February 2010


Previously, Mr JakeGint claimed that innovation was the most important driver for economies. I completed a series of posts refuting this proposition. Here is another viewpoint on essentially the same question.

2.8 million

That’s how many new jobs America’s most technologically-advanced industries were supposed to create between 1998 and 2008. Such ‘leading-edge’ industries as aerospace, telecom, pharmaceuticals, and semiconductor and electronic component manufacturing were all going to add workers over the next ten years or so, according to November 1999 projections by the Bureau of Labor Statistics (see the full list below). Indeed, by my calculations, the 1999 BLS projections implied that employment in leading-edge industries would grow at a 3.4% annual clip, more than twice as fast as the rest of the private sector.

At the time, this forecast made perfect sense. Riding the New Economy boom, the U.S. had become the innovative icon for the rest of the world, the country that knew how to do it right. The global division of labor was clear: The U.S. would focus on breakthrough innovations and creating advanced goods and services, which would in turn create high-paying jobs. Meanwhile, production and routine innovation would be shifted to low-wage countries.

To put it in another way: Innovation was supposed to drive job growth in the U.S. And why not? From railroads to electricity to automobiles to radio to airplanes to computers, breakthrough innovations have created entire new industries.

But that’s not what happened over the past ten years. Instead of growing, the leading-edge industries actually lost 68,000 jobs from 1998 to 2008 (see below).

This astonishing fact is our prime clue to the nature of the current jobs crisis. Innovation makes up the main comparative advantage for the U.S., since we can’t compete on cost with lower-wage countries (at least not yet). If we are not generating jobs in the innovative industries, it’s no surprise that the jobs situation is going to be tough.

Why is this happening? Generally economists advance two explanations for weak job growth in these kinds of high-end industries. The optimistic explanation is that strong productivity growth enables companies to do more with fewer workers. The pessimistic explanation is that competition with other countries, perhaps unfair, is hollowing out our innovative industries.

I’m going to come back to these two explanations in my next post. For now, let me advance a disturbing hypothesis. I suggest that outside of a few high-profile exceptions, a wide range of potential breakthrough innovations have fallen short of promise since 1998. That has produced many fewer jobs in the U.S., and diluted America’s comparative advantage abroad.

One important example: Scientific advances in biotech were supposed to usher in a new era of drug discovery. Instead, many illnesses turned out to be more complicated than expected. Pharmaceutical companies have struggled with a diminished drug pipeline, rather than an expanded one. As a result, this past decade has been one of repeated drug company mergers and layoffs, so that pharma and biotech together created less than 80,000 U.S. jobs over the ten years from 1998-2008, or less than 8,000 jobs per year.

In addition, the lack of profitable results from expensive U.S.-based research and development has made it easier for companies to move big chunks of their R&D operations to China, India, and elsewhere.

I explored this hypothesis in two of the cover stories I wrote while I was still at BusinessWeek, Innovation Interrupted and The GDP Mirage.

If you are willing to accept the idea of an innovation shortfall, then it changes the way we should deal with the jobs crisis. Some form of short-term jobs stimulus is obviously necessary, though I will leave Congress and the Obama Administration to debate the exact form. The one thing to say, though, is that the $15 billion Reid bill–which focuses on tax breaks for hiring unemployed workers and more money for infrastructure–will lead to more hiring in the short-run, but won’t do anything to stimulate innovation jobs over the medium run.

Addressing the innovation shortfall has to be a cooperative project between business and government. How?

*Elevate innovation to the top of the policy agenda. The first step is for President Obama and the rest of the administration to publicly give higher priority to innovation. Right now Obama ritualistically mention innovation once in a speech, and quickly goes on to other topics. In the latest Economic Report of the President, innovation is relegated to the very end of the report, and in fact does not get a whole chapter to itself: The chapter is called “Fostering Productivity Growth through Innovation and Trade.”

Why is this important? Government is much better at stopping innovation than creating it. Breakthrough products and services are a problem for government agencies, because they fall outside the status quo. That’s why even well-intentioned bureaucrats have to be given a signal from the top that innovation is important. This is something that can be done right now, without additional funding.

*Broaden out government funding for R&D beyond healthcare. In recent years, federal funding for R&D has increasingly focused on healthcare, and Obama’s latest budget continues that trend, as I showed in these two posts, here and here. That can’t continue. By becoming increasingly focused on healthcare research, the U.S. is falling behind in other areas.

*Improve measurement of the innovative sectors of the economy As management consultants often say, you get what you measure. Right now our system of economic statistics is still based on the structure set up in the 1930s. So, for example, we have virtually no real time information on business spending on R&D in the U.S. during the downturn–a key piece of information for understanding where the economy is going. The good news is that some progress has been made in this direction. However, a relatively small amount of money could accelerate the upgrading of the statistics.

To come: This is the first in three posts on innovation and jobs. In my next post, I will address productivity and trade as alternative explanations for the employment weakness in leading-edge industries. And then in my third post, I will talk about the state of innovation in the U.S. today, and whether it makes sense to talk about U.S. innovation distinct from the rest of the world.

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The following proposition is the first of five propositions posited by St Anslem as his proof of God existing. I have reformulated the wording so as to be consistent with the definition[s] provided yesterday.

1 By the term God is meant a reality of which none greater can be conceived

Proposition 1 simply asserts a minimal definition of the term God. St Anslem is saying, in effect, that people who believe in God believe in the existence of a reality, of which none greater can be conceived.

Thus the only way to deny the existence of God, is to deny the existence of a reality, of which none greater can be conceived. So, essentially, our human reality, must be, to deny God, the reality, of which none greater can be conceived.

Those who subscribe to science, as essentially providing evidence, or proofs to God’s non-existence have a major difficulty to overcome. One of history. As the history of man has progressed, so has our perception of reality and our experience of reality. To therefore claim, of which none greater can be conceived, places the claimant in a very difficult position.

Of course before progressing to the second proposition, the first must be accepted. To be accepted, it must stand, in the face of all refutations.

In the long run, the gold mining industry’s real profit margin is constant and equals the real per capita productivity. The price of gold, on average, must be the average production cost plus a constant mark-up.

Furthermore, in order for the real value of gold to be maintained on a per investor basis, the stock of gold has to grow at a rate that can be no greater than population growth in the long-term. If the supply of gold grew at a lesser rate than population growth for reasons other than depletion of the exhaustible ore, gold price would grow faster than inflation and the quantity demanded for gold would drop.

Eventually the supply of mined gold will dwindle, which will drive prices up unless world population experiences zero growth in the foreseeable future. In that circumstance, far off in the future, a substitute medium of storing value may be discovered and used.

It would seem that the authors are using the Adam Smith, David Ricardo fallacy of the value equalling the [labour] cost of production. Unfortunately, the value of a good or service is decided by the consumer, on a diminishing marginal demand basis. Thus any theory that proposes to value Gold, based on a cost of production basis, is very likely to end-up with values that are seriously distorted.

With regard to production and population growth, this rather presupposes that future population continue to value gold in the same way that current population values gold. Currently gold is valued as a commodity that has an end use in products, jewellery being the primary good, that interestingly has as a property the belief of investment, or store of wealth properties, and gold as money, which commands an additional value.

What relevance does this question have to the financial markets? Possibly not a great deal. However it was a discussion that was taking place elsewhere in blogoland and the level of discussion was so low that I was quite astounded. To cut a long story short, the evidence, proofs, and other argument all centred around religion and the study of the Bible.

This particular question has preoccupied some of the best minds in history. The way they approached the question was in the following manner.

*A reality that transcends time and space
*The ground of being and value
*A reality worthy of man’s worship

Notice that God is not defined as a being, rather, as a reality. The reason is that a being connotes a something existing in spatiotemporal understanding, alongside other spatiotemporal somethings. Philosophers who have believed that God exists, and that his existence could be proved, have not intended to assert the existence of a being occupying some particular region of time-space. They have meant to assert, rather, the existence of a reality that is not subject to these categories. Hence, God is not a being, but a reality.

The term ground, has been employed by Philosophers when talking about cause. A cause is a spatiotemporal something, that stands in a certain relation to something else that is called it’s effect. As God, a reality, stands outside of spatiotemporal consideration, so ground is adopted in place of cause.

There have been five primary arguments put forward in relation to proofs in support of God’s existence:

*Ontological
*Cosmological
*Teleological
*Moral
*Religious Experience

The first two carry the majority of the intellectual firepower, with the moral argument tending to support the first two, rather than creating a new a separate line of reasoning. I shall be looking at, and analysing the first two arguments, the first, comes from St Anslem.

Nothing terribly exciting taking place, lots of patience required.

Just popped over to iBC…and no ChartAddict blog. Gone. Has flippe-floppe-flye sacked him? Possibly someone in blogoland knows the answer to this rather perplexing mystery. Do tell!

Frenzied developers with access to cheap money are creating a glut of premium office space and luxury apartments, priced at about 80 times the average income of the city’s residents. Prospective middle-class homeowners, in panic-buying mode, are snapping up two properties at once, hoping to flip the second one to finance the first. Civic officials are encouraging the building boom.

The sale of vacant lots bolster their municipal coffers.

Banks eager to reap upfront fees are granting mortgages to all comers. Even factory owners are in on the speculation, generating more profit from flipping property than from traditional manufacturing, which increasingly is moving offshore to Vietnam, Malaysia and other nations with lower labour costs.

No, this isn’t Toronto in the late 1980s, or Santa Barbara or Tallahassee six years ago at the height of America’s record housing boom, which culminated in a global credit crisis and ensuing recession.

This is Beijing today, where until recently one of the most popular programs on local television was a reality show called The Romance of Housing that spotlighted the struggles of families pursuing elusive affordable shelter.

And where the papers are reporting on suicides and violent protests after developers in cahoots with local officials seize someone’s land for a new office building or apartment block.

The disturbing phenomenon extends beyond Beijing, where housing prices are far higher than in Dubai’s overbuilt property market before that red-hot Persian Gulf economy imploded last year. In December alone, Chinese housing prices rose almost 8 per cent in 70 major Chinese cities, while housing starts leapt by 34 per cent nationwide.

Jim Chanos, the legendary U.S. short-seller who thrives on post-bubble bargain-hunting, claims the overheated Chinese housing market is “Dubai times 1,000 — or worse.”

Chanos has an obvious stake in chaos. Not so Patrick Chovanec, as associate professor at the business school at Beijing’s Tsinghua University. Chovanec cites the intoxicating impact of Beijing’s $586-billion (U.S.) stimulus package and an additional $1.4 trillion in lending by state-controlled banks to real estate and other industries last year alone.

With easy money in such abundance, it’s no wonder developers are on a building jag.

“You have state-owned enterprises using borrowed funds from the stimulus bidding up the price of land in Beijing — not even desirable plots of land — to astronomical rates,” Chovanec told Bloomberg News last week.

“At the same time, you have 30 per cent-plus vacancy rates and slumping rents in commercial property. So it’s just a case of when (lenders] recognize the losses — or don’t.”

For the moment, there are two Chinese property markets. There’s an over-served premium-priced office and luxury apartment sector, and a neglected affordable housing market so underserved for lack of profit margins that Beijing recently pledged on its own to build 15 million units of shelter for low-income people.

Limited though the boom is to the high end of the market, the stupendous sums tied up in it have the potential to impede, if not halt, China’s fast-track Industrial Revolution when the boom inevitably ends.

“It’s simply a matter of time before the Chinese real estate bubble bursts,” insists Yi Xianrong, longtime student of Chinese property trends at the finance department of the Chinese Academy of Social Sciences. “A bubble burst in China would not only deal a fatal blow to our own economy, but would also extinguish the world’s hope for recovery.”

Indeed, Western economies are counting heavily on China to lead the nascent global recovery. China’s projected GDP growth this year of about 9.5 per cent will account for about one-third of global economic growth this year.

China has been providing one of the bright spots in the recent global downturn.

Bankruptcy victim General Motors has lost money in North America and Europe for years, but it profits from booming Chinese sales.

And Paul Otelli, CEO of California-based Intel Corp., the world’s leading computer-chip maker, recently said, “Thank God for China. It buoyed our company through the depths” of the recent global downturn.

China has just overtaken Germany as the world’s largest export economy, and eclipsed the U.S. as the biggest vehicle market.

Wen Jiaboa, the Chinese premier, has acknowledged that “property values have risen too quickly,” and vowed a crackdown on speculators. China’s central bank has twice this month raised the amount of capital Chinese banks must hold in reserve to cover losses, reducing funds available for property loans. But government officials are in a quandary over how hard to apply the brakes. A sudden about-face in Beijing’s easy-money policy of ultralow interest rates could trigger widespread property devaluations that would hit not only homeowners but also construction, finance, steel, furniture and other sectors tied to the real estate market.

Yet the longer the bubble persists, the more punishing the inevitable implosion, as Western economies learned from the collapse of the U.S. housing market in 2007-08.

So, uncertainty rules.

A soft landing can be engineered if China’s recent, modest steps to cool the market send a powerful enough signal to developers and panic buyers — and provide enough time for a rise in average income levels to match exorbitant housing prices.

In the meantime, there are a few signs the mania is exhausting itself. The new “instant city” of skyscrapers and thousands of villas built in the coal city of Ordos in China’s Inner Mongolia is largely vacant — a sobering sign to overzealous developers.

“Who would go there?” a downtown resident told Bloomberg Business Week recently of the sprawling metropolis taking shape in the nearby suburban desert. “It’s a city of empty buildings.”

The Romance of Housing show was yanked from the air in November, ostensibly because state officials were offended by a scene depicting a corrupt state official. But the show more likely got the hook over concerns that it celebrated recklessness with personal finances. And in Beijing, dirt is accumulating around the entrances to the newly built twin-tower head office complex of the Bank of Communications Co.

In a business district with a 35 per cent vacancy rate due to over-exuberant developer activity, the lobby of the BCC landmark is now used as a bicycle parking lot.

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