Global R&D:The Stagnant US Position [feedly]

Global R&D:The Stagnant US Position
http://conversableeconomist.blogspot.com/2020/02/global-r-stagnant-us-position.html

Research and development isn't enough by itself. . New discoveries needs to be brought into the economy in the form of new companies, new products, and new jobs. But it matters. A long-standing concern among economists is that a market-oriented economy may tend to underinvest in R&D, because even with intellectual property like patents and trade secret law, an innovator captures on average only a modest share of the social benefits from R&D. Thus, a variety of estimates suggest that the social return from more R&D spending is 60%, or thatthe US should be aiming over time to double its R&D spending. 

In a global context, the US efforts to invest in R&D look stagnant. Here are some figures from a January 2020 report of the National Science Foundation and the National Science Board, called "The State of U.S. Science & Engineering 2020," 

This figure shows total domestic spending on R&D (government, private-sector, nonprofits). The US leads the way. The purple line is China, which surpassed Japan about a decade ago and Europe about five years ago.

If you look at the growth rate of R&D from 2000-2017, you can see that the China is the most obvious area catching up to the US, but certainly not the only one.  

As a result of these ongoing shifts, the US used to be the preeminent region for R&D spending. But now, the the primary geographical  home of most global R&D is the East and South Asia region.

One issue is that the US spends about 2.5% of GDP on R&D in most years, give or take a few tenths of a percent. Germany, Japan, and South Korea spend more. China spends a lower share of GDP on R&D, but the share has been rising and of course China's GDP has also been growing quite rapidly in recent decades. 

In the US, government spending on R&D has been pretty flat for the last decade or so; instead, it has been business spending on R&D leading the way. Business involvement in R&D spending is clearly a good thing, because it suggests that business are seeing ways to bring new discoveries into the day-to-day operations. However, there are also concerns that when it comes to research and development, business can be heavier on the "D" and lighter on the "R." The giant corporate laboratories of the past like AT&T's Bell Labs, Xerox's Palo Alto Research Center, IBM's Watson Labs, and DuPont's Purity Hall have diminished in scope or closed altogether. Relatively few modern companies finance research in basic science, or in long-horizon, high-risk projects that may turn out to be central to whole new industries.


When confronted with these kinds of issues, a standard US response is to raise suspicions that the quality of R&D being done in China or across other countries of east and south Asia may not be very high. It's of course hard to measure the quality of research, but one method is to look at whether research articles are heavily cited by follow-up research. The NSF report explains: 

The impact of an economy's S&E [science & engineering] research can be compared through the representation of its articles among the world's top 1% of cited articles, normalized to account for the size of each country's pool of S&E publications. This normalized value is referred to as an index and is similar to a standardized score. For example, if a country's global share of top articles is the same as its global share of all publication output, the index is 1.0. The U.S. index was 1.9 in 2016, meaning that its share of the top 1% of cited articles was about twice the size of its share of total S&E articles (Figure 22). Between 2000 and 2016, the EU index of highly cited articles grew from 1.0 to 1.3 while China's index more than doubled, from 0.4 to 1.1, indicating rising impact from both areas.

In short, this metric suggests that US research efforts are more likely to be in the top 1% of the research literature. It also suggests that the gap is closing.

I often see proposals for the US to focus on building its transportation infrastructure, like roads, bridges, railroads, and airports. One can certainly make a reasonable case for such investments. But I also suspect that transportation spending is not going to be the main driver for leading global economies for the remaining four-fifths of the 21st century. A serious national conversation on how best to expand US R&D spending substantially is overdue. 

 -- via my feedly newsfeed

Cosatu Wants Workers to Have $6.9 Billion Stake in Eskom [feedly]

Cosatu Wants Workers to Have $6.9 Billion Stake in Eskom
https://www.bloomberg.com/news/articles/2020-02-08/cosatu-wants-workers-to-have-6-9-billion-stake-in-eskom

The Congress of South African Trade Unions, the country's biggest labor federation and a key ally of the ruling party, said it wants the 104 billion rand ($6.9 billion) of Eskom Holdings SOC Ltd.'s debt held by the state pension fund manager to be converted into equity owned by workers.

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The proposal, made in an opinion piece in Business Day newspaper by Cosatu's General Secretary Bheki Ntshalintshali, is part of a deal the labor federation is trying to reach with business and government to rescue Eskom. The utility can't supply sufficient power to the country and has 454 billion rand in debt.

"This will result in workers becoming shareholders in the power utility," he said, without giving further details.

Eskom is seen as key to South Africa's economic performance and the country's ability to hold onto its last investment grade credit rating. Regular power cuts are hindering output in Africa's most industrialized economy.

Ntshalintshali also recommended that at least 10% of all pension funds, whether private or government owned, be invested in government bonds geared toward social investment and employment creation.

"Workers believe that their retirement funds can contribute toward economic growth, socially desirable investments and employment creation," he said.

The raising of the possibility of so-called prescribed assets is likely to anger investors who are opposed to having their investments dictated by government.

 -- via my feedly newsfeed

Another solid jobs report, with lots of evidence that there’s still room-to-run in this labor market. [feedly]

A thorough, but wonky, analysis for the recent jobs and employment data, form Jared Bernstein.

Another solid jobs report, with lots of evidence that there's still room-to-run in this labor market.
http://jaredbernsteinblog.com/another-solid-jobs-report-with-lots-of-evidence-that-theres-still-room-to-run-in-this-labor-market/

Employers added 225,00 jobs last month as the unemployment rate ticked up slightly to 3.6 percent, largely due to more people entering the job market, yet another sign that there's still room-to-run in this long labor-market expansion. Wage growth, a perennial soft spot in recent jobs reports, ticked up slightly to a yearly rate of 3.1 percent, around where it has been for much of the past year. That's ahead of inflation, last seen running at 2.3 percent, but the fact that the wages have not accelerated suggests some degree of slack remains in the job market (other wage and compensation series show roughly similar stability).

Our monthly smoother pulls out trends in job growth by averaging monthly gains over 3, 6, and 12 months. The pattern it shows is interesting and revealing. Over the past 12 months, job gains average 171,000 per month. Yet that average has accelerated over the past 3 months. Typically, as the job market closes in on full capacity, job gains tend to decelerate, much the way you have to pour more slowly as you reach the brim of a glass to avoid spillage (which, in this analogy, is inflation). Instead, we're seeing no such deceleration, another sign of room-to-run.

In a similar vein, the closely watched employment rate for prime-age workers (25-54) continues to rise, and at 80.6 percent now stands above its 2007 peak of 80.3 percent. However, that's more of function of job gains for women than for men. Prime-age men's employment rate is still 1.4 percentage points short of its 2007 peak, while women have surpass their peak by almost 2 points. This partially reflects job gains is services versus recent job losses in manufacturing.

Factory employment fell again last month, down 12,000. Over the past 12 months, factory jobs are up just 26,000, one-tenth their gains over the prior 12 months (267,000). This clearly relates to Trump's trade war, and while the recent "phase one" agreement with China may improve conditions in the sector–though I doubt it will have much impact–it will take time for trade flows to recover. Note also that blue-collar weekly earnings in the sector are up just 1.3 percent over the past year, a full point below inflation, meaning weekly paychecks for blue-collar factory workers are falling in real terms.

Today's report includes the BLS's annual benchmark revision to the payroll jobs data. In order to adjust the jobs data to more closely reflect a true census of the underlying jobs count, once a year the Bureau adjusts the level of jobs in the previous March up or down by factor based on more complete data. That factor this year was -514,000, a larger than average downward revision (the average revision, without regard to its sign, is 0.2% of payrolls; this one was 0.3%). The revision is "wedged" into the jobs data at a rate of -43,000 per month between April 2018 and March 2019. The negative revision for retail trade was particularly large, at -159,000, or 1 percent, likely a symptom of the accelerating loss of brick-and-mortar retail outlets at the hands of online competition.

The figure shows the difference between the level of payrolls before and after the revision. The new results do not change the fact that the historically long jobs recovery has been solid in terms of job quantity (job quality remains a significant problem). But the new trend is notably less robust than was previously recognized.

The wage-growth story remains much the same as it has been in recent months: stable gains but, despite the tight job market, no acceleration. The figures show annual, nominal wage gains for all and middle-wage private sector workers (the dark lines are 6-month trends). In both cases, we see clear evidence of slowing gains. Both series are beating inflation, so hourly wages are growing in real terms, but the pause in their upward trajectory is evidence that there's still slack in the job market. Other wage series show similar, though less stark, stabilization in recent months.

Another critique of recent wage trends is that while they're clearly being nudged up by the tight labor market, the trends are not as positive as you'd expect given the lowest unemployment rate in 50 years. One way to investigate this claim is to construct a statistical model, including labor market slack, to predict wage growth. If the predictions map closely onto the actual series, then perhaps wage growth is about where you'd expect, i.e., not too low, even given the tight job market.

Source: BLS, see text

The "full smpl" line in the figure below shows the results of such a model for mid-wage workers. The line cuts right through the actual trend in hourly wage growth, suggesting there's no gap between expected and actual wage gains.

However, this isn't quite the right way to do test this question. If the relationship between unemployment and wage gains has diminished over time, that change gets built into model estimates like this one. The way to account for that potential problem is to run the model through an earlier year and predict "out-of-sample." The "smpl thru 2010" line shows the result from this approach. Sure enough, it predicts wage growth closer to 4 percent than the current growth rate of X percent. In other words, at least by this simple model, it's not unreasonable to expect faster wage gains than we're seeing.

See the data note below for details and caveats.

Summing up, labor demand remains admirably strong in the US job market, which shows few signs of age. And equally importantly, labor supply is responding to the demand, as the job market continues to pull people in. On the down side, the trade war has clearly damaged export-oriented sectors, especially manufacturing, both on the job and wage side. Moreover, even with unemployment persistently near a 50-year low, wage growth, at least in these data, has stopped climbing. This, along with low, steady inflation data, clearly implies there's still slack left in the job market, with no rationale at all for the central bank to tap the brakes on growth.

Data note on wage model: The model's dependent variable is year-over-year quarterly hourly wage growth for production, non-supervisory workers. Regressors include a constant, the unemployment rate minus the CBO estimate of the natural rate, two lags of the DV, and "expected trend wage growth" taken from a recent Goldman-Sachs analysis. They define this variable as follows: "Trend wage growth is estimated as the sum of the Fed's measure of inflation expectations and a simple average of the backward-looking productivity growth trend and the Survey of Professional Forecasters' estimate of productivity growth over the next 10 years." The full sample goes for 1992q1 through 2019q4. The "out-of-sample" model runs through 2010.

Some analysts have correctly noted that unemployment doesn't capture slack as well as the prime-age employment rate, especially when it comes to correlating with wage growth. If I substitute the prime-age employment rate into the model, the difference between the two predictions is negligible. My point here is simply that those who think wage growth should be faster at 3.5 percent unemployment are not necessarily wrong.

 -- via my feedly newsfeed

Interview with Janice Eberly: Intangible Capital and Other Topics [feedly]

Tim Taylor on the contradictions in "intangible capital", or, as Paul Samuelson remarked early on, (I am paraphrasing a famous paper of Samuelson): "They are poor commodities, do not retain value, and, because they are "ideas", inherently are quasi public goods."

Interview with Janice Eberly: Intangible Capital and Other Topics
http://conversableeconomist.blogspot.com/2020/02/interview-with-janice-eberly-intangible.html

Jessie Romero has an interview with Janice Eberly in Econ Focus(Federal Reserve Bank of Richmond, Fourth Quarter 2019, pp. 22-26). The introduction notes: "Her research covers topics including firms' capital investment decisions, household consumption choices, and how these decisions influence, and are influenced by, macroeconomic trends. Most recently, Eberly has been studying the implications of rising `intangible investment' — the investments firms make in software, intellectual property, and the like — for aggregate investment, market concentration, and productivity growth."

The topic of intangible capital is still very much a subject of live research, not as settled question. But it offers the potential to be an explanation for some otherwise puzzling patterns in the modern economy. For example, US investment spending in physical capital has is low, which seems strange in an economy which "everyone knows" is moving toward a greater focus on technology. Maybe investments in intangible capital can help explain why? Physical capital can help produce up to a certain amount, bur then runs into physical limits. However, intangible capital may be able to expand output to much higher levels without running into physical limits. If some firms are going better at intangible capital investments than others, this could help to explain the rise of "superstar" firms. Here are some comments from Eberly in the interview:

We're familiar with investments in physical capital, by which I mean property, plant, and equipment — the things most people would recognize as capital. That's tangible capital. But today we also have intangible capital — the investments you can't touch, such as software and intellectual property. You can expand the definition to include things like worker skills that are specific to the firm; when a firm invests in its employees, it's also developing its capital in some broad sense. The metaphor we often use is that Amazon's software platform is as crucial for its business model as an oil platform is for an energy extraction firm.

These types of investments are increasingly important: Intangible capital is the fastest-growing part of investment. It also seems to be playing a greater role in the success of firms. Not only is intangible capital a larger and larger share of investment overall, but it's also especially important for the firms that end up being the leading firms in their industries.

Amazon's business is built on intangible capital; Walmart's logistics technology is all intangible capital. Retail is a sector where efficiency has risen dramatically and labor productivity has gone up. This is very highly associated with the increase in intangible capital, so in retail especially you see a very strong role for intangible capital among the most successful firms. ...

Intangible capital seems to be where firms' innovative investments are reflected. Historically, we thought technological change was embodied in tangible capital: When firms put new equipment in place, it came with new software and new capabilities. So a way of increasing productivity was to put new equipment in place. Today, you can buy the software separately. So the question is whether physical capital is embodying technological change in the way that it used to. Is the technological change actually in the intangible capital? ...

Intangible capital does seem less sensitive to traditional monetary policy. It tends to depreciate quickly, and it's not an interest-rate-sensitive spending category. That tends to make it less responsive to monetary policy that moves interest rates.

Financial innovation could reverse that effect, though. If intellectual property was "financialized," for example, becoming more like liquid assets, you could definitely see credit markets arising behind intangible capital, as there are for machinery and equipment. Now, intangible capital tends to be embedded in a firm. But there are new markets developing all the time that could make intangible capital more marketable. There are already markets for some types of intangible capital — patents can be bought, sold, and licensed, for example. ...

Just like job growth has shifted toward the service jobs you can't send overseas, investment has shifted toward the industries where you can't offshore the capital and away from the durable goods and manufacturing industries. The curious thing was that we saw job growth in the high-skilled, high-tech sectors, but we didn't see the counterpart in investment growth. We saw the hollowing out of investment away from manufacturing, but we didn't see it going toward high-tech. This was my first inkling that something was going on with investment that was different from what we'd seen historically. The physical capital was the dog that didn't bark.

But high-tech is where there's been a big increase in intangible capital. So when you add that in, you do see a rise in not only high-tech jobs, but also high-tech investment — it's just that the high-tech investment is not the tangible kind.

For those interested in digging into the underlying research, a good starting point is "Understanding Weak Capital Investment: the Role of Market Concentration and Intangibles," by Nicolas Crouzet and Janice C. Eberly (NBER working paper from May 2019 is here; for an earlier ungated version from the Kansas City Fed, see here). From the abstract:

We document that the rise of factors such as software, intellectual property, brand, and innovative business processes, collectively known as "intangible capital" can explain much of the weakness in physical capital investment since 2000. Moreover, intangibles have distinct economic features compared to physical capital. For example, they are scalable (e.g., software) though some also have legal protections (e.g., patents or copyrights). These characteristics may have enabled the rise in industry concentration over the last two decades. Indeed, we show that the rise in intangibles is driven by industry leaders and coincides with increases in their market share and hence, rising industry concentration. Moreover, intangibles are associated with at least two drivers of rising concentration: market power and productivity gains. Productivity gains derived from intangibles are strongest in the Consumer sector, while market power derived from intangibles is strongest in the Healthcare sector.

I recommend the rest of the Eberly interview as well. As one example, I was intrigued by one of her comments about student loans: 

What everyone notices when you look at the student loan data is this increase in loans outstanding over the course of the 2000s. Then it accelerates during the financial crisis. ... There's a generational switch: The financial responsibility for education is being transferred from the parents to the students. When the parents lost access to home equity, they reduced spending on many things, but they reduced their spending on education more than on other parts of their budget. The student loans help the family to insure the student's education, but there's a reallocation of consumption within the family as well.

So far, the switch hasn't reversed. So there does seem to be a longer-run shift toward students self-financing their educations. Some of that is a change in the composition of the student body, so you're seeing more students who are self-funding

 -- via my feedly newsfeed

NYT U.S. Trade Deficit Shrinks, but Not Because Factories Are Returning [feedly]

U.S. Trade Deficit Shrinks, but Not Because Factories Are Returning
https://www.nytimes.com/2020/02/05/business/economy/trump-trade.html

TEXT ONLY

WASHINGTON — The overall United States trade deficit shrank last year for the first time in six years as the American economy cooled, domestic oil production soared and President Trump waged an aggressive global trade war to rewrite America's trading terms.

The trade deficit for both goods and services fell to $616.8 billion in 2019, down $10.9 billion from the previous year, according to data released by the Commerce Department on Wednesday.

Both imports and exports fell as American factory activity slowed and businesses and consumers felt the impact of tariffs imposed on China, the European Union, Canada, Mexico and other nations. Total American exports dropped $1.5 billion to roughly $2.5 trillion, while imports fell $12.5 billion to $3.1 trillion.

Soaring domestic oil production was a major factor in the shrinking trade deficit, cutting into imports of foreign crude oil by $30.3 billion last year. Exports of civilian aircraft also fell $12.6 billion last year, reflecting the fallout from the deadly crashes of Boeing's 737 Max airplane.

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Continue reading the main story

But the most dramatic changes in global trade flows occurred with China, the target of Mr. Trump's biggest economic offensive.

The trade deficit in goods with China shrank $73.9 billion to $345.6 billion in 2019. It was the first drop on an annual basis since 2016, as both the United States and China placed tariffs on hundreds of billions of dollars of each others' products.

In particular, American imports from China fell sharply in the final two months of the year, as companies worked to avoid tariffs that Mr. Trump has placed on $360 billion worth of Chinese goods and the potential that he could tax nearly everything from China.

Mr. Trump and his advisers have pointed to trends in trade flows as evidence that his trade policies are helping to revive factories and construction sites around the nation.

"This is a blue collar boom," Mr. Trump said in the State of the Union address on Tuesday evening.

But most economists have been skeptical, saying that the country's factory activity weakened last year, and that the trade flows largely reflect a cooling American and global economy.



 -- via my feedly newsfeed

The facebook socialist economics group

Friends

The articles posted on this listserv also appear (much prettier) on the "Socialist Economics\" facebook group (yes, that backslash is there -- I mistyped when creating the group and could not take it back without undue labor.)

The group is member based,, although the content is public, meaning anyone can share or see. posting is restricted to members.

Here is the link: https://www.facebook.com/groups/SocialistEconomics/  

--

John Case
Harpers Ferry, WV

Enlighten Radio

Socialist Economics

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Review of Strong Towns [feedly]

Review of Strong Towns
http://dollarsandsense.org/blog/2020/01/review-of-strong-towns.html

Strong Towns: A Bottom-Up Revolution to Rebuild American Prosperity
by Charles L. Marohn, Jr

Review by Polly Cleveland

Along with the automobile, Detroit pioneered a new American way of living: the auto-dependent housing development consisting of single-family houses arrayed around cul-de-sac streets. After World War II, the Detroit model subdivision exploded into the suburbs around the country. A post-war return to normal life, federal subsidies for veterans and new highways leading out of town—all combined to create a huge boom in suburban housing demand. Aided by federal and local subsidies for utilities, developers could build complete huge new single-family housing subdivisions outside existing cities—such as the famous Levittowns. Middle class white families moved out into these shiny new developments, leaving behind poorer and often minority families in older inner-city neighborhoods.

Before that time, most houses were built one by one, adjoining or replacing existing housing. Neighborhoods therefore represented a mix of older and newer, smaller and larger buildings. Limited transportation kept housing relatively dense. The high density in turn made it inexpensive for city governments to maintain services—police, fire, garbage, schools—and infrastructure—roads, sidewalks, sewers, water supplies, and other utilities. Moreover, due to the mixed age of structures, there were not unexpected peaks in costs.

All that changed with the new subdivisions. At first, they generated substantial tax revenues, making cities eager to encourage and subsidize more of them by extending utilities. But this pattern of growth contained a fatal flaw: Because all the utilities and houses in a subdivision were built at the same time, they all aged at the same rate. After 25 years or so of fiscal surplus, costs began to rise steeply for repairing infrastructure. In wealthier subdivisions, the city could raise property taxes to cover costs. In ordinary middle-class subdivisions, when city maintenance lagged, those residents who could afford it moved to newer subdivisions further out, leaving shabby houses on crumbling streets inhabited by ever poorer and often minority residents. This happened first in Detroit, where huge areas now lie abandoned. It is now happening in inner suburbs around the nation. Yet as inner suburbs crumble, towns pursue the same old financial fix: subsidizing brand-new subdivisions on raw land.

Ferguson, a suburb of St. Louis Missouri, makes a good example. In 1970 the population of some 29,000 was 99% white. By 2010, the population had fallen to 21,000, only 29% white. Ferguson came to national attention in 2014 when a police officer shot and killed an unarmed black teenager, setting off widespread protests. Investigative reporters found that the financially-strapped local government, still largely run by white officials, funded itself in part by imposing fines on the poor residents for minor offenses like driving with a broken headlight, jailing them when they couldn't pay. Ferguson turned out to typify many aging suburbs.

Today the tragedy comes full circle: the more affluent members of the younger generation are moving back into the run-down central city neighborhoods that their grandparents abandoned. In part, that's because today's families need both parents to work, making central locations more desirable. As these people return, they gentrify old neighborhoods, pricing out seniors as well as working-class or poorer residents. The local residents of course fight back, with rent control and severe restrictions on new construction or modifications of old buildings. New York City's newly-fortified rent control laws essentially forbid landlords from raising rents to cover the cost of renovations. California has seen an explosion of homeless and "housing insecure" people, including people with steady jobs.

The author of Strong Towns, Charles Marohn, is a civil engineer and planner. He began his career advising towns on how to attract and support those so-desirable new subdivisions. Eventually the numbers caught his attention, particularly the staggering cost of maintaining the infrastructure in aging single-family subdivisions. He came to recognize that much of this infrastructure was simply long run unsustainable, and that towns were committing financial suicide in their pursuit of "growth."

Marohn also found that in their pursuit of "shiny and new," towns may destroy the most financially productive parts of their tax bases. These are often not the most valuable properties, but roughly those that yield the most revenues per acre. He gives an example from his home town of Brainerd, Minnesota. There were two identical adjoining blocks in an area the town had labeled "blighted." Aided by municipal subsidies, one block was razed and replaced with a Taco John's franchise with plenty of parking. But while the Old and Blighted block had a tax value of $1.1 million, this Shiny and New block had a value of only $620,000. Moreover, Old and Blighted housed 11 small businesses with local owners plus 6 extra full-time workers. On Shiny and New, Taco John's provided 20 to 25 part-time jobs. Not even new jobs, because Taco John's had merely relocated from three blocks away.

Marohn advises towns first of all to prioritize maintenance of the most financially productive areas, whether blighted or not. As he writes, "Mow the grass. Sweep the streets. Patch the sidewalks. Pick up the trash. Fill the potholes…See a streetlight out: replace it. See a weed: pull it. See a crosswalk faded: repaint it…The neighborhoods that are generating such wealth for the community need to be showered with love."

But then Marohn makes a recommendation that will shock most communities: reconsider the policies that restrict change and discourage denser development. Oversized new buildings pop up in the wrong places, he says, because it's so difficult, time-consuming and expensive for developers to battle all the restrictions that when they do finally get a permit, they build as high as they can. Property owners, he says, should have the right to develop their properties to the next level without their neighbors' permission. That is, an owner in a single-family neighborhood should have a right to install a mother-in-law unit, or even build two or three units. In a neighborhood of three units, owners should have a right to build low-rise apartment buildings. And so forth. Meantime, towns should scrap those off-street parking requirements, which waste land, raise housing costs and encourage reliance on cars.

In all his compelling case for allowing higher density, I wish Marohn had addressed the role of property taxes. As I wrote in How a Progressive Tax System Made Detroit a Powerhouse (and Could Again), a tax system that relies heavily on taxing land is both highly progressive and pro-density. Detroit collapsed not just due to unsustainable low density subdivisions, but also due to the loss of such a system. But the book is essential reading for local officials and all of us who love cities.

Marohn now spends his time on his Strong Towns non-profit media organization, setting up events and webinars to discuss growth, development and the future of cities.

 -- via my feedly newsfeed