Growthology

Picturing Deconstructed GDP Growth

This is what pundits will be debating ...

But here is a better look at the components adding to (and subtracting from) growth ...

And a slightly longer term perspective ...

Things I see:

• Inventories are a drag. Growth would be 3.8 this quarter if they were stable.
• Residential fixed investment (RF) has been the major drag for over two years.
• Imports have gone from a drag 10 quarters ago to a positive this year.
• Consumption growth seems unstoppable. (Can that last?)

Hat tip to Jim Hamilton (econbrowser.com) for the idea. He's been making charts like this for a long time. All I did was tweak the design.

$7647 per employee = cost of regulations

Matt Bandyk summarizes recent SBA analysis of the job wedge of regulation:

How would you spend $7,647? That's how much the average business in this country with under 20 employees loses a year for each of its employees because of federal regulations. Thomas Sullivan, the chief counsel for advocacy at the Small Business Administration, testified yesterday before the House Committee on Small Business about ways his office is trying to reduce the $1.1 trillion burden that federal regulations place on businesses. Sullivan also noted that this burden falls disproportionately on smaller businesses. In 2004, the cost of regulations for businesses with more than 500 employees was $5,282 per employee.

Small Biz Job Engine

I expect BLS job numbers to be pretty ugly tomorrow morning, especially with the 448,000 initial jobless claims reported this morning (even though BLS calls that an anomaly).

However, ADP has its jobs report out today as well, and it seems that small business hiring is strong enough to compensate for big business cuts:

Large businesses, defined as those with 500 or more workers, saw employment decline 32,000,while medium-size companies with between 50 and 499 workers declined by 9,000. Employment among small-size businesses, defined as those with fewer than 50 workers, advanced 50,000 during the month.

Be careful though. Small business hiring can be acyclical; laid off employees put up there own shingle while job-hunting. That said, when ADP notes major job losses in its last report, and none in this report, that really is unalloyed good news. How good? I am suspending judgment for another 24 hours.

U.S. GDP is growing

The annualized GDP growth rate in the second quarter was 1.9 percent. To confirm: the economy is growing, not shrinking. That's really good news, and despite everything else you hear, the smart folks at the Federal Reserve under Ben Bernanke's guidance seem to have done a masterful job at avoiding a recession in 2008.

The best analysis of the GDP numbers you are going to find is Jim Hamilton's blog. Don't waste your time reading anything else I (or anyone else) have to say.  Just go to Jim's blog.  Seriously.  Go.

Educational Decline in America?

Even if you dislike the theme of American decline, everyone seems to agree about the dangerous state of public education in the U.S. While American universities lead the world, our high schools lag terribly.

The documentary “Two Million Minutes” (which I have yet to see) is making waves because it compares not just the median American, Chinese and Indian students, but elite students in all three countries. The comparison shows Americans, even at the top, socializing and playing games while the foreigners master violin and calculus. According to Vivek Wadhwa, a Harvard/Duke professor, Kauffman grantee, and former tech entrepreneur,

[T]hings aren't as dire for U.S. students as they might appear in the documentary. As an academic, I have been researching engineering education and have taught many graduates of Indian, Chinese, and American universities. It can take longer for Indians and Chinese to develop crucial real-world skills that come more easily for some Americans. Yes, U.S. teens work part-time, socialize, and party. But the independence and social skills they develop give them a big advantage when they join the workforce. They learn to experiment, challenge norms, and take risks.

Read the whole thing here.

My experience tells me that Vivek is right – soft skills are the key to workforce success, not hard skills. It may be difficult to measure creativity, perseverance, and flexibility, but they not only underpin entrepreneurship, but also serve as the basis for productive teamwork. The danger I see is a school system that is increasingly managed from the top, emphasizing measurable hard skills, but too politically correct and legalistic to enforce classroom discipline, teacher excellence, or personal responsibility. Of course, competition is another cultural advantage America once had, but the very idea of competition among children is becoming a taboo.

So it comes as a slight surprise to see Vivek promoting hard skill training for older workers. He hints at increased "training," but I am skeptical. The empirical results of skills training are not very promising. Wouldn’t it be better to have policies that simply get people back work, which is the incomparably best place for learning soft skills?

To clarify, here is what I think I think:

• Hard skills like science and math education are really important -- for careers, and for innovation externalities.
• Soft skills like creativity and independence are really important -- for careers, and for entrepreneurial externalities.
• Foreigners tend to do better teaching science, math, and other quant abilities.
• The U.S. has traditionally been better at emphasizing creativity and independence.
• Efforts to fix education through central authority (mixed with the PC culture of building self-esteem) is not helping the development of hard skills, and eroding our advantage in soft skills.

If you know of any research or articles along this line, please let me know in the comments. Thanks!

Mark Cuban Nails It

What are the lagest barriers to faster innovation, entreprenership, and economic growth?

The best place to look for answer is start, as it were, at the beginning: remove the barriers to lanching and growing a business. Yes, we know, according to the Woprld Bank's well-known Doing Business annual report, the United States ranks at or near the top of countries where it is easiest to get into business. But as Mark Cuban, owner of the Dallas mavericks and founder of Broadcast.com, tellingly notes in this recent blog post, we're still far from perfect:

This is from the State of Texas: (Which I am proud to say makes it far easier than most states to start a business).

Step 1:Legal Structure and Registrations
Step 2:Business Tax Responsibilities
Step 3:Licenses Permits and Registrations (Note to State of TX, this link was broken, I had to find the destination page )
Step 4:Business Employer Requirements

As an entrepreneur , I can tell you that working through the requirements of these four steps is scary and intimidating. Why ? Because to merely start your business, you have to deal with lawyers and accountants, which not only costs a lot of money, but more importantly, requires you to trust those lawyers and accountants to make decisions that could have make or break consequences on your business.

There have to be better ways. One encouraging sign is recent legislation in Vermont which allows companies to form and to operate in a digital fashion [link to article in recent Inc magazine on this, or perhaps there are other stories on the web about this]. But even under this legislation, lawyers and/or computer jocks may be necessary.

States that figure out how to lower the costs of entry into business will grab the brass ring of faster growth -- and, as a nation, we will all benefit.

- Bob Litan and Tim Kane

Links of the Day

Links of the Day ... (actually, yesterday)

• He changed the world - short biographical essay on Marty Feldstein and the NBER by David Warsh. Bob's reaction was, "This is a really great piece...and a great lesson how one individual can really change the world...."
• Every company has talent – academic paper (recommended by EJ Reedy) by Lazear and Shaw on dispersion of wages and talent between and within firms.
• A good education blog recommended by my friend and Kauffman colleague, Ben Wildavsky: www.thisweekineducation.com

Air out of the bubble?

The Case-Shiller number is usually reported as a year-over-year decline, which looks especially dramatic when any number of months are particularly bad. But in a sign that the bubble is almost out of air, the month-over-month numbers are now dramatically stabilizing. Today's excellent 1-pager by Wachovia's Mark Vitner paints the picture:

Read the whol thing here (HT realclearmarkets)

Survey: Fewer economists believe recession likely

Keep in mind, these are just economists.  What do they know?

An increasing number of top economists say the U.S. economy is likely to narrowly avoid a recession this year, according to a new quarterly survey by USA TODAY. ... In the new survey, economists divide about evenly on the question of whether the U.S. is now in recession: 51% say yes; 49% say no. In the April survey, 67% thought the economy was in recession.

If indeed the U.S. avoids a hangover recession in 2009 then this period will be remembered as the "Ultimate Slowdown" (these things must have names: Great Depression, Prdocucivity Paradox, Jobless Recovery ...).

Caplan says Public Goods are Bad

Bryan Caplan thinks econ profs are overteaching the idea of public goods, when it should really just be a subset of a lecture on positive externalities.

Once economists clean up our undergraduate teaching, we can immediately clean up our internal communications. In my experience, the way the economists apply the concept of "public goods" to the real world is extremely sloppy. How many times have you heard an economist say that "education is a public good," when at most he means that "education has positive externalities"? Given this sloppiness, I suspect that my terminological switch wouldn't just be better for undergraduate instruction; it would also clarify the thinking of professional economists.

I am guilty as charged, having said "Education is a public good" more times than I can remember. But I have started to wonder why most people seem to think that a public good should be both publicly financed AND publicly produced? For example, educational vouchers would let the secondary education market exist, empowering parents to choose the best school for their children, but still having government pay for it. Competition in other markets brings product quality up and costs down. Regulated markets work well for carrots, for cars, for colleges, so why not K-12 schools?

In fact, pre-K education seems to have much higher positive externalities than high school education. So why does high school get financing and production by the public, and Pre-K gets almost nothing?

I'm mixing the issue here ... Bryan is asking the more basic question whether education should be financed because OF COURSE it shouldn't be publicly produced (channeling him in caps). I think the positive externalities of public education are overwhelming - for knowledge, for culture, and doggone it, it's the American way - so that it is justified as a public good.

OK. More questions and predictions here than answers and facts (that's my motto). But at least you should peek at Professor Caplan's lecture notes for this lecture, which he makes freely available online. More professors should do this.

Get Ready for Big News Week

I thought today was a big news day: announcing advance GDP numbers for the U.S. in Q2. I anticipate that the winds will change very sharply against the recession bears when a 2+ annual growth rate is announced, especially when anything above 1 percent is basically a nail in the coffin of the 2008 recession bogeyman.

But somehow my calendar must have messed up, because the big Q2 release is next Thursday. In fact, in the arcane world of macro data geeks, next week is the equvalent of a doubleheader with back-to-back release dates:

Thursday GDP (likely very good news) -- July 31, 2008, at 8:30 A.M. EDT for:

                     Advance estimate of gross domestic product for

                     the second quarter of 2008 and annual revision

                     (first quarter 2005 through first quarter 2008).

                     http://bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

Friday Jobs (likely very bad news) -- August 1, at 8:30 A.M. (EDT) for:

                     The Employment Situation for July 2008

                     http://www.bls.gov/news.release/pdf/empsit.pdf

The Limits of Growth, Water Edition

Ever faster growth will lead to depletion of scarce resources. That statement makes sense until you realize that the Earth has essentially the same number (and type) of atoms today that existed in 5000 B.C. What has changed?

Think of economic growth as a mere symptom of re-arranging atoms.

But won't we deplate resources? Not really, since most resources can be re-used again and again. I mean, where did your teeth come from? Economists make this distinction between stocks and flows. And in the long run, we're all flows.

This mid-day meandering was brought to you by the provocative author of aquanomics, David Zetland, thanks to his article on the water shortage myth at Forbes.com. (HT: marginal revolution)

Venture Conversations, July 08

Business travel has taken me to San Diego and Boston recently, and I took the opportunity to visit with good friends in both cities who are venture investors: Ted Alexander (Mission Ventures) in California and Jim Matheson (Flagship Ventures) in Boston. Both firms seem to be doing well, but in separate conversations, they agreed the sector is changing dramatically and facing new challenges. For the record, my reflections are based on independent conversations, subsequent airline delays, lack of sleep, lost luggage, technical conferences, etc.

The interesting sidenote here is that America is a dynamic economy with lots of turbulence and churn and uncertainty. How strange that the sector devoted to capitalizing on the dynamism is itself being roiled by constant change. 

Public Capitalism? My first order of business was to call them out on what I thought was an embarassing doughut on the scoreboard in Q2: No venture-backed IPOs in the entire quarter, the lowest level in many decades. A lot of folks think that Sarbox is to blame, and both Jim and Ted agree it is a big factor. But they both also said it was probably not the dominant factor. Wall Street is in chaos right now. But there are some bigger forces in play worth considering. Hedge funds and fancy trading schemes are causing instability in the public markets, which is obviously bad for public sentiment, but not appealing to startup CEOs either. The need to focus on the short term in public markets is unattractive, and maybe getting uglier. The new schism between research and banking at Wall Street firms also has a possible downside of drying up research on young firms.

One other potential factor: booming M&A activity in the last decade has plucked a ton of older SMEs off the radar, making it a thinner public market. Venture firms can still enjoy liquidity events with large multiples via mergers and acquisitions. But the stagnation in public markets is a concern on many levels. At the most basic, a weak IPO market which leaves M&A as the only alternative, basically gives the M&A market a kind of monopsony pricing power, pushing down valuations.

I'm reminded of the line from A Man For All Seasons: "And if you cut them down, and you're just the man to do it, do you really think you could stand upright in the winds that would blow then?"

Abandoning the Seedlings. The venture sector has been criticised for abandoning seed-stage firms, and even A rounds, for higher ground. My sense is that if a venture firm tells you that it only wants to see companies that are already profitable, then they aren't really venture firms. The guys I talked to had differeing opinions on this one. It's useful to remember that Angel investors are big players, with available and active capital that is two to four times larger than all the venture funds combined. That angels are less visible does not mean they are less important. Angel networks are organizing and becoming more efficient each year. However, there is still a niche to be filled by an institutionalized venture investment vehicle. Incubators? Accelerators? Something as yet uninvented? Yes to all.

Little Push. Consolidation and shake-out are realities in the venture industy, and my takeaway is that it is not healthy for too much money to be chasing too few deals. It would be nice to believe that investment causes economic growth, but there's not much evidence for it. Nations would like to accelerate their development, and there are countless failed efforts to push investment dollars as a growth engine, by governments themselves and by international development agencies. The same mindset of engineering an economy is common among governors and mayors and city councils all across the U.S.

Talking to Ted and Jim made me realize that we need to really rethink how innovative economies grow. I think economists understand that the most politics can do is to let (not make) an economy grow, but it absolutely cannot engineer an economy to be bigger. That's as true in Independence, Missouri as it is in Iraq.

P.S. For the record, this was my first ever trip to Boston, and it is an amazing city. Amazing! If I had to choose one city over the other (and I lived for many years in San Diego), I might actually choose Boston. Would I make the same choice come January? Ha!

Growing Ideas

Growthology.org was launched on May 12, just 10 weeks ago. To date, the site has received 20,000 pageviews and almost 1000 RSS subscribers. Maybe it's time to tell everyone why.

One question you get all the time in professional situations is, "What do you do (for your employer)?" And working for a philanthropy makes that a difficult question to answer. Entrepreneurs call it the elevator pitch, but I always need a longer elevator ride as an economist/writer/entrepreneur working at place with no customers.

The job compares in some ways to my experience at a DC think tank. The difference is that think tanks have to make money, whereas the challenge for a philanthropy is to give money away. Tough work, huh? There is a danger that a philanthropy can easily drift away from the founder's vision over time, whereas a think tank has its feet kept to the fire by donors with an ideological passion.

Ewing Kauffman realized the danger, and thankfully left us more detailed documentation of his vision than any other major U.S. philanthropist before or since. This is about capitalism -- growing prosperity with free markets, but in ways that empower individuals through entrepreneurship and education. The operational vision & mission statements are documented here in roughly 200 words.

For growth economists, the emerging consensus in the last 10 years is that the key factors that power national productivity are technological innovation and human capital development. It is no small feat that Mr. Kauffman saw these things, and acted on them, decades before the Ivory Tower did. And it is no exaggeration to say that the opportunity for the Foundation to execute on Mr. K's vision in alignment with scholars and policymakers is right here, right now.

Our President, Carl Schramm, never met Ewing Kauffman, but he honors his memory by making sure the Kauffman Foundation goes one step further and practices what it preaches. Associates here are encouraged to be entrepreneurial and innovative. Crazy stuff, I know. So there are no strict job titles or definitions or timetables. Instead, we have short contracts, high expectations, and unbelievable freedom. To be honest, I was shocked when my idea of blogging was not blocked or delayed by bureaucratic hurdles and office politics, but instead given a quick green light, an eager co-author in Bob Litan, and full support from Wendy Guillies and the marketing/IT team.

So there you have it. That's why growthology.org exists. As for what I do for a living ... tune in next month and maybe we'll have invented it!

Losing Your Home 2.0

A lot of hand-wring over the notion of Americans "losing their homes" may be hype if this couple is typical:

As the foreclosure proceeds, the Mitchells have rented a house in Longmont, west of Platteville toward Boulder, Colo., that is nicer than the one they had owned. It's also less than five miles from Brian’s job as a project manager. Although the rent is more than their former mortgage payment, Brian, 43, said that, with gas savings, they are still coming out ahead. The move into town is allowing the couple to downsize to just one car.

“It was a tough decision for us to decide to let the house go into foreclosure, but I’ll tell you what, once we made it … it was very liberating, actually,” he said.

This article fits in with something Bob and I discussed: higher gas prices will reshape American lifestyles, and probably for the better in many ways. The people getting hurt aren't the neo-homeless, because the larger lesson of the housing bubble is that the ownership/renting ratio became unbalanced. But there are plenty of families that in some sense "should" be homeowners, who played by the rules, got good fixed-rate mortgages, but are going to suffer for the choice of buying in the exurbs. Those home prices are probably heading south permanently, and there is nothing fair about it.

* * *

Loyal reader Michael Martin commented on a previous post that gas prices are likely to have another effect: entertainment hubs like Vegas are likely to see a drop in cross-country visitors. But will this mean lower spending on entertainment goods? Or will we just see shifting to local and electronic forms? This is an an interesting question, actually: what are good counter-cyclical entertainment sectors? Maybe the Olympic broadcasting deal is sweeter today than when it was negotiated.

Affordable Entitlements? Check Newtalk.org

There's an interesting new public policy chat room on the Net. It's newtalk.org, which features different public policy experts on various topics. Yours truly was asked to participate on the most recent forum: Can we afford our entitlement promises?

My views, and those of the many other more distinguished participants, are displayed on the site. Needless to say, resolution of the impending entitlements-driven fiscal problem is key to avoiding a major future economic/financial crisis (much worse than the one we are currently experiencing), and to securing a sustainable growth path.

What’s Happening in Vegas?

I doubt my sister would approve, moral angel that she is, but I’ve seen the future and it looks like Vegas. Maybe you can help me convince her this is a good thing.

The nickname for Vegas is “Sin City,” but did you know it wasn’t always thus? During the Wild West of the 19th century, Las Vegas was a sleepy Mormon outpost. In 1930, total population was 2,304, which is pretty much the population of my high school. This is from the Wikipedia entry:

Las Vegas started as a stopover on the pioneer trails to the west and became a popular railroad town in the early 1900s. It was a staging point for all the mines in the surrounding area, especially those around the town of Bullfrog, that shipped their goods out to the rest of the country. With the growth of the railroads, Las Vegas became less important, but the completion of the nearby Hoover Dam resulted in substantial growth in tourism, which, along with the legalization of gambling, led to the advent of the casino-hotels for which Las Vegas is famous.

The rise of entertainment as an industrial sector during the 20th century was probably never imagined. So when you think about the jobs of the future, you cannot help but notice the dramatic developments within our lifetime. Whole cities. Hollywood, Orlando, Las Vegas. Whole oligopolies: the NFL, the NBA, NASCAR, WWF. It’s not enough that television was invented as a new media devoted primarily to entertainment, but massively valuable cable channel brands have been established as subsets: HBO, ESPN, MTV.

For me, the one worth close attention is Vegas. Not until the legalization of gambling on March 19, 1931 did the radical innovation of growing an entire metropolis occur to anyone as goal. The city has essentially doubled in size every decade, reaching a quarter million residents in 1990 and half a million in 2000. It is bigger than Cleveland or Atlanta, and by the time the next Census is taken in 2010, it may be bigger than Boston or Seattle.

Again, Wikipedia:

The primary drivers of the Las Vegas economy have been the confluence of tourism, gaming, and conventions which in turn feed the retail and dining industries. Several companies involved in the manufacture of electronic gaming machines, such as slot machines, are located in the Las Vegas area. In the 2000s retail and dining have become attractions of their own.

So when people tell you that entertainment is an ephemeral economic foundation, that is all based on real money generated in other “real sectors,” just ask why Vegas continues to grow. In a world where food and manufactures are produced through automated processes, what is real?

Is SOX killing IPOs

Risky Business overviews a subject that we at Kauffman are wondering about ... where are the IPOs of venture-backed startups?

The basic reason is that in a world with Sarbanes-Oxley, everyone who wants to take their company public has to deal with extra paperwork and hoops to jump through. Those costs can add up and sometimes make going public simply not worth it.

Perry is on the blog roll

I've had two friends recommend this UM-Flint professor Mark Perry's blog in the last week: http://mjperry.blogspot.com/

First impressive post is a link to a CATO/Regulation magazine study on Wal-Mart, showing that places with more Wal-Marts per capita are slightly correlated with more, not less, small business. This looks insignificant statistically, and there are questions in my mind about causation (i.e. perhaps Wal-Mart is actually attracted to small-biz small towns as per their decades old business model?). However, the article addresses the question of endogeneity with 5-year lagged variable and other techniques. A useful comparison might be made to Detroit's big 3 auto-makers, which in turn fueled small business growth in the auto-parts supply industry throughout Michigan and nearby states back in the day. Study authors Andrea Dean and Russell Sobel conculde:

After examining a plethora of different measures of small business activity and growth, examining both time series and cross-section data, and employing different geographic levels of data and different econometric techniques, it can be firmly concluded that Wal-Mart has had no significant impact on the overall size and growth of U.S. small business activity.

The second post is about the 100th birthday of General Motors in Flint, Michigan with a link to this poignant story in the New York Times. (If I had an editor, I am pretty sure he would tell me not to use the word poignant -- no cool factor.)

In the 1970s, General Motors employed some 80,000 people in the Flint area, and it seems everyone here is tied to the company in one way or another. Those who did not work at G.M. rattle off the names of relatives who did. But as G.M. shed jobs and moved others abroad, its employment in Flint dwindled. Today, about 8,000 area residents work for the company.

The article quotes Perry, but it doesn't have this chart that I assume he created ...

For all you kids out there, this is a poignant chart. If you have seen a tree growing out of the broken concrete steps of a shuttered factory, these numbers will make more sense.

growthology.org Superpower Survey Results!

Survey results are in as of roughly 24 hours.  Completely unscientific, and extremely interesting! Thanks to everyone (N=26) who participated so far. The results:

What is interesting is that NOBODY thinks America will have "accelerating" growth rates of 4 percent or more over the next decade, yet almost EVERYBODY thinks America will be the most innovative country in the world. This is a well-known effect -- nations playing catch-up can borrow technology and grow faster. But growing fast =/= innovative. Japan is the poster child for a fast-growing economy based on importing tech, but not having a broad entrepreneurial culture, which ultimately was one of the reasons Japan's economy stagnated long before it caught up to the U.S. level of GDP per capita. I still admire Japan, but I wonder if it merits the #2 innovative ranking it got here.

As for the other countries, the real story in the world today is not that China is so amazing, but that most poor countries could grow like China if only they got the institutions right. An old friend said even a 4 or 5 percent growth rate for a developing country is not acceptable -- it should be 10!

The superpower assessments came in about where I expected. Notice that Iran got zero votes. And I disagree that Korea won't be a superpower, or at least that more people rated Russia higher than Korea and Mexico. Japan, in my opinion, has a much higher chance of becoming a superpower in 2050 than Russia does. Then again, demographic decline will decimate the power of both. It is a little sad that Europe in general is not respected as a future superpower -- the combined might of Britain, France, Italy, Sweden, Spain and Germany barely measures up to the potential of India?

Thanks go to Kathy Choi, Cristina Fernandez, and Lucretia Zhao for their help in compiling the data and working with me in our MS Excel charting seminar to create the three charts.  Any errors are mine.