The IT revolution and the globalisation of R&D | VOX, CEPR Policy Portal

Moderator: Evidence that advanced infrastructures are strengthening internationalism over nationalism

https://voxeu.org/article/it-revolution-and-globalisation-rd#.W31KqBQKxy4.gmail

The IT revolution and the globalisation of R&D

Lee Branstetter, Britta Glennon, J. Bradford Jensen 21 August 2018

US firms have begun shifting R&D investment towards non-traditional destinations such as China, India, and Israel. The column argues that this is a response to a shortage in software and IT-related human capital within the US. When US multinationals are able to import talent or export R&D work, this reinforces US technological leadership. Conversely, politically engineered constraints on this response will undermine the competitiveness of US-based firms.

16

A

A

Related

• Immigrants and innovation in US history
  Ufuk Akcigit, John Grigsby, Tom Nicholas
• The global race for inventors
  Carsten Fink, Ernest Miguelez, Julio Raffo

Despite rising globalisation after WWII, corporate R&D spending remained highly concentrated in the same small group of advanced industrial countries that dominated it for decades – until recently. Since the 1990s, the distribution of US multinational R&D investment across countries and industries has shifted dramatically toward non-traditional R&D destinations like China, India, and Israel (Kerr and Kerr 2018). Today's leading US multinationals have developed a global innovation system that increasingly relies on emerging market talent to propel innovation for the global frontier. 

Why these emerging markets – and why now? In new research, we argue that the rising importance of software and information technology as drivers of innovation and new product development across a wide range of industries led to a shortage in software/IT-related human capital within the US (Branstetter et al. 2018a). This has driven US multinationals abroad in a search for talent. 

To support this argument, we show:

• the extent of globalisation of R&D by US MNCs,
• the growing importance of software and IT in firm innovation across industries, 
• the rise of new R&D hubs, and 
• the differences in the type of activity done there. 

We also document that IT-intensive and software-intensive firms were more likely to conduct R&D abroad, and that foreign R&D is most pronounced in IT-intensive and software-intensive countries. 

The increase in demand for an IT and software workforce

Software and IT patents have been growing in importance since the 1990s; Figure 1 shows the share of all USPTO patents that are based on software. The share grew from 5% in 1990 to nearly 40% by 2015, and from 10% to 45% for IT. This growth in the IT intensity of invention was explored by Arora et al. (2013) and Branstetter et al. (2018b), who interpret the rise in IT intensity as the emergence of a 'general purpose technology' in new production development that applies across manufacturing industries. 

The advent of powerful microprocessors, memory chips, sensors, and digital control systems has enabled new generations of devices to become smarter and more responsive to their environment. Improvements in product functionality can often be achieved through better software alone. This has made IT, and especially software engineering, more central to success in innovation and new product development, increasing demand for IT and software engineering talent.¹

Figure 1 The growing IT/software intensiveness of US MNC invention

Importing talent from abroad

According to the National Survey of College Graduates, the IT/software workforce – made up of programmers, computer scientists, and electrical engineers – grew by 112% between 1993 and 2010, while the overall workforce grew by 70%. The foreign share of IT workers grew from 16% in 1993 to 32% by 2010. This phenomenon has been documented by Bound et al. (2015). These changes suggest an extremely large increase in demand that was partially met by importing talent from abroad, through mechanisms like the H-1B programme. 

Wage comparisons provide evidence that the foreign talent supply did not meet demand in the software and IT sectors. Figure 2 shows average compensation per worker for US multinationals across different countries, using publicly available Bureau of Economic Analysis data [https://www.bea.gov/iTable/index_MNC.cfm]. 

Figure 2 Average compensation per employee at US MNC foreign affiliates

Source: Bureau of Economic Analysis.

For average compensation per employee in aggregate, the US is in the middle of the country distribution. If we consider IT-specific industries² like Electrical Equipment Appliances and Components, or Computers and Electronic Products, however, the average compensation per employee at US headquarters was much higher than pay for employees at a foreign affiliate. Average compensation represents many functions within US parents and affiliates, the wages of skilled R&D personnel are likely to be relatively high in both the US and in other countries. Nevertheless, these numbers are clearly consistent with the view that:

• demand has outpaced supply of IT and software workers in the US, and
• raw engineering talent of high quality is available in large quantity and at relatively low prices in emerging markets – especially India and China. 

Interviews with the R&D managers of leading US multinationals both inside and outside the US supported the perception that there is a global shortage of IT and software talent. We also confirmed the need to move abroad to gain necessary access to large foreign supplies of skilled engineers. 

New R&D destinations have an abundant supply of human capital 

The supply of technically skilled workers is abundant in many of the same countries in which we found an increase in US MNC foreign R&D activity – notably India and China. Applications for Indian and Chinese high-skilled workers made up 85% of H-1B visa applications in 2017 (US Department of Homeland Security 2016), and Indian and Chinese students combined made up 18% of doctorates in science and engineering from US universities in 2016.³ This share was even larger in some key disciplines. 

If we view the large number of Indian and Chinese students pursuing graduate education at American research universities as the extreme right tail of a distribution of science and engineering talent, most of which remained at home, then this suggests a massive amount of software- and IT-trained human capital available in China and India. Indeed, Arora and Gambardella (2005a and 2005b) record an abundant supply of engineering and technology graduates in emerging economies. 

The types of activity done in new R&D destinations like China, India, and Israel suggests why they have been chosen as R&D hubs. Bureau of Economic Analysis data shows that R&D-performing affiliates in China, India, and Israel are concentrated in computer and electronic production manufacturing and professional, scientific, and technical services. In more traditional destinations like Germany, Japan, Canada, the UK, and France, R&D is concentrated in traditional manufacturing. 

This suggests the need for human capital to meet the demand of software- and IT-intensive US multinationals has motivated US MNC decisions to do R&D in these locations. Figure 3 shows that patenting and the R&D investment of US multinationals outside the US has grown disproportionately in those regions where IT and software skills are well developed. 

Figure 3 US patenting and R&D investment growth is increasingly concentrated in regions specialising in IT and software

In the two graphs, the horizontal axis measures the degree to which local inventors in a country tend to specialise in IT and software invention, as measured by their USPTO patent grants. This obviously tends to be places in which local IT and software skills are well developed. Regression analysis also implies this positive relationship, which is robust to the inclusion of control variables. 

Conclusions and implications

Our analysis suggests that the increasing reliance on IT and software in innovation, and the growing endowments of specialised human capital in countries like India and China, have induced US MNCs to conduct more R&D in these locations. This has important implications: 

• It suggests that there is a constraint on the supply of IT and software human capital in the US, and that these human resource constraints limit the invention possibilities for US-based multinational firms, even for those firms in which innovative activity and technological opportunity seem to be at the highest levels.⁴ 
• Global flows of investment, people, and ideas can help relax these constraints through open immigration policies and liberal trade and FDI policies. When successful, these flows raise growth, productivity, and consumption possibilities around the world. When US multinationals are able to import talent or export R&D work to the regions in which talent resides, this reinforces US technological leadership. Conversely, politically engineered constraints on this response clearly undermines the competitiveness of US-based firms.

We do not directly explore the impact of immigration policy in our paper, but existing evidence suggests that the openness of the US' labour market to immigrants in the 1990s allowed US-based firms to quickly adapt to the software-biased shift in technological opportunity. This created an unexpected and sharp increase in demand for software engineers, met at the height of the internet boom by importing more software engineers than the US was training in its own universities.⁵ 

Since the early 2000s, however, the US labour market has become more closed to immigration. Caps on high-skilled visas like the H-1B visa programme have grown more restrictive, and evidence from Glennon (2018) shows that these restrictive high-skilled immigration caps drove US MNCs to shift some high-skilled activity abroad in an effort to address these constraints. 

Relatively liberal trade and FDI policies have allowed MNCs to address their human resource constraints by sourcing from abroad, but an open immigration regime for highly skilled workers would further ease this constraint. 

• Finally, in addition to open immigration and liberal trade and FDI policies, the constraint on the supply of IT and software human capital in the US could be addressed with education policies that expand the supply of domestic IT and software human capital. 

Authors' note: We gratefully acknowledge financial support from the National Science Foundation through two grants: 1360165 and 1360170. The statistical analysis of firm-level data on US multinational companies was conducted at the Bureau of Economic Analysis (BEA), United States Department of Commerce under arrangements that maintain legal confidentiality requirements. The views expressed do not reflect official positions of the US Department of Commerce or the NSF.

References

Arora, A, L G Branstetter, and M Drev (2013), "Going Soft: How the Rise of Software-Based Innovation Led to the Decline of Japan's IT Industry and the Resurgence of Silicon Valley", Review of Economics and Statistics 95(3): 757–75.

Arora, A and A Gambardella, eds (2005a), From Underdogs to Tigers: The Rise and Growth of the Software Industry in Brazil, China, India, Ireland, and Israel, Oxford University Press.

Arora, A and A Gambardella (2005b), "The Globalization of the Software Industry: Perspectives and Opportunities for Developed and Developing Countries", Innovation Policy and the Economy 5: 1–32.

Bloom, N, C Jones, J Van Reenen, and M Webb (2018), "Are Ideas Getting Harder to Find?", working paper, Stanford.

Bound, J, B Braga, J M Golden, and G Khanna (2015), "Recruitment of Foreigners in the Market for Computer Scientists in the United States", Journal of Labor Economics 33(S1): S187–223.

Branstetter, L, B Glennon, and J B Jensen (2018a), "The IT Revolution and the Globalization of R&D", in Innovation Policy and the Economy, Volume 19, edited by J Lerner and S Stern, University of Chicago Press.

Branstetter, L, M Drev, and N Kwon (2018b), "Get With the Program: Software-Driven Innovation in Traditional Manufacturing," Management Science.

Glennon, B (2018),How Do Restrictions on High-Skilled Immigration Affect MNC Foreign Affiliate Activity?, working paper.

Jones, B (2009), "The Burden of Knowledge and the Death of the Renaissance Man: Is Innovation Getting Harder?" Review of Economic Studies 76(1): 283–317.

Kerr, S P and W R Kerr (2018), "Global Collaborative Patents", The Economic Journal 128(612).

US Department of Homeland Security (2016), "Characteristics of H-1B Specialty Occupation Workers", Fiscal Year 2016 Annual Report to Congress.

Endnotes

[1] Arora et al. (2013) presented evidence that superior access to software engineering human resources enabled US IT firms to out-innovate their Japanese rivals in the 1990s and 2000s. Branstetter et al. (2018b) found evidence that firms better positioned to exploit technological opportunities realise higher returns to their R&D investments.

[2] Classified using the industry of the foreign affiliate.

[3] National Science Foundation, National Center for Science and Engineering Statistics, Survey of Earned Doctorates.

[4] This is consistent with research by Jones (2009) and Bloom et al. (2018), documenting the rising human resource requirements of innovation.

[5] Arora et al. (2013) argue that Japanese firms were constrained in their ability to respond to this shift, as a result of their rigid and closed-off labour market, and that part of Silicon Valley's evident resurgence vis-à-vis their Japanese competitors was based on American firms' greater access to immigrant talent.

Eligible Arkansas Medicaid Beneficiaries Still Struggling to Meet Rigid Work Requirements [feedly]

Eligible Arkansas Medicaid Beneficiaries Still Struggling to Meet Rigid Work Requirements
https://www.cbpp.org/blog/eligible-arkansas-medicaid-beneficiaries-still-struggling-to-meet-rigid-work-requirements

Over 5,400 Arkansas Medicaid beneficiaries have two months of non-compliance with the state's new work requirement policy and could lose coverage as soon as the end of this month — and be locked out of Medicaid for the rest of the year — if they have one more month of non-compliance, state data for July show. They represent about 21 percent of the original cohort to face the new requirements, which took effect for them in June.

 -- via my feedly newsfeed

China now has 802 million Internet users: report [feedly]

China now has 802 million Internet users: report
http://www.atimes.com/article/china-now-has-802-million-internet-users-report/

 -- via my feedly newsfeed

Could Trade War Lead to the Real Thing? [feedly]

Could Trade War Lead to the Real Thing?
https://www.bloomberg.com/view/articles/2018-08-20/could-u-s-china-trade-war-lead-to-a-real-conflict

News that China and the U.S. will resume trade talks this week swiftly lifted markets. This follows the first meetings at the annual summer retreat of the Chinese Communist Party leadership at the beachside resort of Beidaihe. As might be expected, the main topic this summer has been the U.S.-China trade war, where it might lead and what could conceivably be done to avert it without an unacceptable loss of political face.

While we won't have any real indication as to the tenor of the Chinese discussions or their conclusions for awhile yet, it's worth thinking through where this trade war could take us all in the absence of effective diplomatic intervention. History tells us trade wars are easy to start and hard to stop, just like real ones. There's a reason for that. The material stakes become greater as hostilities continue. And the domestic political cost of backing down gets higher and higher.

• Third in a series of articles highlighting the themes of the Bloomberg New Economy Forum, being held Nov. 6-8 in Beijing.

Let's start with trade. The traded sector represents some 38 percent of Chinese GDP and 27 percent of U.S. GDP. If the current, small-scale dispute escalates to cover the entire $650 billion in bilateral trade, the world will have an objective economic problem on its hands, not just one of general market sentiment. Once growth numbers start declining, however marginally, it won't take all that much for sentiment, and then the real economy, to head south. Falling sentiment and economic numbers will contribute to a mutually reinforcing spiral.

Kevin Rudd Says U.S. China Relationship at a Difficult Stage

Kevin Rudd Says U.S. China Relationship at a Difficult Stage

There's a foolish idea in some quarters of the U.S. that because China exports nearly $500 billion to the U.S. and the U.S. exports only $150 billion in return, there's a limit to the impact Chinese retaliatory tariffs can have. Furthermore, so this argument runs, because China's overall economy is more trade-exposed than that of the U.S., and because China's total GDP (as measured by market exchange rates) is smaller than U.S. GDP, Beijing ultimately has much more to lose from continued escalation than Washington does.

Exposed to the World

China's economy is much more trade-dependent than America's

Source: World Bank

* Trade as a percentage of GDP

Such logic could well encourage President Donald Trump to double down and impose tariffs on the remaining $400 billion in Chinese exports. The assumption would be that the Chinese would buckle first through sheer economic necessity.

This argument also assumes that the domestic political pressure on Chinese President Xi Jinping would only increase as tensions rise, meaning that either he, or those around him, would rapidly seek a deal. While protests from U.S. farm states would also get nastier, U.S. subsidies could be used to appease these good, Republican-voting folks until the Chinese haul up the white flag.

Of course, China has a few cards to play as well. For instance, it could impose tariffs on any U.S. components used in global supply chains, even if the final country of origin for the export in question is a country other than the U.S. China could warn other nations that they have a year, say, to sort out alternative, non-U.S. sources of supply. Messy? Yes. But, such measures would escalate America's trade-related pain far beyond the U.S.-China bilateral trade account.

The other factor that can't be ignored is plain old political psychology. If someone is forced into a corner, they can either back down or double down. The assumption in Washington seems to be that Xi will do the former. This may be right. But U.S. leaders need to remember that China, even as a one-party state, has its own domestic politics to confront — both internal regime politics as well as the wider court of Chinese public opinion which, despite internet censorship, is remarkably well-informed.

Over the last five years, when faced with domestic challenges, Xi hasn't shown much inclination to back down. Whenever anyone has given him serious trouble in internal politics, he's smashed them and then tarred them as disloyal to the Party or the country. Such a narrative would be even easier to promote against Uncle Sam, where the line would be: "We Chinese have absorbed pain in the past, we can do it again and we all know that the real U.S. motives are ultimately racist because they will do anything they can to prevent China from becoming the largest economy in the world."

I'm not sure which way the Chinese leadership will choose to go. If they decide to double down rather than back down, the global economy should prepare for a major blow, one capable of tipping us all into recession. And that's not even considering where the next steps in escalatory politics could take us once trade-related measures are exhausted. Bilateral investment flows are already slowing rapidly. A new Cold War in high technology is looming, if not already underway. And on the security front, we could easily see escalation in the South China Sea and beyond.

Historically, we've routinely failed to discern when the tipping points come between public disagreement, failed diplomacy, political crisis, failed crisis management, limited conflict and then more general war. In this case, we aren't even yet at phase two in the sequence.

So those of us, like myself, of a modestly religious frame of mind should light a candle for the upcoming round of negotiations. A great deal rides on them, and not just for the U.S. and China. 

 -- via my feedly newsfeed

Bloomberg: Venezuela Braces for the Devaluation Storm [feedly]

Too much socialism?

Venezuela is in deep trouble. But in some ways it's West Virginia on Socialist Steroids, which is not the same thing as the 'scientific' socialism Frederick Engels wrote of. The similarity is the condition of being cursed by natural resource wealth and a history of exploitation by external, and global, oil and coal interests. In Venezuela, the government of Hugo Chavez famously took control of the oil resources and applied historic taxes on the foreign oil interests that owned the shipping and refining and extraction capital associated with the oil. For such impudence Chavez enemies organized assassination attempts in which US government assets were implicated. Things got worse from there. It turned out fighting poverty and underdevelopment in the rest of the country could not be accomplished with cash alone. The same is true of West Virginia Senator Robert Byrd's legacy of the Federal Subsidies and a coal Severance Tax -- they did not fix WV poverty. Without being long winded, taking a world tour, "socialism" largely financed by the 'curse' did not fare will in Libya, or Nigeria, or Russia, for that matter.  There are some successes -- Finland. Maybe the lesson is: if you have to partly or fully socialize natural resources to reverse suffering -- you need 1) science to guide you toward diversification, and 2) partners to help finance your  less catastrophic economic development. Since there is no "great leap" from scarcity to abundance, there is no "great leap" through capitalism.

Venezuela Braces for the Devaluation Storm
https://www.bloomberg.com/news/articles/2018-08-20/venezuela-ready-for-confusion-or-chaos-as-devaluation-takes-hold

President Nicolas Maduro picked a Friday evening before a long, holiday weekend to unveil a 95 percent currency devaluation. Over the ensuing three days, Venezuela was calm, even quiet. That figures to change dramatically Tuesday.

Venezuelans may encounter soaring prices even as they negotiate the simultaneous debut of a so-called sovereign bolivar currency that drops five zeros after years of hyperinflation. And on top of it all, opposition politicians and unions are organizing a 24-hour nationwide strike, saying the devaluation will deepen suffering.

The plan as Maduro laid it out was "marked by inconsistencies and was short on specifics, suggesting that any attempt to stabilize the economy would start out facing huge credibility problems," Francisco Rodriguez, chief economist of Torino Capital, wrote in a note to clients Monday.

Whatever its reception in international financial circles, the combination of events in the capital city of Caracas foretells heavy use of calculators -- and perhaps chaos. The nation already is in a miserable state. Inflation is running over 100,000 percent, food and medicine are scarce and citizens are are fleeing by the thousands to neighboring countries. Some have met with violence.

What Devaluation Says About Maduro's Grip on Economy: QuickTake

The Maduro regime is taking measures to quell a rising sense of panic in the nation. The minimum wage will increase more than 3,300 percent. Regulated prices for 50 staples will be announced Tuesday, and the government has begun to pay a "reconversion bonus" to help holders of the official "Fatherland" identification card make ends meet during the transition.

But the plan rests on a rickety foundation. The sovereign bolivar's value will be linked to a cryptocurrency -- believed to be the first time a government has tried such a thing. The Petro is backed by crude oil, and the government sets its value at $60, or 3,600 sovereign bolivars. The Petro will fluctuate and be used to set prices for goods. Still, the cryptocurrency doesn't trade on any functioning market, Rodriguez wrote.

Maduro during a news conference on the country's cryptocurrency in March. 

Photographer: Carlos Becerra/Bloomberg

Private businesses are "in serious risk of bankruptcy due to the way in which the measures are being implemented," Fedecamaras, the nation's main business chamber, said in a statement Monday. The president's announcements foster "uncertainty, are improvised and undebated and are not being correctly communicated to the population."

Death Drones

Maduro's gambit follows years of policies that turned what had once been one of Latin America's wealthiest countries into a basket case. Pressure is mounting on the socialist autocrat, with new calls for his overthrow five years after he succeeded the late Hugo Chavez. This month, Maduro cracked down anew on his opponents after an attempt to kill him using aerial drones laden with explosives.

The announcement of the measures on a Friday night was a historical rhyme for many Venezuelans. In 1983, President Luis Herrera Campins devalued the bolivar for the first time in 22 years after oil prices crashed. Citizens called the date "Black Friday."

But on this 2018 Monday, the streets of capital city Caracas were empty, thanks to the holiday the government called to prepare for the roll-out and to allow the banking system to prepare. Most businesses and companies were shut, and people stayed at home, went to the beach or ventured out to the few open shops.

Complex Calculations

Some ATMs were dispensing the new bills, the so-called sovereign bolivar, though many were empty. In pastry shops, consumers pondered over new prices. Some asked managers to do the math. Others waited at the doorsteps of supermarkets to buy groceries.

"I'm still very confused," said Loly Belson, a 56-year-old vendor, who was investigating prices at a supermarket in downtown Caracas. "I still don't know what my wage will be. I'm happy for the rise by Maduro, but I think it will be very difficult for companies and shops to manage around this, because the hike is huge."

People wait in line to receive new sovereign bolivar banknotes at an ATM.

Photographer: Carlos Becerra/Bloomberg

Gustavo Noguera, a 69-year-old retiree, said losing the zeroes from the currency "is the government's best decision to confront the economic war."

"In war, you are entitled to use your best weapons to keep the enemy at bay, be they resellers or businesspeople."

Noguera said he was confident the hike in the minimum wage wouldn't elevate consumer prices. "Maduro will soon announce a 50-product list with maximum prices," he said. "No, nothing will go up."

Tuesday, the nation will begin to see whether his faith is rewarded.

 -- via my feedly newsfeed

Ryan Cooper: Austerity: The biggest Policy Mistake of the past decades

Moderator: Austerity IS and WAS the BIG mistake of the post-Vietnam era. Keynesianism, updated with monetary tools and modern data analysis, ARE the best known economic tools for managing a mixed (mostly capitalist with large public and non-profit sectors). But important components in Keynesianism -- no doubt true for all sciences -- are counter-intuitive and do not translate to politics easily.  Most difficult is the paradox of thrift, which explains why thrift can restore wealth to an individual or family, but will only further impoverish a whole nation or economy  suffering from slack demand.

There must be something more: a change in the governance, in the contracts of rights, privileges and obligations terms chartering corporations, especially too big to fail ones. Keynes and his successors  famously defined public spending (stimulus) as the 'cure' for recessions and depressions. But it did not define fairness or equity in who got what proportions of those funds. That leaves a gaping hole for opportunists to distort the entire proposition. Everytime you hear the "family kitchen table" model invoked to oppose spending on poverty, you are being sucked into the paradox. 

The biggest policy mistake of the last decade

Ryan Cooper

In the great economic battle of the past decade, the winner is the tried and true — in a rout.

After the 2008 financial crisis, old-fashioned Keynesians offered a simple fix: Stimulate the economy. With idle capacity and unemployed workers, nations could restore economic production at essentially zero real cost. It helped the U.S. in the Great Depression and it could help the U.S. in the Great Recession too. But during and immediately after the crisis, neoliberal and conservative forces attacked the Keynesian school of thought from multiple directions. Stimulus couldn't work because of some weird debt trigger condition, or because it would cause hyperinflation, or because unemployment was "structural," or because of a "skills gap," or because of adverse demographic trends.

Well going on 10 years later, the evidence is in: The anti-Keynesian forces have been proved conclusively mistaken on every single argument. Their refusal to pick up what amounted to a multiple-trillion-dollar bill sitting on the sidewalk is the greatest mistake of economic policy analysis since 1929 at least.

Let's take the culprits in turn.

The contrarianism began in earnest in early 2010, when two papers were published apparently finding that austerity — increasing taxes and/or cutting spending to reduce the budget deficit — was actually beneficial. First, economists Alberto Alesina and Silvia Ardagna outlined a theory of "expansionary austerity," arguing that governments could increase taxes, cut spending, and grow strongly. Meanwhile, economists Carmen Reinhart and Kenneth Rogoff demonstrated an apparent trigger point of a 90 percent debt-to-GDP level beyond which more borrowing would cause economic stagnation. 

Both of these papers turned out to have major conceptual problems. Alesina and Ardagna basically cherry-picked their data, using unusual cases in which countries were not suffering a recession or could export their way out of problems. Reinhart and Rogoff got their causality backwards, and even had a humiliating Excel formula error that badly dented their correlation.

More clues that Alesina, Ardagna, Reinhart, and Rogoff got everything wrong can be found in the real world, where the Obama administration's modest stimulus package, while too small to fix the Great Recession entirely, did make things much better. Conversely, the European countries that subjected themselves to severe austerity regimens saw their employment and production collapse, just like Keynes would have predicted. Greece, in particular, has suffered economic disaster considerably worse than the Great Depression in terms of output and unemployment.

Next up: the inflation alarmists.

In late 2010, a bunch of conservative financial and economics luminaries, including Michael Boskin, John Cogan, Niall Ferguson, Kevin Hassett, Douglas Holtz-Eakin, Bill Kristol, and John Taylor, signed an open letter to then-Fed Chair Ben Bernanke warning that "[t]he planned asset purchases risk currency debasement and inflation." (Bernanke went ahead with his stimulus program anyway.) A related argument from 2011-12 came from economists Tyler Cowen and Robert Gordon in their books The Great Stagnation and The Rise and Fall of American Growth, respectively. They argued that the slow post-recession growth problem was a structural one caused by lack of innovation, meaning the economy was running up against supply constraints. We simply couldn't grow any faster.

What connects the monetary stimulus skeptics (Boskin, Cogan, et al.) and the supply-siders (Cowen and Gorden) is the implication that there should be at least some inflation. If the economy is bumping up against maximum capacity, then there should be price pressure as firms bid against each other for scarce labor and materials.

Yet it's been six to eight years since their arguments and there's hardly been a glimmer of the kind of inflation they warned about. Here is the Fed's inflation measure (over the past couple of decades for full context):

(Courtesy St. Louis Fed)

In fact, not only has there been no hyperinflation, inflation has consistently come in under the Fed's supposed target value of 2 percent.

Then there are two more related theories: First, the "skills gap," referring to the supposed reality of American workers being unprepared to take available jobs. This was a major focus of Barack Obama's State of the Union address in 2012, in which he proposed a number of worker retraining and job placement programs. Second, there is the demographic trend argument, which explains a declining fraction of the prime working-age population participating in the labor market (that is, being either employed or looking for work) as some kind of cultural development. As Bill McBride wrote in early 2016, pointing to stay-at-home dads: "[M]ost of the decline in the labor force participation rate is due to ongoing trends … and demographics[.]"

Both of these arguments (as well as the structural ones above) imply a labor shortage — if unemployed workers are essentially unemployable, and declining labor force participation is due to unshakable cultural trends, then workers that do have jobs should enjoy bigger wages as firms compete for scarce labor. Here is inflation-adjusted wage growth for full-time workers over 16:

(Courtesy St. Louis Fed)

There was a few years of moderately okay wage growth from 2015-17, but that was largely due to ultra-low inflation and nothing like the sustained increases implied by the structural or labor shortage argument. And in terms of the overall wage share of business output, it fell to historic lows during the crisis and remains there to this day. Now, low wages might also be due in part to corporations rigging the economy against workers, particularly recently. But at minimum it delivers yet another body blow to the anti-Keynesian case.

But let's also look directly at prime working-age labor force participation, which indeed fell steadily from the crisis through late 2015. But since then, as unemployment passed 5 percent and kept falling, lo and behold, labor force participation rose.

(Courtesy St. Louis Fed)

There was no skills gap, nor an innovation shortage, nor an explosion of stay-at-home dads. There was a collapse in aggregate demand that was left to rot, while a lot of people who should have known better made things worse.

One nauseating irony about this blizzard of nonsense is that many of the anti-Keynesian arguments were premised on avoiding future negative growth effects. For instance, in a 2010 op-ed flogging his erroneous pro-austerity paper, Rogoff wrote, "The sooner politicians reconcile themselves to accepting adjustment, the lower the risks of truly paralyzing debt problems down the road."

As we have seen, the evidence for the Keynesian position is overwhelming. And that means the decade of pointless austerity has severely harmed the American economy — leaving us perhaps $3 trillion below the previous growth trend. Through a combination of bad faith, motivated reasoning, and sheer incompetence, austerians have directly created the problem their entire program was supposed to avoid. Good riddance.

--

John Case
Harpers Ferry, WV

The Enlighten Radio Player Stream, 

Sign UP HERE to get the Weekly Program Notes.

Check out Socialist Economics, the Enlighten Radio website

Safety culture or safety behavior? [feedly]

Safety culture or safety behavior?
http://understandingsociety.blogspot.com/2018/08/safety-culture-or-safety-behavior.html

Andrew Hopkins is a much-published expert on industrial safety who has an important set of insights into the causes of industrial accidents. Much of his career has focused on the oil and gas industry, but he has written on other sectors as well. Particularly interesting are several books: Failure to Learn: The BP Texas City Refinery Disaster; Disastrous Decisions: The Human and Organisational Causes of the Gulf of Mexico Blowout; and Lessons from Longford: The ESSO Gas Plant Explosion. He also provides a number of interesting working papers here.

One of his interesting working papers is on the topic of safety culture in the drilling industry, "Why safety cultures don't work" (link).

Companies that set out to create a "safety culture" often expend huge amounts of resource trying to change the way operatives, foremen and supervisory staff think and feel about safety. The results are often disappointing. (1)

Changing the way people think is nigh impossible, but setting up organizational structures that monitor compliance with procedure, even if that procedure is seen as redundant or unnecessary, is doable. (3)

Hopkins' central point is that safety requires change of routine behavior, not in the first instance change of culture or thought. This means that management and regulatory agencies need to establish safe practices and then enforce compliance through internal and external measures. He uses the example of seat belt usage: campaigns to encourage the use of seat belts had little effect, but behavior changed when fines were imposed on drivers who continued to refrain from seat belt usage.

His central focus here, as in most of his books, is on the processes involved in the drilling industry. He makes the point that the incentives that are established in oil and gas drilling are almost entirely oriented towards maximizing speed and production. Exhortations towards "safe practices" are ineffectual in this context.

Much of his argument here comes down to the contrast between high-likelihood, low-harm accidents and low-likelihood, high-harm accidents. The steps required to prevent low-likelihood, high-harm accidents are generally not visible in the workplace, precisely because the sequences that lead to them are highly uncommon. Routine safety procedures will not reduce the likelihood of occurrence of the high-harm accident.

Hopkins offers the example of the air traffic control industry. The ultimate disaster in air traffic control is a mid-air collision. Very few such incidents have occurred. The incident Hopkins refers to was a mid-air collision over Uberlinger, Germany in 2002. But procedures in air traffic control give absolute priority to preventing such disasters, and the solution is to identify a key precursor event to a mid-air collision and ensure that these precursor events are recorded, investigated, and reacted to when they occur. The relevant precursor event in air traffic control is a proximity of two aircraft at a distance of 1.5 miles or less. The required separation is 2 miles. Air traffic control regulations and processes require a full investigation and reaction for all incidents of separation that occur with 1.5 miles of separation or less. Air traffic control is a high-reliability industry precisely because it gives priority and resources to the prevention, not only of the disastrous incidents themselves, but the the precursors that may lead to them. "This is a clear example of the way a high-reliability organization operates. It works out what the most catastrophic event is likely to be, regardless of how rare such events are in recent experience, and devises good indicators of how well the prevention of that catastrophe is being managed. It is a way of thinking that is highly unusual in the oil and gas industry" (2).

The drilling industry does not commonly follow similar high-level safety management. A drilling blowout is the incident of greatest concern in the drilling industry. There are, according to Hopkins, several obvious precursor events to a well blowout: well kicks and cementing failures. It is Hopkins' contention that safety in the drilling industry would be greatly enhanced (with respect to the catastrophic events that are both low-probability and high-harm) if procedures were reoriented so that priority attention and tracking were given to these kinds of precursor events. By reducing or eliminating the occurrence of the precursor events, major accidents would be prevented.

Another organizational factor that Hopkins highlights is the role that safety officers play within the organization. In high-reliability organizations, safety officers have an organizationally privileged role; in low-reliability organizations their voices seem to disappear in the competition among many managerial voices with other interests (speed, production, public relations). (This point is explored in an earlier post; link.)

Prior to Macondo [the Deepwater Horizon oil spill], BP's process safety structure was decentralized. The safety experts had very little power. They lacked strong reporting lines to the centre and answered to commercial managers who tended to put production ahead of engineering excellence. After Macondo, BP reversed this. Now, what I call the "voices of safety" are powerful and heard loud and clear in the boardroom. (3)

Ominously, Hopkins makes a prescient point about the crucial role played by regulatory agencies in enhancing safety in high-risk industries.

Many regulatory regimes, however, particularly that of the US, are not functioning as they ought to. Regulators need to be highly skilled and resourced and must be able to match the best minds in industry in order to have competent discussions about the risk-management strategies of the corporations. In the US they're not doing that yet. The best practice recognized worldwide is the safety case regime, in use in UK and Norway. (4)

Given the militantly anti-regulatory stance of the current US federal administration and the aggressive lack of attention its administrators pay to scientific and technical expertise, this is a very sobering source of worry about the future of industrial, chemical, and nuclear safety in the US.  

 -- via my feedly newsfeed