Growth? Let’s not be so Hasty: An Assessment of Robert J. Gordon’s Recent Working Paper

The single most important question regarding the future of the U.S. economy is whether productivity growth will be robust going forward. Recently there has been vigorous debate over this question, with some like MIT’s Erik Brynjolfsson arguing for robust, and others like George Mason’s Tyler Cowen arguing for stagnation. The newest foray into this debate comes from Northwestern’s noted economist Robert J. Gordon, through a non-peer-reviewed working paper published by the National Bureau of Economic Research (NBER) entitled “Is U.S. Economic Growth Over?  Faltering Innovation Confronts the Six Headwinds.” Gordon’s paper has received widespread attention for his provocative thesis that U.S. productivity growth is essentially over and that the average American will be no better off, and likely worse off in the future. No wonder neo-classical economics is called the dismal science. Luckily, innovation economics can be called “hopeful” science, for as I will explain; I believe Gordon’s thesis is fundamentally wrong.

Gordon’s paper is framed in two parts. First he argues that productivity growth (output per hour) in the recent past has been weak and will cascade towards zero and remain there for the foreseeable future. Second, he asserts

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