Growthology

Steeper Taxes, Fewer Entreps, Less Jobs

Today, HuffPo ran my contribution to the Kauffman series, and given the mid-April timeframe, what better topic than tax reform? 

[T]he taxes entrepreneurs fear most are not corporate, since many startups these days are sole proprietorships or Limited Liability Companies (LLCs). They pay individual taxes, the good old 1040, not corporate taxes. More often than not, they're paying the top marginal rate.

The theory is that when the top marginal tax rate goes up, entrepreneurship goes down. In 2000, Glenn Hubbard and Bill Gentry examined tax records and found that higher progressivity lowers the probability of an individual choosing entrepreneurship over corporate employment. A year later, Bob Carroll and co-authors found that entrepreneurial profits were lower in states with higher marginal tax rates.

Over the last couple of years, I've been conducting economic experiments to see if progressive taxes affected entrepreneurial behavior, and early (unpublished) results confirm the empirical studies, with a surprising twist: Making taxes more progressive (that is, raising tax rates on the rich while lowering them for everyone else) lowers the incentive for people to take risks that might make them rich. But the surprise was that higher flat-rate taxes had no effect on entrepreneurial behavior. 

Read the whole thing here.



Is college football like a plantation?

Bill Frezza has tough words for the NCAA, likening college football to slavery. Is that a fair charge?

Many of these athletes forego a level of earnings they will never approach for the rest of their lives. In return for what? A shot at pro football? A fortunate few may go on to the NFL but the vast majority will spend the rest of their lives hobbling around on damaged knees. What did they get for it? A brief moment of glory and what often amounts to little more than an honorary degree.

I am sympathetic to the argument that the majority of college football players will never be signed to a pro contract, and that playing this violent game puts them at serious physical risk (e.g. long term brain damage). But I don't think the larger point passes the common sense test. If I had the physical talent to play college football, it wouldn't be a tough decision. I would have played. As for pro prospects, "few" is not the right adjective. With 32 NFL teams restocking every year, compared to about 100 top college teams, the odds are pretty good that a player can "make it" to the pros for at least a couple of years, and that is huge money.

But would it really be so hard to find a way to compensate these young men? That's Frezza's key point, and it's hard to dispute. A creative deferred compensation payout, weighted towards those who sustain career-ending injuries, wouldn't be very hard to design.

As for the slavery claim, Frezza does a fine job of provoking thought, but I think it goes too far. The game was fully integrated in the 1960s. Not long ago the 12-time NCAA champion University of Alabama refused to let blacks play on its team, whereas just this weekend the first Heisman trophy ever awarded to an Alabama player was put into the hands of Mark Ingram, the school's running back who happens to be an African-American. So should Alabama be critized for playing too few?

Upon beginning his Heisman acceptance speech, Mark Ingram finally broke down after uttering the following words: "I'm just so excited to bring Alabama their first Heisman winner."

The good people of that state waited a long, long time for this night. Few place more importance on college football history, and no fan base lionizes its gridiron heroes more than those of the Crimson Tide's. They'll be the first to let you know they take a backseat to nobody -- 12 national championships, 22 SEC titles, 57 bowl berths.

All this points to the larger issue of compensation in a generally wealthy, highly unequal, and supposedly free, society. At least these young men have a choice to "work" for free. In contrast, by increasing the minimum wage three times in two years, Congress has all but made it illegal for many low-skill blacks to find any work at all. With an unemployment rate above 30 percent, the real scandal is why football is one of the few opportunities young African American men are given to escape poverty. I would argue the NCAA isn't a plantation, rather one of the few ways out.

Robot kills terrorist leader

Years ago, the headlines might have featured a soldier, maybe a fighter pilot, daringly taking out the leader of terror cell intent on killing Americans. This theme dominates the hit series 24 and its hero, Jack Bauer. But the actual headline today about fighting bad guys features a robot as the central figure:

"There are strong indications that senior al Qaeda operations planner Saleh al-Somali has died," a senior U.S. official told ABC News.

Al-Somali was believed killed in a drone strike Tuesday that likely was part of the CIA's continuing program that uses armed Predator drones to target al Qaeda terrorists operating along the lawless tribal areas of western Pakistan that border Afghanistan.

Read more about the MQ-1 Predator drone system here and here.

Employment Recovery in Five Years?

The jobless recovery of 2010 may well be the jobless recovery of 2010-2015. The pacesetting econ blogger Mark Thoma writing his first post for the new CBS moneywatch.com blog "Maximum Utility" explains why, though he predicts 2013 as the full-employment mark:

The reason for the slow recovery is partly due to the depth of the recession — the deeper the hole, the longer it takes to crawl out of it — but it’s also because of the large amount of structural change that the economy must go through before it can recover. Prior to the recession we had too many resources in the housing, finance, and auto industries, and it will take time to move the people and resources who used to work in these industries into areas of the economy where they can be employed productively.

My bearishness comes from the realization that monetary policy can only tighten and fiscal policy can only contract in the years ahead, making any upward trend in employment happen in a contractionary context. The body economic may be climbing out of the sand at the pace of 10,000 net new jobs a day, but the macro sand will be sliding back into the hole at 8,000 jobs a day. Like that metaphor?  America has not been in this situation in nearly a century, and nobody can tell you when it ends. Fortunately, we can tell you how it ends. It ends with a new economy, even more diversified as well as focused on services and knowledge work.

Mark mentioned the structural change in the economy. That's good news and bad. The good news is that new jobs will be in new sectors with arguably better pay and quality of life (i.e. I'd rather be a movie star than a coal miner ... rather be a nurse practitioner than a seamstress ... rather be a hammer than a nail). As jobs transition from goods-production to service-provision, workplace fatalities decline and pay rises, satisfaction rises and stress eases. The bad news (and where I disagree with Mark) is that traditional policy remedies -- based on a static notion that old employers will simply rehire the old laid-off workers when stimulated artificially or by real consumption -- can only disappoint.

Manufacturing jobs are not the answer because the long-running trend is automation of line jobs. So the notion of "tiding workers over until the factory hires again" with unemployment checks for 6 months, 12 months, 24 months is delaying the inevitable structural change and basically paying people to be unemployed.

If any modern, depressed economy aims for faster job creation, it has to begin with a realistic understanding of new firm formation. It is much more about restructuring than recovering. In fact, it wouldn't hurt for policymakers to pay attention to this piece in the WSJ penned by my colleagues here at Kauffman (abbreviated here):

• Welcome immigrants seeking scientific training at our universities. Researchers at Duke University and the University of California, Berkeley, found that between 1995 and 2005 immigrants founded or co-founded 25% of all U.S. high-tech firms and accounted for 24% of international patent applications from the U.S. in 2006. One idea to boost innovation would be to grant permanent residency and work status (perhaps even automatic citizenship) to immigrants when they get their degrees in mathematics, engineering or the sciences from qualified universities....

• Unleash America's academic entrepreneurs. Currently, a university professor with an idea may commercialize it only by using his university's technology licensing office. This is an inefficient, monopolistic arrangement. University inventors should be able to use the licensing office of any other university ....

• Provide easier access to capital. The Obama administration has recently expanded some of the Small Business Administration's loan programs, raised the caps on others, and offered more aid to community banks. These are steps in the right direction. But in the longer run, we need a fundamental revision of bank capital standards,...

• Make it easier for companies seeking capital to go public. Compliance with the Sarbanes-Oxley Act of 2002, in particular, has proven to be far more expensive for smaller companies than originally intended or forecasted. Since shareholders are the intended beneficiaries of Sarbox, why not let them vote on whether their company needs to comply with some or all of its provisions....

Entrepreneurs have a proven track record of job creation, especially in the early years of their firms. Eliminating or lowering the economic and regulatory hurdles that stand in the way of their success will pave the way for sustained expansion after the government's current stimulus measures come to their inevitable end.

Sectoral reallocation is real (and often painful)

A survey published today by the Springboard Project (hat tip WSJ Realtime Econ -- go there for link to survey release) is fascinating reading. Labor demand is shifting towards higher skills.  Workers are open to retraining but unsure which skills will be in demand. History says the understanding the jobs of future is elusive (WSJ: "An article on Monday pointed out that in 2003 a quarter of Americans worked in jobs the Census Bureau didn’t even list as occupations in 1967").

This doesn't mean that the sectoral model in macro is superior to the hydraulic view, per the excellent discussion Jim Hamilton covers here. But it does tell me that the natural dynamism of job churn -- anxiety inducing in the best of time -- is especially painful now.

The Robots are Coming, Atlantic Monthly Edition

The latest warning about robots stealing jobs comes from a well written essay by Mike Konczal:

Perhaps we want to think of robots as shapeshifting liquid-metal assassins who travel through time to kill us while we are still rebellious teenagers, or blonde bombshells in red dresses who want to seduce us to steal the military codes so they can nuke the colonies, precisely because that vision is more comforting than the reality that machines are fairly boring bits of code that will generally replace our jobs, depress our wages, and bleed our 401(k)s in ways that are largely invisible to us.

He presents two arguments. One is a chart, the second is logic.

The chart shows the rising national trend in underemployment since 1979, which Konczal interprets without question as a structural shift of some kind ... a decline in demand for unskilled labor, begging for an explanation. It would be nice if he, only in half a sentence, allowed for the possibility that a shift in policy or culture may be the cause. A sticky safety net, for example?  That whole welfare failure that shattered poor families by paying money to single, not wedded, mothers?

The dramatic change in workforce participation over the last half century is not a mystery. Males down, teens down, females up. Are we really supposed to believe that females are generally skilled, males generally not? That that's the big story? Or could it be that a wealthy society experiences shifts in preferences that are fundamentally different than more rural, more religious America? For a view on the cultural explanation, do not miss the (less posty, more thoughtful) essay "What ever happened to the Work Ethic?" by Steve Malanga in City Journal. It is a masterpiece:

Weber famously argued that the Protestant Reformation—with John Calvin’s and Martin Luther’s emphasis on individual responsibility, hard work, thrift, providence, honesty, and deferred gratification at its center—shaped the spirit of capitalism and helped it succeed. Calvinism and the sects that grew out of it, especially Puritanism and John Wesley’s Methodism in England, were religions chiefly of the middle and working classes, and the virtues they promoted led to a new kind of affluence and upward mobility, based not on land (which was largely owned by the aristocracy) but on productive enterprises.

But that's all beside the point. The reason I felt compelled to blog this was Konczal's monster error in his final three paragraphs. His second argument. The nugget:

The increased presences of computers and robots in creating automation and decreasing the need for labor will increase the need for new types of labor. In particular, the labor necessary for the creation, maintenance, and deployment of said machines. But this work is highly skilled, and there is good reason to believe that it will employ fewer people post machines than before.

How can an intellegent, educated writer believe this?  Think, when agriculture became automated, what happened to the 85 percent of the population that stopped farming? Konczal hints that their single option was to become tractor mechanics. Or starve. Or become wards of the state. And that's just shabby reasoning, especially when the division of labor- the most well-known, well-publicized theory in all of social science (okay, maybe a big claim on my part) - tells us what will happen. Labor liberated from its current use will evolve into new and unforeseen occupations. Blogging is the latest example, but the 20th century is littered with jobs that were unknown to the 19th. Cinematographers, professional basketballers, physical therapists. Whole cities and industries were unimagined: Detroit, Hollywood, San Jose. Is it so easy to forget what progress looks like?

I'm confident there were Mike Konczals at the dawn of the iron age warning the tribal elders that new-fangled swords would replace all the warriors. If only it were so.

The Distinct Dystopian Possibility

Tim posted two interesting entries in recent days, both touching on the recurrent question of whether or not we are entering an extended period of Dystopia. Given that it's been just over a year since I happily discounted the possibility of American Dystopia, I thought I might weigh in here. I won't keep you in suspense: I dramatically downgrade my optimism.

There are two related questions here, one pertaining to recent history, the other toward future projections. The first is whether or not the United States economy has really performed as well as we all like to think it has over the past two or three decades. This is a contentious issue among economists and I have nowhere near adequate space to address it, so I'll confine myself to Tim's point:

". . . the existence of the pernicious Dystopian Myth that middle class incomes are stagnant. The Dystopian Myth is social poison, a fiction shouted by the negative nabobs that convinces voters the American economic system is failing them."

Say it ain't so . . . but I will: it's sort of true. In June, Monthly Labor Review published this article, the abstract of which reads:

"OES [Occupational Employment Statistics] data from 2002–2007 reveal that an overall shift in employment towards occupations with lower mean wages hindered growth in the U.S. real average wage and that wage growth was concentrated in higher paying occupations; the data also show a shift in employment from the middle-paying occupations to the highest and lowest paying occupations."

The gist, as you can tell, is that real wage growth in this recent five-year period was basically stagnant overall because of the large growth in jobs paying the lowest wages--which actually appears to have come at the expense of better-paying jobs. The MLR article conveys the image, though not in so many words, of an emerging barbell-shaped wage distribution. Heartening. (I should just point out that Tim's characterization of the myth as a ploy to fool American voters is actually somewhat true--because voting participation follows income. Self-flattery as political vote-buying.)

Onto the larger point: is the United States now entering a Dystopian period of slow or stagnant growth, marred by class conflict, a dysfunctional national legislature (oh, wait, we already have that), and a "new normal" of diminished living standards? Again, this is a subject for a much longer disquisition, but for what it's worth, some recent reading I've been doing--and too many conversations with Paul Kedrosky--has me convinced that we are in for some very trying times ahead. We will see a short-term bounce in GDP growth here in the next quarter or two, but possibly 2010, and more likely 2011 and beyond, will bring discord, precipitated in large part by not only a higher "normal" of oil prices but also the realization that we are about to enter, prepared or not, a serious energy transition. Oh, and China's entire economy might be a bubble and we might be on the brink of having a failed state on our southern doorstep--because of plummeting oil production, not drug lords. (But they don't help; of course, if California legalizes marijuana to deal with its fiscal problems, this would be a boon for Mexico. Wouldn't it be ironic if the United States, irrespective of what party is in power, supported drug legalization because it would forestall the development of a basket case next door?)

OK, so I sound semi-apocalyptic. Don't get me wrong: I don't expect (at least, I don't think I expect) a Joseph Tainter-esque societal collapse. But there is a worrying disconnect between everyone who claims to see "green shoots" around every corner, even those who foresee a longer recession but eventual "normal" recovery, and the reality of long-term energy trends. Look, there is a reason why the Industrial Revolution has been more aptly named the Promethean Revolution (one of the best books on it is Landes' The Unbound Prometheus): humans harnessed inorganic energy. Our entire economic model is based on the premise of cheap coal and cheap oil: techno-utopians consistently ignore the inconvenient fact that much of that computing power they love to tout runs on such energy.

The obverse is that our economic model is not premised on permanently higher oil prices, whatever climate feedback loops we may be instigating, and the nontrivial risk of geopolitical instability. (The U.S. military, by the way, has little room for anything but a realistic appraisal of the future.)

Little of this will be new to readers: we all know we have energy issues to deal with. And, sometimes it's much easier to be pessimistic than optimistic about the future. To be sure, there are a few reasons for optimism. One is that humans are adaptive and we will likely find a way to adapt to the energy challenge. The profit motive will, or should, play a key role in this transition--this doesn't mean there is no role for government. Obviously, there is and should be: federal labs will be critically important going forward, but we need to unlock the innovations in those labs more efficiently. But government's role will be to do what it always does when it acts as facilitator, viz. frame incentives. In this case, it seems that a carbon tax would be an almost no-brainer. Then again, the fact that a carbon tax is treated like a shoot-the-moon option simply reinforces the pessimistic outlook. 

A key piece to moving forward through the next energy transition--and to possibly suppress or at least mitigate whatever geopolitical unpleasantness arises therefrom--is the supply of entrepreneurs. I don't just mean clean tech. We're talking about wholesale economic and social changes here--let's hope in slow motion, rather than abruptly. Don't just take it from me. At the recent World Economic History conference, Robert Ayres presented this wonderful presentation on the relationship between energy and economic growth, concluding that only entrepreneurs can take us forward. How's that for framing a policy debate?

(This pessimistic outlook, of course, will bring some amusement, namely, the perpetual cognitive dissonance of so-called conservatives and liberals as they endlessly bloviate in endless legislative fights. Rightward-leaning folk don't really seem to have dealt with the inherent tension between their Edmund Burke impulse and their defense of free-market capitalism as a ceaseless source of creative destruction. You can't sanction one type of change and seek to prevent the other. And liberals--or in today's parlance, progressives--haven't reconciled the exact opposite dichotomy: their embrace of "social change" as an all-encompassing yet vacuous strategy, but their readiness to preserve nostalgic remnants of the mid-twentieth century economy.)

The most frustrating thing about such a discussion is that it's quite difficult to talk about an alternative future because all we have to structure our imagination of that future is the present state of affairs. When we're trying to imagine what the next economic model will be, and how it will differ from the one that has carried the world forward for the last century and a half, we have little to draw on by way of reference points. But this, oddly, might be the strongest case for optimism: human knowledge always advances in a desultory fashion. We adapt by trial and error and adoption. The potential for future innovation and new knowledge creation shouldn't be in doubt--it's the institutional response, the adoption and absorption, that should be of concern. 

What's important is that we stop discounting the very real possibility that the future could be anything but bright: the fact that the last two hundred years have seen more or less upward progress in terms of human living standards, steadily spreading over the entire globe, is not a reason to believe that the future will simply be a continuation of this. Believing so is the mistake made by Taleb's "turkeys."

What to make of Gregory Clark?

One the one hand, UC Davis economist Gregory Clark says that growth in the future will continue unabated. On the other hand, he claims most Americans will be left behind. I detect in the piece the pernicious Dystopian Myth mentioned in the last post. Some quotes:

No, the economic problems of the future will not be about growth but about something more nettlesome: the ineluctable increase in the number of people with no marketable skills, and technology's role not as the antidote to social conflict, but as its instigator. The battle will be over how to get the economy's winners to pay for an increasingly costly poor.

Winners compensate losers, an old standby in economic analysis. But what if w refuse to acknowledge that growth causes "losers," what then? In the long term, were buggy-whip makers net losers after the automobile was invented?  I don't buy it.

I think the bigger assumption Clark is making is that demand for low-skill labor will dry up, but I would counter that an infinite demand for labor. Infinite. Now I don't know what the equilibrium price will be, but the experience of the last few thousand years suggests it will be higher than it is now. OK, here comes the dystopian myth (and Clark actually does use the word 'dystopia' in the essay!) ...

But in more recent decades, when average U.S. incomes roughly doubled, there has been little gain in the real earnings of the unskilled. And, more darkly, computer advances suggest these redoubts of human skill will sooner or later fall to machines. We may have already reached the historical peak in the earning power of low-skilled workers, and may look back on the mid-20th century as the great era of the common man.

Clark says that machines complemented workers and led to higher wages for basically all of modern history, but that trend is going to abruptly and coincidentally stop right now. Why is this pessimism so easy to believe? His rhetoric goes over the top here:

And as machines expand their domain, basic wages could easily fall so low that families cannot support themselves without public assistance.

He paints a mental picture of 1/3 of the population becoming "socially needy but economically redundant" and uses the example of France as proof that this can actually happen. Is there no sense of misplaced blame in ignoring French labor laws, the global standard for extreme protectionism?

Clark points to California as a harbinger of the U.S. situation, but frames the state's bankruptcy as hurting the "poorest children." He is skeptical that education can lift up the poor, or in his words can, "give the poorest the tools to resist the march of the machines" because most of the higher graduation rates are thanks to lower standards. Then he closes by warning that America will either become Marxist in effect if it does not confront poverty.

Weird. But maybe he's right.

Do We Really Need Daily Doses of News?

There must be an ongoing tally somewhere of the number of stories in newspapers about the future of newspapers. In the grand scheme of things, the number is no doubt tiny, but there is an aura of self-pity (inflated by self-importance) about it.

I don't mean to suggest newspapers aren't important or interesting; compared to my peers, I might be characterized as a dinosaur for still having--what?!--print subscriptions. But the demise of news in general (many individual newspapers will survive) might actually be a good thing for us in terms of perspective. Let's start, first, with the present and future of newspapers: media aren't going away, but everyone seems to have a singular concern about newspapers. Why? The usual course of things is that if an industry can't give people what they want (and the desperation move by many mid-size city newspapers to have lots of short stories with three-inch headlines is pretty ridiculous), it will either adapt or die. 

Such a fate is unthinkable to many regarding newspapers, however, because newspapers--we're told--have a special place in democratic self-rule. It's the Fourth Estate, after all. This would indeed be the overarching concern if it were the case that the government itself was shutting down newspapers. It has before, and newspapers quite literally died. But not this time. This time it's the market. And yet it's also not the case that the demise of newspapers means the demise of news and information. Quite the contrary--it's sufficient to say here that the future of news and information is quite bright. 

OK, fine--most blog readers will agree up to this point, but note that I haven't adequately addressed the question of newspapers and democracy--aren't we losing an essential piece of democratic self-rule? Is the ruthless market destroying democracy? Not really. The nature of daily news is probably more corrosive of democracy than it is supportive. I'm not suggesting that daily news coverage is totally corrosive and totally non-supportive of democracy, simply that it's probably a little more of the former. 

How can I say this? What about Watergate? The Pentagon Papers? What about the ties that bind us together as democratic citizens? The main reason daily news, as manifested by newspapers but also by other sources, might corrode democracy is that it telescopes our gaze almost completely on the here and now. The media has long been obsessed with exploring the present-centered weltanschauung of modern life--a state of affairs that the media, including newspapers, largely helped create. If newspapers are to be believed, each day is simply worse than the day before. Daily helpings of news distort one's perspective because they focus your eyes and brain on the moment, largely composed of detritus that will in time wash away and mean nothing to your life or to history writ large.

There is little room for reflection in the daily news, notwithstanding the superficial weekly attempt in the Sunday editions to reflect on the prior week's event and what they might mean for the future. The daily news is, by and large, superficial. This doesn't mean journalists are superficial--it's the nature of the subject matter, not the interlocutors. And there are exceptions, of course: in-depth stories, long features, etc, are all more helpful and more interesting than the daily news.

A democracy doesn't depend on constant, up-to-the-minute news any more than it depends on 100 percent voter participation. But don't we need newspapers to hold our elected officials accountable? If that's the primary raison d'etre of newspapers, then it's (a) a thin reed, and (b) they've done a pretty poor job of it during the Bush and Obama (so far) administrations. But what would we talk about at cocktail parties and conferences if not for newspapers? Maybe the demise of newspapers will prevent people from thinking they're smart simply because they read that day's Times or Journal. In fact, they might be smarter for having ignored them. And look, if something really big happens, you'll find about it.

Oddly, for all these reasons, blogging might offer a much better epistemology in terms of the flow and digestion of news. (I'm speaking generally here, about blogs qua genre--not all individual blogs will fall into these generalizations.) Bloggers often take the daily or weekly news and piece it all together in a larger narrative that is much more informative and useful than newspaper coverage. Because blogs can focus solely on a niche, they can offer much deeper analysis, which is the true stuff of democracy, not the story itself. Again, I'm speaking generally here, and a quick glance at my Google Reader demonstrates innumberable items that passionately dissect the minutiae of what Speaker Pelosi or Rep. Boehner said this morning. Still, on a possibly frivolous level, I have little doubt that sites like Fangraphs and Baseball Analysts are far more helpful for baseball fans than SportsCenter or the daily sports page. The same principle applies for more serious news.

Anyway, I probably sound pretty curmudgeonly here, and I'm certainly not the first one to make these points. Nassim Taleb reserves a special place in his diatribes for newspapers. The point is that life will go on even when newspapers as we know them are gone. And life and democracy would still go on if the daily news disappeared or was greatly reduced in size. (But keep the op-ed pages--they're the best part.)

Is It a Free Future?

I haven't read Chris Anderson's "Free: The Future of a Radical Price," but I have been thinking about the Jobs of the Future, as you know. Thankfully, Virginia Postrel has read it for me, and I trust her insights more than my own. Here's what she says: (bolding added)

Unlike tangible commodities like T-shirts or plastics, most digital content doesn’t generate much new demand as its price falls toward zero. Even with no admission fee, videos, blog posts and online games soak up users’ time, and time has a hard limit. So as the supply of cheap content expands, it can’t simply fill ever-growing closets (or garbage dumps). Instead, the competition for time and attention becomes ever fiercer, and the market ever more fragmented. Any given producer will find profits elusive, especially since it’s so easy for amateurs to enter the market.

Faced with collapsing business models, today’s journalists-in-denial rail against Anderson’s message. Free contentcannot be the future, they say, because content is valuable. Fixed costs must be covered. We have bills to pay. The problem, they argue, is that we’re giving our work away. ...

The book is certainly good advertising. “Free” is a successful business speech between two covers, pleasant, upbeat and full of anecdotes and bullet points. ...

But what about the competition? What about the time-saving, risk-lowering, beloved alternatives somebody else is offering free? Opponents of the free-content argument too often reject the idea that free content is the future simply because they don’t want it to be true. Even Anderson himself equivocates, flinching at the implications of almost limitless competition.

After all, the last thing a business author wants to suggest is that we’re entering a new age of amateurism. But there are hints throughout the book that the future of this radical price is to be found in the past, when satisfying work was what one did on the income provided by less satisfying toil, or by investments, patronage or marriage. “Doing things we like without pay often makes us happier than the work we do for a salary,” Anderson writes, adding, “No wonder the Web exploded, driven by volunteer labor — it made people happy to be creative, to contribute, to have an impact and to be recognized as expert in something.”

“No man but a blockhead ever wrote except for money,” Samuel Johnson said, and that attitude has had a good two-­century run. But the Web is full of blockheads, whether they’re rate-busting amateurs or professionals trawling for speaking gigs. All this free stuff raises the real standard of living, by making it ever easier for people to find entertainment, information and communication that pleases them.

Business strategy, however, seeks not only to create but to capture value. Free is about a phenomenon in which almost all the new value goes to consumers, not producers. It is false to assume that no price means no value. But it is equally false to argue that value implies profitability.

Anderson asks about the implications of price trending towards zero, not the value. I've been thinking about the implications of productivity trending in the other direction. Agricultural production is rising because two factors are trending: output (quanitity and quality) is rising over time, while labor (L) input is declining over time. Other factor inputs are rising, right? Ag capital (K) and technology (T). And if you think of ag capital is simply a comination of technology and hardware, then the only real change is an increase in T replacing L.

Is there a real trend toward zero for labor inputs? Maybe not, but does it matter? The difference between 90 percent of the population working in the fields and 2 percent working in the ag sector is about the same as 90-to-0. There remain 88-or-90 percent of the population with time on their hands.

Now if you posit that the price of content and material things are similarly trending down towards, if not to, zero, the larger implication is hard to fathom.  People pay lower prices for things and it takes fewer people to make those things. There is a massive amount of value being generated and consumed, but few people making the value who get paid in bulk. What does the remaining mass of people DO? Makes me think this whole idea of human progress is like a magic act where the magician makes himself disappear.

Want a job? Get a license.

Would it surprise you to know that 29 percent of the U.S. workforce has a job requiring a license, up from 5 percent in the 1950s? Would it further surprise you to know that the economic consensus is that licensing raises prices, restricts job opportunities from the less privileged, and offers little or no quality improvement in service rendered?  And would it surprise you to know, lastly, that the ivory tower has essentially turned a blind eye to this research?

Let me recommend this tremendous and readable paper by E. Frank Stephenson and Erin E. Wendt in the May '09 EJW:

Consider the textbook by George Borjas. There are 11 pages covering the minimum wage. If he devoted pages in proportion to workers covered, then 11 pages on the minimum wage would correspond to 99 pages on licensing. Ehrenberg and Smith would give 72 pages to licensing. Hyclak, Johnes, and Thornton would give 135 pages to licensing. Instead, in each case, there is zero.

That this is terrible policy is hopefully self-evident. But are we surprised that its use is rampant? In a world where fear sells protectionism, not so much. In states that really care about fighting poverty, you will see lower licensing regulations.

New Asymmetry: Robots in the U.S. Military

Economic growth has some perverse implications. Not only does new technology allow for enhanced weaponry, but it also implies a reluctance for humans to tolerate casualties. One could argue that the collapse in human mortality and frailty in modern societies has stoked a rising intolerance for the bloodshed of war. An interesting result is that American attitudes towards was seem less sensitive to the carnage of war, so long as our side is relatively unscathed.

Regardless of other causes, the basic fact is that robotic war-fighting is extraordinarily effective in terms of costs and benefits. For surveillance alone, a small robot can see bad guys or sniff our roadside bombs in a mortally costless fashion that defies imagination and traditional concepts of war. Once you expand imagination to the offensive realm, the impact of robotics is obviously revolutionary. Consider these facts, quoted from P.W. Singer's article in Wilson Quarterly:

• When U.S. forces went into Iraq in 2003, they had zero robotic units on the ground. By the end of 2004, the number was up to 150.  By the end of 2005 it was 2,400, and it more than doubled the next year. By the end of 2008, it was projected to reach as high as 12,000.

• All told, some 22 different robot systems are now operating on the ground.

• The amount spent on ground robots, for example, has roughly doubled each year since 2001.

• In addition to the Predator and Reaper [two large robotic air drones], a veritable menagerie of drones now circle in the skies over war zones. Small UAVs such as the Raven, which is just over three feet long, or the even smaller Wasp (which carries a camera the size of a peanut) are tossed into the air by individual soldiers and fly just above the rooftops, transmitting video images ....

• As new prototypes of aerial drones hit the battlefield, the trend will be for the size extremes to be pushed in two directions ... The military's estimation of what is possible with micro air vehicles is illustrated by a contract let by DARPA in 2006.  it sought an insect-sized drone that weighed under 10 grams (roughly a third of an ounce), was 7.5 centimeters long, has a speed of 10 meters per second and a range of 1000 meters, and could hover in place for at least minute.

The big idea in military strategy is "asymmetric warfare" where conventional forces face an enemy that is smaller, lighter, and qualitatively different. While that asymmetry poses difficult problems, the rise of robotic warfare is in the process of turning asymmetry upside down. The power of force stemming from greater financial resources, traditionally manifested in heavy conventional arms, is being supplemented by robotic forces that are smaller, lighter, and qualitatively different than revolutionaries and guerillas.

Peace on Earth?  It would be nice to think so. While I am convinced the battlefield is changing faster than most soliders, let alone policymakers, can anticipate, the path to peace is on the other side. Strategic counterinsurgency requires transformative construction, not transformative weaponry. I'm certainly not the first to say so. I wouldn't put it past the brightest minds in the Pentagon to already have worked on robots that build roads, schools and hospitals.

The Information Economy, Huh?

Automation at factories means that there are simply fewer and fewer manufacturing jobs. And this is a good thing. Machinery does most of the work growing the food we eat, and producing the goods we use (durable and nondurable). What's left is information, hence the moniker "The Information Age."

But if this is the great era of data, then what's with the demise of so many information companies? Newspapers, Record Labels, Encyclopedias, all heading south.

The now-familiar struggles of the newspaper industry is in the news again with the brinksmanship in labor negotiations at the Boston Globe, as well-told by David Warsh in this week's economicprincipals.com essay. David is more optimistic than I about the business of newspapering, but I'd like to think I'm more optimistic about the future of journalism. He concludes,

Never mind Warren Buffett’s admonition over the weekend that there is no price at which he would consider a newspaper an attractive investment (he still has positions in two, the Buffalo News and the Washington Post). Repair work has never been his passion. With a little luck, the best regional papers – The Boston Globe, the Chicago Tribune, the Baltimore Sun, the Los Angeles Times – will wind up back in the hands of people who know how to run them.  If so, the newspaper industry will return to a scaled-down semblance of its former self – a profitable and stable group of companies in the first-draft-of-history business. But then, I am a congenital optimist. I have sometimes been wrong.

Yet I find the story of Encarta even more interesting.  Encarta, as you may recall, was the revolutionary Microsoft product that put an encyclopedia on a CD-ROM in 1993 which was the creatively destructive force that assaulted Encyclopedia Brittanica, first published around 1768. Now it is Encarta that will be shuttering -- this year, even refunding existing users rather than continue into 2010 -- signaling the acceleration of technology cycles in the new century. In this NYT piece, Randall Stross describes how the destroyer became the destroyee:

It’s hard to look at the end of the Encarta experiment without the free and much larger Wikipedia springing immediately to mind. But Encarta arguably would have failed even without that competition. The Google-indexed Web forms a virtual encyclopedia that Encarta never had a chance of competing against.

Encarta was conceived pre-Web and had a long gestation. In 1985, Bill Gates envisioned a CD-ROM encyclopedia as a “high-price, high-demand” product with the potential of becoming as profitable to Microsoft as Word or Excel.

Wherefore Doctors?

Most readers probably saw this lead story in Monday's New York Times: "Doctor Shortage Proves Obstacle to Obama Goals."

If only there were an option of equal quality but lower cost!?!

Short-term Backstop, Long-term Transformation

Out here in suburban Kansas, enrollment at the local community college has been increasing: Johnson County Community College (a fantastic institution, by the way) is experiencing its highest totals ever for a spring semester. The most popular fields of study? Health and entrepreneurship.

That, in and of itself, is unsurprising: higher education often sees a spike in times of recession. Yet in a larger sense, JCCC and other similar institutions around the country may augur a broader shift in the higher education landscape. At least, I hope they do. Enrollment at JCCC is now around 20,000, comparable to some of the country's best state universities--include continuing education, and the number rises. The school expects to benefit, too, from the Johnson County Education and Research Triangle.

In the early decades of the twentieth century, the "high school movement" transformed the relationship between the citizenry, the education system, and the emerging industrial economy. Undoubtedly, a similar transformation is taking place today--community colleges like JCCC, the increasing use of technology in education, completely new ways of teaching, etc etc.

The nature of these transformations is such that, while the federal government will play an unavoidably large role (just given its size and sway in education these days), we won't even be able to coherently outline the future of education until it's already upon us. The only things we can say for sure is that it will be a far more structurally diverse system than today, and it will be much more substantive than simple calls for more money.

The Future of Macro = Jobs of the Future

Arnold Kling writes about the future of macro, and this passage merits close reading:

I believe that confidence in generic fiscal policy is also misplaced. Superficially, it makes sense that government spending can replace private spending when the latter breaks down due to a crisis in the financial sector. However, the fiscal-stimulus theory fails to take into account the fact that what is going on in the real economy, particularly after a financial shock, is a reallocation of resources out of dying sectors and into emerging sectors. (emphasis added)

Instead of looking at fiscal stimulus, I think that economists should focus directly on the adjustment process, particularly in labor markets. How do new industries emerge to absorb the resources that are released from industries that collapse during a financial crisis? What sorts of policies can make this transition take place more quickly and with less difficulty? What labor market institutions are most conducive to economic recovery? Should government try to create policies that mitigate the cyclical behavior of income shares, so that profits rise less during a boom and fall less during a recession?

iPhone Entrep Horde

Call it Steve Jobs' revenge. In what might be called the original "Clone War" of the 1990s, the superior Mac OS and hardware were routed by the Wintel clones -- IBM clones really, including Dells, Gateways, and something called a Compaq. Apple had a fetish for perfection, and old Steve just could not abide letting lesser mortals have a license to make compatible machines. Nor could the great Apple sully its OS by making a version that would run on a clone. Worse yet, Apple wanted to make almost all its own software and snubbed independent software developers.

Maybe that's an unfair charge, you say? Well, I was one, so I remember it pretty vividly. Our company, NeocorTech (a name that liternally nobody got for the half decade we were in business), made Japanese translation software that ran on non-Japanese Windows machines. And how many calls a week did we get asking if we made a Mac version? At least one. And of course, the answer was no. Why? Because Apple made it very hard for us.

So Microsoft had a horde of software coders to match the horde of Intel's clone machines, and we overwhelmed the Macintosh. For a long, long time, my partners and I were part of the crowd of Apple haters who mocked them like Americans mock the French. They were hilarious snobs - oozing stylish class and business ignorance.

And then Steve came back to Apple. And he got it. And when he launched the second coming of computer technology in the iPod/iPhone, he deployed the strategy of the horde of third party developers. And lo, they built a plentiful garden of awesome capitalist creativity that nobody, not even the French, can deny.

Back in the 90s, you still needed a company to deploy your software. But Apple's AppStore took things to an entirely new level. Raw Entreps are making awesome stuff and living the American dream faster and more fully than ever before. Check out this story from WIRED:

Apple's iPhone application store is as crowded as a Beyonce concert, with more than 20,000 apps available. But one independent developer still managed to rake in $600,000 in a single month with a single iPhone game.

Ethan Nicholas, developer of a tank artillery game called iShoot, told Wired.com he quit his job the day his app rose to No. 1 in the App Store, earning him $37,000 in a single day.

"I'm not going to be a millionaire in the next month, but I'd be shocked if it didn't happen at the end of the year," he said in a phone interview. "If it weren't for taxes I would be a millionaire right now."

Until recently, there has been no realistic way for individual programmers to make serious money on their own. Most of the software market is dominated by big companies, and the traditional distribution method for independent developers -- shareware -- isn't conducive to striking it rich. By contrast, Apple's iTunes App Store provides a platform for marketing, selling and distributing software; all a developer needs to provide is a good idea and some working code.

So the question is: What recession?

The Bizarro Bailout

The ongoing sagas of the stimulus bill and financial bailout are, understandably, dominating headlines and online chatter. In no way do I intend to belittle the severity of the current recession and the overall gravity of the situation but, if history is any guide, these policy debates run in parallel to a bizarro world in which a separate economic future is developing.

In this bizarro world, the high-growth companies of tomorrow are just coming into existence, and innovations we cannot even imagine are in their infancy. A few years ago in the American Economic Review, economist Alexander Field declared the 1930s to be "the most technologically progressive of any comparable period in U.S. economic history."

In the bizarro spirit, then, I spent part of the morning canvassing what I like to think of as the frontiers of economic growth--the spaces where our future is being made right now. The stimulus and bailout matter to these frontiers, of course, but it's important to note that the as-yet-imagined future is materializing without word from Washington or Wall Street or anywhere else.

This is just awesome.

Stem cells are key.

The stimulus is apparently directed toward "shovel-ready" projects, but instead of shovels, what about nano-particles?

And this just sounds crazy, but still awesome.

Emergent Innovation: interview with Nathan Myhrvold

This is what makes Joel Achenbach special -- a fantastic interview with Microsoft's genius behind the throne, Nathan Myhrvold, written for the Princeton Alumni magazine and titled:

Inventing the future

The very cool world of Nathan Myhrvold *83

All of which raises a rather profound question: Were teeth inevitable? And what about the innovations in our own world — are they the result of carefully orchestrated projects, schemes, and hard work, or do they tend to bubble up from a million accidents and casual inspirations?  

“Broadly, overall, the way society works is emergent, and it is built on progress — it generally runs downhill toward something better,” Myhrvold says as we get deep into the philosophical weeds on all this stuff. The world is a better place now than it was 500 years ago, he declares. Driving that improvement is, he believes, technology. He’s an unabashed technophile. And he seems to have a strong libertarian streak.

“Creating new technology through invention is the single biggest value driver that our society has,” he says. “Humans grabbed the tiger by the tail when we invented agriculture, and it was one of the best and one of the worst things we ever did.”

Shakespeare's IP Issues

First, a thank you to readers Devin, Charles, and Sergey for their thought-provoking comments in reaction to my post on potatoes, plants, and innovation. Devin and Charles both raise interesting questions about the nature of the innovation ecosystem and the co-evolution of humans and food sources. Sergey, meanwhile, has happily lengthened my reading list. Thanks, guys: great stuff for further discussion.

Now to Shakespeare and those troublesome intellectual property issues. Tangled questions of patents, copyright, licenses, use restrictions, etc, inevitably pop up in most discussions of innovation these days. They have been high profile in the last few years because of Supreme Court cases and the well-chronicled ills of the music industry. Larry Lessig in particular has been at the forefront of these matters: to what extent should we allow copying and "mashups" in the production of new intellectual property?

I don't really have a hard and fast position on this either way, but I've been reading Bill Bryson's slim biography of Shakespeare and found it interesting that the golden age of Elizabethan drama was also marked by--and perhaps had its source in--constant copying and even outright theft. "To Elizabethan playwrights," says Bryson, "plots and characters were common property." Some of the greatest names in drama--Jonson, Shakespeare, Marlowe--were inveterate IP infringers.

The point, however, is not to diminish their achievements, but to show that this sharing was precisely a major reason for the period's flowering of creatity. Boundaries and rules were "exceedingly elastic" with the result that all of the strictures of classical drama were gleefully defenestrated. Strict divisions between comedy and tragedy, limits on dialogue, the prohibition on soliloquies--"Elizabethan playwrights refused to be bound by such rigidities." Without the falling away of these rules and the blurring of boundaries, "Shakespeare could never have become Shakespeare." (Bryson, by the way, is a phenomenal writer and I highly recommend his books to anyone.)

The idea that creativity and innovation result from the combining and recombining of old ideas is well-grounded in the research literature. (See in particular Dean Keith Simonton's work.) And, obviously, our time differs a great deal from the late sixteenth and early seventeenth centuries--many businesses and jobs depend on heightened protection of intellectual property. But the parallel is still instructive: should we choose to limit what people can do with others' ideas, we may miss out on great amounts of innovation. This is sort of the direction in which all of the much-heralded new social media points, as well as Tim's discussion of the jobs of the future.

There's no correct answer, of course, and it may be that muddling through turns out to be the best course. I have doubts, in any case, about the ability of any society to truly limit its members' creative drive.