How to increase innovation and economic growth

The Economist highlights advice from the Organisation for Economic Co-operation and Development (OECD) on how to promote technological innovation, which in turn increases productivity and thus economic growth:

Many governments are facing not only slow economic growth but also big deficits and heavy debts. ... Innovation, the OECD argues, offers a way out. It is already the chief engine of productivity in the rich world, and thus holds out the tantalising prospect of sustaining economic growth on the cheap. ...

But what is the best way for governments to boost innovation? Sensibly if predictably, the OECD urges investment in education, research and “knowledge-supporting infrastructure” (such as broadband internet networks and smart electricity grids). Skimping on this while money is tight, says the agency, will cause growth to suffer in the long term.

The agency also offers several more novel prescriptions. It suggests that governments should not merely encourage the supply of innovation (for example, by funding research) but also try to stimulate demand. Economies, after all, benefit not from the invention of new products or services, but from their diffusion. In countries that are good at commercialising new ideas, such as America and Norway, even newly founded firms coin valuable intellectual property.

If governments want to see a blossoming of clean technology, therefore, they should use taxes to put a price on environmental externalities (such as carbon) rather than coddle pet technologies. ... The report recommends opening domestic research programmes to foreign firms, to take advantage of bright ideas from abroad.

The OECD encourages governments to rethink their policies in the light of globalisation and the information economy. It notes that “intangibles” such as knowledge networks and open business models now make up much of the value of firms in rich countries and that many companies produce profitable innovations with little or no research in-house.

Warning signs of an economic double-dip

The U.K.'s Telegraph newspaper warns of a possible second recession:

The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history. ...

The M3 figures – which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance – began shrinking last summer. The pace has since quickened.

The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of insitutional money market funds fell at a 37pc rate, the sharpest drop ever.

"It’s frightening," said Professor Tim Congdon from International Monetary Research. "The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly," he said. ...

Larry Summers, President Barack Obama’s top economic adviser, has asked Congress to "grit its teeth" and approve a fresh fiscal boost of $200bn to keep growth on track. "We are nearly 8m jobs short of normal employment. For millions of Americans the economic emergency grinds on," he said.

David Rosenberg from Gluskin Sheff said the White House appears to have reversed course just weeks after Mr Obama vowed to rein in a budget deficit of $1.5 trillion (9.4pc of GDP) this year and set up a commission to target cuts. "You truly cannot make this stuff up. The US governnment is freaked out about the prospect of a double-dip," he said.

The White House request is a tacit admission that the economy is already losing thrust and may stall later this year as stimulus from the original $800bn package starts to fade.

Recent data have been mixed. Durable goods orders jumped 2.9pc in April but house prices have been falling for several months and mortgage applications have dropped to a 13-year low. The ECRI leading index of US economic activity has been sliding continuously since its peak in October, suffering the steepest one-week drop ever recorded in mid-May.

Meanwhile, The Economist sees the glass half full (but only half full):

The American economy has now expanded for three consecutive quarters, as of March of 2010. New reports on durable goods orders and manufacturing activity show continued growth in April. This will slowly but surely translate into rising employment, which will ultimately feed back to rising spending and investment.

America's recovery remains young and fragile. Still, many developed nations would be happy to have a nine-month performance like the one the American economy has managed since returning to growth.

U.S. national debt hits $13 trillion

The U.S. Total Public Debt has hit a new record:

The U.S. national debt has passed the $13 trillion mark, according to USDebtClock.org, an independent website that tracks the real-time growth of U.S. revenues and spending.

On Tuesday, the national debt stood at $12,995,779,490,444.52, according to the Treasury Department's national debt-tracking website TreasuryDirect.gov.

Federal Debt Held by the Public, a better measure of the national debt because it doesn't count money some parts of the government owe to other parts of the government, is just shy of $8.5 trillion according to TreasuryDirect.gov. To put things in perspective, that's $75,973 per U.S. household.

Here's a graph of Federal Debt Held by the Public as of year-end 2009:

The European Union's fiscal problems in brief

Via Greg Mankiw:


Nothing to see here. Move along.

Economic outlook good

The National Association for Business Economics sees good economic growth ahead:

The U.S. economy should expand at a solid pace this year and next as consumers increase spending, confident the recession is behind them, a panel of economists said in a survey released Monday.

The 46 economists surveyed in the National Association for Business Economics report between April 27 and May 7 predicted U.S. gross domestic product would expand by 3.2% in 2010 and 2011.

That is a touch higher than the 3.1% growth predicted for both years in the last survey, released Feb. 10.

"Although risks involving Europe have recently escalated, the outlook in this country has improved in most respects," said NABE President Lynn Reaser, chief economist at Point Loma Nazarene University.

"Growth prospects are stronger, unemployment and inflation are lower, and worries relating to consumer retrenchment and domestic financial headwinds have diminished," she said.

Judging by the slope of the Treasury yield curve, I too expect decent economic growth over the coming year. That said, the economy fell so far during this recession that it will take a long time to get back to potential GDP.

To put things in perspective, here's a graph of real GDP vs. potential real GDP:

Luckily, real GDP is currently growing faster than potential real GDP, which is needed if we want the economy to get back to normal.

Income by religion in the United States

According to the Pew Research Center, Hindus and Jews earn the highest incomes in America. Evangelical Christians, Muslims, and Jehovah's Witnesses earn among the least. It appears that the incomes of the different religious groups are highly correlated with the emphasis they put on education. Evangelicals, for example, are downright hostile towards science.

What causes Hindus and Jews to earn so much? It's education, baby!

Nearly half of Hindus in the U.S., one-third of Jews and a quarter of Buddhists have obtained post-graduate education, compared with only about one-in-ten of the adult population overall. Hindus and Jews are also much more likely than other groups to report high income levels.

In short, if you want your kids to grow up to be wealthy, you don't need them to convert to Hinduism. You just need to ingrain them with an education ethic.

Today is "Everybody Draw Muhammad Day"

In response to recent threats of violence from Islamic extremists against depictions of the prophet Muhammad, today is "Everybody Draw Muhammad Day".

David Frum says those who do nothing empower those who attack free speech.

Why regulation doesn’t work, part n

Via Tyler Cowen, Paul Krugman attacks libertarianism:

Thinking about BP and the Gulf: in this old interview, Milton Friedman says that there’s no need for product safety regulation, because corporations know that if they do harm they’ll be sued.

Interviewer: So tort law takes care of a lot of this ..

Friedman: Absolutely, absolutely.

Meanwhile, in the real world:

In the wake of last month’s catastrophic Gulf Coast oil spill, Sen. Lisa Murkowski blocked a bill that would have raised the maximum liability for oil companies after a spill from a paltry $75 million to $10 billion. The Republican lawmaker said the bill, introduced by Sen. Robert Menendez (D-NJ), would have unfairly hurt smaller oil companies by raising the costs of oil production. The legislation is “not where we need to be right now” she said.

And don’t say that we just need better politicians. If libertarianism requires incorruptible politicians to work, it’s not serious.

This spill is evidence that regulation doesn't work. This doesn't mean a libertarian system would have prevented the spill, but it's pretty solid evidence that regulation didn't prevent it. Those oil rigs were regulated. They were Obama's regulators, too. After 15 months in office, he can't pass the buck to George Bush.

In case anyone gets the wrong idea, let me also point out that Sen. Lisa Murkowski is not a libertarian. As a representative of an oil state, she's basically practicing crony capitalism.

And don’t say that we just need better regulators. If progressivism requires incorruptible regulators to work, it’s not serious.

The highest-paying college majors

Here are the 25 highest-paying bachelor degrees according to Payscale.com, ranked by median mid-career salary:

Here's what Payscale.com says about the list:

Only employees who possess a Bachelor's Degree and no higher degrees are included. This means Bachelor graduates who go on to earn a Master's degree, MBA, MD, JD, PhD, or other advanced degree are not included.

For some Liberal Arts, Ivy League, and highly selective schools, graduates with degrees higher than a bachelor's degree can represent a significant fraction of all graduates.

Careers that require advanced degrees, such as law or medicine, are not included.

In case you don't see your college major in the graph, the full list can be found here.

For students who major in physics, I highly recommend a minor in computer science. For students who major in mathematics or statistics, I highly recommend a minor in either computer science or finance. Having an applied skill that complements your "pure" math or science major will give you far better employment opportunities after graduation.

As I've said before on this blog, I think a technical bachelor's degree (e.g. engineering or computer science) combined with an M.B.A. makes a powerful combination that will result in a very high salary. An M.B.A. is also a good follow-up to a degree in economics, finance, accounting, marketing, or information systems.

Previously, I have blogged about average starting salary by category of college major and about median earnings by level of education.

Drug prohibition in action

In this video, a police SWAT team in Columbia, Missouri shoot a suspect's two dogs. He was charged with nonviolent, victimless, misdemeanor marijuana possession. He was also charged with second-degree child endangerment (having drugs in the same house as the child), which raises the question: What endangers a child more, the father using marijuana in the same house as the child, or the police shooting guns in the same house as the child?


Don't (just) blame the police. Blame our draconian drug laws.

New study: You can't trust Paul Krugman

Economist and New York Times columnist Paul Krugman is heavily politically biased—shocker! Here's the conclusion of a new study published in Econ Journal Watch:

Overall, our research finds that most economists don’t change their positions when the White House changes party. Only two economists changed their tune in a significant or moderate way. The strongest case is Paul Krugman. He explicitly supported deficit reduction in the 1990s and early 2000s under Republican administrations, then changed his view once Clinton entered office in 1993 and the Democrats gained control of Congress in 2006. The case is strengthened due to his large number of comments. He is the most frequent contributor on our list, a fact that reduces the chance of error in our conclusion. Alan Blinder also changed his tune, though in a less significant manner than Krugman. He consistently supported deficit spending that resulted from Democratic policies and criticized deficit spending that resulted from Republican policy.

Four other economists—Martin Feldstein, Murray Weidenbaum, Paul Samuelson, and Robert Solow—changed their tune in a minor way. That leaves eleven economists with strong cases in favor of nonpartisan commentary regarding the budget deficit. Given such consistency, they appear to be close to impartiality.

So, Paul Krugman and Alan Blinder are untrustworthy due to their political bias. Which Democrats can you trust? Christina Romer, Larry Summers, Joseph Stiglitz, Laura Tyson, Alicia Munnell, Janet Yellen, and Robert Lawrence. Which Republicans can you trust? Glenn Hubbard, Michael Boskin, and Paul McCracken.

Only 17 economists were studied—eleven of them Democrats—so the absence of someone from the trustworthy category shouldn't be a bad sign. Ben Bernanke, Greg Mankiw, Robert Shiller, and Jeffrey Sachs are a few well-known economists who weren't studied.