Tag: innovation

The Boy Who Cried Wolf Was Eventually Right

“We are reaching end times for Western affluence,” warns economist Stephen King (insert obligatory horror joke here) in yesterday’s New York Times. King, who has authored a book entitled When the Money Runs Out: The End of Western Affluence, joins the ranks of economic Cassandras like Tyler Cowen and Robert Gordon, both of whom have made waves with pessimistic takes on the U.S. economy’s prospects. Like Cowen and Gordon, King couches his claims in overstatements that make it easier for skeptical readers to dismiss his arguments. Peel away the hype, though, and these growth pessmists are still fundamentally correct. The wolf really is at the door this time. In other words, the growth outlook really is darkening.

Cowen put the hype right in the title of his attention-getting book: The Great Stagnation, his term for the past 40 years or so. Of course, real GDP per capita has nearly doubled since 1973, so stagnation is obviously an inapt term. It’s true that productivity growth and growth in median incomes have slowed down, but The Moderate Slowdown is a pretty boring book title. Meanwhile, Gordon saw Cowen and raised him with the highly provocative and speculative argument that technological progress is largely exhausted and, therefore, the 250-year era of modern economic growth is winding down. You don’t have to be Raymond Kurzweil to find that contention unpersuasive.

Now King warns that Western affluence is coming to an end. Well it’s not: even if all growth stopped tomorrow, today’s advanced economies are affluent beyond the wildest dreams of yesteryear.

Push past the hype, though, and Cowen, Gordon, and King are making a point that really needs to be more widely understood: growth is getting harder for the U.S. economy, and there are strong reasons for thinking that growth rates over the next decade or two will fall short of the long-term U.S. historical average. As I explain in a new Cato paper released today, you don’t have to be a pessimist about the future of innovation to be pessimistic about the U.S. economy’s medium-term growth outlook. The main source of weakness lies in demographics: the 20th century saw big increases in both the percentage of the population in the workforce (thanks to the changing role of women in society) and the overall skill level of the workforce (thanks to a huge increase in formal schooling). The rise in schooling has slowed down considerably since 1980, and the labor force participation rate has actually been falling since 2000 (it’s now back to where it was in 1979). What were tailwinds for growth have turned into headwinds.

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ObamaCare’s False Promise of Cost Savings: ACO Edition

One of ObamaCare’s selling points was that it would supposedly reduce costs through such innovations as “accountable care organizations” or ACOs. I have explained how ACOs are an innovation with many benefits, how markets developed ACOs decades before the government’s central planners caught on, and have predicted that ObamaCare’s centrally planned ACO program would fail to deliver on the promised savings. The reason is simple, and explained by industry expert Robert Laszewski:

Here’s a flash for the policy wonks pushing ACOs. They only work if the provider gets paid less for the same patient population. Why would they be dumb enough to voluntarily accept that outcome?

Turns out, health care providers are not that dumb. They have threatened to bolt ObamaCare’s ACO program in the past, and are doing so again [$] if Medicare tries to cut their pay:

One of CMS’ highest profile health care delivery reform initiatives is on rocky ground as most of the Pioneer ACOs are threatening to drop out of the demonstration if CMS makes them start meeting quality measures instead of merely requiring that they report the measures, according to a letter [$] obtained by Inside Health Policy…The Pioneer ACOs were supposed to be the few shining examples of organizations that could handle outcomes-based pay…

CMS often touts the high level of participation in ACOs, and it would seem that CMS has too much at stake to ignore the Pioneers’ requests and let the demo implode, a health care consultant says. However, it’s difficult to believe that this is the first time that the ACOs have brought these concerns to CMS – some innovation center officials come from the very organizations in the Pioneer demo – all of which indicates that negotiations have not gone well with the agency, the sources say. CMS could make changes to the quality metrics without announcing them in the Federal Register because the Pioneer ACOs are a demonstration, but the cat is out of the bag now, the sources note.

The Pioneer ACOs account for a little more than 30 of the some 250 ACOs in Medicare, and the Pioneers are supposed to be the most advanced, integrated systems of them all.

And thus ObamaCare’s false promise of cost savings comes into sharper focus. File this one under “markets are smart, government is stupid.”

This Month’s Cato Unbound: The Online Education Revolution

As Joseph Schumpeter famously wrote, markets are agents of “creative destruction”: when market forces are free to operate, and when entrepreneurs are free to act on their ideas, the old must often give way to the new.

Innovation and cultural dynamism are the hallmarks of a free economy. This state of constant flux is to our way of thinking a welcome and valued thing. Only an economy that is constantly in transition can hope to approximate the changing needs and wants of a robust and flourishing society.

Our love of dynamism is one reason why libertarians aren’t really conservatives, and why we might even wish that we could claim the label “progressive” for ourselves—if it hadn’t been taken, long ago, by individuals whose beliefs differ sharply from our own.

At Cato Unbound this month we are discussing what may prove to be a remarkable example of creative destruction. Within the last few years, Massive Online Open Courses—MOOCs, for short—have become one of the most important trends in higher education. As our lead essayist Alex Tabarrok argues, traditional higher education hasn’t changed substantially for centuries. Yet there is no good reason why this should be, not with all of the new information technology that the market has put at our disposal.

Together with his colleague Tyler Cowen, Tabarrok has founded Marginal Revolution University, which is planned as a growing series of free, online courses that anyone can take. The lectures are brief, watchable on your own schedule, viewable on mobile devices, and replayable. You can ask questions of the professors and receive detailed, personalized feedback. You can study in a group or entirely on your own, and students are invited to create supplemental videos that might be included in future class sessions.

MR University, as it’s called for short, hopes to deliver flexible, inexpensive higher education to the masses, in a way that Oxford, Cambridge, and Harvard—for all their tradition—never could. And it’s just one small player in a burgeoning new educational sector. So how should educators and policymakers think about these developments?

To answer that question, we have recruited a panel of distinguished commentators: Siva Vaidhyanathan is the Robertson Professor in Media Studies and Chair of the Department of Media Studies at the University of Virginia; Alan Ryan is the former Warden of New College, Oxford, and a frequent commentator on developments in liberal education; and Kevin Carey is director of the education policy program at the New America Foundation.

As always, Cato Unbound readers are encouraged to take up our themes, and enter into the conversation on their own websites and blogs, or on other venues. We also welcome your letters. Send them to jkuznicki at cato dot org. Selections may be published at the editors’ option.

Economic Lessons from Obituaries

Where is the best place in the newspaper to learn about how the economy works?

In today’s Washington Post the business section has the usual stories about Ben Bernanke’s manipulations, government debt, and regulatory issues. But there is little on the innovation and dynamism that is at the heart of long-run economic growth.

It is entrepreneurs who create growth, and they are often best covered in the obituary section of the paper. Today the WaPo has a Bloomberg story about the passing of Albert Ueltschi, “who founded aviation-training company FlightSafety in 1951 [and] expanded it into an international powerhouse.”

Here are a few highlights:

As pilot of Pan American’s first corporate plane … Ueltschi hit upon the idea of opening a testing and training center for the booming aviation industry in the 1950s.

That company today is FlightSafety International Inc., which bills itself as the world’s leading aviation-training company, teaching pilots, aviation mechanics, flight attendants, dispatchers and others each year.

After graduating from high school in 1934, he opened a hamburger stand and used the proceeds to take flying lessons. A year later he borrowed $3,500 to buy an open-cockpit bi-wing airplane, the Waco 10, and made it his next business venture. “I took people up for a dollar a hop, gave lessons, and even put on air shows.”

[I]n 1951, Ueltschi borrowed $15,000 by mortgaging his house and opened FlightSafety at LaGuardia’s Marine Air Terminal.

In subsequent years, Mr. Ueltschi worked his tail off juggling two jobs and building what would become a multibillion part of the U.S. economy. The government did not build FlightSafety. Nor did the government build the thousands of other firms and industries that comprise the bulk of the U.S. economy, such as the electric guitar industry, as I discuss here.

To revive the economy, we need fewer central planners like Ben Bernanke and more decentralized business-builders like Albert Ueltschi. We need more firms like FlightSafety and less like Solyndra. Both candidates for president are promising to create jobs, but what we really need is for the government to get out of way of the people who create companies and industries.

A Few Notes:

Here’s a brief history of FlightSafety and pilot training. As in some other tech industries, it appears that the government helped to boost the demand for this industry’s services. But the basic innovations and advancements were made by gutsy individuals taking risks in the marketplace.

A final note is that the Washington Post does run some articles on live entrepreneurs, not just deceased ones. For example, Thomas Heath’s column is often very interesting and inspiring.

Why Are There No Googles or Apples in Education?

Invent a better way to search the Web and you can conquer the world in a few years. Make better tools for communicating and accessing the Web and it’s the same story. But come up with a better way to teach reading or math and … nada. Excellence routinely “scales up” in every field except education. Why?

Read on … “Education’s Missing Apple: The Free Enterprise Solution?”

But Don’t We Really Need Government Research?

It’s a valuable public good, research is, isn’t it? Think of where we’d be without it! I mean, it was government research that came up with the Internet, for heaven sake.

That’s a response to the argument I made last week against government funding of scientific research. Moving away from public funding of scientific research would solve the problem of private companies capturing publication spoils from research that taxpayers funded.

The Defense Advanced Research Projects Agency did indeed come up with and popularize the protocol called TCP/IP, which the Internet uses. (Everyone’s use of the protocol really makes the Internet what it is, of course, but nevermind that.)

To take the Internet as proof that the government is a necessary producer of research and innovation, you have to reject the scientific method. Unfortunately, there are rarely controls in public policy. We can’t find out what would have happened if government policy had taken a different course, so we don’t know anything more about who should fund research from the fact that government-funded research has produced good things in the past.

But what would have happened if U.S. public policy had taken a different course? I’ve thought about the impossible-to-answer question of where we would have been without DARPA and other government influences on telecom. What most people don’t consider, I believe, is the restraining influence the government-granted AT&T monopoly had on telecommunications for most of the 20th century. AT&T developed a “Teletypewriter Exchange” system in 1931, for example, but had no need to develop it, there being little or no competitive pressure to do so. (Its patent on attaching devices to phone wires undoubtedly helped as well, preventing anyone using AT&T’s wires for modem service.)

Had there been competition, I suspect that someone would have come up with the idea of packet-switched networks—that’s what the Internet is—before Leonard Kleinrock did in 1962. Kleinrock was a student at MIT—he wasn’t at DARPA, which didn’t get into packet-switching until about 1966. (Then again, MIT was almost certainly awash in government money—specifically military money—so there you go. Maybe we owe all the good things we’ve got to war, but I doubt it.)

My guess—and it’s only that—is that we would have had the Internet some decades earlier if not for government interventions in telecommunications. We probably would have had multiple, competing “Internets,” actually, adopted more slowly than the Internet we got. (In a chapter of Privacy in America: Interdisciplinary Perspectives, I explored how government has accelerated the development of computing and communications, overpowering society’s capacity to adjust, with negative consequences for privacy.)

Support for government-funded research requires one to elide opportunity costs, the things foregone when one thing is chosen. As I said before, tradeoffs are ineluctable: Money spent on government research takes away from private research, or from other priorities such as reducing debt. In the absence of taxation to support research, the money would go to the public’s priorities as determined directly by the public in manifold spending and investing decision. Taxation and spending on government research is merely the substitution of centralized, political decision-making for a distributed, direct decision-making system. Its supporters are generally going to be beneficiaries of that system—elites, in short.

Even these beneficiaries of the status quo tend to agree that political decisions about funding for scientific research are warped. The solution to that problem, they’ll say, is fixing the political system—that is, creating a political system that is not so political.

Such a breakthrough is as unlikely as the invention of water that is not wet. Perhaps we can put DARPA on both projects.

To Spur Technology Innovation, Stop Pulling on the Rope

I spent the morning at The Atlantic’s Washington Ideas Forum. Before the big names were to do their spiels during the afternoon today and tomorrow morning, there were a series of breakout sessions, among which was one on “Technology Innovation.”

Our suggested “points to ponder” were:

  1. Can our nation regain our competitive edge through innovation?
  2. Will our knowledge and information-based workforce continue to offer cutting-edge technologies to improve the way we live and work?
  3. What measures can we implement to foster creativity and encourage companies to grow intelligently? and
  4. Will the paradigm of how people work, think and communicate be meaningfully transformed as a result of technology? Or is this another short-term trend, with no long term changes?

At least one of the other participants thought the summary of the discussion I gave in the latter half was pretty good, so I’ll share my takeaway here roughly as I did there—maybe sounding just a little more “Cato-y” here.

First, note the conspicuous use of collective pronouns in the first three discussion points. They obscure the goals and actors quite nicely, summarizing to: There is an undefined group out there that we want to have do an undefined set of things amounting to innovation.

I was reminded of the metaphor for spurring economic progress (if I recall, and I don’t recall where I first heard it): Spurring economic progress is like pushing a rope. You really can’t do it. Someone has to pull it, and the job of policymakers is simply to not pull on the wrong end.

In our brainstormy session, the ideas generally focused on pushing our end of the rope. “We” need more basic research and R&D. “We” need more and better education in science and technology. “We” need more inspired leadership, the spur of a new Sputnik.

These things are all probably inputs to innovation in some sense. None of them, I don’t think, will produce innovation as a matter of course. And nobody knows where to direct these efforts so that they do produce innovation.

A few other ideas emerged, ways that public policy can stop pulling on the rope. One was letting immigrants stay in this country—particularly the ones who have just earned advanced degrees—and welcoming them to stay. Another one was reducing the role of patent strategy in tech-business decision-making. Patents seem no longer to be primarily a spur to innovation, but a strategic arsenal used offensively or defensively by tech giants. A third idea that nearly surfaced was tax cuts, but its author in the conversation pivoted from what other countries are doing with tax policy to “national competitiveness,” never actually saying that U.S. tax cuts would spur business activity and innovation.

Arriving back at the office, I chanced to come across some thinking that would have contributed mightily to the discussion: NYU professor of economics Bill Easterly talking about the relationship of individual rights to economic growth, development, and innovation:

[I]ndividual rights is also a way to mobilize all the knowledge in society that we need to make the economy work. It’s the individual that has the particular knowledge so that they know how to run their factory, to employ people, to be a worker themselves, to start new businesses.

We’ll talk later about examples—like the guy in Rwanda, who stumbled upon a very unexpected success. He figured out—this is not something anybody would have predicted—that Rwanda could prosper by exporting gourmet coffee, which you can find in New York’s best coffee shops.

One reason that worked so well for Rwanda, is they have a tremendous infrastructure problem. It’s very hard to get heavy stuff shipped abroad because they are landlocked, they’re surrounded by countries with lousy roads, lousy ports. But gourmet coffee is something that you can create with lots of labor, which Rwanda does have a lot of, and it has very high value-to-weight ratio. So you just put it on the airplane, and ship it to New York.

So, there was no expert economist that flew in and told Paul Kagame, the autocrat of Rwanda, “Here’s the plan: Identify gourmet coffee as the growth industry worldwide. That’s the recipe.” None of that happened.

These successes are always a surprise. That’s why the expert top-down plan doesn’t work. You need the entrepreneur, you need the consumer, you need the market feedback, you need the democratic feedback, and all of this is built on this large edifice at the bottom of individual rights.

Defend people’s rights to own and use their property, however they might imagine to do that, then watch them deliver their surprises. That’s innovation policy. Stop pulling on the rope.

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