Growthology

Economic Pessimism, Reasons 1-5, with a Kicker

The short-term outlook continues to be bleak for the U.S. economy.  Though I'm not in the Krugman camp for policy reasons, I concur with his macro pessimism. I still haven't gotten the memo that the recovery has arrived.  My reasons:

1. Jim Hamilton (via Bill Gavin) adjusts the unemployment rate.

 
  
2. Jobless Claims have not cauterized. Anything above 400,000 new claims per week means the economy is bleeding out. This morning's weekly release is 472,000, the high level its been stuck at for ... years.  You can't hype how bad this is.

3. There's an analogy to oil bleeding out in the gulf. Maybe it's time to blow it up?

4.  Home prices will drop another 5-10%, says Calculated Risk.

5.  Policymakers are out of ammo (see my Depression Index, which hasn't changed much in the year since I described it).  But wait ... maybe this is good news!

I recommend John Tamny's essay in the WSJ today about postwar Germany's rejection of "spending Keynesianism" in favor of what I call "tax-cut Keynesianism."  Krugman's notion of big push stimulus has failed spectacularly, again, and it's time to respect the empirical outcome.

So, here's the good news.  Economies are dynamically stable, not dynamically unstable. Any economy naturally finds an equilibrium if only the masters of institutional policy will let it.  But the animal spirits need a sense of certainty, something sorely lacking in the U.S. right now. Without certainty, state policymakers will continue to make fantasy budgets. Without certainty in mortage tax credits, no one will know when home prices are real.  But once genuine commitments to fiscal stability and tax policy are made, the transition to real growth will be swift. Remember, the credibility story was validated regarding monetary policy in fighting inflation (see Volcker, Paul).  We need our policymakers to understand that credibility trumps stimulus in promoting growth.

Why Not a Market for Advancing Innovations out of Universities?

Yesterday I had the privilege of delivering testimony on behalf of Bob Litan in front of the Joint Economic Committee. The subject of the hearing was how the United States could maintain its position on the global frontier of innovation, with a specific focus on universities and federal funding of research and development. Most of the Members of the Committee were in general agreement with the panelists: innovation is key to economic growth, universities are important to R&D and innovation, and the United States needs to make some changes if we are to remain an innovative economy.

On one particular point, however, there was a considerable degree of contention. Congresswoman Carolyn Maloney (D-NY) inquired as to the state of technology commercialization in higher education. Can it be improved? Is everything peachy-keen? 

The Kauffman Foundation takes the position that all is not well in the land of technology commercialization. There are success stories, to be sure: Gatorade, Vitamin D, Netscape, MRIs and so on. And there are star performing universities--Stanford, WARF (the Wisconsin system), and the University of California system do a phenomenal job of moving innovations out of campus buildings and into new (and existing) companies. But universities, on the whole, appear to be under-performing relative to what they could be contributing to economic growth. The Bayh-Dole Act of 1980 allowed universities to hold the intellectual property rights to innovations and discoveries that result from federally-funded research. The result was a wave of university innovations as well as a wave of attempts to move university innovations into the marketplace. Most universities receiving federal R&D dollars established technology licensing or transfer offices (TLOs or TTOs) to manage the intellectual property and serve as the liaison for faculty members seeking to commercialize their innovation. As noted, many universities have managed to successfully commercialize new technologies.

As with anything, however, the structure that was set up in response to Bayh-Dole has now run into problems. The productivity of federally-funded research at universities has been declining for a number of years. Technology transfer offices are typically understaffed and unable to manage their university's stream of innovations--innovations, moreover, that often span a wide diversity of disciplines. At the same time, however, bureaucracy has grown up around the process of technology commercialization and dramatically slowed, if not stalled, the process in many places. Anecdotal evidence abounds of faculty members running headlong into bureaucratic drywall at their licensing office. Furthermore, as a result of the outstanding success of a handful of universities with a handful of innovations, many TTOs and TLOs have implicitly or explicitly adopted a home-run mentality, chasing the next big hit at the expense of many smaller innovations. 

Finally, many universities have latched onto the most easily measured outputs of R&D, patents and licenses. But, there is little correlation between federal research funding and the returns (in patents and licenses) on that funding. Maybe we shouldn't expect there to be such a correlation, of course, but the race by universities in the wake of Bayh-Dole to establish commercialization offices and the drift of research spending toward a more political rather than scientific distribution have raised the implicit promise that there is such a correlation. The wonderful historian Roger Geiger has documented such drift: at one time, the distribution of university innovations and federal R&D money to universities both followed a Pareto distribution, with a handful of institutions far outdistancing everyone else in terms of inputs and outputs. Over time, however, while the distribution of innovative outputs remains skewed, the distribution of research dollars has gradually gotten flatter. We expect proportional output in terms of innovations but don't receive it.

There is no magic solution to these bottlenecks, but my colleagues Lesa Mitchell and Bob Litan have come up with a fantastically simple and novel idea: open up technology transfer to market competition. That is, allow a professor from University X with a potentially breakthrough innovation to go outside his or her university's TLO and use that of University Y, if University Y happens to be more skilled at commercialization in this particular discipline. University X would not be required to relinquish IP rights, and of course the professor is not required to do anything. The idea is simply to bring more openness and competition into a process that has become muddled and distorted. Where else in society do we tolerate such artificial monopolies with public research dollars at stake? This idea, in fact, perfectly carries forward and extends one of the primary motivations behind Bayh-Dole--to smooth the commercialization process. Bayh-Dole was enacted in part to construct a platform upon which faculty and professors could more easily interact with companies (new and existing). Allowing universities to hold IP rights was meant to remove one of the legal entanglements in this process.

Who could oppose such openness? Who could oppose competition when competition has been shown repeatedly to be the best avenue toward maximizing innovation and social welfare? Not to sound trite, but follow the money. Most universities and TTOs and TLOs vehemently oppose this idea. In fact, you can scroll through the webcast of yesterday's hearing to the very last question and witness the animation with which Dr. Samuel Stanley opposes the mere mention of this idea. Basically, the opposing arguments boil down to these: (a) there is no evidence that the current licensing process is dysfunctional; (b) allowing such "free agency" would give rise to all the legal problems that predated Bayh-Dole and were put to bed by that legislation; (c) no professor and no university wants to do this; (d) technology commercialization is a delicate art that cannot be commoditized; and (e) the current system is working fine as it is--as proof, look at all the great innovations universities have given us.

Unfortunately, I did not get a chance for a counter-rebuttal, so I offer it here. First, Dr. Stanley (and others) confuses an absence of evidence with evidence of absence. The absence of overt dysfunctionality does not imply the corollary, that things are hunky-dory. In fact, the arguments I've mentioned above regarding research productivity and returns to patents and licenses would seem to indicate something is amiss, as would the growing stock of anecdotes from frustrated professors and companies. It is of course nearly impossible to prove that something like a university is not living up to its perceived potential in terms of commercializing innovations, but the inability to prove that there is room for improvement is not an argument against opening up the process. That, in fact, is the nub of the free agency proposal--just open it up. No one would be forced to operate as a free agent or to contract with a free agent, as Dr. Stanley seems to think we are suggesting. This is entirely optional, as is any competitive market. It could even be optional at the level of the department or school of any particular university, with one department perhaps choosing to work with ABC agent while another chooses XYZ agent.

Dr. Stanley also predicts that such openness would instigate a return to those dark days before Bayh-Dole when legal machinations corrupted every attempt at commercialization--contract disputes, broken agreements, etc. Oddly, however, technology commercialization at universities is still plagued by these problems--Bayh-Dole did not banish legal disputes, and I'm not sure how Dr. Stanley manages to pull off such cognitive dissonance.

By opening up the technology commercialization process, we would likely see the development of completely new organizational forms to facilitate the process. No one can predict what will happen--and that is exactly the point. Maybe free agency will flop; maybe it won't. But there is no (or shouldn't be) single model when it comes to technology commercialization: free agency would encourage experimentation as a way to lower transaction costs, which was precisely the idea behind Bayh-Dole. In fact, many professors are already finding their way around the TLOs and TTOs, doing "end-runs" around the bureaucracy and finding their own commercialization routes. Rather than see this perversion as a defense of the status quo we should encourage free agency as a way to promote the development of more such alternate pathways. In their promotional materials and commencement speeches, university administrators consistently trumpet the glories of diversity and self-actualization and intellectual experimentation--except, it seems, when it comes to their own operations.

That seems to be a running theme of opposition: technology commercialization is special and cannot be subject to the rules of the market that govern the rest of the economy. Dr. Stanley is far from alone in asserting that each particular innovation is unique and must be granted its own customized commercialization process that can only be run through a TLO. Undoubtedly, there is some truth to this. Just as clearly, however, there is plenty of room to lower transaction costs by standardizing some portions of the commercialization process. This is precisely what UNC-Chapel Hill has done with the Carolina Express License Agreement; we will keep you posted as to whether or not the world ends as a result of this dangerous experimentation with technology commercialization.

Finally, we come to the tried and true defense that everything is fine. Universities have, after all, contributed enormously to economic growth and human welfare. Why mess with success? The real message, however, is: don't mess with us! This is the completely predictable and understandable response of any institution when its monopoly is threatened and should, in fact, serve as a reason to promote more experimentation. Just because universities have contributed much in the past does not mean they are performing optimally today (research is only one of many fronts on which we could have this discussion) and does not guarantee that they will continue to do so in the future. If bureaucracy keeps building up around the discovery and innovation process, it is almost guaranteed that they will not.

Transparency War, FIFA Edition

I'm starting a new category here on growthology: Transparency War.  Here's why.  The study of economic growth opens one's eyes to undercurrents in societal change, things like human capital, economic freedom, and political economy.  Most of these currents do not puzzle me, as I have a sense of their resolution somewhere in the future.  But the tension over transparency is an undercurrent that leaves me uncertain.  I would like to believe society is trending towards greater transparency, but that resolution is not at all clear.

Examples in the fight over transparency occur in education and medicine, for example.  Consumers have little choice and less transparency about their choices in both areas.  I'd like to call them markets, but that is a fiction.  Students cannot choose which 2nd grade teacher they want.  Nor are they granted a right to know of the performance of the various 2nd grade teachers they might be assigned.  And explaining the lack of transparency in doctoring is well-known to Americans and shameful to the country. But it is what it is.

The latest front in the Transparency War may seem trivial, but it's been on my mind and is all over the world's sports news.  FIFA soccer rules at the World Cup are explicitly aimed at reducing transparency to zero. World Cup 2010 in South Africa has produced a rash of inexcplicably bad refereeing errors, erasing good goals (See 2 of 3 USA games) and granting bad ones (see Mexico v Argentina), and allowing obvious cheats (see Brazil, handball).  England was knocked out of the competition thanks to a disallowed goal that all five referees neglected to see, but which any home viewer could watch on their telly.  Offsides players were called on; onside player were called off. More games were marred than not, which is the shame of the sport.

So what's the response of FIFA (the governing body of futbol)? Even LESS transparency!

The headline on CNN.com says "FIFA to censor stadium replays at World Cup"

JOHANNESBURG -- FIFA will censor World Cup match action being shown on giant screens inside the stadium after replays of Argentina's disputed first goal against Mexico fueled arguments on the pitch. Angry Mexico players protested to referee Roberto Rosetti after the screens in Johannesburg's Soccer City showed Argentina forward Carlos Tevez was offside before he scored the opening goal in a 3-1 victory on Sunday. FIFA spokesman Nicolas Maingot said Monday that replaying the incident was "a clear mistake."

Crash Engineering

What's to be made of the demise of American manufacturing?  Of American engineering?

While both concerns may be overblown, one wonders if a country can maintain its innovative lead in industry, when just over 10 percent of its workforce (that is, parents) are employed in industrial jobs. I'm reminded of my own father's constant efforts to get his kids excited about model rocketry, remote controlled airplanes, and plastic WW2 aircraft models.  He would spend many hours over many months building the intricate models in the basement. And when spring came, Troy and I spent mere minutes crashing them.

Thanks to Pop's crash engineering, I was inspired to join the Air Force, with the stated intention of being the first man to walk on Saturn (Update: didn't happen).  My brother was inspired to crash a handful of family cars ... but that's another story. We both became entrepreneurs.  But I wonder about all the kids who didn't have a father like Pop. Where do they get hands-on engineering play, especially with so many budget cuts to invaluable programs like shop class in middle school? Legos, maybe?

I was directed to a fascinating article in the NYTimes about kindergarten engineering by Stefano Bernardi (who kindly commented on my previous post).  Students spend 15 hours on engineering projects such as designing a Wolf-proof house that can't be blown down. This strikes me as a perfect way to make engineering accessible to young minds, not something distant and difficult.  And come to think of it, engineering is arguably the most kid-friendly subject, or it would be if teachers framed lessons plans around pyrotechnics. Imagine the lesson plan: Smashing versus Crushing, Which Works Best?

As for American demise, put me in the optimist camp. The sunset for U.S. industry will look exactly like the sunset for U.S. agriculture: less labor, more automation, and much more innovative design. That equation will demand better engineering classes, so you have to believe that's in the works, too.  Count us in, for our son and our daughters.

A failed entrepreneur

Tom Kane spoke often during the last fifteen years about why his company failed. After twenty years as the president, ten as owner, of a Michigan manufacturing company called Ronan & Kunzl, Tom felt powerless to stop bankruptcy from washing away all the value he and his team created. Bankruptcy came during the recession of the early 1990s, which hit the industrial Midwest especially hard. He was haunted by it, and he never really got over the loss.

Tom Kane was my father. He passed away from lung cancer on June 3 after a brief, but honestly beautiful, final few weeks. Even as we sat and talked for hours in the hospital, something he hadn’t been able to do for the last decade and a half, he was driven to explain to me what happened to R&K. I encouraged my Pop to talk instead about good times, like the two state high school basketball championships he played in. We talked about family memories, about fishing on the lakes of Michigan, about politics, about geometry, the ancient Greeks, the nature of God. But something was driving him to explain R&K, maybe to confess.

Pop was a proud graduate of Notre Dame, class of 1960, and a math whiz who earned a Master’s degree in economics just to prove to the Dean he could do it with straight A’s. He was patient, arrogant, friendly, generous, honorable, brilliant, defensive, strong, and inspiring. Very inspiring.

Pop was also an accidental entrepreneur. He started his career at Michigan Bell, but his aspirations and innovative style were a poor fit for that prosperous dinosaur. He found success as a consultant for Price Waterhouse, and really enjoyed advising companies, especially one in Marshall, Michigan that made glass backboards for the NBA and NCAA. It was such a neat company, Ronan & Kunzl. A glass company. Six months after his consulting report, the CEO shrugged his shoulders and said R&K had been a family firm, not his, and he’d implemented none of Pop’s ideas. He sighed, then asked Pop if he would be interested in taking over. Opportunity knocks!

The first memory I have of my father is when he cooked breakfast for me. Greasy pink eggs, toast and bacon. My folks divorced when I was two years old, so this was a breakfast at Grampa and Gramma Kane’s house in Lansing, where Pop was living. He had his food, his coffee, a newspaper in his hands, and a cigarette in his lips. All I had was the food and the comics. So I said, “Pop, I can’t wait to be big like you and have a real newspaper, coffee, and a cigarette.” I was probably five. He looked at me and chuckled, and said in his gruff baritone, “Why wait?” He tapped a cigarette from the pack he kept in his pocket, and lit it up for me. “Now don’t be a sissy and hold the smoke in your mouth. Breathe it in deep, all way into your lungs. Got it?” Big smile on my face. I nodded, held it just so, and breathed in deep. Next thing I knew, I had fallen onto the floor and was hacking. I had tears in my eyes when I stared up at him. “Want some coffee?” Pop asked, and laughed. So that’s why I don’t drink coffee.

Within a year of becoming R&K’s president, Pop had met and married a belle in Marshall (and I got a long-coveted brother in the deal). By no means did I grow up wealthy, especially since I lived in my Mom and (step) Dad’s humble home in Columbus. But I enjoyed a confidence from the way Pop talked to us. He planned to hand the reins of R&K to Troy and I someday, and so he asked for our advice on business decisions when everyone else was asking us our favorite color or animal. Not to mention, having a multi- million dollar company as symbolic wind in your sails is a pretty cool feeling.

Under his leadership, R&K became a leading supplier of glass basketball backboards. The company also made swinging and sliding glass doors, and innovated some of the earliest designs that incorporated motion sensors instead of step-mats. I asked when I was ten if a doorbell button could be hooked up to trigger a sliding door, and that next week Pop and a few company engineers showed me a working “Tim-o-matic” door. Not realizing they were humoring me, I was irked that I hadn’t been paid any royalties by the end of summer. Another time, Pop brought home a basketball from an industry conference with signatures from most of the Boston Celtic champions from the 1960s, including John Havlicek. I remember this because one hot summer day, our regular ball deflated, so Troy and I grabbed the Celtics ball from the fireplace mantel to finish our game. I’m pretty sure I won. Pop was astonished when he got home that evening to find all the signatures had worn off, but reacted with his characteristic calm, chuckling at what fools his boys were.

Like father, like son, I needed to cut my own way in the world. I joined the military instead of taking the easy road to the family business. He was very proud, and wrote a note I opened on the flight to Colorado Springs on July 1, 1986. That was the first day of basic cadet training at the Air Force Academy. The note read, “You are an Eagle, and whenever you get tired of flying, I will be your Rock.”

When I was stationed overseas in 1992, I was shocked to get a phone call from him: Ronan and Kunzl was failing. Talk about impotence. I was in Seoul, waiting to fight the North Koreans, and couldn’t do anything to help as the family nest egg fell apart, as the lives of three dozen families who worked at R&K were financially shattered.

I will never know all the details, or what obstacles the company faced, or which of Pop’s decisions were right or wrong. He wanted to explain, but I didn’t think he had to. He was a wonderful father. Troy told him last week that Pop is the best man he’s ever known. He didn’t owe us anything. In my book, he had 19 good years as an entrepreneur, and one bad year. That’s a pretty good shooting percentage.

Scholars of entrepreneurship often speak of America’s unique culture of failure-tolerance, something celebrated in the high tech communities of California where I once worked. We forget, though, that there is a human cost to failure, that despite the culture, many entrepreneurs cannot forgive themselves.

Pop didn’t die thinking that he was a failure, just that he’d failed, that he felt bad about it. He wanted us to learn. He said he was so lucky to be part of the greatest family, and to live in the greatest country the world has ever seen. My three sisters were with him when he passed. Marcella had been beside him constantly for over a week. I spoke to him on the phone that day and teased him that we’d already had a big emotional goodbye talk, so what was he waiting around for? He laughed. “Go Eagle,” he said in a whisper.

One day, I think it was in 1980, my father was in his backyard garden digging away, while Troy and I were passing a football nearby. He was upset about something at the company, but after a while asked us to come over for a lecture/pep talk. He said, "You boys are going to grow up and have people tell you can't do things. It's impossible. Well, don't listen to them. Anything is possible if you dream it." Only later did we appreciate the meaning of his words. But at that age, words like "anything" and "dream" are more potent than he realized. So he scooted us away and we ran up the hill to the side of the house (where the big tree is), and I said to Troy, "You know what this means, don't you?"

My brother shook his head vigorously, eyes wide. "It means we can fly!" he said.

"Exactly," I said. So we climbed the tree and jumped out and crashed into the grass. We kept trying for the next 20 minutes, but we never took off like Superman. By the time we went in for supper, bruised and dirty, we were ashamed that we just didn't have enough faith in our own dreams.

Looking back, I think I learned this from Pop: Flying high is heroic, but crashing isn’t a tragedy. We should save our tears for the people who never try to fly.

So here’s a toast to Pop.

And here’s a toast to all the failed entrepreneurs like him.

Competition and Migration Updated

In the previous post, we examined a dataset on migration to get at what it might mean to be competitive as a nation.  In this post, we give improvements to the data.

Population Adjustments

In the previous ranking, China and India were considered misplaced as they sat near the bottom.  One of the explanations for this placement was that China and India simply contain many more people than other countries.  Therefore, in the pairwise comparisons we were doing, it was natural that they had negative migrant balances with most other countries.  Other countries just cannot produce the sheer number of migrants that China and India do.

As suggested in the comments of the previous post, we have adjusted our numbers to produce a migration per capita measure.  The idea behind this is that instead of comparing migrants one-to-one, we should be comparing migrants as a proportion of the population of their home country.

To create these numbers, we obtained the 2000 population values from the UN Population Prospects, the 2008 Revision and then added in the country’s out-migrants and subtracted out its in-migrants.  This adjustment should have given us the number of people originally from a given country, not just its population.  Using only population numbers includes migrants from other countries and thus might throw off comparisons for some countries.  Finally, we used these numbers to compare migrants as proportions of their home populations.

A downside to this adjustment is that it enhances migration involving less populous countries.  Countries with lower populations are more capable of having a higher proportion of their population living abroad.  Thus, smaller countries become deflated and large nearby countries get inflated.  To correct for this, we’ve left out countries with a population of fewer than 100,000.

Distance Adjustments

The other thing that stuck out in the previous data was that countries could be very locally competitive, which drove up their number of in-migrants, but were probably not competitive on what would be considered a global scale.  The most straightforward adjustment for this is to take into account distance between countries.

CEPII has compiled data (dist_cepii.xls found here) on distances between countries among other geographic measures.  To incorporate this data into our measure of competitiveness, we multiplied the population-adjusted migration balance between each pair of countries by the square-root of the distance between the two countries.  Basically, we wanted migration between two countries that are close together to count less than migration between two countries that are far apart.  Further, using the square-root of the distance reflects our belief that distance traveled would likely be related to competition in a diminishing manner.  Put another way, it might be difficult to move 100 miles, but once you’ve moved that first 100 miles, it becomes less difficult to move another 100 miles and so on.  Therefore, while the distance travelled likely matters, we think it matters in a non-linear, diminishing way.

Applying these adjustments, we get the map below.  Click to go to the more detailed, interactive version.

 

Again, these adjusted numbers by no means constitute a perfect measure.  A brief look at other migration models reveals many different factors that might be accounted for in our numbers.  These include anything from adjusting for whether or not countries share a border to compensating for measures such as the “gravity” between two countries, where “gravity” is measured by an adaptation of Newton’s law of gravitation.

The most notable changes from the previous ranking are China and India as they’ve jumped into the top of the ranking.  China comes in at number 30 and India is at number 18.  Most of this change (from the bottom to their current positions) is accounted for by the population adjustment.  

Some may be unsatisfied even with the new positions for China and India, but it’s important to remember our data on migration are stocks, not flows.  Without data on flows by year, it’s difficult to get at an instantaneous measure of competition.  For example, the United States has clearly built up a strong base of immigrants, but with this data, we can’t tell if people are now starting to move away.  Further, China was once not as competitive as it is now (hence its lower ranking), but we can’t tell if China’s recent rise is reflected in our numbers.

Rankings from the top:

1. The United States
2. Canada
3. United Kingdom
4. Australia
5. Netherlands

From the bottom (starting with the lowest):

1. Netherlands Antilles
2. Antigua & Barbuda
3. Suriname
4. Tonga
5. Samoa

The data are attached in xlsx format: Download NetMigrationAllData

Competition and Migration

Competition between nations is a very popular subject for many politicians, economists and many others.  There is almost an obsession with being and staying competitive as a nation on the world stage.  Despite all the excitement, competition of this type is a difficult concept to define and thus rate.  For one, unlike many of the competitive environments we are used to, we don’t exactly wish other countries to be worse off.  Instead, we only wish ourselves to be better, to be leaders.  Exactly what we want to be better at is unclear.  Nonetheless, we still want to be on top.

The most common measure used to compare countries is GDP or GDP per capita, and it has often been used as a proxy for competitiveness.  However, the problem with GDP that is perennially pointed out is that nations are engaged in much more than simply wealth accumulation.  Wealth does not automatically make a “good” country.

Other common measures are those of happiness, human development and freedom, but these measures suffer from the same problem.  Countries are working on an infinite number of dimensions, and they specialize in different things.  A great example of this comes from an interesting new graphic at Information is Beautiful which shows us that every country is best at something (click the image to see the more detailed map).  As we can see, there are many different rankings which likely have at least something to do with changing a country’s competitiveness.  However, if we boil down a ranking of competitiveness to any one of these dimensions, something would inevitably get left out.

 
 

What we need is a way to really entwine all these measures of what might make a country “good” or “competitive” into one ranking.  I contend that data on where migrants are flowing solve this problem and give us a better idea of which nations are competitive.  The main idea is that a country that has more in-migrants than out-migrants is more competitive simply because it indicates that more people want to live there.

Instead of trying to define a competitive country, this approach answers the question, if a country were competitive, what would we observe?  The most straightforward answer is that more people would like to live there.  What is useful about this measure is that we don’t necessarily have to define what that something important is in order to get an idea of where countries stand in relation to one another.  We only have to see where people move.

Migration DRC has compiled data on migrants around the year 2000, both their origin and where they live (version 4 here).  Subtracting out-migrants by country from in-migrants by country, we are able to determine where migrants are living.  A visual of the final numbers is below (click for a larger, interactive version).  Brown indicates a positive balance of migrants and blue indicates a negative balance.  The size of the circles represents magnitude.

 
 

Like the other measures, there are still problems with this ranking.  First, this ranking is a combination of pairwise comparisons; therefore, it is not an absolute ranking that GDP and others are.  For example, while the United States heads the list with the most in-migrants less out-migrants, it nonetheless has a negative migrant balance with some countries.  Greenland is one.  In this sense, there is no top country because no country bests all others when compared head to head.  The Faroe Islands come closest to this feat but have negative balances with Iceland and Panama.

Further, given that the numbers reflect pairwise comparisons, countries that have attracted more immigrants on a local scale may rank higher than countries that take in a more globally diverse set of migrants.  Thus a place that is more locally competitive could be listed higher than places that we would think of as probably more globally competitive.  Venezuela has one of the most positive migrant balances overall, but most of these are from other South American countries, and few are from further abroad.

Lastly, if we are to use migrant data to look at competitiveness, there are a couple anomalies to account for.  Namely, China and India, two countries continually thought of as competitive or at least emerging as competitive nations, are in the bottom 5 (see below).

Part of this could be due to their massive home populations.  They have more negative balances with other countries because so many more people are able to leave.  However, there are other possible explanations including the exportation of labor.  In a New York Times article, it was estimated that, “From Angola to Uzbekistan, Iran to Indonesia, some 740,000 Chinese workers were abroad at the end of 2008.”

So, at the very least, looking at where people move is another imperfect measure of competition.  But, I do believe there is something more encompassing about its nature which is definitely worth a closer look.

The top 5 countries for migrants are:

1. The United States
2. Germany
3. Saudi Arabia
4. France
5. Canada

And the bottom 5 are (starting with the bottom):

1. Mexico
2. Bangladesh
3. China
4. India
5. Afghanistan

The Entrepreneurial Marines?

Victor Davis Hanson recounts the strategic entrepreneurship of the Marine Corps.  Invaluable lesson for the Centralizers (when will they ever learn?)

The Marines are now starting to redeploy to Afghanistan from Iraq and are building a huge base in Delaram. They plan to win over southern Afghanistan's remote, wild Nimruz province that heretofore has been mostly a no-go Taliban stronghold. While NATO forces concentrate on Afghanistan's major cities, the Marines think they can win over local populations their way, take on and defeat the Taliban, and bring all of Nimruz back from the brink - with their trademark warning "no better friend, no worse enemy."

So once again, the Marines are convinced that their own ingenuity and audacity can succeed where others have failed. And once again, not everyone agrees.

The U.S. ambassador to Afghanistan, retired three-star Army General Karl W. Eikenberry, reportedly made a comment about there being 41 nations serving in Afghanistan - and a 42nd composed of the Marine Corps. One unnamed Obama administration official was quoted by the Washington Post as saying, "We have better operational coherence with virtually all of our NATO allies than we have with the U.S. Marine Corps."

Some officials call the new Marine enclave in Nimruz Province "Marinestan" - as if, out of a Kipling or Conrad novel, the Marines have gone rogue to set up their own independent province of operations.

Yet once again, it would be wise not to tamper with the independence of the Marine Corps., given that its methods of training, deployment, fighting, counterinsurgency and conventional warfare usually pay off in the end.

Are video cameras hostile to Liberty?

Raise your hand if you think security cameras in public places erode individual liberty.  The right to privacy, for example.

Now set aside the distinction between anonymity and privacy, which some Libertarians do, and consider the cases where cameras have helped catch bad people. And here we define bad people as extremely hostile to individual liberty (murderers, rapists, terrorists).

• Most recently, security cameras identified Faisal Shahzad, the would-be terrorist of Times Square in April 2010.
• The murder of Sandra Cantu in early 2009, now in the headlines because the alleged killer confessed, was partially solved using surveillance camera images of Sandra skipping to play at the killer's home.
• Joseph Smith would still be free but for a security camera which filmed him with a girl he murdered in February 2004: "Smith's friends and co-workers testified that he was the tattooed man pictured in a surveillance video from a car wash security camera who grabbed Carlie's wrist and led her away."

Survelliance has both an enforcement effect and a deterrent effect.  As for the erosion of privacy from this new technology, it exists only by conflating the defintion of privacy with that of anonymity.  And American society does not recognize a right to anonymity. Privacy in the public sphere strikes me as oxymoronic.

We can anticipate a rapid increase in public surveillance in the years ahead, and I think that's an almost unadulterated good.  Every time a reckless driver zooms past you on the highway, don't you wish he could be ticketed automatically?  Instead, we rely on random chance that a police vehicle will be hidden, identify the reckless driver, and pursue him/her successfully.  Wouldn't a better world identify every reckless driver and pacify the roads?  Remember, more Americans die every year from traffic accidents than died during the entire Vietnam war.

Changes to VC Carried Interest Tax: Dogs & Cats, Living Together?

Earlier this week the National Venture Capital Association announced that it had 1,700 signatures from people -- mostly VCs and entrepreneurs -- around the U.S on its letter campaigning against changes to carried interest tax. Lest your eyes glaze over, the gist is this: Congress would like to change the rate at which VCs are taxed on monies they make from their investments. The NVCA says that would cease job creation, drive people out of the venture industry, cause investors to take less risk, and then, as I understand it, rain down fire and brimstone, meanwhile  causing dogs and cats to live together (okay, the last few are from Ghostbusters).

All bad, right? I'm unconvinced. The favorable treatment of VCs' carried interest comes because of the way the tax system treats investment gains. If you invest capital, the profits on that investment get taxed at a lower rate than does ordinary income -- and that is a good thing, a tax distortion that promotes investment, risk-taking, entrepreneurialism, etc. (Note: Carried interest is not the same as management fees, the percentage of assets under management that funds rake for managing the firm. That is already taxed as ordinary income.)

But it's not VCs' money being invested. They are, for the most part, investing money assigned to them as agents by the limited partners in their funds. The professional venture capitalists here are acting on behalf of the real investors, who are the endowments, pension funds, etc., that gave them the money, all of whom deserve and get favorable tax treatment for their allocation decision.

Venture capitalists, lovely people that they are, want to have it both ways. They want to risk other people's money, and be taxed as if it's their money. I can see why that's appealing -- lower taxes -- but it is indefensible, illogical, and runs contrary to what their peers do in other sectors of financial services. Mutual fund managers, hedge fund managers, and the like all invest in equities, albeit public ones, and their gains are taxed as ordinary income, not as capital gains. Yes, if they invest their own money in a personal vehicle they can get favorable tax treatment, but so could VCs if they invested their own money that way -- and they (mostly) don't.

No, what is going on here is that venture capitalists have found a lovely loophole, one that they have wrapped up in entrepreneurship, apple pie, job creation, risk-taking, technological wonders, and everything except clear logic. And if venture capitalists really want to argue that a change in the tax treatment of carried interest would drive the best & the brightest out of that business, then I say, Let's do it. I'm willing to call them on that obvious bluff. I bet the best VCs would stay, and maybe a few dodgers would get real jobs -- like as entrepreneurs.

Is the Army Innovative?

David Brooks thinks so

Five years ago, the United States Army was one sort of organization, with a certain mentality. Today, it is a different organization, with a different mentality. It has been transformed in the virtual flash of an eye, and the story of that transformation is fascinating for anybody interested in the flow of ideas.

Brooks is writing about the emergence of counterinsurgency (COIN) strategy, godfathered by General David Petraeus.  I agree this is an important development, even that it should be celebrated, but I have some questions.

First, was it innovative or a rediscovery?  Counterinsurgency, in fact, according to the experts who advocated for it within the U.S. military, is not new. So the bigger question is why did the Army resist adopting COIN tactics that it had learned back in Vietnam?

Second, does the military culture really reward entrepreneurial leaders?  Ross Perot graduated from the Naval Academy, but didn't make a career of the Navy.  Fred Smith, founder of Fedex, served two tours in Vietnam, but left the Army for a business career. Bill Coleman, founder of BEA systems, graduated from the Air Force Academy and left the ranks. John Nagl, who co-authored the COIN field manual with Genral Petraeus, is now a civilian president of a think tank, and more influential than he could have been if he'd stayed in uniform.  Why is that?

One answer might be revealed in Mark Moyar's A Question of Command.  Moyar suggests the key to victory in warfare is great leaders, no the strategies they adopt.  Leader-centric warfare.  So does the Army have innovative leaders?  I believe they do, but there is a love-hate relationship between the military and its entrepreneurs. The godfather of the Air Force, Billy Mitchell, had his career terminated for being overly zealous in championing air power, even though he was right and they were wrong.  We should all worry about a hollowing out of entrepreneurial talent now.  A survey in Moyar's books asks soldiers in the Marines and Army if their "Service encourages risk-taking by company and battalion commanders."  Forty-one percent say "discourages" and thirty-one percent were neutral.

Blogger questions from the KEO Q2

Five bloggers submitted their own questions to this quarter's Kauffman Economic Outlook, which I think turned out very well and will want to continue.  Here are the results, and I'll withhold comment for now.  Others are welcome to copy and repost individual charts. 

 
  
 
  

Kauffman Economic Outlook Q2

Read the Kauffman Economic Outlook Q2 2010: A Quarterly Survey of Leading Economics Bloggers (PDF)  

Here are the first few charts:

 
  

Preview of Blogger Survey

Below is one of the charts from the forthcoming quarterly economics bloggers survey.  This is based on a question from Arnold Kling at Econlog.  Thanks to Arnold.  Great question! 

 

We also received questions from Mark Perry, Tyler Cowen, Mark Thoma, and Ken Houghton.  You can look for the preview charts on their blogs, and the full report here in (hopefully) 24 hours.  

UPDATE: The chart size here is too big and I'm working on it.

UPDATE 2: Ok, we now have the images in 460 pixels.  That should make them easier for other bloggers and users to copy and republished around the web.  Thanks again to all the bloggers who participated.

 
  

Cleantech Loses Its Mojo?

I spoke yesterday on a venture capital panel in San Francisco at the Green:Net event about the confluence of cleantech and information technology. It was a fine and well-attended event, but an entrepreneur friend tweeted me the following afterward:

It struck me today how corporate Cleantech has become. No longer has the Valley vibe - lots of suits and ties and corporate speak.

That comment bothered me. Here's why: I too got the sense that entrepreneurs and investors there were less prone to enthusiasms, and the thinking had become more pragmatic. There was much less talk of world-changing energy innovations, and much more talk of smart meters, iPhone apps for tracking home power usage, a little solar, plus lots of Big Company People noshing about business development relationships with Big Company People.

Now, there is (mostly) nothing wrong with that. The brief flirtation among cleantech investors with capital-intensive projects seems over, at least according to the most recent data I have seen. And that should provide some reassurance to those of us convinced it would end very badly, if it continued. After all, the venture industry is ill-equipped to provide project financing, with the combination of long cycle-times and large amounts of capital toxic to already crushed venture capital returns.

And, to be fair, there is very cool stuff happening at the confluence of green and IT. Here is an example from Greentechmedia, who also attended the event:

AquaCue has effectively created a cellular modem that straps onto water meters that provides municipal water agencies data about water consumption. The data can then be analyzed and mined for patterns about consumption. Potentially, it could even be exploited to inform high-consumption customers that they use far more water than their neighbors.

This sort of thing is great, but we still don't want early energy rigor mortis to set in. Energy is still an emerging category for entrepreneurs and venture investors, so having it become too staid, too soon will be counter-productive, making cleantech less likely to deliver the kinds of entrepreneurial experimentation and waste (more on that in an upcoming paper) that lead to genuine innovation. We want entrepreneurs to be enthusiastic, hyperbolic and generally messing about; we don't want them to fall early into the trap of gradualism, adulthood and diminished expectations.

Can anything be done? I don't know, and I worry about it. In the absence of progress, wealth creation and real successes entrepreneurs -- and investors -- will be ground down to realism, which is never the best place from which to start an entrepreneurial revolution in new territory. After all, as most entrepreneurs I know like to say, "If I had know how hard this would be I might not ever have started".

3.2 percent ain't good enough

The advance number for Q1 growth was released today: 3.2 percent (this link is to a WSJ summary of economist opinions).  Three-point-two would be good in normal times, but it's not enough to catch-up to where the U.S. economy "should" be. 

I'm skeptical this is a solid recovery. I'm skeptical there won't be a double dip. Why?  Because interest rates are very low and have to rise sometime soon, because federal spending stimuli are fading, because I believe in a place called California, and because so much of the durable consumption seems driven by cut-rate deals (Toyota in Q1 offered zero-percent financing for the first time in history). Thin ice.

This would be a good time to reread Mankiw's argument that this is a Unit Root recession, not a Trend Stationary recession. A rebound to normalcy would be nice, but we all know better than to believe the housing bubble defined normalcy. It's time to shelve fantasies that a stimulus, any stimulus, can or should get America back to artificial prosperity.

Who Declared War on Entrepreneurs?

Nick Schulz over at the Enterprise Blog draws our attention to an apparent crackdown by the IRS on the flexible employment arrangements used by many independent contractors and small businesses. It's not clear what impact this will have but, anecdotally at least, there have been reports that many new and young businesses in this recession have been turning more and more to freelancers and contractors. And we've seen the average size of new companies shrink over the past few years by about two employees--as noted in the story above, this likely indicates increasing use of such flexible arrangements.

Put this together with the anti-angel provisions in the Dodd bill (which I think may have been slightly diluted recently), and it seems as if someone has declared a war on startups. Which is, in other words, a war on job creation and economic growth.

An Exciting Day

I just received in the mail a copy of Matt Ridley's forthcoming book, The Rational Optimist. I was fortunate enough to be able to attend a seminar last year at which Ridley discussed the book and solicited input and ideas.

Based on that discussion and Ridley's extraordinary intelligence and writing ability, this book will be stupendous, no doubt about it. Check out his blog here; good stuff.

Lean Startups

Starting IT companies is getting cheaper.  Naturally, it's a new business model.  Cool article in NYT describes the trend.

Technology animates the lean start-up process. Free open-source programming tools and easily distributed Web-based software drive down the cost of developing new products and services. The early companies embracing the principles live largely on the Web, which makes it possible to measure and track customer behavior constantly and to invite suggestions and criticism.

I wish our 1998 startup enonymous.com had used lean-startup approach. We went for VC gold, and won it. But it did not translate to long-term success.

Grading the Presidential Summit on Entrepreneurship

I was curious what being a delegate to a Presidential summit would be like, and now I know. It's like being a passenger on very slow roller-coaster ride, but with awesome fellow passengers. The panels have been pretty typical conference fare, with way too much happy talk about dream fulfillment. But it's important. Really important. In ten years, the most important outcome of the summit will simply be there was a summit at all. I'd venture to say the very idea could not be topped by the substance, no matter how good. 

Consider the "Force of Fortune," recently reviewed in Foreign Affairs:

Renowned Middle East expert Vali Nasr's bestselling The Shia Revival profoundly transformed the debate about the Iraq War by unveiling how the Sunni-Shia rift was driving the insurgency. Now, in Forces of Fortune, Nasr presents a paradigm-changing revelation that will transform the understanding of the Muslim world at large. He reveals that there is a vital but unseen rising force in the Islamic world—a new business-minded middle class—that is building a vibrant new Muslim world economy and that holds the key to winning the cold war against Iran and extremists. His groundbreaking analysis will utterly rewrite the wisdom about how the West can best contend with the threat of Islamic extremism, as well as about what we can expect from the Muslim world in the future. The great battle for the soul of Iran, the Arab world, Pakistan, and the entire region will be fought not over religion, Nasr reveals, but over business and capitalism.

So after one full day, here's my report card:

Title: A
Think about it. They could have had a summit on "Development" or on "Peace" which would have been instantly forgettable gatherings. This topic has some bite to it, and it's something tangible and deep enough that all Americans should be cheering the President. I tried to find out who coined the term, and have been crediting Esther Lee or Secretary Locke at Commerce, but she says it was one of President Obama's speechwriters. If you believe in the transformational power of market capitalism, you believe in this summit.

Team: A
The Obama administration is playing its first string team on this one. Secretary Gary Locke kicked things off, Melody Barnes was on a panel, the President himself gave a long speech today (including a rope line and numerous shout-outs to delegates, though he called me the Governor of Virginia for some reason). Tomorrow Secretary of State Clinton will speak. Arne Duncan. Rajiv Shah. There are many more. To be fair and balanced, I'm not sure all of the White House folks get entrepreneurship and you get a sense some want to talk about social entrepreneurship instead. Believe me, the delegates from the Middle East noticed, and one would-be entrepereneur commented to me that, "We need help creating wealth before we start talking about giving it back." Regardless, they appreciate the symbolism and ceremony of having the President's A team show up, and it means a lot. 

Agenda: B
The panels have been good. Missing so far is an objective accounting of which countries are getting which policies right. Where are labor regulations most efficiently reformed? Who is solving the problem of access to capital and middle-tier loans? Maybe we'll get into the nuts and bolts tomorrow, but I doubt it. That's not the point and/or that point is very much alive without being on the podium, if you know what I mean. Besides, the hallway conversations are excellent. These delegates are players. Biggest surprise of the day was that a lot of folks recommend betting on pro-market reforms in ...Syria.  Young Syrians, apparently, are ambitious capitlists agitating for growth.

Finally, I don't think it's appropriate to simplify a presidential speech with a letter grade. But I thought President Obama's remarks were excellent. I can't find a transcript, but will link to it tomorrow when I can.

Like 99% of you, I don't agree with the Obama administration on everything. But this summit deserves our full-throated support.