May employment

The economy grew by 217,000 job in May while the unemployment rate remained at 6.3%, according to data released this morning from BLS. This was slightly better than economists’ expectation of between 210,000 and 215,000 new jobs.
The other good news is that the number of involuntary underemployed (part time for economic reasons) declined in May. Both the number of those who could only find part time work and number of workers part time because of slack work declined. Slack work has been generally declining since its peak in March 2009 – which signals continued economic demand. (Note: that this refers to worker who can only find part-time work because of slack demand — not the same as Fed Chair Yellen’s comments about slack in the labor market which includes unemployed, underemployed and currently out of the workforce). The total involuntary underemployment remains well above pre-Great Recession levels. This constitutes a continued waste of human capital.
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April trade in intangibles

In a reversal from last month’s good news, this morning’s trade data from BEA shows the deficit widening by $3 billion to $47.2 billion from the revised figure of $44.2 billion for March. Imports were up and exports down. And the bad news could not be blamed on oil imports as the deficit in petroleum good declined slightly. Economists had expected a much smaller deficit. (Note the data contains revised figures going back to 1999.)
The somewhat good news is that our trade surplus in pure intangibles continued to improve, slightly. The April surplus increased by $215 million to $16.2 billion. (Note that this revised data shows the March improvement was not as large as previously reported). Royalty receipts (exports),royalty payments (imports), business service exports and business service imports all increased – with exports growing faster than imports.
The really bad news is the huge jump in our Advanced Technology deficit – which grew from $3.9 billion in March to almost $8.4 billion in April. The increase was due to an increase in imports and a drop in exports in information and communications technology and life sciences combined with a drop in aerospace technology exports.
Advanced Technology goods also represent trade in intangibles. These goods are competitive because their value is based on knowledge and other intangibles. While not a perfect measure, Advanced Technology goods serve as an approximation of our trade in embedded intangibles. Adding the pure and embedded intangibles shows an overall surplus of approximately $7.8 billion in April, down from $12.2 billion in March.
Note that the BEA has revised its categories of services trade. I will begin reporting trade in intangibles using the new categories next month.
Intangibles trade-Apr14.png
Intangibles and goods-Apr14.png
Oil goods intangibles-Apr14.png

Note: we define trade in intangibles as the sum of “royalties and license fees” and “other private services”. The BEA/Census Bureau definitions of those categories are as follows:

Royalties and License Fees – Transactions with foreign residents involving intangible assets and proprietary rights, such as the use of patents, techniques, processes, formulas, designs, know-how, trademarks, copyrights, franchises, and manufacturing rights. The term “royalties” generally refers to payments for the utilization of copyrights or trademarks, and the term “license fees” generally refers to payments for the use of patents or industrial processes.

Other Private Services – Transactions with affiliated foreigners, for which no identification by type is available, and of transactions with unaffiliated foreigners. (The term “affiliated” refers to a direct investment relationship, which exists when a U.S. person has ownership or control, directly or indirectly, of 10 percent or more of a foreign business enterprise’s voting securities or the equivalent, or when a foreign person has a similar interest in a U.S. enterprise.) Transactions with unaffiliated foreigners consist of education services; financial services (includes commissions and other transactions fees associated with the purchase and sale of securities and noninterest income of banks, and excludes investment income); insurance services; telecommunications services (includes transmission services and value-added services); and business, professional, and technical services. Included in the last group are advertising services; computer and data processing services; database and other information services; research, development, and testing services; management, consulting, and public relations services; legal services; construction, engineering, architectural, and mining services; industrial engineering services; installation, maintenance, and repair of equipment; and other services, including medical services and film and tape rentals.

A look at a new book on Creating a Learning Society

It is hard to tell whether “Pikettymania” (including the little dust up over data) has peaked now that he has been on the Colbert Report (see my earlier post on the best reviews of his work). But the real debate over what to do about inequality is just heating up. Most believe that Piketty’s proposal for a global wealth tax is a non-starter. There is little agreement as to what, if anything, should be done.
In part, the “if anything” view still remains strong. Inequality is still seen by many as the price of growth. Earlier I noted this argument that inequality is necessary for economic growth falls by the wayside when considered from an intangible capital perspective. If you believe, as I do, that intangibles are the drivers of economic growth, then anything that undercuts and destroys the value of those assets undermines economic growth. Inequality undermines human capital development by reducing access to education for all. Inequality undercuts strategic capital by reducing entrepreneurship and risk taking. It destroys relationship capital by undermining the trust necessary for a market economy to work. Finally, inequality undercuts social capital by increasing political instability and uncertainly.
If this is true, then can growth and equality be pursued simultaneously? The growth side of this topic is explored in more depth in a new book by Joe Stiglitz and Bruce Greenwald called Creating a Learning Society: A New Approach to Growth, Development, and Social Progress (Amazon or Columbia University Press). The book is an extension of the Kenneth J. Arrow Lecture Series at Columbia University and builds upon the growth theory of Kenneth Arrow and Robert Solow. Note that the subtitle of the book includes both “growth” and “social progress.” In an earlier book (The Price of Inequality: How Today’s Divided Society Endangers Our Future), Stiglitz clearly states his belief that inequality hurts economic growth.
Creating a Learning Society lays out the case that economic growth is no longer a question of efficient allocation of resources, specifically labor and capital (aka static efficiency) but the creation, dissemination and utilization of knowledge (aka innovation).

In the first few chapter of this book, we lay out our basic theses: that most of the increases in standards of living are, as Solow suggests, a result of increases in productivity–learning how to do things better. And if it is true that productivity is the result of learning and that productivity increases (learning) are endogenous, then a focal point of policy ought to be increasing learning within the economy; that is, increasing the ability and the incentives to learn, and learning how to learn, and then closing the knowledge gaps that separate the most productive firms in the economy from the rest. Therefore, creating a learning society should be one of the major objectives of economic policy. If a learning society is created , a more productive economy will emerge and standards of living will increase. By contrast, we show that many of the policies focusing on static (allocative) efficiency may in fact impede learning and that alternative policies may lead to higher long-term living standards. Thus, the theory we develop provides one of the most compelling and fully articulated critiques of the Washington consensus policies that dominated development thinking in the quarter century before the Great Recession.

As Stiglitz and Greenwald stress:

All of this highlights that one of the objectives of economic policy should be to create economic policies and structures that enhance both learning and learning spillovers; creating a learning society is more likely to increase standards of living than is making small one time improvements in economic efficiency or sacrificing consumption today to deepen capital.

The generic policy prescriptions that flow from their conclusions concern the role of government.

If learning, and R&D more generally, is at the center of the success of an economy, and if there is no presumption that markets are efficient in making decision which affect the pace of learning (or R&D), then the longstanding presumptions against government intervention are simply wrong.
. . .
our concern is that some of these classical policy prescriptions, thought well-intentioned, may actually lead to a reduction in the rate of progress of societies and a deterioration in ling-run societal well-being. In the attempt to improve the static efficiency of the economy, learning may be impeded.

Using a twist on the market failure argument, they argue that the case for government intervention rests on the need to promote positive outcome rather than simply prevent negative ones.

The production of knowledge entails positive externalities . . .
the private sector typically produces too little goods that give rise to positive externalities. To correct this market distortion requires some form of government intervention.

But the government interventions to create positive externalities are more complex.

If there are market failures in learning, then the market failures are pervasive in the economy. They are diffuse. More pervasive governmental interventions are required to correct them.

Much of the book subjects a variety of areas (trade policy, intellectual property, competition policy/anti-trust, financial policy and investment) to this lens of “does this policy promote learning? As an example, the authors reconfigure the infant industry case for limited trade protection. The traditional argument states that an industry need limited projection in order to grow strong enough, with economics of scale, to compete on the world market. The new argument calls for policies that protect where there are knowledge spillovers to the entire economy.
While I’m not convinced about all the policy prescription in this book, I heartily agree with the notion of subjecting economic policies to the test of whether they promote broad economic learning (and not just narrow knowledge creation). Such a test would greatly improve the changes of a positive outcome of our policy proposals.