Innovation, innovation, my kingdom for a nineteen million jobs creating innovation

Richard B. Freeman, Harvard and NBER Competitiveness, Job Creation, and Inequality Panel Georgetown Law Conference, Improving Economic Competitiveness and Innovation Capacity, Oct 11, 2011

This talk
1- Two views of the illness plaguing US economy 2- What innovative activity can/cannot do 3- Some policies to help spur innovation 4- The opportunity if we do it right

Cassandra/Jeremiah View: Sicker than you think

Even before Wall Street imploded, distorted economic growth: wage stagnation for vast bulk of workers; share of pretax income earned by top 0.1% increased from 2.7% to 12.3% (2007). Rest of upper 1% increased from 5.3% to 5.7%. Who are the 0.1%? Executives, managers, supervisors, Financial professions + real estate This means income of 99.9% of Americans would have increased by nearly 10% if share of 0.1% was constant.

US 93rd in 134 of Gini coefficients ranked from lowest to highest; compared to developing countries, US is in bottom 3rd of distribution; would be 20th of 35 in highly unequal Africa ( ie 19 countries had lower inequality).

Three years after finance disaster/bailout

Five years after? Seven years after?

? ?
Imagine how US people will react to another financial disaster? if next 20 years of economic growth ends up in the hands of small minority?

Alternative view: We can muddle through and restore the old financial/economic order and continue on road to Economic Feudalism

2. Can Innovation Come to rescue?

NO.
Analysis : Innovation measured by productivity change increases employment only if elasticity of product demand/labor demand is large >1 because need more output to balance saving on inputs. If skill-biased tech change caused rising inequality, more of it will cause more. Evidence: Productivity change by industry, firm, establishment is inversely related to growth of employment. Instead of adding jobs, firms/ establishments with fast productivity add pay and profits.

Do we know how to reduce inequality?

Yes.
When economic and social institutions help determine wages and benefits, inequality is less than when we rely solely on firms and markets. Unions and collective bargaining reduce inequality, especially when wages are set with strong employer associations. Government and non-profit sector enterprises have less inequality in wages and benefits Progressive taxes reduce inequality The form of pay stock options and other capitalrelated modes of compensation affects inequality.

Innovation must be judged on its own as improvement in long term productive capacity
When someone tells you that X, Y, or Z that makes them better off will create jobs, hold on to your wallet.

Repealing the Death Tax Would Create 1.5 Million Jobs

Special Tax Holiday for Us Will Create Jobs.

Every industry/group that wants policy favorable to it tells you it will create jobs. Every politician tells you the same. They sold NAFTA as job creating.

Basic facts on who innovates, 2006- 2008

(NSF Business R&D and Innovation survey for 2008, NSF 11-3000)

7% of US firms report creating new/significantly improved products: This is the sum of 67% of the 3% who do R&D and 7% of the 97% who do not do R&D 8% of US firms report creating new/significantly improved processes: This is the sum of 51% of the 3% who do R&D and 8% of the 97% who do not do R&D RD firms are much more innovative but most firms do not do R&D. Do non-R&D innovators use outcomes from R&D done elsewhere in their innovations? Are their innovations less important than the innovations of R&D firms? WE DO NOT KNOW. WE HAVE NO OBJECTIVE MEASURE OF INNOVATION. WE MEASURE PATENTS, R&D, PRODUCTIVITY but not INNOVATION ITSELF.

The type and locus of innovation matters for its impact

Process Innovation can spread widely, affecting all business practices. INTERNET, Computers, Bar codes Product Innovations can also spread widely. Cell phones, I-Pad etc. Some innovations have proven to be dangerous to our health. The financial implosion was brought to us by securitization, credit default swaps, that just a few years earlier were sold as eliminating risk.

Financial Innovations: Spreading risk or destruction?

Robert Shiller (New Financial Order): We have seen the development of vast varieties of new futures, options, swaps, new forms of mortgages and consumer credit these inventions really work, most of the time the risks to the individual business are blended into large international portfolios where they are diversified away to almost nothing among the ultimate bearers of the risk, the international investors. Alan Greenspan: As the market for credit default swaps expands and deepens, the collective knowledge held by market participants is exactly reflected in the prices of these derivative instruments. Warren Buffet (on credit default swaps): a financial instrument of mass destruction; George Soros: a license to kill.

Regulators Clamping Down on High-Speed Stock Trades October 9, 2011

Credit Default swaps in action, Christmas 2009

December 2009, YRC, the largest US trucking firm with over 30,000 truck drivers is close to bankruptcy. The firm owed $1.6 billion in loans and bonds for acquisitions. To survive, YRC had to convince bondholders to swap bonds for equity. Wall Street had issued CDSs against YRC bonds. Investors with CDSs who bought bonds and voted against restructuring would make more from the CDSs than they would lose from bankruptcy. Goldman-Sachs organizes bondholders with swaps to bankrupt the firm. Goldman changes tune, and YRC survives.

In the real economy innovation and geography of production has changed Olden days: North-South Model we do the science and innovation, make the products in US, then trade for low-skill old products from developing countries. Today: Science and innovation are cross-country
Over half of US Patents are to non-resident foreign born inventors US multinationals do much production overseas Immigrants create disproportionate # firms in US

Percent of S&E articles by region/country, 1998-2008 All Engineering

2011 National Medal of Technology and Innovation

Rakesh Agrawal(Purdue University) innovations in improving the energy efficiency and reducing the cost of gas liquefaction and separation. India, Delaware, MIT

B. Jayant Baliga (NC State) Insulated Gate Bipolar Transistor and other power semiconductor devices (India, RPI)
C. Donald Bateman (Honeywell) developing and championing critical flight-safety sensors (Canada, Saskatchewan) Yvonne C. Brill (RCA Astro Electronics), rocket propulsion systems for geosynchronous and communication satellites (Canada, USC) Michael F. Tompsett (TheraManager) design and development of the first charge-coupled device (CCD) imagers (UK, Cambridge)

3. Implications for Policy

1. International student and immigration policy are major part of innovation policy 2. Need to monitor overseas science and innovation help small and medium firms keep abreast of new developments 3. Cutbacks in science R& D can endanger innovation 4. Need to develop metric of innovation independently of patents and R&D

4. Opportunity: World has S&E workers, R&D, computer

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