Everyone agrees that entrepreneurs are important to an economy that, like the U.S., relies on innovation and productivity growth. But concrete data on the numbers and characteristics of entrepreneurs are not always easy to come by. The Global Entrepreneurship Monitor project has been seeking to address this issue since 1999 using survey data. The GEM project now surveys 54 countries, and the results for the 2011 U.S. survey of 5800 adults are now available. It is publishes as the National Entrepreneurial Assessment for the United States of America, written by Donna J. Kelley, Abdul Ali, Edward G. Rogoff, Candida Brush, Andrew C. Corbett, Mahdi Majbouri and Diana Hechavarria.
In general, survey measures suggest that many Americans think of themselves as potential or actual entrepreneurs. \”Capabilities perceptions in the United States are among the highest of the innovation-driven economies.Over 55% of adults (aged 18–64) believe they have the skills and ability to start a business. This measure shows a relatively stable pattern over time.\”
But measures of actual entrepreneurship show some differing results. One measure is Total Entrepreneurial Activity (red bars in the graph below), which refers to what share of the population is starting or running a new business. By this measure, the U.S. leads the way among high-income economies. Another measure is Entrepreneurial Employee Activity (blue bars in the graph below), which seeks to measure \”employees developing or launching new goods or services or setting up a new business unit, a new establishment or subsidiary for their main employer.\” By this measure, the U.S. performs well, but lags behind Sweden, Denmark, Belgium and Finland. Of course, this difference points out that organizations that encourage \”intrapreneurs\” may be as important as entrepreneurs who start businesses from scratch.
The report also suggests that entrepreneurship in the U.S. made something of a comeback in 2010 and 2011, after sinking with the economy in 2009. The following graph shows five measures of entrepreneurship in the U.S.
\”1. Intent. Percentage of non-entrepreneurs in the adult population that intend to start a business in the next three years. 2. Nascent. Percentage of the adult population that is in the process of starting a business that has not paid salaries or wages for more than three months. 3. New. Percentage of the adult population that is running a new business (beyond nascent stage), less than 42 months old. 4. Established. Percentage of the adult population that is running an established business older than 42 months. 5. Discontinuance. Percentage of the adult population that has discontinued a business in the last year.\”
As the report points out, the green line \”nascent\” entrepreneurs show the biggest jump. They write: \”Nascent activity accounted for the majority of this activity: 8.4% of the adult working age population—two-thirds of the entrepreneurs—were in the early stages of this process. Additionally, nascent activity accounted for much of the increase in TEA, indicating that a lot of people were jumping into entrepreneurship in 2011.\”
The report has lots more breakdowns of U.S. entrepreneurs by age, education, gender, income, industry, export focus, and other factors. While I find these survey results thought-provoking, I confess that interpreting the results remains difficult for me. When I see data to the effect that 55% of Americans consistently believe that have the skills and ability to start a business, I find myself wondering (a bit cynically, I confess) what percentage also believe that they could be professional athletes–if only they had practiced a little more in high school.
When I seen rates of entrepreneurial activity rising in 2010 and 2011, I find myself wondering if this should be interpreted more as a reaction of people who lacked other opportunities in the dreadful job market of these years and were trying to scrape together some income by working on their own or with a few friends, rather than as a signal of greater entrepreneurial vigor. There\’s a difference in the economic effects of entrepreneurs who start businesses which grow and hire and individuals or small groups who make a living working independently, but who have no real opportunities or plans for expanding.
I also find myself remembering the arguments by John Maynard Keynes to the effect that entrepreneurs as a group are driven by \”animal spirits,\” not a rational calculation of costs and benefits. For a a nice overview of what Keynes meant by the term \”animal spirits,\” and the earlier uses of the the term in Descartes\’ analysis of physiology, I recommend this short article by Roger Koppl that appeared in back in the Summer 1991 issue of my own Journal of Economic Perspectives. (This article, like all JEP articles back to the first issue in 1991, is freely available on-line courtesy of the American Economic Association.) Koppl wrote:
\”Although Keynes would have agreed that animal spirits can lead to bubbles and fads and crashes, he also argued that positive investment generally occurs because of a mistake by the investor, a mistake undertaken because of animal spirits. Keynes argued that since entrepreneurs and investors would often be immobilized if they sought to make rational economic decisions, animal spirits are needed to leapfrog rationality and bolster the economy.\”
Of course, even if entrepreneurship is heavily driven by animal spirits, the ultimate success of entrepreneurial efforts will still depend heavily on the economic, financial, regulatory, and institutional environment.
What is America\’s costliest health condition? I suppose the two obvious guesses might be cancer or heart disease. But the answer may well be Alzheimer\’s disease, according to \”Monetary Costs of Dementia in the United States,\” written by Michael D. Hurd, Paco Martorell, Adeline Delavande, Kathleen J. Mullen, and Kenneth M. Langa, and published in the April 3, 2013 issue of the New England Journal of Medicine. They write:
\”The estimated prevalence of dementia among persons older than 70 years of age in the United States in 2010 was 14.7%. The yearly monetary cost per person that was attributable to dementia was either $56,290 … or $41,689 …, depending on the method used to value informal care. These individual costs suggest that the total monetary cost of dementia in 2010 was between $157 billion and $215 billion. … By 2040, assuming that prevalence rates and cost per person with dementia remain the same, our estimates suggest that these costs will more than double because of the aging of the population. …
Our estimate places dementia among the diseases that are the most costly to society. The cost for dementia care purchased in the marketplace ($109 billion) was similar to estimates of the direct health care expenditures for heart disease ($96 billion in 2008, or $102 billion in 2010 dollars) and significantly higher than the direct health care expenditures for cancer ($72 billion in 2008, or $77 billion in 2010 dollars). These costs do not include the costs of informal care, which are likely to be larger for dementia than for heart disease or cancer.\”
The fact that 1 person in 7 in the United States over the age of 70 has dementia now was an unpleasant surprise to me: I would not have guessed the proportion was that high. As the population ages, my guess is that the proportion will tent to rise. The calculations in this study show that only for those in the 71-74 age bracket, just 2.8% have dementia, but that percentage steadily rises to 4.9% for those in the 75-79 age bracket, 13.0% for those in the 80-84 age bracket, 20.3% for those in the 85-89 age bracket, and a frankly terrifying 38.5% for those over age 90.
The cost-per-person of dealing with dementia seem likely to rise, too, like so many other service-related health care costs. With generally lower birthrates in the last few decades, finding unpaid family caregivers to look after those with dementia will become harder. But pushing all of those with Alzheimer\’s into America\’s ultra-costly health care system isn\’t practical, either. Barring some medical breakthrough that dramatically holds down the number of future cases of dementia, thinking about a model of care for growing numbers of dementia patients that is acceptable and affordable is going to pose some difficult social challenges.
The 2013 Economic Report of the President, published recently by the President\’s Council of Economic Advisers, devotes a chapter to bringing readers up to speed on\”The Challenges and Opportunities of U.S. Agriculture.\” Here are some of the main points that jumped out at me:
Over much of the 20th century, the number of farms was falling, the size of farms was growing, rhe rural share of the population was falling, and the share of GDP from farming was falling–although all of these trends have leveled off in the last decade or so.
When it comes understanding farm incomes, the key point is to recognize that there are different types of farmers, like whether the main income come from farming or from outside activities. The report explains:
\”Fifty years ago, average household income for the farm population was approximately half that of the general population. Today, however, farm households tend to be better off than other American households; in 2011, median income for farm households was about 13 percent higher than the U.S. median household income … The difference in income between farm households and the nonfarm households is due in part to the broad Department of Agriculture (USDA) definition of what constitutes a farm, which includes farms where the principal operator is retired or has a main occupation other than farming (“residence farms”). Households operating rural residence farms earn more than the U.S. median household income even though their net cash income from farming is negative. Households operating intermediate farms (farms where the principal operator is not retired and reports farming as his or her main occupation) have on average positive net cash income from their farming operations, but most household income comes from sources other than farming. The sources of income for farm households are increasingly diversified, which means that many of them are less vulnerable to the fluctuations of farm income. In 2011, households operating commercial farms had median household incomes two and a half times the overall U.S. median household income, with most of their income from farming. … By 2000, 93 percent of farm households had income from off-farm sources, including off-farm wages, salaries, business income, investments, and Social Security. Off-farm work has played a key role in raising farm household income. In 2011, only 46 percent of principal operators of farms reported that farming was their main occupation.\”
Farming remains one of the most useful industries for generating vivid and understandable classroom examples of technological change. Again, some examples from the report:
\”While farm household incomes have become more diversified, farm operations have become increasingly specialized: In 1900, a farm produced an average of about five commodities; by 2000, the average had fallen to just over one. This change reflects not only the production and marketing efficiencies gained by concentration on fewer commodities, but also the effects of farm price and income policies that have reduced the risk of depending on returns from only one crop or just a few crops….
\”In 1950, the average dairy cow produced about 5,300 pounds of milk. Today the average cow produces about 22,000 pounds of milk, thanks to improvements in cow genetics, feed formula, and management practices. Over that time period, the number of dairy cows in America has fallen by more than half, yet U.S. milk production has nearly doubled. …
\”Livestock operations have undergone dramatic changes in the last 30 years. Farmers now use information technology to adjust feed mixes and climate controls automatically to meet the precise needs of animals in confined feeding operations. Integrated hog operations, for example, sharply reduced the amount of feed, capital, and labor needed to produce hogs as new technologies and organizational forms swept the industry. As a result, live hog prices were nearly a third lower than they would have been without the productivity growth that occurred between 1992 and 2004, and retail pork prices were 9 percent lower. …\”
\”From 1948 to 2009, farm productivity nearly tripled, growing at a rate of 1.6 percent a year. In the early part of that period, increased productivity, measured as output per unit of combined inputs, combined with increased use of equipment and chemical inputs to drive the growth in agricultural output. Between 1980 and 2009, equipment stocks fell along with continued declines in labor and land inputs; chemical use continued to rise, but at a much slower rate. Despite reduced input use, agricultural output grew by 1.5 percent a year in 1980–2009, with increasing productivity accounting for almost all of the growth.\”
Americans continue to spend more on food.
Finally,the average age of farmers has been rising; for example, farmers under age 35 contribute only 6% of the total value of agricultural production. Clearly, this raises some issues about who the farmers of the future are likely to be (citations omitted):
\”The average age of U.S. farmers and ranchers has been increasing over time. In 1978, 16.4 percent of principal farm operators were over age 65. By 2007, 30 percent of all farms were operated by producers over 65. In comparison, only 8 percent of self-employed workers in nonagricultural industries in 2007 were that old. One reason the farming sector is relatively older is that farmers are living longer and often reside on their farms. Many established farmers never retire. Additionally, one-third of beginning farmers are over age 55, indicating that many farmers move into agriculture only after retiring from a different career. More than 20 percent of farm operators report that they are retired. Another 32 percent of all farms are operated by farmers aged 55 to 64 years. Farmers aged 55 and older account for more than half of the total value of production. Farmers under 35 contribute only 6 percent of the total value of production. This demographic transition has implications for the future of the U.S. agricultural sector.
When any large group of Americans seems to be moving backward over a sustained period of time, it\’s cause for concern. In Wayward Sons: The Emerging Gender Gap in Labor Markets and Education, a report written for Third Way, David Autor and Melanie Wasserman point out: \”Over the last three decades, the labor market trajectory of males in the U.S. has turned downward along four dimensions: skills acquisition; employment rates; occupational stature; and real wage levels.\” Moreover, Autor and Wasserman argue that these patterns are intertwined through mechanisms that involve marriage decisions and family structure. (Full disclosure: David Autor is the editor of my own Journal of Economic Perspectives, and in my everyday work life, he\’s my boss.)
Educational achievement for men went backward for a time, and has only recently been recovering back toward the levels of the 1960s. Here\’s a figure showing the pattern for the share of 35 year-olds who have completed a four-year college degree, but similar patterns arise if one looks at completing high school, or completing some college, or other measures of education.
Employment rates for both white men and black men have been sagging since the 1970s, although they took an additional drop during the Great Recession.
Meanwhile, wages have been sagging for low-skilled men workers in particular. This figure shows the percent change in real hourly wage levels over the period from 1979-2010. The left-hand figure shows patterns for younger workers, ages 25-39; the right-hand figure shows patterns for older workers, ages 40-64. The blue bars show outcomes for men, given different levels of education, while the red bars show outcomes for women. Clearly, it\’s been a lousy few decades to be a low-skilled worker. But for men, even being a college graduate hasn\’t been much help for those in the 40-64 age bracket. It\’s also notable that in every age and education category, wages changes for women have outperformed those of men.
Autor and Wasserman offer a multipart hypothesis to tie these fact patterns together. They would be the first to admit that their explanation falls short of a rigorous cause-and-effect demonstration. But as they assemble what evidence is available, their story has considerable plausibility. Here\’s their summary of the argument:
\”[W]we argue first that sharp declines in the earnings power of non-college males combined with gains in the economic self-sufficiency of women—rising educational attainment, a falling gender gap, and greater female control over fertility choices—have reduced the economic value of marriage for women. This has catalyzed a sharp decline in the marriage rates of non-college U.S. adults—both in absolute terms and relative to college-educated adults—a steep rise in the fraction of U.S. children born out of wedlock, and a commensurate growth in the fraction of children reared in households characterized by absent fathers.
The second part of the hypothesis posits that the increased prevalence of single-headed households and the diminished child-rearing role played by stable male parents may serve to reinforce the emerging gender gaps in education and labor force participation by negatively affecting male children in particular. Specifically, we review evidence that suggests that male children raised in single-parent households tend to fare particularly poorly, with effects apparent in almost all academic and economic outcomes. One reason why single-headedness may affect male children more and differently than female children is that the vast majority of single-headed households are female-headed households. Thus, boys raised in these households are less likely to have a positive or stable same-sex role model present. Moreover, male and female children reared in female-headed households may form divergent expectations about their own roles in adulthood—with girls anticipating assuming primary child-rearing and primary income-earning responsibilities in adulthood and boys anticipating assuming a secondary role in both domains. …
Sorting out the causal factors behind these trends is a challenging but nonetheless central topic for social science research and public policy. A growing body of evidence supports the hypothesis that the erosion of labor market opportunities for low-skill workers in general—and non-college males in particular—has catalyzed a fall in employment and earnings among less-educated males and a decline in the marriage rates of less-educated males and females. These developments in turn diminish family stability, reduce household financial resources, and subtract from the stock of parental time and attention that should play a critical role in fomenting the educational achievement and economic advancement of the next generation.\”
I\’ll leave it to the reader to contemplate policy alternatives. But of course, the antedilivian prescription that making women economically worse off would some how rescue low-wage men is not a path either to economic growth or to social well-being. However, finding ways to improve the skills and job opportunities of low-skill workers could clearly have substantial social payoffs beyond the labor market.
A friend of mine argues that the roadways are full of people driving as if they had recently knocked back a beer or a glass of wine. But their tipple isn\’t alcohol; instead, it\’s the distractions of cell-phones and texting. There\’s at least some circumstantial evidence that the parallel between how alcohol and texting affect driving is all too real: a few years back, Car and Driver magazine had a few people drive while texting and then drive while drunk, on a closed course. The effects on reaction times were similar, with texting being a little more disabling. One study has estimated that 2700 deaths per year were occurring in the mid-2000s as a result of texting-while-driving.
Thus, it\’s not surprising that from 2007 through January 2012, 33 states had banned texting while driving. Rahi Abouk and Scott Adams examine the evidence about what happened next in \”Texting Bans and Fatal Accidents on Roadways: Do They Work? Or Do Drivers Just React to Announcements of Bans?\” The paper appears in the April 2013 issue of the American Economic Journal: Applied Economics (5:2, 179–199). The AEJ:Applied isn\’t freely available on-line, but many in academia will have access through library subscriptions.
By looking at data across 33 states, the authors can look for how texting-while-driving bans in one state affect accidents in that state at the time before and after the ban, which helps to sort out the effect of the ban from other issues affecting auto accidents. They can also look at states where the ban is enforce more or less harshly. In particular, they focus on data about single-car accidents, which took a significant jump in the early and mid-2000s as texting became popular. As they explain: \”A driver with passengers might be less willing to put them in danger by texting. Moreover, they may find less need to text if someone is there to speak with them or stop them from texting if they perceived the risk to be dangerous. Multiple vehicle accidents typically are caused by more than one factor since there are multiple drivers.\” Of course, this doesn\’t mean that texting doesn\’t also contribute to multi-car accidents! It just means that if you are seeking evidence in particular about the effect of texting-while-driving bans, single-car crashes are a category where the cause-and-effect connection from legislation is likely to be more clear.
Abouk and Adams summarize their findings in this way: \”Our evidence suggests fatal accidents are reduced by bans if they are enforced as a primary offense and cover all drivers. Alternatively, accidents less likely to be related to text messaging, particularly multiple vehicle or multiple occupant accidents, are not reduced significantly. The strong impact of texting bans on single-vehicle, single-occupant crashes is short-lived. While the effects are strong for the month immediately following ban imposition, accident levels appear to return toward normal levels in about three months. This suggests that a texting ban immediately saves lives, but the positive effect cannot be sustained. The declining impact of traffic safety policies over time is not uncommon and has been observed in other regulations. Given the large impact of texting bans in the initial months following enactment, however, the evidence of the paper suggests greater enforcement of these laws likely can save more lives.\”
Here\’s are a couple of illustrative figures from their paper that give a sense of their findings. On the horizontal axis, the zero point is when the texting-while-driving ban was passed. Thus, the figures show the pattern of accidents both before and after the ban. At the time of the ban, accidents drop, as shown by the dark line. (The dashed lines are the statistical confidence interval around the main estimates). But then, a few months after the ban, accidents creep back up again. The upper panel shows states with stronger enforcement; the bottom panel shows states with weaker enforcement.
To me, the lesson here is that despite all the states which have passed laws about texting-while-driving, as a society we are still somewhat ambivalent about the practice. We don\’t yet think of it with the condemnation given to drunk driving. Legal enforcement and social opprobrium just aren\’t as fierce in the case of texting-while-driving. But both texting-while-driving and drunk driving pose a real and serious threat both to the driver of the vehicle, and also to all the other drivers on the road.
Long-term economic growth in the United States has a remarkable continuity: indeed, on a certain kind of graph, it almost looks like a straight line. The graphs that follow are from the Measuring Worth website, an extremely useful resource for long-term economic data led by Lawrence Officer and Samuel Williamson. At the website, you will find long-run data on GDP, earnings, prices, interest rates, and other statistics for the U.S., U.K, Japan, and China. One useful purpose of the website is to use long-run data on prices, household consumption, income, and output as ways of putting in perspective what things were worth at different times.
Here, I want to focus on growth of the U.S. economy over time. The first graph shows growth of the real (that is, inflation adjusted) U.S. output from 1790 to the present. The second graph shows growth of real per capita U.S. GDP over the same time–that is, it is calculated on a per person basis and thus adjusts for population growth.
But for the uninitiated, these graphs may not deliver a clear message. It looks on these graphs as if growth was slow in much of the 19th century, but then accelerated in recent decades. It looks as if the most recent Great Recession was similar in depth to the Great Depression of the 1930s.
The problem here arises because of a difference between absolute levels of growth and rates of growth. Imagine, for example, an economy that starts out a size of 100, and grows by 1 every year, so that after two centuries it has reached a size of 300. If you think about it for a moment, the growth rate of this economy is slowing every year: it grew by 1% the first year (1/100), but by less than 1 percent the second year (1/101) and by the end of 200 year is growing at only about one-third of a percent (1/300). Thus, a line of straight slope on the graph above would actually show a steadily declining rate of growth. Now imagine that the economy starts at a growth rate of 100, but grows at 1% each year for 200 years. As this growth rate compounds, with each year building on the previous one, this economy will reach a size of 731 after 200 years. The steady rate of growth over time will look be a larger absolute amount–a difference that will look large after a couple of centuries.
In a logarithmic graph, a straight line shows that the same percentage rate of growth is continuing from year to year. Here is the same data as in the above figure from the Measuring Worth website, but now presented on a logarithmic graph. Notice that both graphs are nearly straight lines–which means that the rate of growth has been fairly consistent over time. Notice also that when expressed in terms of growth rates, the Great Depression is clearly larger than the more recent Great Recession.
Of course, the persistence of per capita economic growth in the U.S. economy over the last couple of centuries doesn\’t prove that such growth will continue. Future growth prospects depend on investments in human capital, physical capital, and new technology, along with a market-oriented environment that provides incentives for such investment and innovation. Sometimes I meet a true skeptic about the future of economic growth, who views the entire economy as a house of cards that might tumble down tomorrow. Maybe they will prove to be correct! But I sometimes point out that when you are arguing that a remarkably persistent pattern of growth of the last several centuries is about to end suddenly, history is not on that side of the argument.
The terminology of \”intellectual property\” goes back to the eighteenth century. But some modern critics of how the patent and copyright law have evolved have come to view the term as a tendentious choice. One you have used the \”property\” label, after all, you are implicitly making a claim about rights that should be enforced by the broader society. But \”intellectual property\” is a much squishier subject than more basic applications of property, like whether someone can move into your house or drive away in your car or empty your bank account.
The Oxford English Dictionary gives a first use of \”intellectual property\” in 1769, in an anonymous review of a book authored by a Dr. Smith and called New and General System of Physic, and published in a publication called Monthly Review (available here). The book review is extremely negative, essentially accusing the author of copying copiously from other writers–but adding errors of his own. Apparently at various points in the book, the author Dr. Smith refers to wonderful and enlightening experiments of his own that he claims have worked extremely well, but says that he doesn\’t want to bore the reader with his own work. The reviewer notices this disjunction between extensive copying from others and bashfulness about revealing actual work of his own (if indeed such work existed) and writes: \”What a niggard this Doctor is of his own, and how profuse he is of other people\’s intellectual property!\”
In the U.S. legal system, the use of \”intellectual property\” is often traced back to the case of William Davoll et al. vs. James S. Brown, decided before the First Circuit Court of the United States in the October 1845 term, which is available various places on the web like here. The court wrote: “[A] liberal construction is to be given to a patent and inventors sustained, if practicable, without a departure from sound principles. Only thus can ingenuity and perseverance be encouraged to exert themselves in this way usefully to the community, and only in this way can we protect intellectual property, the labors of the mind, productions and interests as much a man\’s own, and as much the fruit of his honest industry, as the wheat he cultivates, or the flocks he rears.”
The rhetoric is sweeping enough to make an economist blink. Is it really true that using someone else\’s invention is the actually the same thing as stealing their sheep? If I steal your sheep, you don\’t have them any more. If I use your idea, you still have the idea, but are less able to profit from using it. The two concepts may be cousins, but they not identical.
Those who believe that patent protection has in some cases gone overboard, and is now in many industries acting more to protect established firms than to encourage new innovators, thus refer to \”intellectual property as a \”propaganda term.\” For a vivid example of these arguments, see \”The Case Against Patents,\” by Michele Boldrin and David K. Levine, in the Winter 2013 issue of my own Journal of Economic Perspectives. (Like all articles in JEP back to the first issue in 1987, it is freely available on-line courtesy of the American Economic Association.)
Mark Lemley offers a more detailed unpacking of the concept of \”intellectual property\” in a 2005 article he wrote for the Texas Law Review called \”Property, Intellectual Property, and Free Riding\” Lemley writes: \”\”My worry is that the rhetoric of property has a clear meaning in the minds of courts, lawyers and commentators as “things that are owned by persons,” and that fixed meaning will make all too tempting to fall into the trap of treating intellectual property just like “other” forms of property. Further, it is all too common to assume that because something is property, only private and not public rights are implicated. Given the fundamental differences in the economics of real property and intellectual property, the use of the property label is simply too likely to mislead.\”
As Lemley emphasizes, intellectual property is better thought of as a kind of subsidy to encourage innovation–although the subsidy is paid in the form of higher prices by consumers rather than as tax collected from consumers and then spent by the government. A firm with a patent is able to charge more to consumers, because of the lack of competition, and thus earn higher profits. There is reasonably broad agreement among economists that it makes sense for society to subsidize innovation in certain ways, because innovators have a hard time capturing the social benefits they provide in terms of greater economic growth and a higher standard of living, so without some subsidy to innovation, it may well be underprovided.
But even if you buy that argument, there is room for considerable discussion of the most appropriate ways to subsidize innovation. How long should a patent be? Should the length or type of patent protection differ by industry? How fiercely or broadly should it be enforced by courts? In what ways might U.S. patent law be adapted based on experiences and practices in other major innovating nations like Japan or Germany? What is the role of direct government subsidies for innovation in the form of government-sponsored research and development? What about the role of indirect government subsidies for innovation in the form of tax breaks for firms that do research and development, or in the form of support for science, technology, and engineering education? Should trade secret protection be stronger, and patent protection be weaker, or vice versa?
These are all legitimate questions about the specific form and size of the subsidy that we provide to innovation. None of the questions about \”intellectual property\” can be answered yelling \”it\’s my property.\”
The phrase \”intellectual property\” has been around a few hundred years, so it clearly has real staying power and widespread usage I don\’t expect the term to disappear. But perhaps we can can start referring to intellectual \”property\” in quotation marks, as a gentle reminder that an overly literal interpretation of the term would be imprudent as a basis for reasoning about economics and public policy.
I\’ve posted on this blog in the past about how the U.S. economy has experienced a declining labor share of income. The just-released 2013 Economic Report of the President, from the Council of Economic Advisers, points out that this pattern holds across countries–and in fact is on average more severe in other developed economies than in the United States. The ERP writes (with citations omitted for readability):
\”The “labor share” is the fraction of income that is paid to workers in wages, bonuses, and other compensation. … The labor share in the United States was remarkably stable in the post-war period until the early 2000s. Since then, it has dropped 5 percentage points. …. The decline in the labor share is widespread across industries and across countries. An examination of the United States shows that the labor share has declined since 2000 in every major private industry except construction, although about half of the decline is attributable to manufacturing. Moreover, for 22 other developed economies (weighted by their GDP converted to dollars at current exchange rates), the labor share fell from 72 percent in 1980 to 60 percent in 2005.\”
Here\’s a figure showing the change.
The reasons behind the substantial fall in labor share are a \”topic for future research,\” which is to say that there isn\’t an agreed-upon answer. But there is a list of possibilities from the ERP discussion:
\”Proposed explanations for the declining labor share in the United States and abroad include changes in technology, increasing globalization, changes in market structure, and the declining negotiating power of labor. Changes in technology can affect the share of income going to labor by changing the nature of the labor needed for production. More specifically, much of the investment made by firms over the past two decades has been in information technology, and some economists have suggested that information technology reduces the need for traditional types of skilled labor. According to this argument, the labor share has fallen because traditional middle-skill work is being supplanted by computers, and the marginal product of labor has declined. Increasing globalization also puts pressure on wages, especially wages in the production of tradable goods that can be produced in emerging market countries and some less-developed countries. These pressures on wages can lead to reductions in the labor share. Changes in market structure and in the negotiating power of labor could also lead to a declining labor share. One such change is the decline in unions and collective bargaining agreements in the United States.\”
Given that the fall in labor share of income is larger in other countries than in the U.S. economy, the cause or causes should presumably be something that had a greater effect on many other countries than on the U.S. economy. Any narrowly U.S.-centered explanations are bound to fall short in explaining an international phenomenon.
The ongoing purpose of the Human Development Report, published by the United Nations Development Programme, is to serve as a reminder that GDP isn\’t all that matters. Yes, income matters, but so does education, health, inequality of incomes, treatment by gender and race, voice in how you are governed, and many other dimensions. Each year, the report produces detailed tables on many measures of well-being, including a Human Development Index that ranks countries by a weighted combination of life expectancy, education, and income. he 2013 edition of the Human Development Report has the theme\”The Rise of the South: Human Progress in a Diverse World.\” It points out that the countries of the world are seeing a convergence in HDI values: that is, the gains in low- and middle-income countries are larger than the gains in high-income countries.
\”Over the past decades, countries across the world have been converging towards higher levels of human development, as shown by the Human Development Index (HDI), a composite measure of indicators along three dimensions:life expectancy, educational attainment and command over the resources needed for a decent living. All groups and regions have seen notable improvement in all HDI components, with faster progress in low and medium HDI countries.\”
Of course, the HDI is inevitably imperfect as well. The purpose of the measure is to push us all to remember the multiple dimensions of human well-being, not to pretend that human well-being can be captured in a single number. As Amartya Sen writes in some short comments accompanying the 2013 report: \”Gross domestic product (GDP) is much easier to see and measure than the quality of human life that people have. But human well-being and freedom, and their connection with fairness and justice in the world, cannot be reduced simply to the measurement of GDP and its growth rate, as many people are tempted to do. The intrinsic complexity of human development is important to acknowledge … We may, for the sake of convenience, use many simple indicators of human development, such as the HDI, based on only three variables with a very simple rule for weighting them—but the quest cannot end there. … Assessing the quality of life is a much more complex exercise than what can be captured through only one number, no matter how judicious is the selection of variables to be included, and the choice of the procedure of weighting.\”
Each year, the HDR is a treasure trove of figures and tables and evidence. Here, I\’ll focus on one theme that caught my eye: the relationship of globalization and human development. I sometimes hear the complaint that globalization is all for the benefit of high-income countries, and is making the rest of the world worse off. But that complaint doesn\’t seem to hold true. As Kofi Annan said some years ago when he was Secretary-General of the United Nations, \”[T]he main losers in today\’s very unequal world are not those who are too much exposed to globalization. They are those who have been left out.\”
Here\’s a figure illustrating the point. The horizontal axis shows the change in trade/output ratio from 1990 to 2010. The vertical axis shows \”human progress\” as measured by relative improvement in an HDI value. Clearly, those countries with the biggest changes in trade/output value were far more likely to have larger-than-average gains in HDI. Conversely, countries where the trade/out value dropped were far more likely to see lower-than-average gains in HDI.
Here are a comments from the HDR on our globalizing world economy:
\”The South needs the North, and increasingly the North needs the South. The world is getting more connected, not less. Recent years have seen a remarkable reorientation of global production, with much more destined for international trade, which, by 2011, accounted for nearly 60% of global output. Developing countries have played a big part: between 1980 and 2010, they increased their share of world merchandise trade from 25% to 47% and their share of world output from 33% to 45%. Developing regions have also been strengthening links with each other: between 1980 and 2011, South–South trade increased from less than 8% of world merchandise trade to more than 26%. … Global markets have played an important role in advancing progress. All newly industrializing countries have pursued a strategy of “importing what the rest of the world knows and exporting what it wants.”\”
Whether for a high-income country like the United States or for other countries of the world, the path to an improved standard of living for average people involves more engagement with the global economy, not less.
Macroeconomic policy discussions keep reminding me, as a Minnesotan just making it through the winter, of a car stuck in the snow. For the uninitiated, when your car is truly stuck in a snowbank, gunning the engine doesn’t help. Your wheels spin. Maybe a little snow flies. Maybe the car shivers in place. But you don\’t have traction. Pumping the gas pedal up and down doesn\’t help. Twisting the steering wheel doesn\’t help. Putting on your emergency blinkers is recommended–but it doesn\’t get you out of the snowbank, either. Time to find a shovel, or dig that bag of sand or cat litter out of your trunk to spread under the wheels, or look for friendly passers-by to give you a push.
During the recession of 2007-2009 and since, U.S. policymakers have stomped hard on macroeconomic gas pedals. But although the unemployment rate has come down from its peak of 10% in October 2009, it remains near 8% –and the Congressional Budget Office is predicting sustained but still-slow growth through 2013. As a result, those who recommended stomping on the fiscal and monetary macroeconomic pedals are on the defensive. Some of them are doubling-down with the argument that if only we had stepped even harder on the macroeconomic pedals, recovery would have happened faster, and/or that we should stomp down even harder now.
My own belief is that we stepped about on fiscal and monetary gas pedals about as hard as we conceivably could back 2008 and 2009. Although I had some disagreements with the details of how some of these policies were carried out, I think these policies were generally correct at the time. But the recession ended in June 2009, according to the National Bureau of Economic Research, which is now almost four years ago. In the last few years, we have all become inured to fiscal and monetary policies that would have been viewed as extreme—even unthinkably extreme—by onlookers of all political persuasions back in 2005 or 1995 or 1985.
Consider fiscal policy first. Here\’s a figure generated with the ever-useful FRED website maintained by the St. Louis Fed, showing federal budget deficits and surpluses since 1960 as a share of GDP. Even with smaller budget deficits in the last couple of years, the deficits remain outsized by historical measures–in fact, larger as a share of GDP than any annual deficits since World War II.
Federal debt held by the public has grown from 40.5% of GDP in 2008 to a projected (by the Obama administration in its 2013 budget) 74.2% of GDP in 2012. This rise of 34 percentage points in the ratio of debt/GDP over four years is very large by historical standards.
For comparison, the sizable Reagan budget deficits of the 1980s increased the debt/GDP ratio from 25.8%in 1981 to 41% by 1988—a rise of about 15 percentage points over seven years. During the George W. Bush years, the debt-GDP ratio went from 32.5% in 2001 to 40.5% in 2008—a rise of 8 percentage points in eight years. Going back to the Great Depression, the debt/GDP ratio rose from 18% of GDP in 1930 to about 44% in 1940 – a rise of 26 percentage points over 10 years.
The only comparable U.S. episodes of running up this kind of debt happened during major wars. For example, the federal debt/GDP ratio went from 42.3% in 1941 to 106.2% in 1945—a rise of 54 percentage points in four years. From this perspective, the fiscal stimulus from 2008 to 2012, as measured by the rise in the debt/GDP ratio, has been about about two-thirds of the size of World War II spending. Of course, World War II, the debt/GDP ratio then fell to 80% in 1950 and 45% in 1960.Conversely, the current debt/GDP ratio is on track to keep rising.
My guess is that most people of would have believed, circa 2005, that a fiscal stimulus that was double or more the size of the Reagan deficits or the Great Depression stimulus was plenty “large enough” to deal with a recession that led to a peak unemployment rate of 10%. I have no memory of anyone back in 2008 or 2009 (myself included) who argued along these lines: \”Of course, this extraordinary fiscal stimulus may only be modestly successful. It may help drag the economy back from the brink of catastrophe, but leave unemployment rates high for years to come. And if or when that happens, the appropriate policy will be to continue with extraordinary and even larger deficits for five years or more after the recession is over.\”
Monetary policy got the gas pedal, too. Here\’s a figure of the federal funds interest rate, which up until a few years ago was the Fed\’s main tool for conducting monetary policy. The Federal Reserve took its target federal funds interest rate down to near-zero in late 2008, and has been promising to keep it near-zero into 2014. With this tool of monetary stimulus essentially used to the maximum (there are practical difficulties in creating a negative interest rate), the Fed has taken to policies of “quantitative easing,” which refers to direct purchases of over $2 trillion of federal debt and mortgage-backed securities, as well as policies that seek to “twist” long-term and short-term interest rates to keep the long-term rates low.
These monetary policies are clearly extreme steps. Looking back at the history of the federal funds interest rate since the Federal Reserve gained its independence from the U.S. Treasury back in 1951—and announced that it would pursue low inflation and sustained economic growth, rather than just keeping interest rates low so that federal borrowing costs could also remain low–it has never tried to hold interest rates at levels this low, much less to do so for years on end.
If you had asked me (or almost anyone) back in 2005 about the likelihood of a Federal Reserve of holding the federal funds interest rate at near-zero levels for six or seven years or more, while at the same time printing money to purchase Treasury bonds and mortgage-backed securities, I would have said that the probability of such a policy was so low as to not be worth considering.I have no memory of anyone back in 2008 or 2009 (myself included) who argued along these lines: \”Of course, this extraordinary monetary policy may only be modestly successful, and may well leave unemployment rates high for years to come. And if or when that happens, the appropriate policy will be to continue with near-zero interest rates for five years or more after the recession ends, along with and printing additional trillions of dollars to buy debt.\”
When it comes to the very aggressive fiscal and monetary policies that the U.S. has pursued in the last few years, my own views occupy an uncomfortable middle ground. I supported those policies when they were enacted in 2008 and 2009, and continue to believe that they were mostly the right thing to do at the time. This view puts me at odds with those who opposed the policies at the time. On the other hand, I have become increasingly uncomfortable, nearly four years after the official end of the recession, with the idea that the main focus of macroeconomic policy should be to continue stomping on the macroeconomic gas pedals. This view puts me at odds with those who favor continuation or expansion of these policies. I\’m reminded of an old line from Milton Friedman, \”The problem with standing in the middle of the road is that you get hit by traffic going in both directions.\”
Snowbank macroeconomics suggests that after a financial crisis and a recession is over, and when you have tried gunning the engine for a few years, you need to think about alternatives. It\’s easy enough to generate a list of potential policies, many of which I\’ve posted about over time.
A globalization agenda might focus on how the federal government can facilitate stronger ties from the U.S. economy to the emerging economies of the world, where most of global economic growth will be happening in the decades ahead. Trade agreements are part of the picture, but more broadly, policies would include improving communications, transportation infrastructure, cross-border processes for goods and people, language training, aligning legal systems, and more.
An education and training agenda might look seriously into two issues: how to facilitate the development of education and career paths for those who aren\’t going to complete a four-year college degree, like apprenticeships, and also how to boost K-12 achievement through mixtures of institutional reforms and incentives.
An innovation agenda might look at spending on research and development, at reform of the patent system, at science and technology education, and at simplifying the regulatory burden on those who who want to start a business.
It would be easy to extend this list to steps that might help to bring health care costs under control, or to take steps to address the long-run financial problems of Social Security, or implementing financial reforms to make a recurrence of the 2007-2009 disaster less likely. My point is not to limit the possibilities, but just to note that is that when macroeconomic policy is stuck in the snowbank, not working as well as anyone would like to boost growth and jobs, it\’s time to focus on some alternatives.
Of course, when anyone suggests that it\’s time to start easing back on our long-extended stomp on the macroeconomic gas pedal, and start focusing policy attention elsewhere, that person is soon accused of not believing in \”standard macroeconomics,\” or not believing in the idea that government can help with countercylical policy in recessions. But in spring of 2013, such remonstrations are a bit like telling the driver stuck in the snowbank that if you don\’t favor a policy of just jamming on the gas as hard as possible for as long as possible, then you must not believe in the scientific properties of the internal combustion engine.
Sometimes aggressive expansionary macroeconomic policy can be the boost that the economy needs, and I believe that stomping on the macroeconomic gas pedal made sense in 2008 and 2009. But clearly, not all the problems faced by a sluggish economy in the aftermath of a financial crisis and deep recession have solutions as simple as mountainous budget deficits and subterranean interest rates. Indeed, the U.S. economy will eventually face some risks and tradeoffs from a continued rise in its debt/GDP ratio and in a continued policy of rock-bottom interest rates.
At a minimum, it seems fair to note that that the macroeconomic situation of 2013 is quite a bit different from the crisis and recession of 2008 and 2009, and so proposing exactly the same policies for these two different times is a little odd on its face. Moreover, the extraordinarily aggressive macroeconomic policies of the last five years have not worked in quite the ways, for better or for worse, that most people would have predicted back in 2008 or 2005 or 1995 or 1985. It seems clear that the U.S. economy needs much more than just an longer dose of the macroeconomic policies we have already been following for years.
