Thursday, December 27, 2012

Go off the fiscal cliff

The US federal budget has been chronically in deficit for most of my life, not to mention most of the century.

The national debt is bouncing up against a ceiling of 16.4 trillion, compared to a 2012 GDP of around 15 trillion. Each of the 117 million American households owes about $140,000. Median household net worth was over 100,000 before the real-estate bubble burst. Now it's about $67,000.

Krugman argues that we can grow our way out of debt and that scary talk of a trillion dollar deficit is just a tactic to frighten voters into abandoning welfare and social programs. We can continue to print money, short-changing China and domestic savers.

But, debt can't increase indefinitely without landing us in the same pickle as Greece or Argentina sooner or later. And there's no way to know in advance when later becomes now.

Obama is offering $1.3 trillion in revenue increase for $930 billion in spending cuts. The republicans might haggle this ratio down a bit, before a deal is struck. A big chunk of the cuts ($400 billion) fall on health care programs. Farm subsidies take a hit ($200 billion). And "non-defense discretionary spending" gets slaughtered. This obscurely named category includes things like infrastructure, research, disaster relief, education and the environment. Neither party seems ready to cut more than $100 billion or so from defense.

The fiscal cliff splits the cuts evenly defense and domestic spending. If you prefer butter to guns, that might be a better deal than a "grand bargain".

Far from an apocalyptic event, the fiscal cliff is a good start at what we need to do anyway. It accomplishes two wise but politically impossible things - spending cuts on defense and ending the Bush tax cuts. Fixing the collateral damage is going to be a lot easier that getting either of those items a-la-cart. Don't panic! If anything worthwhile gets cut, we can always bring it back.

So, I say, Fuck it! Let's go flying off the fiscal cliff.

Thursday, December 6, 2012

Three Myths about Copyright Law

Just to prove that Lawrence Lessig is right, a GOP group released a shockingly sensible memo on copyright, then retracted it due to pressure from lobbyists. Now Derek Khanna, the staffer that wrote it has been given the boot.

Khanna’s three myths

  • the purpose of copyright is to compensate the creator of content
  • copyright is free market capitalism at work
  • the current copyright legal regime leads to the greatest innovation and productivity

To read

More on intellectual property

Sunday, November 25, 2012

Hong Kong

I started reading Restless Empire, China and the World Since 1750 by Odd Arne Westad. Here's what he has to say about Hong Kong:

It was in Hong Kong that the colonial experience in China was formed. It was in the great harbor at the mouth of the Pearl river, that the pattern for hybrid Chinese-European societies would be set. The city facilitated British trade all over southern China, while becoming in population a Chinese city, attracting immigrants from all over the country: refugees, dissidents, entrepreneurs, and fortune hunters. In 1860, Hong Kong had a population of more than 120,000, of whom only 3,000 were non-Chinese.
Like all British colonial cities, Hong Kong was basically well-run, but somewhat shoddy at the edges, where corruption and exploitation thrived. It was a city founded on enormous paradoxes and hypocrisies. The foreign missionaries preached virtue to the Chinese where the foreign merchants kept them addicted to opium. The British preached law and order, though they had taken the territory by brute force. The Chinese came to Hong Kong to take advantage of the opportunities offered them in a city that was not theirs and bore the indignities of being second class residents in a strict racial hierarchy in order to escape a world that was crumbling around them elsewhere in China. Over time, they built their own organizations, as the Chinese diaspora did elsewhere, even though the Hong Kongers had never left their own country.
The great trading houses stood at the center of foreign commercial activity in Hong Kong. Many of these companies - Jardine, Matheson, Butterfield & Swire, Hutchinson - came out of British trade in India after the dissolution of the East India Company in 1834, and established a presence in many treaty ports in China. Still, they were nowhere more influential than in Hong Kong, where they not only ran the economy and in effect also the politics. From the beginning, these trading houses where international organizations, led by English (or in the case of Jardine's, Scots) businessmen but staffed by Chinese, Indians, Europeans, and Americans. By the late nineteenth century, they were the main mediators between Chinese and foreigners, not only in Hong Kong, but all over China, not least because of their increasing control of the Chinese banking system.
It was not just Hong Kong's economic opportunities that drew Chinese from all over but also its educational ones.

- Odd Arne Westad's Restless Empire (slightly edited)

The original charter city

In keeping with a history full of contradictions, Hong Kong serves as the model for charter cities. Proposed by economist Paul Romer, charter cities are semi-autonomous cities in rural sections of developing countries that would have some foreign supervision and, most importantly, would be founded upon a new set of rules.

This unconventional idea was considered and rejected by Madagascar and looks to be having trouble getting off the ground in Honduras. It was always going to be a tough sell - taking the good parts of colonialism. Making an end run around the entrenched interests of local elites is exactly the point, and oddly enough, said elites tend to dislike the idea.

Systems of political/economic order

I'm enjoying tying together the various strands that form the background for modern China's hyperspeed industrial revolution: Confucian order thrown up against the freewheeling and chaotic mixture of cultures and languages of trading cities; complex fluid dynamics of power and money, governments and corporations, and individuals at the margins of empires.

Colonialism is the story of one system for marshaling resources overtaking another, by being more efficient, flexible, scalable, brutal or ruthless. This process seems like a general theme in history:

mercantile > nationalist > feudal > tribal

Maybe, I haven't got the categories quite right. Does capitalism belong there to the left of mercantilism? Judging by Barnett's systems view of the world, you could argue that the age of the mercantile system is not really over, yet.

Saturday, November 24, 2012

Persuasion, Initiative, Freedom, Desire

Econ 101 leaves out persuasion. What fraction of business (/politics) is persuasion? ... It's rare for people to initiate their own dreams or be 100% originators of their goals or preferences. ... Which presents a problem for the Edgeworth-box story of lonely individuals trading with each other. ... pleasure and preference themselves are malleable and being moulded by others all the time. ... Even besides "marketing types" ... plenty of people reflexively enforce social norms and expectations.
The story of Don Draper and the Lucky Strikes makes us individuals out not as free-willed inventors of ourselves, util-seekers and comandantes of our own pocketbooks--but as dull voids with no idea what to do with the incomprehensible freedom we enjoy in a society where incomes so far exceed subsistence. ... It puts us as templates onto which meme-smiths paint their work, searching for 1 that will stick and replicate itself.
...the suggestions of what to do with freedom--trips to India, faling madly in love, "On The Road" type life--aren't original ideas, those come from stories which we have no better idea than to live out.
It's somewhere in that spirit, I think, that persuasion in the workplace, in the store, on the TV, can be modelled. And without an effective theory of persuasion I don't see how economic theory can take an honest accounting of choice, preference, or "optimum".

Isomorphismes, see things differently

Sunday, November 18, 2012

Building reliable systems out of unreliable parts

The following rant was inspired by listening Econ Talk Garett Jones on Fisher, Debt, and Deflation while running.

There's a certain type of fundamentalism around the belief that government is necessarily dysfunctional. Reasoning that government is likely to spend and regulate unwisely, adherents advocate spending cuts and limitations on regulatory authority. The failures of defunded and hamstrung agencies then serve as further proof that the public sector can do little right. If further proof is needed, it's easy to find examples of state sponsored screw-ups.

These same individuals are often more credulous about the competence and probity of corporations. This faith seems undiminished by mountains of evidence in the events of recent years that it is misplaced. Businesses leveraged themselves to the hilt, made and traded risky loans with abandon, and felt almost obliged to keep dancing while the music kept playing.

It should be clear to all that an economic crisis of the magnitude of the great recession that began in 2008 couldn't have happened without substantial errors in both public policy and business decision making. Such as:

  • too much leverage
  • complexity and absence of regulation of derivatives
  • lax regulation of the traditional parts of the financial sector
  • perverse short-term incentives, moral hazard and lack of accountability on the part of the financial sector, especially investment banks
  • moral hazard and lack of accountability in government sponsored entities like Fanny Mae.
  • outright corruption (for example in loan origination) and regulatory agency shopping
  • policy encouraging home-ownership for high credit risk buyers.

Economists debate the degree to which stickiness of prices and wages magnify short-term blow-ups. One extra difficulty of a real-estate driven recession is that long-term contracts like mortgages are about as sticky as it gets.

Economic adjustment happens at different rates - from the millisecond response times of high-velocity algorithmic traders to the months it takes to sell a house or mop up after a bankruptcy. These mismatched rates present opportunities for arbitrage, but if they become severe enough, they can break established systems. Examples include collapses in overnight interbank lending during recent crises and the flash-crash of May of 2010.

Corporations are powerful engines of wealth creation. Countries without governments are not nice places. Both are flawed, but we'll have to stick with them, at least until we find better alternatives.

But, organizations built of humans are bound to be flawed, because they're built of flawed parts. History can be viewed as a series of attempts at engineering reliable systems from unreliable parts, with varying levels of success.

The political and economic dimensions of organizations, public or private, are inextricable. The rats are always trying to find a way in.

Sunday, October 28, 2012


In a great little interview on the Renegade Economist Talkshow, Tim O' Reilly mentions a 1993 paper by George Akerlof and Paul Romer called Looting: The Economic Underworld of Bankruptcy for Profit. The central idea is that there's a difference between creating wealth and extracting wealth from the economy.

The paper was the subject of a write-up in the NYTimes: The Looting of America’s Coffers.

Thursday, October 18, 2012

Inequality and Democratic Responsiveness

There has never been a democratic society in which citizens' influence over government policy was unrelated to their financial resources. In this sense, the difference between democracy and plutocracy is one of degree. But by this same token, a government that is democratic in form but is in practice only responsive to its most affluent citizens is a democracy in name only.
Most Americans think that public officials don't care much about the preferences of "people like me." Sadly, the results presented above suggest they may be right. Whether or not elected officials and other decision makers "care" about middle-class Americans, influence over actual policy outcomes appears to be reserved almost exclusively for those at the top of the income distribution.
Inequality and Democratic Responsiveness:
Who Gets What They Want from Government?
Martin Gilens
Politics Department, Princeton University

Years ago, I came across a paper about welfare. Written in the context of the Clinton era welfare reforms, the paper acknowledged the perverse incentives and dependency that accompany welfare for the low end of the income distribution. It went on to talk about welfare for the wealthy. This, it explained, is much more pernicious, in that the wealthy have greater means to influence policy, influence they use to divert further resources to themselves.

Every now and then, I try to find that piece again because it really helped open my eyes. The quotation above was the closest I could come, this time.

Friday, July 20, 2012

A revolution in higher education

In Lessons My Father Taught Me About How to Live on a Dangerous Planet, David Rothkopf recounts his father's narrow escape from Nazi occupied Austria to later become a professor of telecommunications and education at Columbia University.

“His response to the ravages to which he had been exposed was to focus on education, and specifically on understanding how people learned.”

This echoes a recent interview with Computer Science pioneer, and hero of mine, Alan Key.

...the thing that traumatized me occurred a couple years later, when I found an old copy of Life magazine that had the Margaret Bourke-White photos from Buchenwald. This was in the 1940s — no TV, living on a farm. That's when I realized that adults were dangerous. Like, really dangerous. I forgot about those pictures for a few years, but I had nightmares. But I had forgotten where the images came from. Seven or eight years later, I started getting memories back in snatches, and I went back and found the magazine. That probably was the turning point that changed my entire attitude toward life. It was responsible for getting me interested in education. My interest in education is unglamorous. I don't have an enormous desire to help children, but I have an enormous desire to create better adults.

It looks like something really important is happening in higher education. Open online courses are disrupting the lock high-cost exclusive universities have on elite education. Sebastian Thrun talks about "democratizing higher eduction". In her New York Times essay, Daphne Koller quotes Nelson Mandela: “Education is the most powerful weapon which you can use to change the world.”

The senior Rothkopf dedicated his studies to the power of technology to remake education, delivering knowledge to people everywhere, believing that the greatness of nations is measured by “how we invest in our classrooms and our laboratories and in the minds and futures of our children.”

Saturday, June 23, 2012

It isn't blasphemous to exit the Euro

Sometimes I think I'm too cynical. But if this exchange on Dr. "Doom" Nouriel Roubini's twitter feed is to be believed, I guess I'm not cynical enough.

Roubini also lists the threats to the world economy in the doom-alicious A Global Perfect Storm that risk making 2013 into an especially 'lucky' '13.

  • Synchronized slowdowns in economies of Europe, the US and China
  • Political transition in China and elections in the US
  • Continued political risk in the Middle East, especially concerning Iran
  • Monetary policy depleted and fiscal stimulus limited by already high debt

Update ...and right on queue, the WSJ opines on Berlusconi's Latest Clown Act Italy's former prime minister turns populist euroskeptic. Too bad he never delivered on promised reforms.

Saturday, June 16, 2012

The Price of Inequality

Nobel prize winning economist Joseph Stiglitz came to Seattle Town Hall this week to talk about a new book, The Price of Inequality. Here's the way I heard it.

US inequality

The US is the most unequal of all industrial nations as measured by Gini index. As much as Americans take pride in the equality of opportunity and social mobility offered by our country, that seems to be a thing of the past. While inequality is rising in wealthy countries around the world, it's rising faster here.

To quote the OECD: “The wealthiest Americans have collected the bulk of the past three decades’ income gains. The share of national income of the richest 1% more than doubled between 1980 and 2008: from 8% to 18%. The rising incomes of executives and finance professionals account for much of the rising share of top income recipients. Moreover, people who achieve such a high income status tend to stay there: only 25% drop out of the richest 1% in the US, compared to some 40% in Australia and Norway, for instance.”

Rent seeking

The greater wealth accumulating at the top is not due to greater contributions to society. Rent seeking, in the forms of outrageous executive salaries and bonuses, regulatory privilege, corporate welfare and transfers from the bottom to the top, explains much of the wealth of the top few percent. That's not to mention the 15% tax rate paid by the likes of Mitt Romney. As Warren Buffet says, “It's class warfare, and my class is winning.”

Rent seeking distorts the economy away from productive activity. Because the payoff is so high, the best and brightest rush eagerly from graduate school to the high-stakes increasingly zero sum sleazy gambling house that is the finance industry, forgoing useful arts like medicine or research.

Political disfunction

Some have propagated the idea that greater inequality leads to a more efficient economy and therefore greater wealth in total. But, how to explain the fact that several countries have less inequality and higher GDP and also higher quality of life. Looking at the lack of growth in median household income over the past thirty years, one must conclude that little is trickling down.

Inequality and polarization go hand in hand, leaving our country divided and unable to deal with important issues, like the deficit or the environment. The unfortunate Citizens United decision gave corporations the same freedom of political speech protection enjoyed by individuals, leading to unlimited corporate money in politics, pushing America further from democracy to plutocracy.


Stiglitz offered a few thin rays of hope. Can America change course? Well, it has in the past. As in our own age, inequality was high in the gilded age of the late 1800's and again in the 1920's. Also notably, both eras were marked by financial crises. In each of these cases, America changed course to temper the worst of the excess.

In more recent times, Brazil has succeeded in swimming against the tide of rising inequality. Stiglitz credits the Brazilian elite for realizing that a more level playing field would lead to a more stable and functional society. Will their American counterparts realize that the collapse of the middle class is not in anyone's best interest?


Monday, June 11, 2012

Capital stock vs. GDP per person

From the Economist of May 26, Special report: China's economy, Investment: Prudence without a purpose; Misinvestment is a bigger problem than overinvestment.

That's a nice linear relationship shown in all the Asian countries. What explains the lower slope of the US - high GDP but lower growth in capital stock? Is the US underinvesting / overconsuming? Much of the growth over this time in America was the rise of the finance industry, which is not capital intensive, whereas the Asian countries are more weighted towards manufacturing.

I wonder what the breakdown is of each economy in terms of manufacturing vs. services.

Tuesday, March 20, 2012

Corporations United

The absurdity of the republican primary has set me to thinking about the catastrophic Citizens United decision by the Supreme Court. How anyone in their right mind could think that what this county needs is more corporate money in politics is totally beyond me.

(photo: seth_schneider)

In the dissenting opinion in the Supreme Court's Citizens United ruling, Justice John Paul Stevens wrote:

“A democracy cannot function effectively when its constituent members believe laws are being bought and sold.”

According to Senator Bernie Sanders (I-VT) , “Americans are profoundly disgusted by the Citizens United decision and what it means for our democracy.”

That's why Sanders is trying to build momentum for an amendment to overturn Citizens United. The Saving American Democracy Amendment states that:

  • Corporations are not persons with constitutional rights equal to real people.
  • Corporations are subject to regulation by the people.
  • Corporations may not make campaign contributions or any election expenditures.
  • Congress and states have the power to regulate campaign finances.

The New Mexico state legislature passed a measure calling on congress to overturn Citizens United. You can read about this almost nowhere in mainstream news. Several other states and local governments have introduced similar measures to similar lack of fanfare. Among them, Hawaii and California, and towns in Massachusetts and Vermont.

Organized opposition to Citizens United

  • Amend2012 a project of Common Cause
  • Free Speech For People (FSFP) is a national, non-partisan campaign seeking to restore democracy to the people and to ensure that people, not corporations, govern in America. FSFP is dedicated to overturning, through a 28th Amendment to the US Constitution, the US Supreme Court’s January 2010 ruling in Citizens United v. FEC and a corporate rights doctrine, which threatens our elections and our self-government.
  • Corporations Are Not People
  • Move To Amend End corporate rule. Legitimize democracy.

More News

Our kind of truth

Populist demagogues in politics and the mass media are doing everything they can to discredit the quality press as propaganda organs for left-wing elites who sneer at the views of ordinary Americans. Santorum pretends to speak for these people – that is, for a minority of Americans who are mostly white, provincial, highly religious, deeply conservative on cultural and social issues, and convinced that Obama and all Europeans are dangerous godless socialists.
The point is not whether Santorum is right or wrong factually. What he says “feels” right to his followers, because it conforms to their prejudices. And the Internet, having swamped the quality press, feeds and reinforces those prejudices, making it more difficult to distinguish the truth from lies.
The public is increasingly segmented into groups of likeminded people who see their views echoed back to them in blogs, comments, and tweets. There is no need to be exposed to different opinions, which are, in any case, considered to be propaganda.

Our Kind of Truth, by Ian Buruma on Project Syndicate

Tuesday, March 13, 2012

The Rise of Private Power

David Rothkopf spoke yesterday at Seattle Town Hall on the rise of private power on a cold rainy night.

Rothkopf served as deputy under secretary of commerce for international trade policy in the Clinton Administration. Rothkopf was managing director of Kissinger Associates, an international consulting firm, founded and run by Henry Kissinger and Brent Scowcroft and went on to start two international advisory firms of his own. He is now a visiting scholar at the Carnegie Endowment as well as CEO and editor at large of Foreign Policy magazine.

Rothkopf is the author of three books, most recently, Power, Inc.: The Epic Rivalry Between Big Business and Government and the Reckoning that Lies Ahead.

Power, Inc.

Rothkopf begins with the origins of corporations in the Europe of the middle ages where church and state competed for power. Since that time, the world has moved to an era in which the axis of political tension is beween corporations and the state.

Governments midwived the birth of corporations, creating early state sponsored companies like the Dutch and British East India companies, an event soon followed by the South Sea Island Bubble. Church, state and the corporation are different approaches for controlling and allocating wealth, status and authority in society. In western countries, the church was largely tamed. But, in the modern day, laissez-faire capitalism has enabled the corporation to become a serious rival of state power.

There are several means of deploying power available to nations - control of borders, printing money, passing laws, military force. Multinational companies can circumvent many of these by changing domicile to the most favorable legal environment. Most financial instruments are created by private entities. Some big corporations have larger cash flow than most countries.

The financial crisis was a shocking demonstration of corporate power. When the shit hit the fan, who did we help? Homeowners? Nope, Wall Street. Next came the Citizens United decision, a milestone in the increasing political rights of corporations.

Thomas Jefferson, William Brandis and Adam Smith all mistrusted corporations and feared their influence on politics. Alexander Hamilton was their early cheerleader in American history and architect of the framework in which corporations helped America rise to power.

Adolf Fassbender, The White Night, 1932

American Capitalism

The financial crisis left the reputation of Anglo-American Capitalism in taters and the disfunction of American politics isn't helping America's influence in the world. Rothkopf took a big swipe at the premature triumphalism of the 1990's exemplified by Francis Fukuyama's The End of History which asserted that the Washington Consensus represented "the end point of mankind's ideological evolution and the universalization of Western liberal democracy as the final form of human government."

Ideologicalization of American politics has rendered constructive debate impossible. (Ideology sucks! See the tag-line above.) The great opportunity presented by the crisis for financial reform was wasted. The watered down reform that was enacted remains underfunded and mostly unimplemented.

As traditional forms of state power are increasingly ineffective, the US government has put all it's chips on military power, developing its comparative advantage at projecting force. This is the "leviathan" doctrine articulated in Thomas Barnett's 2004 book The Pentagon's New Map, which set out a grand strategy for an American foreign policy specializing in policing the globalized world economy.

Different capitalisms

What is taking the place of the Washington Consensus, both between and within countries, is a competition among several different varieties of capitalism: state capitalism, entrepreneurial capitalism, small business capitalism, chaotic capitalism.

Can corporations be made to serve societies? Rothkopf believes so. But, we need to intelligently discus the alternatives, and be willing to cede authority upward to transnational bodies. Viewed in this light, the EU as an experimental attempt to regain lost sovereignty. Rothkopf also cited public/private partnerships such as those that created the transport system in the US and the internet.

The Scandinavian countries, Rothkopf pointed out, are near the top of the rankings, including quality of life, education, and per-capita GDP. It's amusing to note that socialist Sweden let Saab go under at the same time the nominally capitalist US was bailing out GM. The reason? A generous safety net in Sweden made bankruptcy possible.

Rothkopf, perhaps understandably considering his background in publishing, sees a comparative advantage in protection of intellectual property. I see problems with that. At least in its current form, IP law overwhelmingly favors big companies, holding back innovation. Patents and copyrights are a blatant example of corporate manipulation of the legal environment. Erecting barriers to the creative remixing of ideas will merely succeed only in exporting the vibrant technology sector and with it another of the crown jewels of the American economy.

Rothkopf's intelligence and scholarship were evident throughout his thought-provoking talk. The same could not be said of the questioners in the Q&A session. The city that brought the world the Battle of Seattle couldn't muster many rhetorical molotov cocktails. Step it up, Seattle.


Saturday, March 10, 2012

Leveraging moral hazard

The Economist, hypothesizing an unattainable federalized Euro-Fed, says, "If you were sitting down with a blank sheet of paper, you would advise the euro zone to complement its one-size-fits-all monetary policy by pooling sovereignty and creating new institutions, [...among other things...] a bail-out fund could ensure that large European banks were not at the mercy of their vulnerable sovereign borrowers."

That's a touching show of sympathy for the creditors. And, looking at how the US fared with its massive intervention and how scary things were looking in Europe for a while there, you might conclude that bail-outs are the lesser evil. We'll have to wait and see how this looks in 5 or 10 years.

Greece asks Angela Merkel and Nicolas Sarkozy for a hundred billion Euros as concerned and inexplicably naked investment bankers look on.

Some say the big mistake the US made was letting Lehman Brothers go under. Some say the mistake was in the inconsistency of how Bear Stearns was handled compared to Lehman.

Whether an investment bank or a small sunny country with lots of islands, "too big to fail" applies either way. Maybe Greece isn't, but Spain might be and Italy even more so. While Greece and Spain both have long histories of default on debt (according to my dedicated research staff), Italy does not.

What's needed is a mechanism, an orderly well-defined processes, to handle failure of large systemically connected entities, whether they are corporations or governments.

Defaults happen. It's only common sense that we should have a means for resolving default, while minimizing damage and preventing problems from spreading to weaker neighboring nodes in the densely connected social network of finance.

That shouldn't mean protecting creditors or borrowers from the consequences of poor decisions.

The so-called "voluntary" hair cuts for holders of greek bonds, an attempt to avoid triggering credit default swaps, appear to have failed. But, what if they hadn't? Or pressure from some country whose investment banks had underwritten CDS's had influenced the terms of a bailout? Some speculate that was back story behind Timothy Geithner's trip to Europe in December.

In that context, credit default swaps are a device for leveraging moral hazard.

Credit-default swaps on Greece cover $3.16 billion of debt, down from about $6 billion last year, according to the Depository Trust & Clearing Corp. That compares with a swaps payout of $5.2 billion on Lehman Brothers Holdings Inc. in 2008. The actual payout on Greece will be “much smaller” than the net amount reported by DTCC, Pickel said. A gross $68.9 billion of contracts were outstanding as of March 2 before accounting for offsetting trades.

Amazingly, after the AIG debacle, there's still no disclosure requirements for CDS exposure, so it's hard to know the extent to which US banks have sold CDS on European Debt and net exposure is even harder to guess. It looks like some of that exposure got unwound in to past few months. You can bet, a lot of it ended up in the laps of taxpayers, just like last go 'round.

Saturday, March 3, 2012

Monday, February 27, 2012

Alex Tabarrok - Launching the Innovation Renaissance

I'm something of a junky for the EconTalk podcast. On a recent episode, Alex Tabarrok and host Russ Roberts both of George Mason University had a conversation about Tabarrok's book Launching the Innovation Renaissance. Tabarrok argues that innovation in the United States is being held back by patent law, the educational system, and immigration policies.

Tabarrok's recommendations to increase innovation and productivity:

  • prune back the patent system
  • pay teachers better and in return demand better more accountable teachers - a more competitive, flexible, and open educational system
  • focus education more on the STEM (science, technology, engineering, math) fields
  • enable high-skilled immigration
  • cut back on regulation
  • invest in research and infrastructure - productive assets rather than welfare and warfare.

On intellectual property, he nails the problem head on:

Where you are building on previous ideas, standing on the shoulders of giants, then what you have to recognize is that previous intellectual property has veto power on new intellectual property. Intellectual property has two sides. Yes, it's an incentive to innovate. But it's also a cost. When you are building on previous intellectual property, it's a cost of innovation. Patents can be a cost of innovation as well as an incentive.

Tabarrok suggests a graduated system with 3-year, 15-year and 20-year patents and a narrowing of scope of the patents that are granted with the specific aim of allowing for cumulative innovation.

On education, Tabarrok worries that universities have become a status good - a consumption good, rather than a productive investment, especially for fields outside of the STEM fields, science, technology, engineering, math.

Computers are exploding, the Internet is exploding. And yet we graduated more students in computer science 25 years ago than we do today. [...] the same thing is true in mathematics and statistics, in chemical engineering.

How you fix that, I'm not sure. Subsidize those fields more and fluffier fields less? An engineering student pays 3k in tuition, but it costs 20k to study English Literature? That seems a little crass. On the other hand, I studied in a building paid for with Microsoft money. So, even if governments find it difficult to play favorites, industry can certainly sponsor fields selectively.

The one place where I might part ways with both Tabarrok and Roberts is the belief in deregulation.

One of the big influences on my thinking has been Mancur Olson's Rise and Decline of Nations. What Mancur Olson talks about is this accretion of interest groups over time. Everyone is trying to divide that pie up more and more in their favor, and it slows down decision-making.

It's not that I doubt the accretion of special interests. It's all around us. But, is deregulation the cure to that? Maybe they're right; regulation can certainly be a tool of rent-seekers.

Could we even build the Hoover Dam today? Technologically, yes. But politically could we have the will to do it? There would be so many environmental groups, so many lawyers, so many state and local governments, so many veto players.

But, deregulation can work out for worse, too. Take away Glass-Stegal, you get too-big-to-fail. Too much deregulation is an invitation to criminality and incompetence. Think of liar loans or the BP gulf oil spill. My own suspicion is that tilted rules are no good, no rules are no good, and sensible, well thought out, fairly and firmly enforced rules are really difficult and prone to failure, but are still the only serious option.

Venture capital comes up, briefly, in the context of it being stifled by Sarbanes-Oxley. I would pay a lot of attention to that system. Big companies are doing less basic research. In the pharmaceuticals industry, for instance, a big chunk of the early stage R&D has been outsourced from big-pharma to venture funded biotech. You might say, venture capital is the silver lining on this gilded age we're in. VC and corporate research budgets skew largely toward product development rather than basic research. Even so, we'd better keep the venture system healthy or we'll have a lot less privately funded research of any kind going on.

It might be the case that the dilema the US finds itself in regarding innovation is a counterpart to what gets called the middle-income trap. In the high-income trap, the pie is so big that there's an enormous temptation to try to get a slightly bigger slice for ones-self. The relative effort of that is less then trying to grow an already huge pie bigger and the potential rents are juicy. Once that kind of thinking sets in, the social contract erodes and people loose faith.

I hope people in high places read Tabarrok's book. I hope they don't pay too much attention to the deregulation bit, and instead take seriously the challenging job of designing rules that make true innovation more rewarding than gaming the system.


A political economy

A recent piece in the Economist ( A new anthology of essays reconsiders Thomas Piketty’s “Capital” , May 20, 2107) ends with these words: &q...