Relevant and even prescient commentary on news, politics and the economy.

Do Patents Lead to Economic Growth?

Recently I discussed a paper by David Autor, David Dorn, Gordon Hanson, Gary P. Pisano and Pian Shu. The paper noted that as competition from China increased, innovation by US firms, measured by patent output, decreased. I believe the result, but started to wonder… are patents a good measure of innovation? Do patents drive economic growth?

I don’t know how to measure innovation, but I can look at the relationship between patents and economic growth. We being by looking at patents per capita. I found patent data going back to 1840, and population to 1850.  The graph below shows patents per capita beginning in 1850. (All data sources provided at the end of this post.)

patents per capita 20170326a

Next, let’s compare that to growth rates. We would expect patents today to lead to growth tomorrow. So, I will add a line to the graph showing, for each year, the annualized growth rate in real GDP per capita over the next ten years. That is, for 1950, the growth rate from 1950 to 1960, and for 1980, the growth rate from 1980 to 1990. Unfortunately, real GDP per capita data begins in 1929, so the original graph gets truncated.

patents per capita v. annual change, real gdp per capita t to t+10

If it kind of looks to you like patents are not driving economic growth, well, it kind of looks like that to me too. In fact, if anything, the lines seem to be more negatively than positively correlated.  In years where there are more patents, the subsequent growth rate in real GDP for capita over a ten year period seems to go down.  Conversely, fewer patents in one year seem to be associated with more growth over the next ten years.

What’s going on?  Well, obviously, if there is no protection for developing intellectual capital, nobody is going to put much effort into creating that capital. On the other hand, protecting intellectual capital too well can stifle economic growth. For one, it requires spending an awful lot on on attorneys. For another, it forecloses on a lot of areas of potentially fruitful research by a lot of people who are worried about stepping into a mine field potentially defined by other people’s patents.


A few notes…


1.  I have a question. Anyone have any idea why there was a big rise in patents per capita beginning in 1983? What changed? Was it some aspect of the law? Something having to do with how research was written off? What’s going on?

2. Data… Data and estimates for the US population originates with the Census, but I’m using the set cleaned up by the Texas State Library and Archives Commission since its in an easy to use format. Since data was only available decennially with no annual estimates from 1850 to 1900, I linearized the decennial to generate my own annual estimates. Real GDP per capita comes from NIPA Table 7.1. Patent data comes from the US Patent Office.

3. If you want my spreadsheet, drop me a line at my first name (mike) dot my last name (that’s kimel with one m) at gmail with a dot com.

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Say’s Other Law: “Misery is the inseparable companion of luxury”

It was a dark and stormy global night economy and a spectre task was haunting facing Europe…

A new supply-side agenda for the left

The task facing Europe is to meet the challenge of the global economy while maintaining social cohesion in the face of real and perceived uncertainty. Rising employment and expanding job opportunities are the best guarantee of a cohesive society.

The past two decades of neo-liberal laissez-faire are over. In its place, however, there must not be a renaissance of 1970s-style reliance on deficit spending and heavy-handed state intervention. Such an approach now points in the wrong direction.

Our national economies and global economic relationships have undergone profound change. New conditions and new realities call for a re-evaluation of old ideas and the development of new concepts.

In much of Europe unemployment is far too high – and a high proportion of it is structural. To address this challenge, Europe’s social democrats must together formulate and implement a new supply-side agenda for the left.

— Tony Blair and Gerhard Schroeder, The Third Way/Die Neue Mitte, 1998.

In a 1981 review of George Gilder’s Wealth and Poverty, Anna Weniger and Hank Robinson succinctly described “the essence of supply-side economics” as “simply a campaign to redistribute income from poor to rich, dressed in the garb of economic theory.” Gilder’s economic theory was fundamentally an affirmation of Say’s so-called Law. “The essential thesis of Say’s Law,” he insisted, “remains true: supply creates demand. There can be no such thing as a general glut of goods.”

I’m not going to bother trying to debunk supply-side economics. What would it take to change the mind of someone who “can’t see what’s wrong” with a theory about a monetary economy that is based on the assumption it is a barter economy? What would it take to change the mind of someone whose belief in the theory is intimately tied to their identity?

So let’s assume that anyone I could persuade with the following argument is already inclined to agree with Weniger and Robinson’s assessment of supply-side economics as mere pretext. Theoretical flimsiness is no problem for conservatives because the argument is, after all, consistent with their values and objectives. Supply-side rhetoric is their sales pitch.

But what about “the left”? If we take Blair’s and Schroeder’s representation of their position on the left at face value, the question arises of what in Hell did they think they were selling? A social democratic redistribution of income from the poor to the rich? It appears they were selling the supply-side rhetoric to themselves and to corporate media and campaign donors as “realism.”

The old ideas that were thinly veiled ends in themselves for conservatives were to be repackaged as new concepts that would enable electoral success in an environment that was inhospitable to the Labour Party’s own “old ideas.” Whether the “new concepts” could somehow deliver social cohesion and expanding job opportunities as well as redistribution of income from the poor to the rich was seen by Third Way acolytes as strictly a matter of cleverness. Third Way proselytizers were supremely confident of their cleverness.

You Don’t, Say?

On the assumption that those who believe Say’s Law — or those who cling to the argument as a ready-made justification for their preferred policy outcomes — will not change their minds, I would like to present what might be described as Say’s other law:

Misery is the inseparable companion of luxury.

A position Say proclaims “as false in principle, as it would be cruel in practice” is that misery and want are indispensable as incentives to work:

The apologists of luxury have sometimes gone so far as to cry up the advantages of misery and indigence; on the ground, that, without the stimulus of want, the lower classes of mankind could never be impelled to labour, so that neither the upper classes, nor society at large, could have the benefit of their exertions.

Of course the Third Way manifesto didn’t overtly “cry up the advantages of misery and indigence.” The phrasing was more subtle and nuanced:

But providing people with the skills and abilities to enter the workforce is not enough. The tax and benefits systems need to make sure it is in people’s interests to work… Part-time work and low-paid work are better than no work because they ease the transition from unemployment to jobs. … The labour market needs a low-wage sector in order to make low-skill jobs available.

In short, there needs to be more low-wage jobs to transition people away from benefits and benefits need to be restricted so that they are not an impediment to people accepting low-wage jobs. Or, in blunter words, “without the stimulus of want, the lower classes of mankind could never be impelled to labour.”
Say’s “other law” appears in the chapter “On Consumption” in his Treatise on Political Economy; or the Production, Distribution, and Consumption of Wealth. Here’s more:

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On @UnlearningEcon

Unlearning Economics is a person somewhere on planet earth. He or she has been debating with Simon Wren-Lewis and Nick Rowe (on twitter). Brad DeLong joined the discussion.

But what about me. Elisabetta Addis (we’re married) just returned from Palermo. I was eager to talk with a physically present human being having not done so all day. First I said “Hodor” (and had to explain). Then, looking for a topic, I said, “Unlearning economics is someone who is debating”.

She said “incredibile” and showed me her smart phone. On the small screen I could read (barely) the post by unlearning economics which I was planning to discuss.

OK now we are reading the post so that we can discuss it.

The world is highly connected. The 21st century is very strange.

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Accountability Bond Accounting

Recently I learned about a proposal for Euro denominated “accountability bonds”. They are basically a clever way to enforce the stability and growth pact. I don’t like the pact, so I don’t support the proposal which I made by Clemens Fuerst here . The idea is that borrowing beyond the level allowed by the stability and growth pact could be financed only by special junior bonds. Owners of those bonds would lose everything before owners of senior bonds lose or taxpayers who finance the ESM risk anything.

The key part (which I don’t support) is that currently outstanding bonds are senior to these new bonds. This means that the reform will cause a windfall gain to current bond owners. The value of their bonds will not be diluted by the junior bonds. The risk that it would be diluted by regular bonds issued above the stability and growth pact levels would vanish. Importantly, this windfall would not be openly paid by the Treasury issuing the junior bonds – on its face, the reform regulates only the interaction of those Treasuries with new investors. The windfall would be paid by other investors who value the old bonds more highly. The old bonds will be more valuable in case of default, because they will be more senior than the average outstanding bond (the average including the junior bonds). Since investors in junior bonds won’t pay this cost in (at least subjective) expected value, the issuing Treasury will.

If no junior bonds are issued, old bonds are average bonds so there is no windfall and no cost. Byt the reform appears to only regulate the interaction between issuing treasuries and investors in new bonds. It is a penalty to be levied by investors thinking of their own interests, so it is a penalty which will actually be levied.

I don’t like the windfall (which Fuerst might consider the whole point of the reform). It implies giving people who are on average wealthy something for nothing. It isn’t hard to come up with a proposal for junior and senior bonds, related to the stability and growth pact, which does not create a windfall. The problem (or whole purpose) is that old bonds are senior to the average bond. The solution is to require that, in case of default, recovery ratios for old bonds are equal to average recovery ratios.

My proposal is that as of the start date T, there is a limit on the issuance of new senior bonds. Beyond that limit, new bonds must be new junior bonds. In case of default, first payments (coupons plus face values of maturing bonds) are divided into the proportions due to newer than T and older than T bonds – so payments to old bonds are
(total payments)(amount owed on old bonds)/(total amount owed).

The remaining payments must first go to new senior bonds and any money left goes to new junior bonds.

Discussion of the effects of such a plan after the jump.

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Labor Conditions in Colonial America

Back in 1934, the Bureau of Labor Statistics produced a fascinating and very readable book entitled History of Wages in the United States From Colonial Times to 1928 : Bulletin of the United States Bureau of Labor Statistics, No. 604. There’s lots of cool stuff there, but it quickly becomes apparent that Colonial America was a whole other country than today’s America.

I want to quote extensively from the beginning of the book. (Note – I’m not going to copy footnotes.) It begins with a chapter entitled “Early Working Conditions and Wage Legislation.” The chapter begins with this:

“ High American wages” date from the beginning of the country, to judge from evidence contained in the earliest colonial records in which reference to wages is found. Letters and reports from agents of the British companies engaged in colonial settlement and from the early colonial governors, express consternation amounting to distress over the “ exhorbitant demands” of craftsmen and laborers. A colonial treasurer of the Virginia Colony declared, about 1625, that the wages paid there were “ intolerable” and “ much in excess of the sum paid to the same class of persons in England.” In 1633 Governor Winthrop, of the Massachusetts Bay Colony, noted that the “ excessive rates ” charged by workmen “ grew to a general complaint ” which called for legislative action, and a colonial governor in North Carolina complained that “ the Price of Labour is very high.”

From the workman’s side of the story comes similar testimony treated from a different viewpoint. Gabriel Thomas, who wrote a history of “ the Province and Countrey of Pensilvania” in 1698 for the purpose of inducing the poverty-stricken workers of England to emigrate, asserts that “ the encouragements are very greate and inviting, for Poor People (both Men and Women) of all kinds can here get three times the wages for their Labour they can in England or Wales;” and William Penn says in a letter that “ all provisions are reasonable but Labour dear, which makes it a good Poor Man’s country.” Another promoter, with a zeal suggestive of present-day publicity methods, wrote glowingly of the “ happy circumstances” in which laborers in New Jersey were placed in 1641.

Moving on:

Governor Winthrop, of the Massachusetts Bay Colony, declared in 1630 that the “ scarcity of workers caused them to raise their wages to an excessive rate;” a century and a quarter later Governor Dobbs, of North Carolina, reported that “ artificers and labourers being scarce in comparison to the number of Planters, when they are employed they won’t work half, scarce a third part of work in a Day of what they do in Europe, and their wages are from two shillings to 3, 4, and 5 shillings per Diem this currency.”

Today’s Planters, er, farmers sympathize.  Of course, today’s outrage is that workers get paid more in the US than in Mexico.

A bit later, still in chapter 1, we get a section entitled “Control of Workers”:

Both of these conditions, the scarcity of labor and the resulting high wages, were met differently by the northern and the southern colonies… The New England colonies undertook to meet them by regulation and legislation. If local laws limiting property holding and citizenship to “ freemen” and “ commoners” operated to exclude needed tradesmen from a town, the laws were either suspended in given cases or the town found some way to get around them in order to secure the desired services. Both Boston and Charlestown in 1640 waived certain of the citizenship requirements to obtain carpenters. As early as 1635 Lynn voted to admit a landless blacksmith, and later granted him 20 acres of land, thus keeping both the blacksmith and the letter of the law requiring that residents be landholders.

These concessions as a rule had strings to them. When 20 citizens of Haverhill, Mass., raised a subscription among themselves to purchase a house and land in order that a blacksmith could come into the settlement, they required that the smith agree to remain for seven years, and did not permit him to work for any person other than the 20 subscribers. The town of Windsor, Conn., presented a currier with a house and land and “ something for a shop,” but it was to belong to him and his heirs only on condition that “ he lives and dies with us and affords us the use of his trade.” Otherwise the property was to revert to the town. In 1656 William How was granted “ twelve acres of meadow land and twelve acres of upland ” in what afterwards became the great textile center of Lowell, Mass., “ provided he set up his trade of weaving and perform the town’s work.”

Once established in the colony, workmen were under the rigid regulation and control of a governmental system which, to quote Weeden, believed that it “ could legislate prosperity and well-being for everyone, rich or poor.” Impressment of labor was one tenet of that system, and “ either the public need or the demands of private business could enforce it.” As a rule it was only in harvest time that craftsmen were impressed into private service, but carpenters were sometimes drafted to build houses for individuals. Work on the public roads one day in the month was required of every workman in Salem, and he was subject to a fine of 3 shillings if he did not comply. When the selectmen of Dedham, Mass., decided to build a meeting house, the committee in charge was authorized to “ order men to worke upon the same.”

The next section of Chapter 1 deals with “Wage Legislation”

It was in legislation dealing with wages, however, that the authorities in the New England colonies made their most persistent efforts to control workers. Plymouth Colony and Massachusetts Bay Colony passed similar laws in 1630 fixing a maximum rate of pay. In Massachusetts Bay Colony:

It was ordered that Carpenters, Joyners, Brickelayers, Sawers and Thatchers shal not take above 2s. [48.6 cents] a day, and 16d. [32 cents] a day if they have meate and drinke, nor any man shall give more, under paine of 10s. [$2.43] to taker and giver; and that sawers shal not take above 4s. 6d. [$1.00] ye hundred for boards, att six score to the hundred, if they have their wood felled and squared for them, and not above 5s. 6d. [$1.33] if they fell and square their wood themselves. It was ordered that labourers shal not take above 12d. [24.3 cents] a day for their worke, and not above 6d. [12 cents] and meat and drink, under paine of 10s. [$2.43].

Although this law was not successful and operated less than six months, the court tried again in 1633, with lower rates and evidently greater determination, to dictate wages. The second ruling kept the same rate of 2s. a day for “ master” workmen—building tradesmen, mowers, and wheelwrights— but the rate with “ dyett” became 14d. (28 cents) a day instead of 16d. “ Master taylors” were allowed 12d. (24.3 cents) and “ inferior taylors” 8d. (16 cents) per day “ with dyett.” Instead of fixing the rate for laborers, or “ inferior” workmen, as did the 1630 act, that of 1633 left its determination to the town constable and “ two indifferent freemen,” probably for each and every given case.

Of course, it helps if the workers know their place.  The powers that be knew how to keep workers from developing fancy tastes that might lead them to get uppity, though truth to tell, a bit more than that might be happening in the quote below:

A few years later the court, “ aware that the board at public houses, if extravagant, not only required a corresponding price from the traveller, but also put him in the hazard of contracting a taste for similar fare at his own house, and thus promoted a costly mode of living, ever unfavorable to the pecuniary concerns of a community,” tried another way of helping the consumer. It declared that:

Whereas complaint hath bene also made that diverse pore people, who would willingly content themselves with meane dyet are forced to take such dyet as is tendered them at 12d. [24.3 cents] the meale or more; it is now ordered that every keeper of such Inn or comon vicualling house shall sell and allow unto every of their guests such victuals as they shall call for, and not force them to take more or other than they desire, bee it never so meane and small in quantity, and shall affoard the same and all other dyet at reasonable prizes upon paine of such fine as the Court shall inflict according to the measure and quantity of the offence.

This law was enacted in 1637.

Anyway, the book is chock full of good stuff. I might quote some more in later posts.

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Poor Salesman Great Grasp of Policy

I am aware of all internet traditions (with notably rare exceptions) and I think this might be another classic.

In a generally very good article in Politico Tim Alberta wrote “Ryan is poor salesman with a great grasp of policy” [skip] “After he unveiled the bill, leading health care experts on the right like Yuval Levin and Avik Roy trashed it as a poorly conceived mess; ”

So having a great grasp of policy is consistent with writing an immensely important poorly conceived mess. I am googling [Ryan salesman “great grasp of policy”] which only gives 142 results. Does seem twitter has taken over the snark industry. This thread burns. Also at least 1% of the US Senate took Alberta to task.

update: I was wrong. The classic is actually


So the fact that Ryan’s polics don’t withstand scrutiny shows that Ryan has a great grasp of policy. OK I fell for it. Tim Alberta is just trolling me. He. will. not. make. my. head. explode. No he won’t.

end update:

I think the crazy claim shows a few things. One is that conventional wisdom is invulnerable to evidence. Ryan has been declared a super wonk by the cool kids, so the assertion is riskless. Another is that Alberta wasn’t thinking about policy (he wrote almost nothing about the content of the AHCA). Another is that he assumes that the problem for Ryan with Levin and Roy was that he didn’t flatter them enough and not that his bill was a poorly conceived mess (the preceding sentence was “There was no such effort on Ryan’s part, and it showed. (Several allies argued he had done some outreach, but they failed to provide any specific examples.)”). Finally, symmetry is dangerously tempting. The whole crazy claim is “If the bill failed because Trump is a great salesman with a poor grasp of policy, it also failed because Ryan is a poor salesman with a great grasp of policy.” This is symmetry at the expence of accuracy. Ryan is a brilliant salesman who has a weak grasp of policy.

I foolishly said that ignoring policy and discussing inside baseball is what Politico does, then found out that they also published an excellent article by Harold Pollack “Paul Ryan Failed Because his Bill was a Dumpster Fire”

update: Ouch

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Complacency Or Community Commitment? Human And Social Capital Reconsidered

by Barkley Rosser (originally published at Econospeak)

Complacency Or Community Commitment? Human And Social Capital Reconsidered

I have been poking at Tyler Cowen’s recent book on The Complacent Class, along with those who have praised it unstintingly, with my main complaint being that what he calls complacency may really be fear.  In an exchange posted today between Tyler and Noah Smith at Bloomberg, Noah makes many of my points, saying that what people who are not moving or changing jobs are doing is seeking “safety and security,” with “complacency” sounding like “blithe optimism.” Tyler then admits that “many people are afraid,” but then says that they are still complacent because they are not reacting “with urgency.”  He also says that a lack of increased income volatility shows that they do not have reason to feel they are facing more risks than those in the past did, although it looks to me like the greater risks they face are more due to higher payments they must make for health or education rather than greater volatility of income.  But this is not what I want mostly to address here, at least further.

I wish to go back to the implications of people not quitting jobs and not moving as much as they used to. Rather than rerunning the fear versus complacency point, I want to think about how this relates to human and social capital accumulation.  In particular, I think  that while people may increase their individual human capital by moving around more, there may be an increase in social capital from people staying in one place more.  This greater social capital may result in more committing by people to the quality of their communities, more engagement in civic groups, and so  on.  It may be that the human capital part means that greater mobility improves economic growth, but this may be at the expense of better quality of life and other parts of economic growth associated with having high quality communities with high social capital.

Since I am setting up in effect a competition between human and social capital, I must admit that some of  the early work on these matters,  especially by sociologists like James Coleman and political scientists like Robert Putnam, initially argued that they were linked, that social capital enhances human capital.  Now I am not going to deny that. Certainly a person with a larger network of trusting acquaintances may be able to be more productive in their work and have essentially higher skills than someone who does not. Nevertheless, I am going to note how they may also be in conflict.

A crucial issue here involves externalities.  I  think that social capital involves and leads to more externatities than does human capital.  Or, even if I am wrong, they will involve different kinds of externalities.

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Variations on the Phillips Curve: unemployment and underemployment

by New Deal democrat

Variations on the Phillips Curve: unemployment and underemployment

This is part of a longer post I wanted to write, and if FRED didn’t play so poorly with iPad I would put it all up.  But, having finished with my cursing, let me put up a truncated version now and follow up with another one sometime in the next week.

This picks up on my post from several days ago in which I noted that a fuller explanation of the cycle of wage gains should take into account the labor force participation rate for prime age workers.  So I thought I would show the differences in how the Phillips Curve (the tradeoff between wages and unemployment) looks depending on how completely we look at it.

Let’s start with the unemployment rate (bottom scale) vs. YoY nonsupervisory wage growth (left scale) since the series started in the 1960s:

It’s pretty clear that there are two regimes, higher vs. lower wage growth (top vs. bottom).  And if you were looking for a clean relationship in which lower inflation equals higher wage growth, it ain’t there.

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Fifty Shades of Yellow? Post-Truth Then and Now

by Peter Dorman (originally published at Econospeak)

Fifty Shades of Yellow? Post-Truth Then and Now

Simon Wren-Lewis can’t take it anymore. I’ve just read his fulminations on the blatant dishonesty of right wing media outlets in the US and the UK, untethered to any residual professional attachment to standards of evidence and nakedly in the service of political ideologues. He’ll get no argument from me about that.

But I think his distinction between post-truth outlets and the other kind (pre-truth?) is much too clean. We won’t understand the new frontier of news/fiction unless we see what connects it to the rest of the media world.

A first hint appears in his discussion of the difference between UK and German media on the issue of immigration. The nativist tabloids in the UK bombarded its readership with several stories per day that dehumanized immigrants and presented them as threats to jobs, services and civil order, while their counterparts in Germany (e.g. Bild) had heartwarming portrayals of immigrants overcoming great odds to save themselves and their families. This is true; I saw it myself when I was in Germany during the runup to Merkel’s adoption of a Welcome Culture policy.

But this was also the period during which Greece, led by Syriza, faced off against Schäuble and his EU Wall of Nein. Here the ruling interests in Germany showed their other side, and the popular press was filled with made-up atrocities about the lazy, dishonest crew in Greece whose main purpose in life was to fleece the German taxpayer. (I posted here at the time about the false news, widely reported in Germany, that Syriza, financed by EU funds, had made rail travel free as a ploy to buy votes.) Obviously the probity of German journalism was selective.

And similar post-truth spasms have characterized media outlets in the English-speaking world ever since the advent of the printing press. These were in the service of fomenting war fever (the Spanish-American War, World War I, Vietnam, and Iraq, to mention examples from US history), demonizing labor organizers and civil rights activists or whatever cause needed a bit of extra buttressing.

If there is anything new, I think it might be on one of these fronts: (1) The doctrine that deceit and manipulation are virtuous in the service of the Cause, an element of fascism and Leninism alike, has now found a home in somewhat more mainstream ideologies on the right. A self-conscious defense of making stuff up increases its effectiveness, because embarrassment at being caught out is no longer a risk. (2) Post-truth is being deployed, to some extent, against the interests of the capitalist class, particularly as it attacks globalization. It is “out of control”, the figurative loose cannon on the deck of the battleship, rolling around and capable of firing in any direction. It needs to be domesticated again.

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What’s behind stalled nonsupervisory wage growth?

by New Deal democrat

What’s behind stalled nonsupervisory wage growth?

Wage growth for nonsupervisory workers nominally has been stuck in the +2.3% to +2.5% range (or worse) for three years.  Why?

Over the weekend I was cleaning out some old graphs, and came across this one from the Atlanta Fed, suggesting that the Phillips Curve (the tradeoff between unemployment and inflation) is very much alive, with the tweak that the amount of wage growth follows a decline in the unemployment rate with a one year lag:

The red line is the progression of the Phillips Curve since the beginning of 2011. The dotted line indicates that the Altanta Fed’s model was calling for a significant acceleration of wage growth between the spring of 2016 and spring this year.  [NOTE: all of the discussion in this post is about nominal, not inflation-adjusted wage growth, which has an awful lot to do with the volatility of gas prices.]

Except when we look at wages for nonsupervisory workers, that really hasn’t happened, at least not through February.  The below graph compares the YoY change in the unemployment rate (blue) and YoY wage growth for nonsupervisory workers (red):

As noted above, wage growth has been stuck at between 2.3% YoY and 2.5% YoY with some (mainly negative) exceptions since the end of 2013.

Using the U6 underemployment rate to capture the broader picture doesn’t change the outcome:

So, what’s going on?

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