Doctors Remove Bullet From Victims Head


Washington is the mecca for people across the country and around the world who have difficulty seeing the obvious. The economy tanked because the country had a huge housing bubble that burst. The collapse sent the economy into a long and severe recession because there was nothing that could replace the $1.4 trillion in annual demand that was generated by the housing bubble.

In the absence of a stimulus program that was 2-3 times the size of the one President Obama put forward and considerably longer lasting, the economy was doomed to a prolonged period of unemployment. None of this is 20-20 hindsight; some of us said it repeatedly as clearly as possible in advance.

Nanaturally, in Washington, when events turn out exactly as predicted, leading policy wonks turn to alternative explanations. Hence we have?Innovation Economics: The Race for Global Advantage?(Yale University Press) a new book from Robert Atkinson and Stephen Ezell of the Information Technology and Innovation Foundation.

There is much here that is annoying and some that is useful and interesting. Being annoyed, I will start with the former. The basic story of the U.S. macro economy over the last 15 years is pretty straightforward. We have an economy that was driven by two bubbles, the stock bubble in the ’90s and the housing bubble in the last decade.

It is not easy to recover from the effects of a collapsed bubble; as people should have known given the weak recovery from the 2001 recession. Alan Greenspan inadvertently told us so himself, since he kept the federal funds rate at 1.0 percent (a 50-year low at the time) for two and half years after the official ending of the recession.

Why did the economy need to be driven by bubbles? Well, the anti-worker policies of the ’80s broke the virtuous circle that tied wage growth to productivity growth. This raised the possibility of serious shortfalls of demand. We also had the ungodly awful?high dollar policy?that followed in the wake of the East Asian financial crisis. This priced U.S. goods out of the market, causing our trade deficit to soar. The only way to fill the huge gap in demand created by a trade deficit that eventually reached 6 percent of GDP ($900 billion a year in today’s economy) was with a massive housing bubble.

We already knew the story. We don’t need Atkinson to tell us why the victim is dead.

But this is not the end of the annoying part. While the whole theme of the book is the need for more innovation, the book is not especially innovative in how it pursues this agenda. Yes, we need more graduates in the sciences and engineering. Additional research money at all levels of government would also be good. But when it comes to basic issues about how research is organized and the incentive structure is put in place the book is strangely silent.

This is striking because hardly a day goes by when we don’t see new evidence that our patent system is badly broken. This is most clear in the case of prescription drugs, where we constantly see accounts of pharmaceutical companies concealing evidence that their drugs are less effective than claimed or even harmful. The enormous patent rents in the drug industry (at?$270 billion a year?or roughly five times the size of the Bush tax cuts for the wealthy) also lead companies to market their drugs for inappropriate uses.

While the pharmaceutical industry alone?accounts for almost?20 percent of R&D spending, the problem is not restricted to pharmaceuticals. When Google bought Motorola Mobility it was widely reported in the business media that the motivation was to acquire its patents. However, Google did not actually want the patents to develop new products. It wanted the patents to file suits against its competitors in retaliation for patent infringement suits that they are filing against Google. In this case patents are not providing an incentive for innovation, they are providing a basis for stemming competition and wasting a huge amount of resources on legal fees in the process.

Can’t we do better than the current patent system? There have been proposals, most notably by Nobel Laureate Joe Stiglitz to replace the current patent system for drugs with a?prize system?(here’s?my plan?for direct public financing of research). One would think that a book like this would discuss whether we have our incentive system right, but the issue never gets raised.

There are interesting and important proposals in this book. We can and should do much better than we are on innovation policy. But this book could certainly be much more ambitious in how it addresses the issue, and it strikes out badly in trying to construct a new macroeconomic story when the old one, that at least some of us have been using, fits the evidence very well.



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