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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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Innovation by Acquisition: New Dynamics of High-tech Competition

Wednesday, November 30th, 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.

Diana G Carew


Diana G. Carew is an Economist at the Progressive Policy Institute.

by Michael Mandel and Diana G Carew

Right now policymakers are grappling with the implications of slow economic growth in the United States and the rest of the industrialized world. One response is austerity—cutting back on spending, accepting reduced living standards, and slowly digging out from the mess.

A better option, though, is innovation, which accelerates growth, creates new jobs, and makes U.S. products and services more competitive world-wide.  Innovation has the potential for raising incomes, an especially important task given that real median household incomes have fallen more than 10 percent since the beginning of the recession.

While innovation can come from any industry, the technology sector is particularly important, as it has been the main source of growth and innovation in the economy for the past 35 years.  The locus of innovation started with the personal computer in the late 1970s and 1980s; shifted to software and the internet in the 1990s; and now has moved to mobile, search, and more broadly communications, where U.S. companies are world leaders. Today’s technological advances have facilitated the emergence of innovation “ecosystems,” or platforms on which many different companies can build products or provide services.

The growth of tech companies stems from a combination of organic growth and business acquisitions, driven by the rapidity of innovation. It’s a virtuous circle, where successful technology companies pay large sums for small startups, which in turn induces the formation of more startups. For that reason, technology acquisitions need not diminish competitiveness, even as they accelerate innovation and job growth.  Indeed, as we will see later in this paper, periods of high levels of acquisition have also been periods of rapid job growth.

One question is whether there is anything that government policy can do to encourage technology innovation in the short run.  The answer is probably not—while the government does have plenty of long-term levers, such as spending on basic research and investment in science and engineering education, there are few ways to speed up innovation over the next year.  On the other hand, government policy is actually quite capable of discouraging innovation in the short-run, through outdated regulation and restrictive antitrust policy that does not take the importance and uniqueness of the technology sector into consideration.

Antitrust policy, as applied to the technology sector in its current form, can impede the virtuous circle of nurturing innovation through startups and acquisitions. By slowing down or blocking acquisitions, antitrust policy can limit the exit routes for startups, potentially reducing their value and making it less attractive for investors to put their money into the next round of innovative new companies.

This paper will explore the role of technology acquisitions in encouraging innovation, facilitating economic growth, stimulating jobs, and enhancing our quality of life. First, this paper examines past trends in technology acquisitions, establishing that waves of industry acquisitions have been an integral part of the rapid innovation in tech since the 1980s.  We focus in particular on the post-2005 acquisitions by major tech firms.

Second, we examine the question of whether technology acquisitions facilitate innovation, and in particular high-impact innovations. In fact, the benefits to the rest of the economy are connected to the speed at which potential innovations are moved to market and scaled up. This is because the value created from rapid technological innovation is distributed across all users of the new technology.

Further, this paper will show that periods with high levels of acquisitions generally also tend to be periods of rapid employment growth. This is not meant to be an assertion of causality, but to rather argue that tech acquisitions are part of the same innovative process as employment growth.

To summarize: (1) when done correctly, acquisitions in the technology sector can and have encouraged innovation by bringing new products to market faster and more effectively; and (2) acquisitions and innovation in the technology sector are positively associated with economic growth and job creation. What’s more, mainstream economic theory associates sustainable economic growth in the long-term with constant innovation and technological progress. Looking at technology acquisitions from this perspective provides a different framework from which to assess the potential implications of excessive antitrust regulations, and current antitrust policy.

Read the entire memo.

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A Negative Sign for Investment and Job Growth

Wednesday, August 31st, 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 a good rule of thumb–you get what you reward.

Here’s a summary of current U.S. policy towards big corporations: Invest in the U.S., create jobs, and get sued by the government.

You would think that during a business investment drought, any company that puts big money into the U.S. would be patted on the back. But no…

AT&T is the company which is putting the most money into the U.S.—almost $20 billion in capital spending in 2010. AT&T is also planning to bring back call center jobs from overseas. AT&T is also getting sued by the Justice Department to block the merger with T-Mobile.

Frankly, this sends a signal to U.S. companies that getting out of  the reach of government regulators by going overseas is the right strategy.

Crossposted from Innovation and Growth.

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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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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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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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More Regulatory Overreach at the FCC

Monday, April 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

Imagine that you had an industry where customer satisfaction was increasing faster than any other part of the economy.  Now imagine that the same industry showed rising real investment, even during the worst recession in 75 years.  Finally, imagine that industry charged  falling prices for both consumers and businesses.

But of course, that industry is not imaginary: The telecom industry, and in particular the wireless sector, has  outperformed  the rest of the economy on key measures such as customer satisfaction, investment, and price.  Moreover, at a time when President Obama is calling  for more innovation,   the wireless industry has produced more genuine new products and services than anyone else.

So given the great performance of the industry during this tough period, why the heck does the Federal Communications Commission keep imposing additional regulations on wireless providers? The latest case of regulatory overreach: On April 7,  the FCC issued an order forcing the  big wireless providers to sign ‘data-roaming’ agreements with smaller carriers.  In effect,  the smaller carriers can now tell their customers that they could have data service all over the U.S., free-riding on the mammoth investments by the big carriers. In addition, the FCC made it clear that it is willing to set the price for each data roaming agreement if it doesn’t like what the big carriers are offering–effectively reinstituting price regulation for the most dynamic sector of the economy.

This aggressive regulatory move by the FCC follow its enactment of confusing ‘net neutrality regulations’ in December 2010, an 87-page order that raises more questions than it resolves. And then coming down the road is the ‘bill shock’ regulation. In order to address the rather rare and fixable problem of a surprisingly high bill, this regulation would force providers to spend scarce investment dollars on revamping their billing system rather than  building out their networks.

In many ways, enacting this series of regulations is like throwing pebbles in a stream. One pebble doesn’t make much of a difference, but throwing enough pebbles in the stream can dam it up.

Frankly, the degree of regulation that the FCC wants to impose is more appropriate to a failing industry rather than one which is demonstrably successful and growing.  Let’s just run through the performance of the telecom/wireless industry over the past five years.  According to the American Customer Satisfaction Index,  satisfaction with wireless service has increased by 14% over the past five years, by far the biggest  jump of any industry.

Now let’s look at investment. The data on investment is somewhat fuzzier than for satisfaction, since the government’s figures on industry investment only run through 2009, and merges the telecom and broadcasting industries.

But here’s what we see: In the telecom/broadcasting industry, real investment in equipment and software  is up 30% since 2005, despite the turbulence of the financial crisis. By contrast, overall private sector real investment in equipment and software is down 8% over the same period.

And then of course the price of wireless service keeps falling. The latest figures from the Bureau of Labor Statistics say that consumer wireless prices are down 6% since 2011, and business wireless prices are down a lot more.

Right now the FCC  has the good fortune to preside over one of the few growing industries in the economy.  If the commissioners genuinely want to  support  innovation and growth, they should stop throwing regulatory pebbles into the stream.

Crossposted at Mandel on Innovation and Growth

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Evening Fix

Wednesday, March 2nd, 2011
Lee Drutman


Lee Drutman is a senior fellow and the managing editor for the Progressive Policy Institute.

by Lee Drutman

Our top five reads of the day:

  • Ribal Al- Assad thinks Syria may be the next democracy domino: “In Syria, it seems inevitable that protest may soon crack the regime’s brittle political immobility. Most ordinary Syrians face extremely difficult economic and social conditions, including high unemployment, rising food prices, constraints on personal freedom, and endemic corruption. These factors are no different from those that brought people on to the streets in North Africa and the Middle East. What began as protests over living conditions became full-scale demands for freedom and democracy.”
  • Peter S. Green reports on the World Bank’s chief economist’s support for infrastructure spending as a way to drive growth: “The U.S. and other developed countries can stoke growth and reduce excess industrial capacity by investing in infrastructure at home and in potential consumer nations abroad, the World Bank’s chief economist, Justin Lin, said in New York today.”
  • David Leonhardt looks beyond public employees as the cause of state budget woes: “The cause is Americans’ collective desire for low taxes and generous government benefits. We want our politicians to promise us tax cuts, a strong military, safe streets, good schools and unchanged Medicare and Social Security. And promise it all they do. Eventually, we will have to pay for the government we want, regardless of what happens in Wisconsin.”
  • Kevin Drum highlights the costs of tax expenditures: “Of course, getting rid of a tax credit is…..um, a tax increase, according to reigning Republican orthodoxy. So I guess this is out of the question. Which is too bad, because on page 75 GAO identifies the real killer app in the federal budget: “almost $1 trillion in federal revenue was forgone due to tax exclusions, credits, deductions, deferrals, and preferential tax rates— legally known as tax expenditures.””
  • Chuck Marr and Brian Highsmith outlines some guiding principles for corporate tax reform: “All parts of the budget and the tax code, including corporate taxes, should contribute to deficit reduction.  Well-designed corporate tax reform can improve economic efficiency and help on the deficit-reduction front at the same time.”

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Evening Fix

Thursday, February 24th, 2011
Lee Drutman


Lee Drutman is a senior fellow and the managing editor for the Progressive Policy Institute.

by Lee Drutman

Our top five reads of the day:

  • Ruy Teixera finds strong public support for infrastructure spending: “It’s no secret that our country’s infrastructure is in urgent need of repair and serious modernization. Conservatives, in their mania for cutting government spending, have lost whatever little interest they once had in addressing this problem. But the public hasn’t.”
  • Thomas Carothers thinks Republicans should see foreign aid as a great value for their buck: “As House Republicans press for deeper budget cuts, one of their top targets is foreign aid. It is a tempting candidate for draconian cuts—a soft priority in today’s hard fiscal times and a budget line with no strong domestic constituency. Before Republican budget hawks wield their knife, however, they should take a lesson from their conservative cousins in the United Kingdom: When belt-tightening gets serious, foreign aid should be improved, not gutted.”
  • Tucker Willsie ponders how government can promote innovation: “A significantly more nuanced debate than ‘cut or invest’ is necessary to arrive at the best policies for stimulating innovation. Certain government interventions have been more successful than others. Government determination and funding was essential in creating the Internet, and there are clear instances of government intervention overcoming market failures such as when AT&T refused to build the initial infrastructure to demonstrate the internet technology – the task was instead taken on by the state-run British Post Office.”
  • Andrew Rotherham offers a five-point education reform plan: “So forget the theatrics in Wisconsin, reform doesn’t have to mean abolishing collective bargaining. But, if we’re serious about having school systems that put student learning first and creating a genuine profession for teachers here are five common practices that must change.”
  • John Avlon chronicles the apocalyptic politics in Wisconsin. “The Wisconsin protests are proving that the era of unhinged politics is not over. If anything, the hyperpartisan hysteria seems to be catching, with Democratic lawmakers in Indiana running for the hills while a new round of union protests swamps the statehouse in Ohio.”

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When Did the Innovation Shortfall Start?

Monday, February 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

I’m responding to the posts by Arnold Kling and critiquing  Tyler’s The Great Stagnation. Let me just throw out some thoughts, from the perspective of someone who thinks that The Great Stagnation is a terrific book.

1. I agree wholeheartedly with Tyler that the current crisis is a supply-side rather than a demand-side problem. That explains why the economy has responded relatively weakly to demand-side intervention.

2. From my perspective,  the innovation slowdown started in 1998 or 2000, rather than 1973–sorry, Tyler.  The slowdown was mainly concentrated in the biosciences, reflected in statistics like a slowdown in new drug approvals, slow or no gains in death rates for many age groups (see my post here),  and low or negative productivity productivity in healthcare (see David Cutler on this and my post here).  This is a chart I ran in January 2010 (the 2007 death rate has been revised up a bit since then)–it shows a steady decline in the death rate for Americans aged 45-54 until the late 1990s.

The innovation slowdown was also reflected in the slow job growth in innovative industries, and the sharp decline in real wages for young college graduates (see my post here). (Young college grads, because they have no investment in legacy sectors, inevitably flock to the dynamic and innovative industries in the economy. If their real wages are falling, it’s because the innovative industries are few and far between).

3. The apparent productivity gains over the past ten years have been a statistical fluke caused in large part by the inability of our statistical system to cope with globalization, including: The lack of any direct price comparisons between imported and comparable domestic goods and services; systematic biases in the import price statistics (see Houseman et al  here, for example); and no tracking of knowledge capital flows. I’ve got several posts coming on this soon.

4. I agree with Tyler that regulation of innovation is a big problem.  That’s why I’ve suggested a new process, a Regulatory Improvement Commission, for reforming selected regulations.

5. I’m of the view that we may be close to another wave of innovation, centered in the biosciences, that will drive growth and job creation over the medium run.  If we want growth and rising living standards, we need to avoid adding on well-meaning regulations that drive up the cost of innovation.

Cross-posted at Mandel on Innovation and Growth

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Posted in A New Framework for Growth and Equity, Daily Fix | 2 Comments »

Obama’s Two-Track Approach on Energy

Thursday, January 27th, 2011
Scott Thomasson


Scott Thomasson is the economic and domestic policy director for the Progressive Policy Institute. Follow @st_ppi

by Scott Thomasson

As often happens with State of the Union addresses, President Obama’s speech left a lot of D.C. pundits and policy types unsatisfied and complaining that he didn’t lay out enough specifics, or that he didn’t use clear enough language to endorse one policy proposal or another. And for some of the areas that he breezed through so quickly between his Sputnik references, they’re right to be hungry for more.

But one area where he did manage to send some strong signals was on energy policy. He didn’t lay out a long list of proposals here either, but he made it clear that he plans to push for an ambitious two-part energy agenda: encouraging technological innovation through research and development funding, and pursuing a strong national Clean Energy Standard (CES) that shifts our energy production away from the dirtiest categories of traditional power resources.

Supporting energy R&D isn’t really anything new for Obama, but the 80 percent CES target for 2035 is a more exciting announcement. It’s a bold attempt to take Congress again into the breach of debating a national energy plan, which requires more than relying on innovation alone. It’s a starting point for talking about what we want our mid-term future to look like, and how we intend to realistically manage our energy resources over the course of the next few decades.

One reason Obama is able to set the goal so high at 80 percent is that his definition of “clean energy” in this proposal is very broad. It goes beyond the zero-carbon category of renewables and nuclear, and includes partial credits toward the goal for natural gas and clean coal (see DOE’s fact sheet), a step that goes beyond most CES proposals that have been floated in Congress, and well beyond what many environmental advocates are comfortable calling “clean.” But Michael Levi has done an excellent job providing first-responder estimates of what the country’s generation supply would look like in 2035 under this proposal, and concluded that it’s clearly a more ambitious target than last year’s Senate bill.

In practice, Obama’s CES target is also very similar to the Balanced Energy Portfolio target for 2040 that PPI is proposing in an upcoming paper, but more on that later.

Just as the CES proposal is a new beginning for energy policy this year, Obama’s speech also signaled a new approach to framing the arguments for his proposals, both in what he said and what he didn’t say.

First, what he didn’t say: the phrase “cap and trade” didn’t come up, but that was no surprise, especially after he chose not to say much about it while it was dying a slow and public death in the Senate last year. But some of the other things he didn’t include in this speech are more interesting. He didn’t use the words “climate” or “environment” once. And no mention of global warming, carbon, EPA, or clean air. Apparently Obama not only wants to put cap and trade behind us, but he wants to move beyond the climate debate and talk about energy only in terms of innovation, competition, and clean energy jobs. With so many Republicans in the House now proudly flaunting their rejection of climate science, Obama’s move is politically understandable, even if it’s not morally commendable.

Next, what he did say: Obama’s call to arms was announcing a “Sputnik moment” for clean energy and national competitiveness, rhetoric he and John Kerry have been using a lot in recent weeks. It isn’t clear to me how they are defining this moment, but apparently my confusion is reasonable, since Obama himself wasn’t so clear on it back in 2009 either, when he sent a different message on energy [courtesy of Rachel Brown]:

There will be no single Sputnik moment for this generation’s challenges to break our dependence on fossil fuels. In many ways, this makes the challenge even tougher to solve—and makes it all the more important to keep our eyes fixed on the work ahead.

Frankly, I like Obama’s earlier message more than his new one, because I don’t really subscribe to this idea that clean energy development is a race that we are going to win or lose as a nation. However, I do think we should be taking much stronger steps than we are now to shift our energy use to cleaner resources and grow clean energy industries globally, so if Obama can make that happen by convincing Americans that a Chinese solar research center poses the same type of existential threat to our way of life as Russian rocket technology we couldn’t match in 1956, more power to him.

The best takeaway from Obama’s case for competitiveness is that we need a sustained national commitment to innovation, recognizing it as a comparative advantage we should exploit wherever possible.  This is true not only for clean energy, but for other innovative industries as well, as my colleague Michael Mandel emphasized this week. That commitment needs to be a shared effort that we value as part of our culture, with appropriate roles for the public, private, education, and non-profit sectors. It is a position that all progressives should rally around, because it’s one that will be under attack from the new goon squad of Tea Party conservatives, who want to cut most public spending just for the sake of cutting.

Just as progressives need to present a united front in support Obama’s call to defend well crafted R&D programs in the face of conservative budget roll-backs, progressives also need to raise their voices in support of his Clean Energy Standard proposal. Obama is right that investing in innovation and R&D is the key to finding long-term solutions that will be good for our economy and our planet, but innovation alone is not enough. Robert Stavins made the case last year that carbon pricing and R&D are both necessary, and one or the other alone is not enough, and I agree with his argument for the most part. And while a CES is a less efficient substitute for cap-and-trade, Stavin’s point still holds: whatever the incentive structure, we need a resource planning policy that reshapes today’s energy markets, while we wait for tomorrow’s solutions to become a reality.

President Obama deserves praise for taking a bold step toward an actual energy plan for the country, and he deserves it from all progressives. That means those of us who would prefer to see a stronger approach that includes a price on carbon, or those who are disappointed with Obama for moving too far to the center, should see the CES proposal for what it is: probably the only opportunity we have to move forward on energy resource policy in the next two years (at least), and therefore and opportunity that must be seized if at all possible. It also means that those who have advocated for innovation-only approaches need to extend their enthusiasm over Obama’s speech to support the CES together with other progressives, instead of trying to claim the mantle of leadership for themselves exclusively, as some have done this week.

Both pieces of Obama’s agenda are going to be tough to pass, and it goes without saying that they will require a better plan of attack than last year’s. There are a lot of details to be fleshed out, and some horse-trading compromises as it moves forward that won’t sit well with everyone. But the president has stepped forward this week and shown some real leadership, and progressives should return the favor as he takes the fight to Congress.

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Posted in Clean Energy and Modern Infrastructure, Daily Fix | 2 Comments »

The Economist: Red Tape Rising

Thursday, January 27th, 2011
Brandon Biegert


Brandon Biegert is an intern at the Public Policy Institute and senior at the University of California, Berkeley majoring in political science.

by Brandon Biegert

PPI Senior Fellow Michael Mandel talks to The Economist about the interaction between excessive regulation and innovation:

Also unquantifiable is the innovation that may be deterred by regulation. Michael Mandel, a scholar at the Progressive Policy Institute, a think-tank, says some of Mr Obama’s rules, though well intentioned, interfere with the most dynamic parts of the economy. Rules meant to deter the abuse of student aid by for-profit colleges could stunt the growth of college courses taught over the internet; tighter conditions on drug approvals, prompted by much-publicised scandals, raise the cost of drug research, especially for small companies; and “net neutrality” rules could expose internet-access providers to stifling litigation.

Mr Obama’s regulatory surge would be less damaging if it had not followed one by Mr Bush, Mr Mandel says. Because of fears about national security, telecoms and internet companies came under pressure to accommodate federal eavesdroppers. The Sarbanes-Oxley accounting law has made it more expensive for start-up companies to list their stock publicly.

Read the full article.

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