Nitpicking @stevenljoyce reply 2 @TaxpayersUnion on corporate welfare @JordNZ

The best the Minister for Economic Development, Steven Joyce, could do in response to my recent report on corporate welfare was nit-picking. Joyce said my definition of corporate welfare was flawed and that spending on R&D will grow the economy. He said

“To brand things like tourism promotion and building cycle-ways as corporate welfare is, I think, creative but not accurate at all.”

Joyce also said my report was

just somebody picking out a whole bunch of government programmes that in many cases don’t involve payments to firms at all…

Those that do involve payments to firms are specifically designed to encourage the development for example of the business R&D industry. Politicians don’t choose them.

Payments in kind are business subsidies. R&D is so important to the economy that the last thing you want is its direction to be biased by funding from government. Bureaucrats have a conservative bias and do not fund oddballs and long shots. The oddballs and hippies in the picture below could only afford the photo because they won a radio competition in Arizona.

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The R&D expenditure that was criticised in my report was commercialisation, not basic research, which was specifically praised. Which research to commercialise is for entrepreneurs.

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There is no reason whatsoever to think bureaucrats administering R&D subsidy budgets set by politicians are any better than private entrepreneurs at picking the next big thing.

If bureaucrats were any good at picking winners, were any good at beating the market, they would go work for a hedge fund on an astronomically better salary package. The salary package of one top hedge fund manager exceeds the entire payroll budget of most New Zealand government departments including those administering R&D subsidies and other hand-outs.

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Government expenditure in vital areas such as innovation should be justified on the basis of cost-benefit ratios and a rationale for why bureaucrats have superior access to information about the entrepreneurial prospects of unproven technologies and product prototypes. 

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Subsidies should not be defended because of their popularity and sexiness as Mr Joyce did for the film industry, tourism promotion and ultra-fast broadband

If they told New Zealanders that in their view tourism promotion should be cancelled, the film industry should close down, that their shouldn’t be any ultra-fast broadband…I don’t think people would be that enamoured with it.

On irrigation funding, Mr. Joyce cited a report by NZIER that found irrigation contributes $2.2 billion to the economy. Irrigation is a private good which can funded by pricing it properly including the recovery of capital costs. There is no case for a subsidy.

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Public goods have spillovers, private goods such as water and irrigation do not. Users can fund the irrigation themselves buying as little or as much water as they are willing to pay out for out their own pockets. The NZIER report noted that it was not about the case for public funding:

… we are not able to quantify the environmental or social impacts if irrigation had never occurred. We also do not attempt to investigate the relative merits of public versus private sector funding of the schemes.

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The 8 types of creative destruction

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Share market capitalisation by marijuana industry sector

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Source: For These 55 Marijuana Companies, Every Day is 4/20.

R&D spending across the industrialised countries

https://www.facebook.com/FigureNZ/photos/pb.374053709279073.-2207520000.1449201572./1023753807642390/?type=3&theater

Should We Subsidize Scientific Research?

Recurrent business cycles without shocks – the role of lumpy investments

The brilliant monetary economist Scott Freeman was one of the 1st to show the existence of real business cycles without the need of shocks to drive the ups and downs of the economy. He did this when taking time off from showing that much of the apparent correlation between the nominal and the real side of the economy is due to the endogenous response of money created by banks to fluctuations in real activity.

In 1999, Scott Freeman co-wrote Endogenous Cycles and Growth with Indivisible Technological Developments. The paper was about large, discrete technological improvements that required the accumulation of research or infrastructural investment over time before any benefits for realised in terms of increased output. With these lead-times for research or infrastructure investments, growth paths display cyclical patterns even in the absence of any shocks.

This lumpiness over time implied that a costly process such as research or construction must be completed on a large scale before the greatest part of a project’s benefits in output can be realized as Freeman and co. argue:

There are numerous examples of big research or infrastructural projects that are characterized by huge investments and relatively long development periods, where most of the benefits occur only after the project is complete.

Freeman and his co-authors gave as examples space research and satellite programs and major medical research. These are examples of prolonged and costly R & D whose benefits come primarily at the conclusion of the project.

Lags in the development of a new drug between the commencement of the R&D project and any revenues received is routinely now more than a decade. The Human Genome Project seems to be going on without end with few initial benefits.

Infrastructural examples given by Freeman and his co-authors included the installation of telephone, the internet, transportation shipping canals, interregional highways, railroads, mass transit or electricity transmission projects. All of these projects with long lead times, once completed that may increase the productivity of many economic sectors in addition to increasing output in the area concerned. In many cases there are no benefits whatsoever of the project and to after it is completed many years in the future. Oil pipelines can take up to a decade to build.

The 1973 oil price crisis launched a research and development program into alternative sources of energy and alternative sources of oil and gas supply that has lasted to this day.

Classic further examples of long lead times are mega sports events such as the World Cup and Olympic Games. Years of planning, development and construction for any benefits or revenues are obtained.

What is important in terms of the random shocks that drive the business cycle as championed by Ed Prescott is there are a range of sectors within the economy where there are long lead times before the investment leads to any outputs. Not surprisingly the first article in the real business cycle literature included in its title “time to build“.

Rabah Arezki, Valerie Ramey, and Liugang Sheng in “News Shocks in Open Economies: Evidence from Giant Oil Discoveries” explore a related theme of real business cycles without shocks. In particular, they investigate news of productivity enhancements. They look at what happens to economies that discover oil. An oil discovery is a well identified “news shock.”

An oil discovery is well publicised and creates an incentive to invest in oil drilling. More importantly, there is news of greater income in the future but no change in current labour productivity or technological opportunities.

Rabah,Valerie, and Liugang  found that after big oil discoveries, during the period of investment, the newly rich oil country borrows from abroad to build oil wells, oil pipelines and associated port infrastructure, obviously, but also borrows to finance higher consumption now. Consumption goes up and stays up in permanent income hypothesis fashion.

Interestingly, employment declines because of the wealth effect from the future income but there is no higher productivity of labour to encourage more work today. Investment rises soon after the news of the oil discovery arrives, while GDP does not increase for 5 years or more.

This is consistent with experience in the oil-rich Arab countries where there was increased consumption of leisure in anticipation of high future income is based on oil.

The same happened in Norway where massive investment was funded by foreign borrowing  that led to annual current account deficits of up to 15% of GDP. Domestic savings fell away because Norwegians anticipated higher future incomes and started spending some of it now as predicted by the permanent income hypothesis. Norway now has a huge sovereign wealth fund able to fund a large part of its demographic burden from an ageing society.

After Mexico’s discovery of oil in the early 1970s, investment was high in oil and related industries. Consumption—by households and government—rose because of the increase in prospective real income.  Since real GDP was not yet high, Mexico  borrowed to pay for both the oil investment and the higher  current consumption. Mexico’s foreign debt increased from $3.5 billion or 9% of GDP in 1971 to $61 billion or 26% of GDP in 1981. This boom in consumption and investment occurred without any productivity shock. All that was required was the ability to borrow.

Once the oil comes on line, the economy concern exports oil and pays back debt. This is when GDP including oil production finally rises a good five years and often more after the oil discovery. Consumption continues for its previous high rates while investment falls as the oil wells and pipelines have been built.

As with Scott Freeman, the long lead times not only can lead to large swings in investment, lumpy investments can also lead to increases in consumption, savings and employment without any productivity shocks.

Keynesian macroeconomics postulated that the economy slips into recessions for all sorts of reasons such as shifts and turns in the animal spirits and a loss of consumer confidence leading to a fall in autonomous investment and autonomous consumption. A collapse in autonomous investment and autonomous consumption is the Keynesian explanation for the great depression.

Both Keynesian macroeconomics and real business cycle theories at least at the outset couldn’t explain why there were recessions. Both attributed to them to causes they were yet to explain.

Keynesian macroeconomics could not explain what drove the waves of optimism and pessimism that either sharply increased or reduced investment. At bottom, Keynesian macroeconomics makes an unjustified assumption that technological progress unfolds at a relatively smooth rate and it attributes volatility in the economy to fluctuations in investment unrelated to trends in productivity.

The  key inside of Keynesian macroeconomics was that inflation and unemployment were inversely correlated, so as one went up, the other went down as Milton Friedman explains.

Marvellously simple. A key that apparently unlocks the mystery of long-continued unemployment: inadequate autonomous spending or too low a propensity to consume. Increase either, or both, being careful simply not to go too far, and full employment could be attained.

What a wonderful prescription: for consumers, spend more out of your income, and your income will rise; for governments, spend more, and aggregate income will rise by a multiple of your additional spending; tax less, and consumers will spend more with the same result.

Though Keynes himself, and even more, his disciples, produced much more sophisticated and subtle versions of the theory, this simple version contains the essence of its great appeal to non-economists and especially governments.

A well-functioning economy should have no business cycles – no bouts of high inflation or persistent unemployment as Richard Rogerson explained:

So if there are cycles, that’s an indication of a malfunctioning economy. That idea permeated thinking for many years and was deeply ingrained. In effect, if an economy is in recession, someone should fix it.

The Keynesians only retreated as their empirical predictions were thoroughly discredited in the 1970s stagflation. Ad hoc auxiliary hypotheses were included about the supply-side in the Keynesian paradigm to prop up the old-time religion, not find new paths as Robert Barro put it:

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At least Prescott and other real business cycle theorists accepted that they must eventually unpack productivity drops and name causes that can be explored further to be found persuasive or perhaps wanting. They argued that periods of temporarily low output growth need not be market failures, but could follow from temporarily slow improvements in production technologies.

As research progressed, real business cycles were viewed as recurrent fluctuations in an economy’s incomes, products, and factor inputs—especially labour—due to changes in technology, tax rates and government spending, tastes, government regulation, terms of trade, and energy prices.

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Scott Freeman took this research further. He, his colleagues and his progeny showed that real business cycles can occur without any productivity rises and falls whatsoever. All that was needed was the ability to borrow and invest across time to finance lumpy investments. These lumpy investments can be anything from oil wells, dams to new drugs, anywhere involving time to build and capital accumulation:

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HT: The Grumpy Economist: Arezki, Ramey, and Sheng on news shocks.

EU/OECD averages on R&D spending

Which companies are the most innovative?

via The Bloomberg Innovation Index – Bloomberg Business.

Many forget how expensive the moon program was in the 60s and that it wasn’t popular!

…many people believe that Project Apollo was popular, probably because it garnered significant media attention, but the polls do not support a contention that Americans embraced the lunar landing mission.

Consistently throughout the 1960s a majority of Americans did not believe Apollo was worth the cost, with the one exception to this a poll taken at the time of the Apollo 11 lunar landing in July 1969.

And consistently throughout the decade 45-60 percent of Americans believed that the government was spending too much on space, indicative of a lack of commitment to the spaceflight agenda. These data do not support a contention that most people approved of Apollo and thought it important to explore space.

HT: Moondoggle: The Forgotten Opposition to the Apollo Program – The Atlantic.

Rise of private R&D and the fall of public R&D

via Corporate R&D Spending Offers Glimmer of Economic Hope – Bloomberg Business.

50% more R&D since the 60s, but still no growth dividend?

Spending on intellectual property products has risen in the USA from 1% in 1950 to 5% now. Public R&D spending in the USA has been pretty static for 60 years. Intellectual property products in the chart below includes traditional research and development, spending on computer software, and spending on entertainment such as movies, TV shows, books, and music. Spending on software and entertainment was only recently measured in the US national accounts. This inclusion of intangible capital investments will radically change the story of economic growth and the business cycle in the 20th century.

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Source: Chad Jones (2015).

The growth rate in the USA hasn’t changed much despite this massive increase in intellectual property property product production. Is innovation getting harder? R&D is supposed to boost the growth rate, if you are to believe politicians bearing subsidies for it wherever they find it.

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Source: Chad Jones (2015).

Ben Jones in The Burden of Knowledge and the Death of the Renaissance Man: Is Innovation Getting Harder? found that as knowledge accumulates as technology advances, successive generations of innovators may face an increasing educational burden. Innovators can compensate through lengthening their time in education and narrowing expertise, but these responses come at the cost of reducing individual innovative capacities. This has implications for the organization of innovative activity – a greater reliance on teamwork – and has negative implications for economic growth.

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This longer period of education and initial study is not compensated by inventors innovating for longer spans of their lifestyle. This rising burden of knowledge is cutting into their best years of their lives. Jones found a broad and dramatic declines in early life-cycle productivity among great minds and ordinary inventors, and a close relationship  of these trends with increased training duration.

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Jones found that the age at first invention, specialisation, and teamwork increased over time in a large micro-data set of inventors. Upward trends in academic collaboration and lengthening doctorates can also be explained in his framework of innovation getting harder because of a rising burden of knowledge. Co-authorship in academic literature has increased, including physics, biology, chemistry, mathematics, psychology, and economics. This measure of teamwork has increased 17% per decade.

Using data on Nobel Prize winners, Jones found that the mean age at which the innovations are produced to win the Prize has increased by 6 years over the 20th Century.

  • Before 1901, two-thirds of the Nobel laureates did their prize-winning work before the age of 40 and 20 per cent did it before age of 30.
  • By 2000, however, great achievements seldom occurred before the age of 40.

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It’s now taking longer for scientists to get their basic training and start their careers. There is simply more to learn because knowledge in all fields has grown by quantum leaps in the past century. Nobels are being handed out for different types of work than a century ago.

  • There has been a trend away from awarding prizes for abstract, theoretical ideas.
  • Now more honours are being bestowed on people who have made discoveries through painstaking lab work and experimentation – which takes a lot of time to do.

Jones’ theory provides an explanation for why productivity growth rates did not accelerate through the 20th century despite an enormous expansion in collective research effort and levels of education and many more graduates. Innovation is getting harder?

Moondoggle: The Forgotten Opposition to the Apollo Program – The Atlantic

SpaceRace.jpg

…many people believe that Project Apollo was popular, probably because it garnered significant media attention, but the polls do not support a contention that Americans embraced the lunar landing mission.

Consistently throughout the 1960s a majority of Americans did not believe Apollo was worth the cost, with the one exception to this a poll taken at the time of the Apollo 11 lunar landing in July 1969.

And consistently throughout the decade 45-60 percent of Americans believed that the government was spending too much onspace, indicative of a lack of commitment to the spaceflight agenda. These data do not support a contention that most people approved of Apollo and thought it important to explore space.

HT: Moondoggle: The Forgotten Opposition to the Apollo Program – The Atlantic.

On the need to quantify and take advice from consultants

 - Dilbert by Scott Adams

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On the role of R&D and boffins in lab coats in the Industrial Revolution

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R&D tax incentives: New evidence on trends and effectiveness | VOX, CEPR’s Policy Portal

Figure 1: No relation between a country’s innovativeness and R&D tax credits

Figure 2. Proliferation of R&D tax credits in Europe

via R&D tax incentives: New evidence on trends and effectiveness | VOX, CEPR’s Policy Portal.

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