Growthology

The Real Costs of Patent Trolls: $500-billion and Lost Innovation

There is a new paper out on the real costs of patent trolls. Who are patent trolls? They are those patent owners in the business of holding others up for ransom, as opposed to doing something useful with their (often trivial) patents. The subject is absurdly controversial, not to mention politicized, marbled with romanticism, and generally impossible to have a coherent discussion about, so this new paper's empiricism is highly welcome.

Here is the gist:

• Costs associated with patent trolls have touched $500-billion in the last decade, an incredible tax on innovators
• Very little of the money lost to trolls' actions goes to small investors, as the romantics would have it. It is mostly a deadweight loss to innovation, and thus to all of us.

You can read the entire paper here.

In a related vein, the OECD has a new report out that, among other things, highlights the declining quality of patents in the last decade. Graph follows:

 

Fixing Politics with Math! (Kids and Supreme Court Edition)

Readers are aware of my ever-deepening conviction that America's economic problems are not really economic. They are political. Practically any high school senior could devise a fiscal solution to the deficit mess.  I wouldn't like the growth effect of the higher tax rates, and you may not like the spending cuts, but this is a 1-pager that my old pal Mick Lewis would have scribbled out 10 minutes before the assignment was due in Civics.  And he would have gotten an A.  

Today, I'll describe what I see as one of the deepest - and worsening - political problems in our democracy.  Gerrymandering.  What Mick can't do, or any of my friends from Columbus can't do collectively, is fix the politicians who are making the mess.  We literally can't pick our representatives any more, because they have fixed the political game and are picking their voters through the process of Gerrymandering.  Another friend, Paul Parrish, just posted the new map of Ohio's congressional re-districting on facebook with the comment: "What is this? My son could have drawn a better map with his crayons."

Believe me, it's not just Republicans.  In California's 2002 redistricting, the seat I competed for was redistricted from a 50-50 partisan split into a roughly 60-40 safe seat for Democrats. Heck, Dem incumbents even "lawfully" paid the consultant who was asked by the state to draw the new maps. How sweet is that deal?  To his credit, Arnold Schwarzenegger fought to change abusive redistricting, but it remains rampant about everywhere else in the country.

The Supreme Court Pass

Gerrymandering got out of control in the 2002 redistricting process, and actually in the years afterwards when the normal once-a-decade process turned into a state by state, once-my-party-is-elected-majority process. Voters became pawns in this charade.  

A legal challenge finally made its way to the Supreme Court, which is truly the only institution with the authority to police political abuses of this scope and scale. The case was VIETH et al. v. JUBELIRER, and was decided on April 28, 2004.  My birthday, which is an ironic gift.

In the lengthy 4-1-4 decision, the Court took a pass.  The 4-Justice plurality ruling said that redistricting is a "political" matter for Congress alone to manage because the Court itself lacked jurisdiction per the Constitution. This is wrong.  Precedent says so, but frankly so does Originalism. Would the Court remove itself if a racist Congress reordered districts so that black members were redistricted ad hoc?  Would it rest idly if rural votes were essentially diminished to nil in each of the 50 states?  These are possible tactics of modern gerrymandering, and I don't believe for a second the Court would abide them as Constitutional.  Neither did the fifth justice, whose consenting opinion hinged on these words:

When presented with a claim of injury from partisan gerrymandering, courts confront two obstacles. First is the lack of comprehensive and neutral principles for drawing electoral boundaries. No substantive definition of fairness in districting seems to command general assent. Second is the absence of rules to limit and confine judicial intervention.

I had hoped the Court would revisit this, or somehow it would be fixed by mobs of angry voters, but the Ohio map indicates it is getting worse. So, in anticipation of this rising in a new case to the Supreme Court, I'd like to weigh in the blog post from a humble economist.  I think they call these amicus briefs or something.  Dunno.  When the time comes, here's what we need Justice Kennedy to understand: there is a simple and neutral principle for drawing fair boundaries.  

The Perimeter Rule

A gerrymandered seat has that pornographic "you know it when you see it" subjective quality.  But its curves can be quantified in a revealing way.  Simply measure the perimeter of each district on a map and compare it to an ideal map with minimal perimeters.  That ratio should tell you how far the legislature has gone to bend the districts.  A perimeter ratio of 1 would be, literally, perfect.  A perimeter ratio of 1.25 would be reasonable, especially if the state were to respect rivers and county lines where convenient.  But a ratio of 2.0 or greater certainly fails a reasonableness standard.

Let's consider an example using a simple chessboard.  Imagine the chessboard is filled with relatively homogeneous voting communities of Alphas and Betas.  Alphas can represent social conservatives, or whites, or pacifists, what have you.  The Betas represent the opposite. Now imagine a smooth spread where alpha and beta communities alternate across the board, just like the colors of the squares on the board.  Now let's carve four equally populated districts.  Ideally carved districts would be cut into neat mega-squares, 4x4, right?  Each would have sixteen squares, with 8 alpha and 8 beta communities, and a perimeter of 16.

An alternative cut could neatly add two alphas to one district and two betas to another  This yields more partisan seats of 10-6 and 6-10, which both protects incumbents and advantages more partisan candidates. The new perimeters of these districts would be 22.  The perimeter ratio for this example would be 22/16 or about 1.4.

But our simplified gerrymander could be much more intense.  I've drawn one map which allows slivers to connect various squares so that a district could be drawn with 14 alphas and 2 betas, and a perimeter of 54!  That's a ratio of 3.38. As ugly as that number is, my guess is Ohio's new perimeter ratio is even bigger.

If I have time, I'll make some images.  It would be a nice graphic to show some high school seniors.  Or maybe Justice Kennedy.

My Credit Card Number is 5420 3960 ...

I had the opportunity to speak at the NABE conference in Dallas, which was wonderful in every way. The dinner was great the night before.  Dallas was fabulous.  My speech went very well. Not to mention, Herb Kelleher, founder of Southwest Airlines, was the luncheon speaker on Monday and he was stunningly good. What great irony it was for me to then visit Love Field and take the mid-trip flight from Dallas to the Kauffman HQ here in Kansas City.  I promptly lost my wallet ... sometime after clearing security but before the taxi dropped me off in KC.  

The three vital lessons I've learned from this experience:

First, losing your wallet only happens immediately after you get cash from an ATM.  This is just the gods laughing at you. Roll with the punches and laugh along.  This world has too many really difficiult stories (see: 15% U.S. poverty rate) to take stuff like lost wallets too seriously. This was self-inflected, and made me laugh even harder when I next discovered that my car battery was dead.

Second, I need to superglue my next Mastercard to the home office desk.  And NOT travel with the card that we use for all of our auto-bill-paying!  Stupid Tim.  Stupid Tim.  I'll get a second card, yes with a different number, for travel.  As it is, now I get to spend the next 4-6 weeks receiving notices from the newspaper, the lawncare service, insurance, phone, electric ... asking why my cc # isn't working and remindming me that a late fee kicked in 2 days prior. 

Third, I'm 99% sure the wallet slipped out mid-flight and was just sitting on my seat (7F or so).  By the way, I always keep my thin wallet in my front left pants pocket.  I learned watching Pop carry his three-inch thick wallet in his back pocket that it made his back ache over the years.  Besides, a front-loaded wallet is much harder to pickpocket ... word to the wise.  So on this day, when I yanked out my iPhone while in a sitting position, I bet the kung-fu grip skin pulled the wallet out as well. So there it sat.  But when I called Southwest to ask if they found a wallet, they took down a missing baggage / item report and my phone number, then promised a call within 24 hours with a report.  Cool.  Thirty-six hours later (Yes, mom, I cancelled my cards), no call, so I phoned back to assess the status and learned, no, it will take them "two to four weeks to match the lost item report with the warehouse in Dallas of all lost items, which is where they are shipped."  Huh?  This is the hyper efficient common sense air carrier I've loved and lauded?  For Pete's sake, it's a WALLET.  It has 5 business cards of mine and my driver's license.  Did it really get sent down to Dallas where it is put in a "warehouse" in line behind a dozen teddy bears, a thousand neck pillos, and the Ark of the Covenent to be matched by Debbie and Shawn with a database??  Wallet, black, trifold: Enter.  Herb, can't you just pull out any of the contents and match with a passenger list then, you know, call my emergency contact?

So what's lesson number three?  I'm torn here.  Maybe it's that I am a little more skeptical of flying Southwest as if it really is better than the others. Or maybe I should take a hint and superglue my driver's license to my own stupid forehead.  

A great "whiteboard" lesson on entrepreneurs in the economy

This video is awesome, and it features a voiceover by Kauffman president, Carl Schramm.  The sketches are priceless ... definitely something I would show to kick start an economics class discussion. Kudos to our team for putting this together.

The three essential messages of Steve Jobs (so far)

The retirement of Steve Jobs as CEO of Apple is perhaps a bigger earthquake in the world of technology than we realize. The "eruption" of adulation, as Will Wilkinson (blogging at Economist.com) calls it is entirely deserved but can't help but mask the depth of meaning underneath the simple story of one man stepping down.  The essential messages of the Steve Jobs' life story are three.  First, he more than anyone is the icon of the boomer generation of American entrepreneurs, even more than Bill Gates. Second, Jobs (and Steve Wozniak) completely upended the prevailing model of economic progress of the 20th century, which was understood as technological discovery stemming from the academic or corporate laboratory.  Third, by returning to Apple in 1996, twenty years after founding the company, then leading it from near bankruptcy to dominance in a decade - with a current market capitalization of $346 billion (exceeding other tech giants such as Microsoft at $207b and Google at $169b) - Steve Jobs has powerfully affirmed the idea of the 'great man' in history.  

Born in 1955, the man essentially emerged from nowhere: he is not from a well-connected family (indeed, was adopted soon after birth) and did not attend or graduate from a top college. He tinkered, showed enough interest in computers in high school (in the very early 1970s) to hang around Hewlett-Packard, and collected coke bottles in order to have spare change for food.  This is reminiscent of the humble origin of the superhero (part of the American mythos) save this: Clark Kent was a farmboy not suburban hacker. And Peter Parker got his superpowers from a science lab accident, not from tinkering in the garage. 

Years ago, when the triumphant gaze of Bill Gates loomed over the stage where Jobs announced a major Microsoft investment in the new Apple Corporation, many realized that Jobs was actually the larger man.  This discounts nothing from Gates and his legacy, but the key distinction between them is glamor, or elegance, or charisma. Perhaps the ultimate design achievement of Steve Jobs was Steve Jobs.  With over hundreds of patents, the CEO is also the real deal in terms of innovation. And by God, does he have his flaws. So?  He's authentic, not perfect. And his authentic genius is understanding better than anyone how to make technology so easy that it becomes profound, obvious, and yes magical.

I speak often about the big sweep of history, particularly how relentless economic growth changes the human condition.  And I almost always call out Steve Jobs and Steve Wozniak because their story represents a stunning refutation of the consensus paradigm of progress that held sway over serious thinkers for almost all of the 20th century, certainly the middle five decades.  Even Joseph Schumpeter, the celebrated prophet of innovation and champion of the heroic entrepreneur believed that the new era would inevitably see the dominance of corporatism and its efficient R&D labs.  Not until the rise of Silicon Valley and its startup culture affirmed the pioneering success of Apple did the consensus shift, quietly, as if nothing had changed.

The recognition of startups, not governments, as the central actors in economic history should not be neglected after you turn this page.  As the great Apple chronicler Robert X. Cringely noted, "Apple has more cash on hand than does the U.S. government." And it has that cash for a reason, not to deny jobs to hungry Americans, but to invest in ever leaner supply chains making magical new products affordable to everyone. That, folks, is a big fracking deal.

“Innovation has nothing to do with how many R&D dollars you have. When Apple came up with the Mac, IBM was spending at least 100 times more on R&D. It’s not about money. It’s about the people you have, how you’re led, and how much you get it.” - Steve Jobs, Fortune, Nov. 9, 1998

The American economy has been the strongest in the world for nearly a hundred years.  Its growth has been built on the innovations of great entrepreneurs like Henry Ford and the Wright brothers.  Thanks to the boomer entrepreneurs, that legacy has been reaffirmed.  Best of all, we now know that hard work and competitiveness are what matter, not class. Jobs represents the triumph of intelligence, of merit, over fate. You could not script the American dream with a more compelling central character.

CORRECTION: THe original post stated Steve Jobs was born in 1995. The correct date is 1955.  

Why do we need government's permission to work?

I had a chance to speak at a meeting of the National League of Cities yesterday, and the audience was very receptive to the entrepreneurship message. One of the key things I recommend which cities can do to promote small and entrepreneurial firms is reconsider the economically unwise practice of licensing occupations. If there are any serious arguments on behalf of licensing, I'm not aware. Instead, you might hear superficial arguments about how licensing protects consumer safety, but is there any empirical data to support that? Does the low rate of licensing in Indiana make it a dangerous state? Hardly. Instead, most licensing represents regulatory capture, and often leads to less - not more - transparency among the licensed professionals, not to mention pushing the unlicensed actors underground or forcing poorer citizens to do things (electricity, plumbing) themselves.

A must-read article on this topic is a May 2009 article in Econ Journal Watch by Stephenson & Wendt. An instant classic.

http://econjwatch.org/articles/occupational-licensing-scant-treatment-in-labor-texts

Main points worth remembering:

• Occupational licenses affect 30 percent or more jobs in the U.S., but Indiana has them on just 11 percent of jobs.
• Wages rise in licensed occupations, but the number of jobs declines in that sector.  This should surprise no one, because tighter regulations act as a supply restraint.
• Licenses may reduce inequality within a profession, but seem to increase it economywide.  For example, licensing by dentsits and doctors appears to shift income to the top of those health pyramids and away from assistants and clinicians.

Dire pictures of the U.S. employment situtation

Here are three freshly updated charts showing the performance of key labor indicators relative to other recessions.  If one sets the value of each indicator to zero at the first month of recession, the net result is comparable for each of the recessions.  For example, the unemployment rate today is only 9.1, not nearly as high as the peak of the 1980-82 (double) recession.  Yet the peak is relatively higher for the current recession, relative to the starting value, what we might think of as the NAIRU base.

 

 

 

When you hear "Job growth is hardly strong enough to keep up with population," this last chart shows it to be true, even during the recovery. 

Refelecting on ABCD&G week: Amendments, Budgets, Checks, Downgrades, and Growth

A week ago on August 2, 2011, Washington cobbled together a last-minute "compromise" to raise the U.S. federal debt ceiling by $2.4T.  Let's take a moment to reflect on the good, bad, and ugly to come from the episode.

The debt ceiling is now $17.7T or, more importantly, above 100 percent of GDP, meaning the President can take on more debt on our behalf than the sum of an entire year of the nation's income.  Hard to believe it has only been a week, because since then the quality of our debt has been downgraded from the tippy-top AAA grade to merely AA+ grade. Not to mention, Friday's jobs report was disappointing (the labor force keeps shrinking) and the previous Friday's report on U.S. GDP - with huge downward revisions and "stall speed" of 0.8 percent growth in 2011 so far - shattered the illusion of recovery. 

As usual, I find the media conversation upside down, but I also see some real signs on progress.

False Narrative

First, the media conversation has been almost entirely about the "tea party" which acted "like terrorists" in holding our nation "hostage" and risking a default on U.S. debt.  The final bill is conveniently called a compromise. So let's just list the ironies, dare we say hypocrisies, involved in this narrative:

1. The media has long pined for a third party as a cure for 2-party polarization.  Now they've got a legit third party.  Where's the love?

2. Textbooks celebrate American checks and balances.  We just witnessed a check in action -- a minority third party checking the decades-long bipartisan spending binge.  Has anyone seen the phrase "checks and balances" in the MSM about what happened?

3.  The deal was not a compromise.  It was a successful check on higher taxes and unconditional debt increases, but a failure of a grand bargain that might have been. The need to reform entitlements and taxes could and should have been the result of this crisis, but instead it was a wasted crisis.  The result is a commitment to cap spending in the future, which is as binding as tissue paper.  Bill Galston has the best analysis I've read of what might have been. And CNN has a nice summary timeline here.

4.  Was debt default really on the table?  This is now assumed, but we will never know alternative histories.  What we know is that some bills and some government paychecks might not have been paid, but most certainly the debts would have been.  

5.  The weak economy is no excuse.  The media keeps parroting this talking point that the weakness of the economy prevented (for the last many years) more aggressive action to curb deficits.  Nonsense.  The S&P downgrade was telegraphed beforehand as a response to long-term structural deficits.  Why has the government been AWOL on proposing how to curtail entitlements over the next century?  A credible budget can certainly have projected trillion dollars deficits for the next few years, so long as it includes substantive reforms. That is our nation's weakness, not the recession.

Real Progress

The deal included two hugely important structural changes to the budget process. 

First, though the media doesn't get this, is the idea of a "super committee" which I applauded last week.  No, it not just another commission!  As I've said, "Blue-ribbon commissions are excuses for inaction" such as the Simpson-Bowles farce.  As good as the ideas from those groups are, the proposals almost always end up as PR material, but never get a vote as real legislation. The super committee is exactly the opposite.  Its members are elected officials, not greybeards, pundits, and poo-bahs.  And the super committee's work is guaranteed a vote!  Shifting the budget process away from the broken legislative system in place now and towards a more independent(ish) group is genius.  Forcing Congress to take up or down votes has been widely touted by its own members.  I predict a triumphant outcome, and I also predict it will cement Boehner's legacy as a visionary leader.

Second, the balanced budget amendment is now a reality.  Well, sort of.  The LA Times reports:

A balanced-budget amendment to the Constitution, which had been crucial to attracting support from House conservatives, would be brought to a vote, but the increase in the debt ceiling would not be tied to the outcome as conservatives had wanted. However, if the amendment were approved by both chambers and sent to the states for ratification, the automatic cuts would not be triggered — a provision designed to entice Democrats to vote for the amendment.

Will Congress actually pass a BBA, or it will it be a litmus test?  Well, that depends on what the text of the amendment actually says.  I might was well ask if you are for or against marriage, the only answer being that it depends on the prospective spouse!  Glenn Hubbard and I published a short essay in POLITICO last week, proposing a way to write the Amendment that would make it appealing to centrists and also, somewhat importantly, a good reform,  Here's a long quote:

First, the annual constraint on expenditure should be defined by the median federal revenues of the last five years, not the current year. This year’s revenues are not final, and worse, will likely fluctuate with the business cycle. Conservatives rightly criticize fine-tuning federal spending when it is counter-cyclical — but they should oppose it when it amplifies the cycle, too.

Second, any amendment should be simple — focused only on fiscal balance. That balance should count accrued liabilities in entitlements, not just outlays. It should be a neutral process — not ideological. The economist James Buchanan, Nobel laureate and professor at George Mason University, encouraged conservatives to advocate for a BBA, but warned against mixing process reform with a prescribed outcome.

 Smaller government is a natural end of the process of balancing the budget, if one trusts the voters, but dictating that as the means only insures liberal opposition.

Third, any new rule or BBA should use escalating supermajorities for exemptions which are universal. Let’s unpack that. Escalating means that Congress could allow higher expenditures in a given year with a supermajority vote that increases in successive years. For example, a 3/5 vote in both houses is required the first year of exemption, 4/6 the second year, 5/7 next, and so on. Universal means that exemptions are not pre-defined, such as wars or recessions. A natural catastrophe will do.

Again, trusting future Congresses to judge what is best is one way to help passage and protect the nation.

Fourth, the BBA should provide a glide path to a lower debt-to-GDP ratio. For example, after it passes, the average fiscal gap of the preceding decade should be narrowed by one-seventh per year for seven years. That will avoid sudden, perhaps recessionary, shocks.

After our essay's publication, I learned that Alex Tabarrok has similar ideas for what he called an Unbalanced Budget Amendment.  Also, freshman Congressman Justin Amash has an actual legislative proposal for an Amendment with many similar features.  So, for the first time in a long time, I am hopeful. 

Correction: I revised the paragraph about economic reports - Employment report was last Friday, GDP report was the Friday before that.  New economics mantra: thank God it's NOT Friday!

Econ Blogger Survey Charts!

(KANSAS CITY, Mo.), July 28, 2011 – Optimism is out; pessimism is in among the country's top economics bloggers as they look to 2012 and beyond, particularly regarding jobs. A new Ewing Marion Kauffman Foundation survey released today shows that only 50 percent of respondents anticipate employment growth, a decrease of 20 percent from second quarter.

"This quarter's survey provides an unprecedented level of pessimism about the state of the U.S. economy among top bloggers," said Tim Kane, the survey's director and a senior scholar at the Kauffman Foundation. "But, it also contains a handful of unique questions submitted by bloggers themselves that offer new perspectives and new directions forward."

The full set of web-ready images of the survey charts are presented below:

 

 

Thanks to Mike Buster at ampersand for the design work, and to the team at Kauffman for getting the report assembled and published!
 
 
 
 
 
 
 

Super Congress!

The "Super Congress" is an impressive structural reform in the way politics operates in America, exactly the kind of thing needed to bring balance to America's economy (as opposed to another blue ribbon plan).  Critics will assail it as antidemocratic and devolution of legislative authority.  Which will be ironice, since the leaked proposal recommends a 12-member group made up entirely of elected legislators. 

This "Super Congress," composed of members of both chambers and both parties, isn't mentioned anywhere in the Constitution, but would be granted extraordinary new powers. Under a plan put forth by Senate Minority Leader Mitch McConnell (R-Ky.) and his counterpart Majority Leader Harry Reid (D-Nev.), legislation to lift the debt ceiling would be accompanied by the creation of a 12-member panel made up of 12 lawmakers -- six from each chamber and six from each party.

Downside?  Well, it locks in the 2-party system, at least on the surface.  But so what?  Get a viable 3rd party candidated elected, and then complain. Even in theory, the Super Congress works, because in theory and practice the two parties are coalitions of other "parties" (e.g. Tea, Christian, Hawk).  It stands to reason that each mini-party will have a seat.  Similar left-leaning mini-parties will have reps as well (e.g. Labor, Poverty, Trial Lawyer). 

Upside? Up or down votes.

No Side?  Constitutionality.  This is a non-issue.  Is the Pentagon mentioned in the Constitution?  No.  Nor is the Federal Reserve, the CBO, the IRS, or even the Ways and Means Committee. I'm pretty sure there is no Gang of Six clause either. 

Is Access to Capital Restricted from .... Banks (false) or Friends (true)

Two new pieces on access to capital are worth note.  The first, and by far more important piece, is an opinion by Professor Scott Shane arguing that the SEC should scrap the accredited investor rule.  I couldn't agree more.  The second is a NY Fed paper that sheds some light on the question of access discrimination against entrepreneurs (and finding little evidence for it).  I have some thoughts on Shane, first with a quote from his piece.

The accredited investor rule makes it harder for entrepreneurs to raise money for their businesses. Non-accredited investors are much more numerous than accredited investors. Analysis I conducted shows that there are nearly four non-accredited angel investors for every one accredited angel. And there are more than 7.5 non-accredited informal investors for every accredited informal investor. By limiting reduced disclosure requirements to fundraising efforts targeted at accredited investors, the SEC makes it more difficult for entrepreneurs to raise money from non-accredited investors, which, in turn reduces the amount of money raised from them. While some entrepreneurs would clearly benefit from tapping accredited investors, particularly if they will need to raise large sums of money or will need follow-on funding from venture capitalists, many would be just as well-served raising money from unaccredited investors, perhaps through processes like crowd funding. Making that process easier would make capital more readily available to private companies.

I agree with Shane, and have always found the rationale for the law is thin:  assuming that non-millioaires are dummies (i.e. income is a good proxy for financial sophistication) and that the cost of low-grade financial fraud outweighs the benefits. The only avenue left for non-accredited investors (accreditation = having a net worth of $1 million or more), is public stocks, mutual funds, and the like. 

Two observations.  One, was high-grade investing less dangerous to the public over the last decade?  Experience seems to confirm that small investors were damaged pretty severely in the "safe" markets during 2008.  Two, doesn't this rule diminish the power of local investing.  By forcing uncle Charlie to put all of his $50,000 in savings into a Manhattan-based mega bank rather than sprinkling some it around the neighborhood, who wins?  Even if centralized mega-funds (whether in NY or San Jose) look for worthy entrepreneurs in Uncle Charlie's neighborhood, there is a non-trivial transaction cost.  This geographic discrimination erodes local knowledge and trust networks.  And one can only guess at the damage it causes to early stage entrepreneurs, with confidence that it is real and also non-trivial.

Why Do We Expect a "Normal" Recovery?

The thrust of all debates over economic policy and government debt these days seems to be that this recovery ought to look like previous recoveries. We are insistent that unemployment fall faster, jobs be created more rapidly, consumption rise quickly, and economic growth pick up steam. All desirable outcomes, unquestionably. But we keep ignoring the factors that made the "Great Recession" of 2007-2009--and, accordingly, also the subsequent recovery--an outlier in terms of recent historical experience.

This is only natural, of course; our only comparative frames of references are other recessions since 1948 and, in terms of personal experience, the recessions of 2001, 1990-1, and the early 1980s. But this recessions was clearly of a different order, for a variety of reasons. For starters, the expansion that preceded it was one of the weakest--if not the weakest--since World War Two, as measured by job creation, per capita income, and the employment-to-population ratio.

Of the growth that did take place, we obviously know now that a significant portion of it was distorted by all things housing bubbled-related: construction, real estate, finance, etc. The plural of anecdote is not data, but I find Paul Kedrosky's parable of the highway ladder debris amusingly illustrative. Looking at Statistics of US Business data from 1998 to 2006 reveals that, of the net increase in the total number of firms of 442,000, fully one-quarter of that growth was in Construction (NAICS two-digit industry code). The only larger share went to the Professional, Scientific, and Technical Services (PSTS) sector, which includes businesses in R&D testing, ad agencies, computer design services, engineering services, law offices, accoutants, payroll services, and so on. Overall, a good sector in which to experience growth; yet, both the Construction and PSTS sectors are comparatively small job creators because average employment per firm is nine and ten, respectively, compared to the all-sector average of about twenty.

We keep wondering why job creation isn't automatically bouncing back to expansionary levels, and blaming sluggish job figures on fleeting factors like discretionary government policy. But because job creation in the prior expansion was low and because the driver of job creation--consumption--was built on sand (i.e., housing bubble), we shouldn't expect it to come roaring back. The employment-to-population ratio barely budged from 2002 to 2007, a historical first. The Federal Reserve of San Francisco, moreover, has calculated that personal consumption took a hit equivalent to about $175 per month per person as a result of the recession and is nowhere near returning to pre-recession levels. This is due, in part, to the completely unsustainable level of consumption the US enjoyed in the last decade. We shouldn't expect a return to that.

This points to the deeper factor underlying the slow recovery: this recession was marked by a financial crisis. And, as Reinhart and Rogoff have convincingly showed, post-financial crisis recoveries are very, very slow. Combine that with deep-seated challenges facing the American economy--geographic asymmetries, skills mismatches--and you can't help feeling that this is going to take a while.

California's Poisonous Business Environment

When economists talk about business environment, this is what we mean.  For years, the agglomeration momentum of Silicon Valley has trumped the bad governance, but the tide will turn, I'm afraid...

CNN: California companies fleeing the Golden State
... Companies are "disinvesting" in California at a rate five times greater than just two years ago, said Joseph Vranich, a business relocation expert based in Irvine. This includes leaving altogether, establishing divisions elsewhere or opting not to set up shop in California.

Startups stifled = jobs leakage

Great new paper about the demise of startups in the modern era by my colleagues, EJ Reedy and co-blogger Bob Litan.  What I call the repression of entrepreneurship is now clear in the data.  This is yield from big firm bias in policy. Key nugget from Reedy and Litan:

In fact, since 2006, the annual number of new employer businesses tracked in government statistics has plummeted 27 percent for new independent firms and approximately 23 percent when considering a broader measure of new “establishments” (new independent businesses and new expansions of existing businesses).

The Great Jobs Drought

The concept of a jobless recovery has been redefined, both for America and for my family, with the new jobs report out this morning. For America, this is the first jobless recovery lacking not only jobs, but also a recovery.  A freind the other day noted it was the 2 year anniversary since that recovery officially began.

With recoveries like these, who needs recessions? 

The mainstream news is saying the paltry job growth is a surprise, but it's not to me. I'll tell you this: as long as the weekly UI claims are above 300,000, there will be no significant recovery. And the reality is that UI claims remain north of 400,000.

For the first time in my family, the 9.2 percent (and rising) unemployment rate is personal.  You see, it's summer time, and we have a newly minted 16 year old male in the house. Annie Lowrey at Slate reminds us that kids these days have drastically worse summer job prospects (25% unemployment) than any generation of kids since such measurements began.  I mean, I'm all for child labor laws, but this is getting ridiculous. We told Sean he couldn't play on his XBox until he got a job, and it looks like the "summer of no fun" is becoming a reality. Next thing you know, the politicians will define away the problem by raising the age of childhood to 33.  Or better yet, wait for them to "means test" the definition of unemployed.  "Don't have a job?  You're officially a child!"

Jobs, Jobs, Jobs

In Kauffman's 1st quarter 2011 survey, I asked top economics bloggers to identify the causes of persistently high unemployment.  The answers were fascinating, but the powerful consensus about uncertainty as the leading cause was a surprise. Here's the chart and table (below) and a link to the full survey.

 
 
All of you following this issue have heard five or ten plans to create jobs - just today! - because every interest group has their pet solution. Surely, some of them have to be right, but can we all agree that they're not the ones being tried?

Here at Kauffman, we tend to believe that since all net jobs are created by new firms less than one year old, gee, maybe policy should focus on a better startup environment and less on big-old-firm bailouts.  But setting all that aside (for a few weeks at least), let's admit that some of the policy perscriptions in place have been, how shall we say, wrong. Doing more harm than good. Colossal embarassments. Ideologically blind. Naive. Failures. No really, please stop helping.

I've already beat the drum against the increased minimum wage (enacted by the Pelosi congress, signed into law by President Bush), and I blame that for our son's predicament, not to mention the sky high unemployment rates among teens, inner city youth, and low-skill workers generally. We have made it illegal for them to work at their marginal value, and thus gain skills that would enhance their marginal value and employability. Nothing like hobbling the weakest among us.

But the minimum wage surely can't be to blame for magnitude of joblessesness.  I do wonder: Is there any bolt of enlightenment shocking Congress to the realization that extending UI benefits from the norm of 26 weeks to 99 weeks didn't work as planned?  Essentially, paying a jobless person half of their salary not to work for 99 weeks all but guarantees their skill set is atrophied and any post-99 job prospects are dim. It was a radical experiment in the blindest kind of Keynesianism, and the results are probably too painful for its authors to ever admit.  I know this isn't one of the top explanations listed above, but the unique persistence of our current joblessnes strongly suggests that the cause is unique.  A sudden quadrupling of UI eligibility is too strongly linked with record-setting long-term unemployment to ignore.

Unemployment is hardly a sleeper issue.  But fixing a dysfunctional UI system is too wonky for most wonks.  That has to change.

 

What is a Tax Increase?

My studied opinion says it is all about the top marginal rate & the attendant incentive effects on work, savings, and entrepreneurship. Jim Carter and Jason Fichtner take a closer look.  And, not to be missed, Bob McNally explains how some simple accounting will save Medicare and Social Security.

Galston on tension between Progress & Innovation

I've had the pleasure of getting to know Bill Galston in recent months, and recommend his essay in the current issue of DEMOCRACY: A Journal of Ideas.  There are five essays about entrpereneurship (sponsored by Kauffman), and they're all good.  His summary:

In short, while “progressive entrepreneurship” is far from an oxymoron, it is at best a promising possibility. Turning it into an achieved reality will take some work on both sides. Progressives must embrace growth as a high priority, and they must therefore endorse its preconditions. Innovation and entrepreneurship must be to the twenty-first century what industrialization and mass production were to the twentieth. For their part, innovation advocates must recognize that not all reservations against growth and competition are the product of ideology or ignorance. Justice matters, and so do public goods that markets cannot provide.

I find Galston's essay most interesting because it innocently exposes the ironic tension between progress as a historical fact and progressives as a political movement. Wy there should be such a tension is an accident of politics, history, and naming conventions. In America, it is common to think of conservatives as extremists (irony), liberals as statists (irony), and now progressives as suspicious of innovation. 

Galston provides a very nice summary of the landscape and a few issues at stake, but no deep analysis of any one issue or game-changin path forward. Thoughtful comments on torts, immigration, and public goods. I think his most striking comment is this: "It has taken many aging progressives too long to realize that the manufacturing economy of their youth cannot be restored."

You Should Overreact to the Employment Report

The normal advice from sage, two-handed economists is that people shouldn't overreact to one bit of bad news.  The wise guys on Wall Street snicker at the day traders with lines like, "Two data points make a trend!"  So count on lots of punditry that today's employment situtation isn't as bad as it looks, especially when the Bureau of Labor Statistitcs comments that the uptick in the unemployment rate is statistically insignificant. With friends like these ...

This time, if your instinct is not to overreact, I'd urge you to reconsider.  This month's report on May activity shows that the April report wasn't a fluke. And it confirms that the entire last year of lackluster labor market equilibrium isn't some unique aspect of a unique recovery. It's time for some overreaction.

• The unemployment rate is now 9.1 percent, up from 8.8 percent two months ago.  That's important.  Although research shows the U rate is more reliable than the payroll employment numbers over the long term, it might still suffer from a one month blip due to turnover in the survey sample.  But a second increase in two months all but nails the coffin shut. By that I mean that the U.S. is experiencing if not a double recession then a historically stagnant recovery. 
• The May payroll gains of 54,000 are nothing short of stunning. The U.S. lost 8 million payroll jobs during the recession.  Adding 54,000 a month will get the nation back to normal ... never!  A recovery in the job growth number needs to average 400,000 a month to achieve the simplest recovery in 2.5 years.  As it stands, the BLS commissioner is trying to emphasize the good news that the average payroll growth has been 220,000 for the previous 3 months. Let's be clear: that is not a silver lining, it's an indictment of the current course.
• The long-term unemployed increased in May by 361,000.  Add that to the disturbing uptick in weekly jobless claims, stuck north of 400,000 a month.
• The labor force increased by roughly 1.2 million a year before the recession, peaking at 154.7m in Dec 2008.  Two and half years on, it is 153.7m (a million souls fewer).  Another way to think of this is that the labor force has roughly 4 million in extra-normal slack, people who have officially left/not joined the labor force but will come in as the economy recovers.  This is a recipe for the unemployment rate to rise as things get better, but what we are seeing is the unemployment rising even as conditions slip.

So who is to blame?  It's easy for some to blame the Federal Reserve, but I think that is a foolish debate.  Monetary policy, inceed macro in general, has limits to its effectiveness.  The Fed can only compensate for a broken fiscal policy for so long, and it appears the U.S. has reached that point. Think of money supply as blood supply.  You can pump gallons of fresh blood into a sick lion, and she ain't gonna roar.

Tiger Mothers versus Dolphin Dads

I respect the Tiger Moms, I really do. But I'm with Professor Bryan Caplan on this debate: kids are plastic, not clay. Parents can press on the kids all they want, but the kids will be who they will be. That's just one of the secrets that Dolphin Dads (my term), backed by good research, know instinctively. Kids learn better through play than through discipline, repetition, or threatened punishment. And keep in mind, dolphins have bigger brains than tigers!* There is a method to our madness.

Here's my PBS commentary on this topic:

Watch the full episode. See more Nightly Business Report.

*Disclaimer: the world is full of tiger dads, dolphin moms, and of course, sloths of all genders. Like Amy Chua's use of the term Chinese, ethnicity and gender are shorthands for behaviors, not ethnicities and genders here. Hat tip to my very own Dolphin Mom, enjoying her retirement even now as she golfs in Florida!

Wadhwa: Promises, Promises on the Startup Visa

Vivek Wadhwa provides some troubling news about the fate of the startup visa being DOA.

... Chopra dropped a bombshell at the Economist event. He said that the President would only support the Startup Visa in the context of “comprehensive immigration reform”. What this means is that the legislation will be lumped in with toxic debates about illegal immigration and will be held hostage to other interests.

... I received confirmation from a staffer in the office of Senator Lugar (one of the two sponsors of the Startup Visa Act) that without the support of the White House, the legislation has almost no chance of passage. The

If immigration reform is the Rubik's cube of domestic policy, why are politicians saying they will solve it with just one move?  A few years of Washington experience have taught me that some issues are never meant to be solved ... they're just too valuable politically if they stay unsolved.