Posts Tagged ‘ Michael Mandel ’

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Scale and Innovation in Today’s Economy

Wednesday, December 7th, 2011
Michael Mandel


Michael Mandel is the chief economic strategist at the Progressive Policy Institute and the founder of Visible Economy LLC, a New York-based news and education company.

by Michael Mandel

Conventional wisdom these days says that small is better when it comes to innovation and putting new ideas into practice. Large enterprises are typically thought of as hidebound defenders of the status quo, dominating by market power and brute force rather than technological and innovative prowess.

Yet reality is far more complicated than this simple small versus big distinction. As we all know many common-sense beliefs turn out to be only partly true, or not to be true at all.

In this policy memo we will reconsider the link between scale (size) and innovation. After 20 years where startups have rightly dominated the innovation headlines, we will show that the pendulum may be swinging back. As a result, there are reasons to believe that scale may be a plus for innovation in today’s economy, not a minus. We will then relate scale to government policy, U.S. competitiveness and prosperity.

The now-heretical idea that scale is an advantage for innovation actually dates back more than 60 years. Back then, Harvard economist Joseph Schumpeter, the inventor of the term ‘creative destruction’, suggested that large-scale firms were “the most powerful engine of progress.” Following after his work, economists developed what came to be known as the “Schumpeterian Hypothesis.” The first part of the Schumpeterian Hypothesis was the argument that bigger firms have more of an incentive to spend on innovation than a smaller one. For example, if we compare a company that manufactures 50 million t-shirts a year versus one that manufactures 10,000 t-shirts a year, the larger company is much more like to spend the big bucks needed to develop and test a new process for dyeing the t-shirts.

The second part of the Schumpeterian Hypothesis is the observation that companies with more market power might also be more willing to invest in innovation. The argument is that if a firm in an ultra-competitive market innovates, the new product or service is quickly copied by rivals, so that the gains from innovations are quickly competed away. Conversely, a firm with market power has the ability to hold onto some of its gains from innovation, so it may pay to invest in product or other improvements.

Together, these two conjectures are among the most controversial and most widely studied of economic theories. Economists and business experts have generated a long series of theoretical papers, econometric analyses, case studies, and anecdotal reports, examining the impact of scale on innovation.

After all this research, we can summarize the economic evidence for and against the Schumpeterian hypothesis in two words: It depends. Part of the problem is that innovation influences scale, as well as vice versa. A successful and innovative small or medium-size company will often grow to be a successful and innovative large company, which perhaps dominates its market because of its very success.

At the same time, the link between scale and innovation, positive or negative, depends on the economic environment. In this policy memo, we will suggest that the current U.S. economy is dealing with a particular set of conditions that will make scale a positive influence on innovation. First, economic and job growth today are increasingly driven by large-scale innovation ecosystems, such as the ones surrounding the iPhone, Android, and the introduction of 4G mobile networks. These ecosystems require management by a core company or companies with the resources and scale to provide leadership and technological direction. This task typically cannot be handled by a small company or startup.

Second, globalization puts more of a premium on size than ever before. A company that looks large in the context of the domestic economy may be relatively small in the context of the global economy. In order to capture the fruits of innovation, U.S. companies have to have the resources to stand against foreign competition, much of which may be state supported.

Finally, the U.S. faces a set of enormous challenges in reforming large-scale integrated systems such as health, energy, and education. Conventional venture-backed startups don’t have the resources to tackle these mammoth problems. Only large firms have the staying power and the scale to potentially implement systemic innovations in these industries.

We finish this policy brief with some observations about scale, innovation, and government policy. In particular, we raise questions about whether an aggressive policy of filing antitrust actions against America’s key technological leaders is really the optimal course for improving U.S. competitiveness, raising living standards, and boosting job growth in the U.S.

Read the entire memo.

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The Consumption Economy Is Dying—Let it Die

Tuesday, August 16th, 2011
Michael Mandel


Michael Mandel is the chief economic strategist at the Progressive Policy Institute and the founder of Visible Economy LLC, a New York-based news and education company.

by Michael Mandel

With the stock market plunging, we’ve heard plenty of warnings that a “pullback” in consumer spending could trigger another recession. Let me suggest an alternative. The last thing this economy needs is more debt-fueled consumer spending which mainly creates jobs overseas. Instead, we should be focused on boosting investment in physical, human, and knowledge capital.

Now, who am I to be dissing the American consumer? Don’t I know that consumer spending “accounts for 70% of economic activity,” as many economic reporters have written in recent weeks? (Indeed, if I have to read that number in another story, I might be forced to go all Office Space on a piece of expensive consumer electronics.)

It’s true that consumer spending creates economic activity. But it’s not true that all that economic activity is in the United States. Many of the consumer goods we buy are imported. If you buy a shirt or television, you are stimulating manufacturing jobs in China, or perhaps Mexico. You aren’t doing as much to stimulate jobs at home.

This is true across the economy, but a helpful example is the clothing, or apparel, industry. Since the fourth quarter of 2007, clothing purchases by consumers have increased by about 5% in real terms, according to the latest figures from the Bureau of Economic Analysis. Over roughly the same period, shipments from U.S. apparel factories fell by 31% in real terms, while apparel jobs fell by 26%. The winner: Factories in China and elsewhere making clothes for the U.S. market.

It’s not just clothes, of course. In many stores, it’s getting harder and harder to even find products that say “Made in the U.S.A.” That’s one reason why much of the economic stimulus escaped out the back door in the form of imports.

Now, this doesn’t mean imports are evil. When we buy goods from overseas, we generate some jobs in retail and wholesale. If you buy a shirt for cheaper than it would otherwise be if we made it here, you have more money left over to buy other things, like health care.

But the big problem with consumer spending is that if you buy a product made outside the U.S., it doesn’t encourage domestic investment. And that’s what we really need. In the past, a dollar spent on a shirt would start a virtuous circle, as the clothing factory expanded, adding more workers and buying new sewing machines. That investment in new machines, in turn, would create more business for the sewing machine company, who would then hire more workers who would need new shirts.

Today, the cycle is happening overseas. We have a genuine investment shortfall in the U.S., where both business and government are way below historical norms for spending on equipment, buildings, software, and infrastructure.

Consider this: Personal consumption in real terms is 11% below its long-term trend, based on the 1997-2007 period. That sounds bad enough. But nondefense government investment is 17% below its long term trend, as state and local governments cut back. And counting all private sector enterprises, nonnresidential investment is a stunning 25% below its long-term trend.

nonresidential investment.png

These figures are devastating for our economic future, both short and long-term. Low investment means fewer jobs and weaker productivity growth. The longer the investment shortfall lasts, the more damage it does. However, we’re not going to close the shortfall by encouraging debt-financed consumer spending. Instead, we need to redirect resources to productive investment.

Here’s a couple of examples of what we can do. First, I like to see the Obama administration publicly identify and applaud “investment heroes”: the top companies who are investing domestically in either physical capital or knowledge capital (R&D, design, and other forms of intellectual investment). The bully pulpit of the president can be a wonderful tool, if it directed toward the right cause, and this would send a signal of the importance of investment.

Second, Obama should come out in favor of countercyclical regulatory policy. We should accelerate the regulatory approval process during periods of economic weakness to boost corporate investment, just as countercyclical monetary and fiscal policy have been used to stimulate consumer spending. This is a message that has to be sent from the top to encourage regulators to consider the effects of their action on the economy.
The potential list of policies to boost investment goes on and on, including targeted infrastructure spending, as I described in my previous Atlantic piece, and perhaps a rationalization of the corporate tax code.

But what’s important is that none of these policies is about boosting consumer spending. If we want Americans to prosper, we need consumer spending to become less important to the economy, not more. In the end, we need a production economy, not a consumption economy.

The piece was originally written for the Atlantic.

Photo credit: Grace

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Where Americans Can Cut Back

Tuesday, August 9th, 2011
Michael Mandel


Michael Mandel is the chief economic strategist at the Progressive Policy Institute and the founder of Visible Economy LLC, a New York-based news and education company.

by Michael Mandel

Dollar billWhere can Americans cut back if the economy slips back into recession again?  After all the talk about the “new frugality” and the deepest recession in 75 years, it might seem like households have tightened their belts as much as possible.

Surprisingly, however,  the economic figures show several key areas where Americans have actually increased consumption compared to 2006, the year when housing prices peaked.  Judge for yourself whether we can cut back more or not.   (Note: all consumption changes are measured in inflation-adjusted 2005 dollars, comparing the 2nd quarter of 2011 with the second quarter of 2006)

1. Clothing — Consumption: + 8.9% since 2006

Despite the economic weakness,  Americans spent on clothing at an almost $350 billon annual rate in the second quarter of 2011. Nothing seems to stop the waves of inexpensive shirts, dresses, and coats  coming from overseas.  Clothing imports from China, especially, are up 37 percent since 2006, and Americans are snapping them up.  Perhaps we could buy a a few less t-shirts with funny sayings on them?

2. Personal care products — Consumption: +14.4% since 2006

We like to look our best, even in a recession. Perfume, makeup, shampoo,  shaving cream and razors, body gels–Americans spend about $100 billion a year on these personal care items.  Not only that, we’re spending more on imported cosmetics,  which are up 26 percent since 2006.  Are all those goos and gels  really necessary?

3. Televisions — Consumption: +287.4% since 2006

No, that’s not a misprint.  The government adjusts for the size of the television, among other things, and the average size screen has soared since 2006.   If we don’t adjust for size and other variables,  Americans are spending 12.7% more on televisions today compared to 2006.  Total personal consumption outlays on televisions, according to the BEA: About $40 billion, pretty much all imported.  Do you really need an even bigger TV?

4. Alcoholic Beverages (off-premises) — Consumption: +10.7% since 2006

Perhaps it’s not surprising that Americans need an extra drink these days. Still, the total home spending on alcoholic beverages is about $110 billion, at annual rates, according to the Bureau of Economic Analysis. A few less glasses might put a few extra dollars in the pocket.

Remember, all these figures apply to Americans in the aggregate. Those people who have been out of work for months or years don’t have room to cut back at all.

And remember–when journalists write that “consumer spending is 70 percent of economic activity,” they are completely wrong. What the U.S. economy needs is more production, not more consumption–and in a globalized economy, the two are not synonymous at all. And that, my friends, will be the subject of tomorrow’s post.

Photo credit: iChaz.

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America’s Coming Infrastructure Crash

Tuesday, July 26th, 2011
Michael Mandel


Michael Mandel is the chief economic strategist at the Progressive Policy Institute and the founder of Visible Economy LLC, a New York-based news and education company.

by Michael Mandel

When President Obama took office in January 2009, he promised that ” to lay a new foundation for growth….we will build the roads and bridges.” And in his 2011 State of the Union address, he promised to “put more Americans to work repairing crumbling roads and bridges.”

But as all attention is focused on the debt ceiling battle, here’s what’s happening on the infrastructure front. Highway, street, and bridge construction jobs through the first five months of 2011 are running 18% below 2007 levels, and the stimulus money is fading. House Republicans are proposing to cut future federal infrastructure funding by roughly one-third. And any defaults among state and local governments would raise borrowing costs for infrastructure bonds across the country and in some cases make the bonds unsellable.

In short, a difficult infrastructure situation is about to turn worse. The U.S. seems likely heading for an infrastructure crash that will terribly damage both our prospects and those of our children.

But in the spirit of making lemonade from lemons, budget austerity may offer an opportunity to rethink our priorities and consider our vision for the future of infrastructure. The big question is: Do we want to build roads, bridges, harbors and airports to support the current consumption- and import-oriented economy? Or should we focus infrastructure spending to encourage the shift to a more sustainable production- and export- oriented economy?

The shift from a consumption economy to a production economy is probably the most important–and most difficult–task that the U.S. faces. The clearest sign of the problem is the apparently intractable trade deficit. Over the past ten years, the country has run up a cumulative deficit of $5.7 trillion with the rest of the world, and there’s no sign of that reversing any time soon. To put it a slightly different way, the U.S. imports almost as much goods ($1.9 trillion in 2010) as the country produces (value-added of $2.2 trillion in manufacturing, mining, and agriculture).

Both Democrats and Republicans agree that one way out of this dilemma is to increase exports. But with resources scarce, that means tough choices for infrastructure spending. For example, consider our spending on ports. The Port of New Orleans is a major shipping point for our agriculture exports. Meanwhile the Ports of Los Angeles and Long Beach, with many more loaded inbound containers (imports) than outbound containers (exports), are running a significant trade deficit. Should we devote more resources to beefing up the Port of New Orleans, or to improving the Ports of Los Angeles and Long Beach?

Or think about road and bridge construction. Should we spend scarce resources on improving road links to a regional shopping mall? Or should we place top priority on infrastructure improvements that might entice foreign firms to locate manufacturing facilities in the U.S.? These are tough questions to answer. I know which way I lean–towards production rather than consumption–but there are good arguments on both sides. What’s more, there are a couple of other big wild cards. For example, the retirement of the baby boomers will change infrastructure needs, as more and more people will want to be located in inexpensive areas near hospitals.

The other big concern is defense surge capacity. If the U.S. were engaged in a major global war, heaven forbid, the country would need an efficient transportation system (there’s a reason why the construction of interstate highway system was originally justified on defense grounds). A major war would require that the U.S. beef up its manufacturing very quickly, and we wouldn’t want to have to divert manpower to rebuild our transportation infrastructure at the same time. A good infrastructure base is an insurance policy against future events.

What Washington needs is a coherent strategy for infrastructure that goes beyond “shovel-ready.” We need to shift project selection and investment decisions away from a politically-driven process to one that fits our overall economic aims as a country.

Treating infrastructure spending as an essential part of a shift towards a production-oriented economy may provide the right framework for good decisions that can get support from both Democrats and Republicans.

The piece was originally written for the Atlantic and can be found here.

Mandel will be a regular contributor to the Atlantic in the future, stay tuned for his most recent posts.

Photo Credit: Salim Virji

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Misinterpreting Data: How the WSJ Got the Wireless Jobs Story Wrong

Monday, July 25th, 2011
Michael Mandel


Michael Mandel is the chief economic strategist at the Progressive Policy Institute and the founder of Visible Economy LLC, a New York-based news and education company.

by Michael Mandel

On July 17 the online edition of the WSJ published a widely-cited story entitled Wireless Jobs Evaporate Even As Industry Expands. The main point of the story  (my emphasis):

In May, on the heels of a record year for industry revenue, employment at U.S. wireless carriers hit a 12-year low of 166,600, according to U.S. Labor Department figures released earlier this month. That’s about 20,000 fewer jobs than when the recession ended in June 2009 and 2,000 fewer than a year ago. While the industry’s revenue has grown 28% since 2006, when wireless employment peaked at 207,000 workers, its mostly nonunion work force has shrunk about 20%.”

In addition, the Journal digs further into the official data and claims that:

The number of customer-service workers at wireless carriers dropped to 33,580 last year from 55,930 in 2007, according to the Labor Department

Seems like a pretty straightforward story, doesn’t it?  The Journal is quoting directly from authoritative BLS data to demonstrate that the  wireless industry has been losing jobs, despite the mobile boom. The big picture message: Innovation does not equal job growth.

Unfortunately, the reporters and editors at the WSJ fell into the same trap that has ensnared many other journalists, policymakers, and even economists. They looked at the label on a piece of official economic data, and assumed that they understood it.  But as we saw during the financial crisis and subsequently,  government economic data can all too easily be misinterpreted.

In this case,  the article was based on the Journal’s analysis of jobs in the “wireless telecommunications carrier industry,”  as defined by the BLS. However,  despite the name of the data series, it turns out that:

  • The BLS definition of the “wireless” industry does not include company-owned  retail stores or stand-alone company-owned call-centers.
  • The customer service numbers cited do not include company-owned retail stores or stand-alone company-owned call centers.
  • The 2007 occupational data in telecom cited in the story cannot be compared with later years, because the telecom industry classifications in the occupational data were substantially redone in 2008.

As a result:

  • The data cited in the WSJ article completely misses the growth of jobs at company-owned retail stores (see Metro PCS chart below)
  • The data cited in the WSJ article potentially misses call center job growth such as the expansion of Verizon’s Nashville call center (see example below)
  • The phrase “employment at U.S. wireless carriers hit a 12-year low”  simply cannot be supported by the available data.  Data from the industry trade association (CTIA), which shows wireless employment up 36% since 2000, is much more plausible (see chart below).
In my view,  the WSJ article is a classic case of misinterpreting official statistics.

Before getting into the details, why am I taking the time and trouble to disassemble this particular article? Historically innovation and job creation have been closely linked, as I have argued in multiple papers and articles. With Washington now fighting tooth and nail over the budget, it’s very important for policymakers to understand that successful innovation creates jobs, not the opposite.

Second,   journalists, policymakers, and economists need to understand how easily government statistics can be misinterpreted.  For example, the statisticians at the BLS have reported huge U.S. productivity gains over the past decade, including the years following the financial crisis–a fact that has been duly repeated by journalists and applauded by economists.  However, in a recent paper, Sue Houseman of the Upjohn Institute and I argued that these reported U.S. productivity gains could be interpreted, in part,  as  an increase in the efficiency of global supply chains.  It matters enormously for jobs and wages whether productivity increases are coming from more efficient domestic operations, or more efficient offshoring.

Or consider  consumer spending. Journalists regularly report that  ”consumer spending accounts for 70 percent of economic activity.”  (see, for example, this recent Associated Press story that ran on the New York Times website). However this number,  calculated by dividing consumer spending into GDP, is pernicious nonsense. Nonsense,  because consumer spending includes a big chunk of  imports, which does not correspond to economic activity in the U.S.  Pernicious,  because it perpetuates the fallacy that the U.S. cannot recover without gains in consumer spending (see my blog post on the subject here).

Details

Now let me turn to the details of the WSJ’s mistake, or if you’d like, misintepretation.  The WSJ analyzed BLS jobs data for the “wireless telecommunications carrier industry”, (with the NAICS  ID 5172). That data looks pretty bleak (if you want to download the data for yourself, instructions are at the end of this post).

However, the WSJ apparentlydid not realize  that the BLS collects industry employment by establishment, not by company. The BLS defines an establishment in this wa:y

An establishment is an economic unit, such as a farm, mine, factory, or store, that produces goods or provides services. It is typically at a single physical location and engaged in one, or predominantly one, type of economic activity for which a single industrial classification may be applied.

Whenever possible,  the BLS assigns each establishment to an industry, and counts all the employment at that establishment at part of that industry.

Viewed from this perspective, a single wireless carrier, such as Verizon Wireless or Metro PCS,  will typically include several different types of establishments, each of which will be assigned to a different industry.

  • Wireless operations are in NAICS 5172 (“Wireless telecommunications carriers”)
  • Company-owned call centers are in NAICS 56142 (“telephone call centers”)
  • Company-owned retail stores are in retail trade, probably NAICS 443112 (“Radio, TV and electronics stores”)
  • Mobile tower and base construction could be in NAICS 23713 (“Power and Communication Line and Related Structures Construction”)
There might even be more different types of establishments in the wireless industry…it’s hard to tell.

This has several implications. First, retail expansion by wireless providers is counted in the retail trade industry, not  the BLS “Wireless Industry” numbers that the WSJ used.  This is true even if the store is carrier-operated.

For example, the tremendous expansions of retail stores by Metro PCS  in recent years, with added jobs,  did not show up in the WSJ data (for a related example,  employees at Apple stores are counted in the retail industry, not the computer industry).

Second, to the degree that wireless carriers are expanding stand-alone call centers, those additional jobs are not being picked up by the WSJ data.  We don’t know exactly how many there are, but we do know that overall national employment at telephone call centers have been rising, surprisingly enough.  It’s likely that the expansion of the wireless industry is a factor in that rise in call center employment.

We also know that at least some wireless telecom companies have been hiring at their call centers. For example, it took the work of five minutes to find this example of Verizon hiring workers for a call center outside of Nashville. Here’s an excerpt from the July 1, 2011 story in the Nashville Post:

Verizon Wireless has announced via Facebook and Twitter that it will expand its Sanctuary Park Center of Excellence Loyalty Retention Center by opening an office in Franklin. The company plans to add some 300 jobs in the Franklin area over the next 18 months.

“We’re excited about this expansion for several reasons. It allows us to continue to provide customers with the high quality of service they expect from Verizon Wireless,” said James Nelson, associate director of customer service. “It’s also great to be a source for new job opportunities – especially in this economy.”

Further, the company said, “Many of the thousands of calls handled by LRC representatives each month are from customers requesting to discontinue service. It is their responsibility to convert as many of those disconnect requests into satisfied customers.”

The company ran its first training sessions in May and plans to begin taking calls at the center starting July 5.

I didn’t research this example any further. But it looks like these new call center jobs are not counted in the BLS data that the WSJ was using.

Finally, those customer service figures that the Journal made such a big deal about. Let me repeat the quote from the Journal story.

The number of customer-service workers at wireless carriers dropped to 33,580 last year from 55,930 in 2007, according to the Labor Department

Actually, that sentence is not correct as it stands.  The WSJ is citing occupational data pertaining to the “wireless” industry as defined by the BLS (NAICS 5172). By definition, the WSJ’s figure for customer-service workers excludes company-owned stand-alone call centers (like the previous example for Verizon Wireless). As a result, the figures cited by the Journal are absolutely useless for determining whether  wireless carriers are hiring or firing customer-service workers.

Just to add insult to injury, there’s a subtle twist that no reporter could be expected to know. Buried deep in the documentation, the BLS explains that:

In 2008, the OES survey switched to the 2007 NAICS classification system from the 2002 NAICS. The most significant revisions were in the Information Sector, particularly within the Telecommunications area.

The implication is that telecom occupational data from 2007 simply cannot be compared to later years (I believe that the BLS would agree with that, if asked).

What’s the bottom line here? Let me show you again the chart of the jobs in the  BLS “wireless industry” (the data the WSJ used), and compare it to the survey of wireless industry employment done by CTIA, the wireless industry association.

The industry association figures-rose by 46% from 2000 until 2008, before dipping by 7% from 2008 to 2010.  By contrast, the BLS “wireless” data, which does not include call centers, retail stores, and tower construction, rose by only 8% from 2000 to 2008. Now, honestly, in the middle of a wireless boom of historic proportions, which figure do you think is more likely to reflect “employment at wireless carriers”, the phrase used in the WSJ story?

Now, that brings me to my final ethical question: Does the Journal have an obligation to run a retraction or a corrective story?  The article did not slander or libel anyone, and the reporter used the government statistics in good faith.  However, because the statistics did not mean what the Journal thought they meant, the story is filled with statements which leave readers with the wrong impression.  The typical reader  would read the story and naturally conclude that the phrase “ employment at U.S. wireless carriers hit a 12-year low” referred to the number of workers who receive paychecks from Verizon Wireless, Metro PCS, the wireless part of AT&T, and the like.  But as we have seen, that phrase is based on government figures that only reflect a portion of wireless carrier employment.

More importantly, the story’s big picture conclusion–that innovation does not equal job growth–is not supported by the statistics. In this era of distrust of the press, should publications make an effort to clarify the record if their original story is faulty?

 

 

Coda: How to Get the Government Data that the WSJ used

 

Go to  http://www.bls.gov/data/#employment

Click on “Employment, Hours, and Earnings – National, Multiscreen data search”

Check ‘Not seasonally adjusted’, and click on ‘next form’

Scroll to ‘information’, and  click on ‘next form’

Click on ‘all employees, and  click on ‘next form’

Scroll to “wireless telecommunications carriers (except satellite)”, and  click on ‘next form’

Click on ‘retrieve data’

The data for customer service representatives in the wireless industry in 2007 can be found at

http://www.bls.gov/oes/2007/may/naics4_517200.htm#b41-0000

 

This piece is cross-posted from Michael Mandel’s blog “Mandel on Innovation and Growth“.

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Michael Mandel Featured in the Baltimore Sun

Tuesday, July 12th, 2011
The Progressive Policy Institute




by The Progressive Policy Institute

The thoughts of PPI’s Chief Economic Strategist Michael Mandel were highlighted in Baltimore Sun Columnist Jay Hancock’s recent piece on research and development investment.

“Two years ago Michael Mandel, then chief economist for Business Week magazine, wrote a cover story titled “The Failed Promise of Innovation in the U.S.” The piece blamed the lack of technology breakthroughs over the last decade as a factor in the 2008 financial collapse.

I asked Mandel, now chief economic strategist for the Progressive Policy Institute in Washington, whether the problem is getting worse.”

Read the full article here and check out Mandel’s recent brief on the FDA and innovation.

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PPI Policy Brief: Is the FDA Strangling Innovation?

Thursday, June 23rd, 2011
Michael Mandel


Michael Mandel is the chief economic strategist at the Progressive Policy Institute and the founder of Visible Economy LLC, a New York-based news and education company.

by Michael Mandel

As the key gatekeeper for pharmaceutical and device innovation, the Food and Drug Administration (FDA) has a tough job. If it is too lenient, it will allow the sale of drugs and medical technology that could harm vulnerable Americans. Too tight, and the U.S. is being deprived of key innovations that could cut costs, increase health, and create jobs.

With this in mind, this paper addresses the question: Is the FDA unintentionally choking off cost-saving medical innovation? First, I discuss the difficulty of assessing whether the FDA is under-regulating or overregulating new drugs and devices, given the desire for safety. I then show how the FDA is clearly applying “too-high” standards in the case of one noninvasive device currently under consideration—MelaFind, a handheld computer vision system intended to help dermatologists decide which suspicious skin lesions should be biopsied for potential melanoma, a lifethreatening skin cancer. I then draw analogies to development of the early cell phones and personal computers.

Read the entire policy brief.

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Real Trade Deficits in Capital and Consumer Goods Near New (Negative) Record

Thursday, May 26th, 2011
Michael Mandel


Michael Mandel is the chief economic strategist at the Progressive Policy Institute and the founder of Visible Economy LLC, a New York-based news and education company.

by Michael Mandel

Many economists are racing to declare a ‘manufacturing revival.’  The latest to join the bandwagon is Paul Krugman. In his latest column, Krugman writes (my emphasis added)

Manufacturing is one of the bright spots of a generally disappointing recovery…..Crucially, the manufacturing trade deficit seems to be coming down. At this point, it’s only about half as large as a share of G.D.P. as it was at the peak of the housing bubble, and further improvements are in the pipeline…one piece of good news is that Americans are, once again, starting to actually make things.

Oh, how I wish Paul was right.  Unfortunately,  I still don’t see it in the trade numbers. In fact, the real trade deficits in capital and consumer goods are both nearing all-time (negative) records. Meanwhile, the real trade deficit for industrial supplies and materials has improved in large part because of an enormous surge in real exports of energy products, including coal, fuel oil, and other petroleum products (yes you read that right) and a sharp decline in imports of building materials. I don’t find either of these convincing proof of a resurgence of manufacturing.

As you might expect, time for some charts. Here’s a chart (below) of the real trade balance in capital goods in billions of 2005 dollars, calculated on a 12-month basis.

Capital goods include computers, telecom gear, machinery, aircraft, medical equipment–the heart of U.S. advanced manufacturing. Within a couple of months, if current trends continue, the capital goods trade deficit will be at a record level. What’s more, there’s no sign of any great domestic capital spending boom that could suck in imports.

And not to digress, these figures probably substantially underestimate the deterioration of the capital goods trade balance because of the import price bias effect , where the government statisticians do not correctly adjust for rapid changes in sourcing from high-cost countries such as the U.S. and Japan to low-cost countries such as China and Mexico (for a good reference see the new paper “Offshoring Bias in U.S. Manufacturing” by Susan Houseman, Christopher Kurz, Paul Lengermann, and Benjamin Mandel in the latest issue of the Journal of Economic Perspectives) .

Now let’s turn to consumer goods. Here’s the chart (right) of the real trade balance in consumer goods, in 2005 dollars.

No sign of any real improvement here either, I’m afraid. The trade balance retreated a bit during the recession, but since then has surged back.  Once again, there’s no sign of a sustainable improvement in the trade balance.

The situation with motor vehicles is a bit more ambiguous. As the chart to the left shows, clearly there has been some gains in the motor vehicles and parts trade balance.  However, it has started deteriorating again.

Finally, we come to the one area, industrial supplies and materials, where there has been a clear improvement in the real trade balance. Industrial supplies and materials includes fuel imports and exports; steel and other metals; building materials; chemicals; and a grab bag of other things including newsprint, audio tapes, and hair.

Since 2006, there has been roughly a $150 billion improvement in the industrial supplies and materials trade deficit, measured in 2005 dollars (I say roughly because this is one case where the chain-weighted procedures used to construct the figures gives quirky answers that aren’t additive. So when I give the following numbers, please please don’t divide them into $150 billion to get a share of the improvement). Part of that is a decline in real imports of crude oil, which fell by roughly $30 billion (measured from 2006 to the 12 months ending in March 2011). But another $30 billion, more or less, came from an increase in real exports of petroleum products such as fuel oil and lubricants. I’m not sure whether a gain in exports of fuel oil really tells us much about the fortunes of manufacturing overall.

Another contributor to the improved trade balance is a decline in the imports of building materials. Once again, not a sign of strength.

So I see no sign in the trade data of a great manufacturing revival. The topline improvement in the real trade deficit has mostly come from industrial materials and supplies, and within that from a swing in the energy sector imports and exports.

Let me finish with a quote from a piece that Paul Krugman wrote back in 1994. In that piece, he scoffed at worries that foreign competition was hurting U.S. manufacturing. He argued that

A growing body of evidence contradicts the popular view that international competition is central to U.S. economic problems. In fact, international factors have played a surprisingly small role in the country’s economic difficulties…. recent analyses indicate that growing international trade does not bear significant responsibility even for the declining real wages of less educated U.S. workers.

I wonder if he still believes that today.

Crossposted from Innovation and Growth.

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New Manufacturing Data Show Weaker Factory Recovery, Deeper Recession

Monday, May 16th, 2011
Michael Mandel


Michael Mandel is the chief economic strategist at the Progressive Policy Institute and the founder of Visible Economy LLC, a New York-based news and education company.

by Michael Mandel

There’s been a lot of happy talk recently about the revival of U.S. manufacturing .  According to an article in the New York Times,  “manufacturing has been one of the surprising pillars of the recovery. “  In a Forbes.com column entitled “Manufacturing Stages A Comeback,”  well-known geographer Joel Kotkin talks about “the revival of the country’s long distressed industrial sector.”  The Economist writes that “against all the odds, American factories are coming back to life.”*

Truly, I’d like to believe in the revival of manufacturing as much as the next person. Manufacturing, in the broadest sense,  is an essential part of the U.S. economy, and any good news would be welcome.

Unfortunately,  the latest figures do not back up the cheerful rhetoric.

Newly-released data suggest that the manufacturing recession was deeper than previously thought, and the factory recovery has been weaker. On May 13 the Census Bureau issued revised numbers for factory shipments,  incorporating the results of the 2009 Annual Survey of Manufacturers.  The chart belows shows the comparison between the original data and the revised data (three-month moving averages):

The decline in shipments from the second quarter of 2008 to the second quarter of 2009 is now 25%, rather than 22%. And the current level of shipments in the first quarter of 2011 is now 9% below the second quarter of 2008, rather than only 5%. In other words, the new data shows that factory shipments, in dollars, are still well below their peak level.

The manufacturing recovery looks even more  tepid when we adjust shipments for changes in price.   Here are real shipments in manufacturing, deflated by the appropriate producer price indexes.**

Now that hardly looks like a recovery at all, does it?  Real shipments plummeted 22% from the peak in the fourth quarter of 2007 to the second quarter of 2009.  As of the first quarter of 2011, real shipments are still 15% below their peak.  To put it another way,  manufacturers have made back only about one-third of the decline from the financial crisis.

And while U.S. manufacturers have struggled, imports have coming roaring back.  Here’s a comparison of real imports (data taken directly from this Census table) and real U.S. factory shipments (my construction, using Census and BLS data).

This chart shows that imports have recovered far faster and more completely than domestic manufacturing.   Goods imports, adjusted  for inflation, are only about 1% below their peak.  That’s according to the official data. If we factored in the import price bias, we would see that real imports are likely above their peak (I’ll do that in a different post).

In other words,   this so-called  ’revival of U.S. manufacturing’ seems to involve losing even more ground to imports.  That doesn’t strike me as much of a revival.

 

P.S. Oh, oh, what about all those manufacturing jobs that Obama’s economists are so proud of? This chart plots aggregate hours of manufacturing workers against aggregate hours in the private sector overall (the last point is the average for the three months ending April 2011).

What we see is that the decline in hours in manufacturing was deeper than the rest of the private sector, and the recovery has really not made up that much ground. Over the past year, aggregate hours in the private sector have risen 2.3%, while aggregate hours in manufacturing have risen 2.9%.  That’s not much of a difference. In fact, probably the best we can say is that manufacturing has not held back the overall recovery.

*An important exception to the happy talk has been the recent report from the Information Technology and Innovation Foundation, entitled The Case for a National Manufacturing Strategy.

**For those of you interested in technical details,  I used the producer price indexes for 2-digit manufacturing industries, as reported by the BLS.  Could these estimates be improved on? Probably–but they are good enough to get the overall picture.

Crossposted from Mandel on Innovation and Growth.

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The New Centrism

Friday, February 11th, 2011
Michael Mandel


Michael Mandel is the chief economic strategist at the Progressive Policy Institute and the founder of Visible Economy LLC, a New York-based news and education company.

by Michael Mandel

I don’t do much politics, but I feel like I have to say something about the demise of the Democratic Leadership Council, which helped bring Bill Clinton to the Presidency in the early 1990s. A lot of writers have interpreted the end of the DLC as the end of centrism, and a sign that Washington has become completely polarized.

My take is different. To me, we’re moving into a new era of centrist ideas, based around the importance of innovation and investment, creative thinking about regulation and jobs, and a greater appreciation of a global economy built around cross-border collaboration rather than “you-me” economic nationalism.

Rather than the center disappearing, I think we’re going to start seeing both left and right start drawing on ‘new centrist’ ideas. Let me just give a few of them:

*The importance of innovation for driving economic and job growth. When businesses try and innovate, we should reward rather than punish them, especially given the innovation shortfall of the past decade.

*The need to  think about investment in broad terms, including human capital and knowledge capital. Our conventional economic statistics, which measure only physical investment, are giving us a misleading view of the economy.

*The need to understand the true nature of the long-term fiscal and entitlement problem: The long-term rise in medical spending is a total reflection of falling or flat productivity in the healthcare sector. If we can fix that–through a combination of techological advances and institutional change–we can in effect grow our way out of the entitlement problem.

*The importance of rising real wages for young educated workers as a sign of the health of the economy. Real wages for young college grads have been falling since 2000–we cannot operate a modern economy this way, because our young people can no longer afford to pay for the education they need.

*The need to find some way to lessen the burden of regulation without losing touch with our social values. We need a systematic process for examining the thousands of regulations and carefully adjusting or removing the ones that slow down growth, while protecting public health, safety, and the environment.

*The need to think about the global economy in terms of supply chains which cross national borders. The U.S. needs to make sure that we are part of global supply chains and that we are getting our fair share of the benefits.  And we need new measures of competitiveness that take account of the new world.

This piece is cross-posted at Mandel on Innovation and Growth

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State of the Union: Obama Gets Innovation Upside-Down

Wednesday, January 26th, 2011
Michael Mandel


Michael Mandel is the chief economic strategist at the Progressive Policy Institute and the founder of Visible Economy LLC, a New York-based news and education company.

by Michael Mandel

In his State of the Union speech, President Obama spent a lot of time on innovation, regulation, and jobs–that’s good. Unfortunately, in all three cases he got his priorities upside down.

Let’s start with innovation.  I counted how many words the President devoted to different areas of innovation.

  • 2 words for biomedical research, the area where the U.S. is far ahead of the rest of the world.
  • 68 words devoted to extolling the job-creating virtues of space travel and NASA, an agency which currently has no mission unless it gets a lot more money.
  • 113 words for  high-speed-wireless broadband, a worthy goal.
  • 361 words in favor clean energy, a technology where the U.S. has little competitive advantage over the rest of the world.

In other words, Obama spent his time lauding our least competitive areas of innovation, while giving the back of his hand to biomedical research, the area where we have the clear global advantage.

If you think I’m exaggerating, take a look at these two charts.  When it comes to life sciences, the U.S. is way ahead. U.S. companies account for 44% of   R&D spending by life sciences companies around the world in 2010, according to etimates by Battelle/R&DMagazine.  And U.S. government support for health research is unsurpassed, accounting for 70% of  global public sector funding.

On the other hand, the U.S. support for  energy research is mediocre, at best. U.S. companies account for only 25% of global energy R&D spending by businesses.  And in 2008, before Obama took over, the U.S. government funding for energy R&D accounted for only 20% of the global public sector spending on energy R&D.  That’s pitiful.

Here’s what a recent R&DMagazine piece says about U.S. energy R&D:

the level of R&D spending in the U.S. energy sector is small in absolute terms and as a percent of revenue (0.3%) when compared with other sectors. For example, the total amount of private sector investment in all forms of energy research in our portfolio would likely amount to little more than half of the leading life science R&D investor, Merck, or the leading software/IT R&D investor, Microsoft, both of which invested more than $8.4 billion in R&D in 2009.

Mr. President, every time you talk about clean energy creating jobs, you are placing your bet on the wrong horse.  Communications and biosciences are the best bets we have in the near-term.

Now we come to regulation. I’m afraid once again the President started out right, and ended upside-down. He began by explaining how he would get rid of rules that imposed an unnecessary burden (29 words). But then he spends triple the time ( 102 words) defending his administration’s regulatory efforts.  He should have stopped while he was ahead.

Finally, we come to jobs, which were spread through the whole speech. This is my ‘soft’ count of how many times the word ‘jobs’ were mentioned in connection  with various areas of the economy (your count may differ)

  • IT-1
  • Space-1
  • Clean energy –2
  • Education–3
  • Infrastructure –2
  • Exports–4

Exports got the most mentions as a source of jobs—-but no mention of imports, and no mention of the fact that our trade deficit in advanced technology products hit an all-time record in November, going into double digits for the first time.  The reason? Imports of advanced technology products have surged, while exports are basically flat.  Before worrying about exports, we should worry about recapturing some of the jobs lost to imports.

This piece is cross-posted at Mandel on Innovation and Growth

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Where Regulation Did and Did Not Intensify, 2000-2010

Wednesday, January 5th, 2011
Michael Mandel


Michael Mandel is the chief economic strategist at the Progressive Policy Institute and the founder of Visible Economy LLC, a New York-based news and education company.

by Michael Mandel

As Republicans go on the attack about excessive regulation under the Obama Administration, it’s worth noting two things. First, the regulatory state started growing under President George Bush, as I showed in my posts The Age of Regulation Started Ten Years Ago and Homeland Security and the Regulatory Burden.  Homeland Security accounts for roughly 90% of the increase in federal regulatory employment over the past ten years.

The second point is that the growth of regulation over the past ten years has been quite uneven, even outside of Homeland Security. Take a look at the chart below.

You can see that workplace and the environment has lagged in terms of regulatory employment. Just something to keep in mind.  Some of the big gainers were the FDA, the SEC, and the NRC.

This piece is cross-posted at Mandel on Innovation and Growth

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