Reports

Healthy Funding: Ensuring a Growing and Predictable Budget for National Institutes of Health

February 26, 2015
| Reports

The current budget and appropriations process coupled with a lack of consensus among policymakers on how to address our long-term fiscal challenges makes it seemingly impossible to deliver the level of funding for biomedical research that the American public overwhelmingly supports. This report reviews the implications of a reduced federal commitment to research funded by the National Institutes of Health (including a look beyond our shores) and then examines possible options for altering the budget process so that Congress can continue to invest in the nation’s biomedical leadership even as it makes progress on addressing broader fiscal challenges.

 Members on both sides of the aisle understand that the federal government has an essential role in funding biomedical research and often point with pride to the advances made and lives saved or improved on account of research undertaken by scientists in their home states. Government funding for biomedical research brings large health benefits. It also reduces the burden of fiscal debt both by reducing the long-term cost of medical care and by boosting economic growth.

There also seems to be a growing awareness that the failure to provide both growing resources and increased predictability has negative effects on the pace of medical breakthroughs and the strength of the U.S. biomedical industry. Several other nations have succeeded in making long-term public commitments to biomedical research, partly because of its importance in attracting private research.

Unfortunately, political battles over the broader federal budget have prevented legislators from translating this support into rising, or even stable, budgets. This has resulted in tremendous uncertainty about what NIH’s budget will be from year to year. Although there is a general willingness to increase the agency’s budget, members differ over whether any increases should be offset by cuts to other programs. As a result, policymakers should consider separating NIH’s budget from the broader deficit battles and implement a number of budget reforms that could provide NIH with greater resources and flexibility. These include:

  • Increase discretionary spending caps and ensure additional funding flows to NIH;
  • Provide NIH with permanent appropriations, limiting the agency’s exposure to annual budget battles;
  • Establish a biomedical research fund to supplement annual appropriations;
  • Remove NIH from the discretionary budget, making the program mandatory; or
  • Streamline regulatory processes to ensure efficient use of existing funding.

 

 

Cross-Border Data Flows Enable Growth in All Industries

February 24, 2015
| Reports

The importance of cross-border data flows is not confined to high-tech industries. Increasingly, firms in a wide array of industries, from mining and retail to finance and manufacturing, have operations, suppliers, or customers in more than one country and rely on the data that come from these other countries. The benefits of sharing data across borders are realized by consumers in a myriad of ways: from cheaper, safer, and more environmentally friendly products to personalized services. Unfortunately, many countries have begun creating policies that impede cross-border data flows. Such policies are likely to backfire and hurt these nations’ own domestic firms.

This report offers several examples of how cross-border data flows are vital to not only technical industries, but traditional industries as well. It argues that countries should avoid protectionist rules that limit data exchange across borders, such as data residency requirements that confine data to a nation’s borders. This report explains why protectionist data policies—whether they are intended to enhance security or privacy, or foster economic activity—tend to backfire in the long run.

Finally, this report recommends six ways to roll back anti-competitive trade practices for data:

  1. International organizations should develop mechanisms to track data-related localized barriers to trade, making it easier to quantify the economic impact of those measures.

  2. International organizations, such as the World Bank, should push pack against countries that create barriers to cross-border data flows.

  3. The United States could negotiate its trade agreements, such as the Trans-Pacific Partnership (TPP) agreement, to eliminate these barriers.

  4. The United States should use international forums, such as the World Trade Organization (WTO), to propose a treaty to reduce member states’ incentives to pursue data-related localized barriers to trade. This agreement could be called a “Data Services Agreement”.

  5. All future U.S. trade promotion authority legislation that the U.S. Congress produces should push back on data protectionism by directing U.S. negotiators to do so.

  6. The United States should engage its trading partners in a “Geneva Convention on the Status of Data” to resolve international questions of jurisdiction and transparency regarding the exchange of data.

Only by creating a global trade system that respects the free flow of data can countries fully realize the benefits of a data-driven economy.

A Policymaker's Guide to the GMO Controversies

February 23, 2015
| Reports

 

Crops and foods improved through biotechnology, popularly known as “GMOs” (for “genetically modified organisms”) remain at the center of a maelstrom of conflicting claims and assertions. This is evident throughout all media, but especially on the Internet. It is difficult for a layperson to make sense of it all, and this becomes even more important when the layperson is a government official in a position to make or influence policy decisions. Because bad information makes for bad policy choices we have prepared this report to provide some factual information, with abundant citations from independent third party authorities.
It always helps to consult the data, so we do that in order to examine several key questions that have been repeatedly visible in media of late. These include the economic benefits of GMOs, the U.S. rate of adoption of GMOs, the level of success of the labeling movement, the role of GMOs in affecting weeds and human health, and the sustainability of GMO-based agriculture. In all six cases we find overwhelming evidence for the economic, agricultural, environmental, and health benefits of GMOs.
Anyone who follows the news could be forgiven for believing that there is a genuine debate over the merits and safety of crops and foods derived through modern biotechnology. There is not. Scientists and farmers are virtually unanimous on the safety and desirability/effectiveness of crops improved through biotechnology. There is, however, definitely a controversy, one largely manufactured by a small handful of committed, anti-innovation advocacy groups using tried-and-true propaganda techniques to spread fear, uncertainty, and doubt about this important technology, aided by media coverage that is too often uninformed about science and agriculture. As with any campaign wanting to hold back technological innovation, the anti-GMO campaign is based both on ideology and vested interests. The ideological protestors simply reject modern technology in foods and want the world to return to a pre-industrial, pastoral system where farmers plowed with horses and reaped with scythes. In recent years, these professional protest industry’s opposition campaigns have been heavily aided by interests: in this case the organic food industry, a segment of which has openly adopted a strategy of spreading unjustified fears and disparagement of their competition. For if extremist elements of the organic industry can (despite all evidence) persuade consumers that GMO foods are harmful, the price of foods will not fall as much, providing less competition for high-priced organics. It is, therefore, worthwhile to dig a little deeper into some of the key issues of the controversy that have been featured prominently over the last year or so.

 

Crops and foods improved through biotechnology, popularly known as “GMOs” (for “genetically modified organisms”) remain at the center of a maelstrom of conflicting claims and assertions. This is evident throughout all media, but especially on the Internet. It is difficult for a layperson to make sense of it all, and this becomes even more important when the layperson is a government official in a position to make or influence policy decisions. Because bad information makes for bad policy choices we have prepared this report to provide some factual information, with abundant citations from independent third party authorities.

It always helps to consult the data, so we do that in order to examine several key questions that have been repeatedly visible in media of late. These include the economic benefits of GMOs, the U.S. rate of adoption of GMOs, the level of success of the labeling movement, the role of GMOs in affecting weeds and human health, and the sustainability of GMO-based agriculture. In all six cases we find overwhelming evidence for the economic, agricultural, environmental, and health benefits of GMOs.

Anyone who follows the news could be forgiven for believing that there is a genuine debate over the merits and safety of crops and foods derived through modern biotechnology. There is not. Scientists and farmers are virtually unanimous on the safety and desirability/effectiveness of crops improved through biotechnology. There is, however, definitely a controversy, one largely manufactured by a small handful of committed, anti-innovation advocacy groups using tried-and-true propaganda techniques to spread fear, uncertainty, and doubt about this important technology, aided by media coverage that is too often uninformed about science and agriculture. As with any campaign wanting to hold back technological innovation, the anti-GMO campaign is based both on ideology and vested interests. The ideological protestors simply reject modern technology in foods and want the world to return to a pre-industrial, pastoral system where farmers plowed with horses and reaped with scythes. In recent years, these professional protest industry’s opposition campaigns have been heavily aided by interests: in this case the organic food industry, a segment of which has openly adopted a strategy of spreading unjustified fears and disparagement of their competition. For if extremist elements of the organic industry can (despite all evidence) persuade consumers that GMO foods are harmful, the price of foods will not fall as much, providing less competition for high-priced organics. It is, therefore, worthwhile to dig a little deeper into some of the key issues of the controversy that have been featured prominently over the last year or so.

The False Claim That Inequality Rose During the Great Recession

February 17, 2015
| Reports

Income inequality has become a major topic of public concern lately, partly as a result of the release last year of Thomas Piketty’s best-selling book on inequality, Capital in the Twenty-First Century, and his writings with his colleague Berkeley economics Professor Emanuel Saez. In 2013, Saez claimed that 95 percent of growth during the recovery from the Great Recession went to the top one percent. Many commentators jumped on these results as a foreboding sign of what was to come in the future and called for a focus on redistribution, rather than growth policies. After all, if the rich are getting all the gains, why focus on overall economic growth?

However, the claim that income inequality grew following the Great Recession is nothing more than a statistical gimmick. In fact, Piketty’s own research shows that the “1 percenters” experienced the largest loss of income from 2007 to 2012.  A Congressional Budget Office report found that while the richest one percent of households saw their after-tax incomes decline by 27 percent from 2007 to 2011, the bottom 95 percent saw only one to two percent loss.

This report analyzes the data to provide a clearer picture on income inequality during the last eight years and argues, given these findings, that it would be a mistake to give up on pro-growth policies in favor of a predominant focus on redistribution. 

American Innovation Under Structural Erosion and Global Pressures

February 9, 2015
| Reports

For most of the postwar era, the United States has enjoyed superior leadership in innovation, whether measured by student skills, research and development spending, patents, or high-technology industry output. However, as Western European economies caught up with the global innovation frontier and Japan followed, this superiority began to erode. The U.S.-led IT revolution of the 1990s seemed to slow down this innovation convergence, but only until the bubble burst in the early 2000s. While America has recovered faster from the global financial crisis than other nations, structural trends in innovation convergence have not disappeared. On the contrary, the technological advancement of large emerging economies, such as China, has even more clearly delineated different nations’ impacts in global innovation.

In the absence of significant government investment in innovation (from both direct spending and tax incentives for business to invest more in innovation), the current budget sequestration is likely to pave the way for further relative decline in innovation with accompanying slower economic growth. It is not an inevitable scenario, however. The United States could once again lead in the race for global innovation advantage with an appropriate innovation strategy — one that’s credible, bipartisan and medium- to long-term in nature.

This report assesses the current state of the American innovation ecosystem, compares it to the systems of our top global competitors and argues that we need a comprehensive national innovation strategy, backed by significant government investment, to restore the United States to global leadership.

How and When Regulators Should Intervene

February 2, 2015
| Reports

Regulatory oversight keeps companies in check, promotes fair competition, and upholds consumer protections. However, regulators can also go too far and overzealously target companies acting in good faith. Such actions are not just unfair, but they also divert companies towards needless compliance at the expense of useful product advancements. Policymakers must get regulation right to protect competitiveness in the innovation economy. This report proposes a typology that regulators can use when evaluating which infractions should be pursued and what type of penalty should be administered based on a sliding scale of intent and resulting harm. The report argues that smaller penalties should result when consumers are not harmed and the company acts unintentionally, while larger penalties should result when consumers are harmed by a company’s actions and that company acted with intent. 

This sliding scale is represented by the following situations based on harm and intent. First, if a company makes a mistake and something happens that does not result in real consumer harm, then regulators should work to resolve the complaint, but not impose any penalties. Second, if an action is unintentional but results in real harm to consumers, then regulators should again work with the company to fix the problem but levy only a modest penalty against the company to mitigate the damage that resulted from the company’s mistake. Third, if a company intentionally commits an infraction that results in no harm, then regulators should not only work to resolve the problem, but also levy a modest penalty against the company to create an incentive against similar future infractions. Finally, if a company acts with intent, including negligence, and its actions harm consumers, then regulators should impose significant penalties. 

The report then analyzes four case studies involving past or possible Federal Trade Commission action against companies—including Amazon, Google, Path, and Uber—each corresponding to a square in the below table.

The Intellectual Basis of U.S. Trade Policy Trench Warfare

January 26, 2015
| Reports

At its core, trade policy is based in economics. And despite what many economists claim, economics is not a science. And, as with economics, intellectual approaches to the issue of trade differ substantially. These approaches reflect differences in economic doctrine among economists, policymakers and others. This paper postulates and describes three competing economic doctrines that shape the current U.S. trade debate: the predominant neoclassical doctrine (NC), the oppositional neo-Keynesian doctrine (NK), and the emerging innovation economics (IE) doctrine. The IE doctrine (IE) not only more accurately reflects the reality of the 21st century global innovation economy but offers the best opportunity for creating at least some actionable consensus on trade policy moving forward.

The three competing doctrines are:

1. The  Washington free trade consensus grounded in neoclassical economics: The NCs’ primary rationale for and defense of free trade is allocative efficiency, because it privileges this over all else. In this doctrine, free trade lets the global economy allocate production on the basis of nations’ inherent comparative advantage: the belief that countries all have an inherent advantage in some kind of production relative to others. Thus, because all trade is voluntary, no two parties will trade unless they can both improve their welfare, especially consumer welfare, by obtaining things for which they do have a comparative advantage. In this sense, nations do not compete with each other economically.  In addition, even one-sided trade (free trade by the U.S., mercantilist by others) increases U.S. welfare.  By definition then, measures that hinder trade (e.g., countervailing duties, anti-dumping duties, tariffs, non-tariff barriers, etc.) even if used to pressure mercantilist nations to adopt free trade measures reduce allocative efficiencies for both nations involved.

2. The protectionist impulse grounded in Neo-Keynesian economics: Because neo-Keynesians privilege worker, as opposed to consumer, welfare they are resistant to and skeptical of globalization and trade, especially with low-wage nations. Rising demand based on rising worker incomes drives growth and trade, especially with low-wage nations, and might lead to downward pressures on some wages and therefore limit opportunity. Thus, just as NCs will go to great lengths to deny any negative economy-wide impacts from trade, NKs will do the same with regard to the benefits of trade. NKs oppose virtually all new trade agreements, and prefer stronger labor and environmental standards for other nations, assuming that if corporate costs go up in other nations, American workers will benefit. Similarly, NKs oppose stronger enforcement of some kinds of trade rules against foreign mercantilism, especially if those rules (such as IP protection and investor protections) are designed to enable multinational companies in the United States to become more competitive.

3. The qualified free trade support grounded in Innovation Economics: Because IE’s see innovation as the key driver of growth, they embrace global trade in part because trade enables larger markets, which in turn help spur innovation in innovation-based industries with high fixed costs but relatively low marginal costs of production. For IEs nations competitive advantage must be created and constantly fought for.  As a result, they recognize that not all trading regimes, even if they maximize short-term U.S. consumer welfare, are structured in ways that boost productivity and innovation of firms in the United States. Indeed, some policies that improve consumer welfare (e.g., low currency values in foreign nations, export subsidies, etc.), are harmful to competitiveness, productivity and innovation. In a similar vein, IEs oppose policies such as weak intellectual property rights that might increase short-term consumer welfare but would harm innovation in the medium-term. In this sense, IEs see globalization and trade as a key tool for productivity and innovation, but only if the global trading system is structured in ways that limit mercantilist policies and if the United States embraces active national competitiveness policies.

In short, Washington’s trade policy debate is like World War I trench  warfare.  Both major sides (NC and NK) are committed to their  doctrinal views with neither side willing to give an inch for fear of total victory for the other side. Each side is sure that if they just speak more loudly they can prevail on the latest trade policy skirmish. But like an increasing number of other policy areas, this kind of Manichean thinking – the belief by NKs that trade and globalization is largely a force for ill and by NC’s that it is a brilliant and liberating force – serves to obscure reality and hold back progress.

To break this stalemate, the Keynesian left will have to once and for all embrace U.S. integration into global markets and accept “natural” loss from trade.  But the NC right and center will have to abandon their focus on short-term consumer welfare and their naive, textbook beliefs that markets are perfect, wonderful things without failure or political distortion. This will mean recognizing that nations compete; that trade can be negative sum; that if markets apply to goods and services, they also have to apply to currency; and that the only way to save the soul of the global trading system is to first risk going down the protectionist road – by taking aggressive trade enforcement actions in the service of pressing other nations to roll back their mercantilist regimes. And all sides will need to put their shoulder to the political wheel and advocate for a new national trade enforcement and competitiveness strategy that will enable enterprises in the United States to win in global competition.

The Limits of the Knowledge-Based Capital Framework

January 20, 2015
| Reports

Knowledge-based capital (KBC) investment refers to business spending on knowledge-related assets such as R&D, managerial competence, and advertising that incurs future returns for firms. However, many forms of KBC, or intangible capital as it is also known, have to date been absent from national economic accounting, and many advocate their inclusion as an important step toward a better understanding of our changing economy. Unfortunately, the KBC framework as currently conceived suffers from a number of fundamental problems: in particular, it wrongly assumes that that firms are rational investors, glossing over differences in returns to different types of capital, and it oversimplifies the aggregation of capital from the firm level to the national level. These issues need to be overcome before the KBC framework should be applied to economic theory and policy.

The KBC framework as currently promoted by its advocates suffers from two key challenges. First, by incorporating the neoclassical assumption that firms invest rationally in all capital with a positive net return, the framework effectively assumes that all classes of capital spending have the same return for firms and thus the same effect on economy-wide productivity. This assumption obscures more than it reveals. The inclusion of all forms of knowledge capital risks leading policymakers to give short shrift to certain kinds of physical capital, particularly ICT capital, that research has shown plays an outsized role in driving productivity and innovation. At the same time, the KBC framework overvalues whole classes of intangible investments that have little or no impact on growth, such as architectural designs, or that can actually destroy economic value, as we have seen in the case of investments in new financial products.

Second, the KBC framework assumes that the sum of benefits to firms from investments can be aggregated to national levels. There are a number of reasons why this may not be the case, particularly for intangible capital investments in things like advertising and brand development, in large part because much of the benefits are zero-sum in nature with one firm’s benefit coming at the expense of another.

In order to incorporate intangibles into national accounts in a more useful and accurate manner, the following changes should be made to the framework:

It should focus on the types of capital that do the most to drive productivity instead of making an artificial tangible/intangible distinction. Emphasizing KBC sends a misleading message to policymakers: that intangible capital is inherently good and tangible capital is in the “buggy whip” category. The right message, instead, is that investments must be understood first and foremost by the contribution they make to economy-wide productivity and innovation. This should be true regardless of their tangibility.  

In addition, more careful attention should be paid to the problems inherent in aggregating firm-level expenditures into national accounts, as intangibles present a particularly tricky problem due to the peculiarities of market structures. A more careful distinction needs to be made between positive- and zero-sum investments at the national level, and develop more robust estimates of the actual net value created. The value of advertising spending is particularly difficult to pin down objectively. As firms compete for a fixed supply of attention using theoretically costless information, the link between individual and aggregate benefit is elusive. As a concept KBC may be somewhat better linked to international competitiveness than to simple productivity comparisons.

Finally, additional adjustments to methodology should be made, including: finding more accurate ways of valuing human capital, reconciling important differences in international economic systems that can lead to distorted and misleading international comparisons, and including the value of prosumer capital.

Coase and WiFi: The Law and Economics of Unlicensed Spectrum

January 12, 2015
| Reports

In 1959, economist Ronald Coase argued for innovative and needed change to the system of spectrum allocation, challenging the prevailing “command and control” model in favor of one based on property rights and auctions. Today, many continue to not only rely on Coase’s insights to support spectrum auctions over command and control, but also invoke Coase’s writings as almost sacred texts opposing any use of spectrum for unlicensed purposes. We believe that this is an inappropriate reading of Coase and that his economic insights provide strong support for unlicensed, as well as licensed, spectrum. Indeed, Coase was primarily attacking a model of governmental command and control that was in dire need of modernizing. But Coase surely never intended his work to be used to support rigid and doctrinaire thinking about spectrum.

This paper examines the support for a new interpretation of Coase, concluding that a mix of both unlicensed and licensed spectrum is well grounded in Coase’s economic pragmatism. There is a wide range of possible ways to define rights in spectrum use; we should craft those rights in such a way that minimizes the costs of arranging the most socially beneficial outcome. Given the tremendous benefits of both licensed and unlicensed applications, we need a spectrum policy grounded in Coasean pragmatism, not Coasean doctrine. 

Policy makers should not take an overly-narrow focus on one particular type of efficiency (allocative efficiency) of one particular input (radio spectrum).  Using this to focus only on auctions gives short shrift to the obvious and growing value of unlicensed services all around us. Services utilizing unlicensed spectrum are valuable contributors to the economy and should not get short shrift based on misunderstood doctrine.

It is common to think of unlicensed as a gap-filler, as an efficient way to fill guard bands with low-power devices that are unlikely to cause interference to licensed services. While this can be a great opportunity to maximize the use of spectrum, offering up only narrow slices of spectrum is not what unlicensed services deserve. Policy makers should consider new, dedicated unlicensed bands where possible. 

The potential for economic growth through new unlicensed platforms, services, and devices is greatest when large, contiguous blocks of harmonized spectrum with simple service rules are available. Wherever possible, we should avoid creating specialized rules to protect particular incumbents from interference, allowing for simpler, cheaper equipment. All and all, this offers the best potential to maximize spectrum use, which is what professor Coase was really after.

The Myth of America’s Manufacturing Renaissance: The Real State of U.S. Manufacturing

January 12, 2015
| Reports

To listen to most pundits and commentators, U.S. manufacturing has turned a corner and is roaring back after the precipitous decline during the 2000s. Long gone are the dismal days when manufacturing jobs and output were lost due to foreign competition. Higher foreign labor costs, cheap oil and gas here at home and automation are combining to make America the new global manufacturing hub: at least according the now dominant narrative. Indeed, the term “manufacturing renaissance” is used to describe this new state of affairs.

However, as a new ITIF report shows, the data do not support such a rosy scenario.  In fact, at the end of 2013 (the most recent year available) real manufacturing value added (the best measure of the health of U.S. manufacturing) was still 3.2 percent below 2007 levels, despite GDP growth of 5.6 percent. Moreover, there are still two million fewer jobs and 15,000 fewer manufacturing establishments than there were in 2007. Much of the growth since 2010 appears to be caused by a cyclical recovery as demand, particularly for motor vehicles and other durable goods, returns. In fact, 72 percent of jobs gained and 187 percent of the heralded real value added growth in manufacturing between 2010 and 2013 came from transportation sector or primary and fabricated metals.

It is true that some jobs are being brought back to the United States. However, reshoring numbers are modest and the manufacturing sector is also still sending jobs overseas, roughly at the same rate. While this new equilibrium between companies coming and going is certainly an improvement over rapid off-shoring, it is hardly indicative of a renaissance.

At the end of the day, much of the renaissance story is based around several misconceptions about U.S. cost advantages, including incorrect assumptions surrounding Chinese wage growth and productivity, global shipping costs, the role of the U.S. dollar, the importance of the shale gas-driven energy boom, and American productivity growth. The pervasive belief that these factors will drive production back to the United States with little real assistance constrains the possibility of real legislative action to support American manufacturing. The report addresses and refutes the following misconceptions: 

Myth: China’s rising labor costs will soon match U.S. wage

Fact: Chinese wages, while rising rapidly, are still estimated to be just 12 percent of average U.S. wages in 2015. Chinese labor productivity growth and its infrastructure push to open the interior for production reduce the impact of Chinese wage growth.

Myth: Global shipping costs are unusually high, making it easier for the United States to produce more for U.S. and European markets.

Fact: Undersupply led to skyrocketing global shipping costs in 2008. However, today shipping costs are back to normal after falling by 93 percent in a six month period in 2009.

Myth: The Shale Gas boom gives U.S. manufacturing a substantial advantage

Fact: Reduced costs for shale energy has had an impact only on energy intensive industries, and then only a minor one. For 90 percent of the manufacturing sector, energy costs are lower than 5 percent of shipment value. The benefits are largely restricted to the petrochemical sector and drilling operations.

Myth: Currency fluctuations will fix the trade deficit

Fact: In the long-term, macroeconomic theory states that currency valuation should fix trade deficits. However, the United States has been running a trade deficit since 1975, and the trade imbalance is wider than ever. The dollar is currently at a comparable level to where it was during the 2000s, when job losses accelerated, and has proven unable to fix the United States’ persistent trade deficit.

Myth: Superior U.S. productivity growth will restore jobs

Fact: U.S. productivity is not increasing faster than that of other industrialized countries, and is growing much slower than China and South Korea.

In summary, to realistically assess U.S. manufacturing, it is important to have a clear idea of where we are. The debate on U.S. manufacturing should not be informed by anecdotal evidence, promotional consulting reports, or reports from think tanks with an agenda of keeping bad news from dampening support for further global integration. From an in depth analysis of available data on U.S. manufacturing workforce, value added, and productivity, U.S. manufacturing is shown to be in state of moderate, cyclical growth and not experiencing a renaissance.