Innovation Nation
The EU-U.S. innovation gap is getting smaller, but America still leads in most categories.

Americans like to think we live in the most innovative country in the world. But how do other countries compare?

The European Innovation Scoreboard (EIS) is an annual survey of “innovation indicators and trend analyses” put together under the auspices of the European Commission. The 2007 EIS, which was released earlier this year, covers not only the EU-27 member countries, but also the United States, Canada, Australia, Japan, Israel, Norway, Switzerland, Iceland, Croatia, and Turkey.

While the innovation lead enjoyed by the United States over Europe has declined in  recent years, America retains an edge in most categories. According to the EIS, “There are 15 indicators with full data for the U.S. and EU, and of these the U.S. performs better than the EU in 11 indicators, while the EU scores above the U.S. in 4 indicators.”

But that isn’t the whole story. “Although the U.S. is leading in 11 indicators, on 9 of these indicators the U.S. is outperformed by at least one European country.” Indeed, according to the EIS, “Sweden is the most innovative country, largely due to strong innovation inputs, although it is less efficient than some other countries in transforming these into innovation outputs.” The only two indicators on which America outperforms all other European countries are tertiary education and U.S. Patent and Trademark Office patents.

Still, in several crucial areas the EU-U.S. gap remains sizable. For example, “the GDP share of early-stage venture capital” is “more than 50 percent higher in the U.S.” In  addition, “There is a large gap in business R&D expenditures, 1.17 percent of EU GDP as compared to 1.87 percent in the U.S., which is not becoming smaller.” Meanwhile, the  United States is expanding its lead in public R&D expenditures and high-tech exports.

And consider the most recent evidence from the World Intellectual Property Organization (WIPO). In 2007, the United States accounted for over one-third (33.5 percent) of all international patent filings under the WIPO Patent Cooperation Treaty. Japan came in a distant second at 17.8 percent. In terms of individual corporations—such as Qualcomm, Microsoft, Motorola, and Intel—40 percent of the top 25 patent applicants (and 38  percent of the top 50 applicants) came from the United States.

Sources: “European Innovation Scoreboard 2007: Comparative Analysis of Innovation Performance,” February 2008; World Intellectual Property Organization, “Unprecedented Number of International Patent Filings in 2007,” February 2008.

The Very Golden Arches
Bad news for Morgan Spurlock: the robust McDonald’s comeback continues.

Four years after the release of “Super Size Me,” Morgan Spurlock’s popular anti-McDonald’s film, the fast food giant is going gangbusters. In January, CEO Jim Skinner affirmed that McDonald’s plans to return between $15 billion and $17 billion to its shareholders from 2007 to 2009. That same month, as Reuters reported, CFO Pete Bensen “reiterated the company’s forecast for capital spending of about $2 billion in 2008.” Its first quarter sales were strong across the globe.

It ‘exemplifies the role of small businesses in Americans’ upward mobility.’

Ironically, in the years immediately before “Super Size Me,” McDonald’s appeared to be in bad shape. In January 2003 it posted its first quarterly loss since becoming a publicly traded company. But over the past half decade McDonald’s has rebounded tremendously, thanks to its breakfast offerings, menu innovations, savvy marketing, and longer hours.

From a business perspective, we’d suggest that critics of the Golden Arches remember a point made recently by columnist George Will: “McDonald’s exemplifies the role of small businesses in Americans’ upward mobility. The company is largely a confederation of small businesses: 85 percent of its U.S. restaurants—average annual sales, $2.2 million—are owned by franchisees. McDonald’s has made more millionaires, and especially black and Hispanic millionaires, than any other economic entity ever, anywhere.”

Sources: McDonald’s press release, January 28, 2008; “McDonald’s sees ’08 capital spending at $2 billion,” Reuters, January 16, 2008; George F. Will, “Lovin’ It All Over,” The Washington Post, December 27, 2007.

Has Income Volatility Really Increased?
New research suggests it has not.

In an era of rapid globalization, it is widely believed that U.S. workers face a heightened risk of income volatility. Last year, Senators Chuck Schumer (D-NY) and Jim Webb (D-VA) asked the Congressional Budget Office (CBO) to study the issue and report back. After an initial analysis, the CBO concluded that, “since 1980, the trend in year-to-year earnings variability has been roughly fl at. That finding is consistent with the results of existing studies, which tend to show more variability in earnings in the 1980s and 1990s (on a percentage basis) than in the 1970s but relatively stable trends in earnings variability since about 1980.”

In his April 2007 letter to Senators Schumer and Webb, CBO Director Peter Orszag noted that the initial analysis “does not examine workers’ family income or assets. It is possible that trends in the variability of family income or assets may differ from those of workers’ earnings.” 

Now the CBO has investigated household income. As Orszag reported on the Director’s Blog, “The preliminary results suggest that household income is much less volatile than individual workers’ earnings, and that household income volatility has not increased over time—and perhaps even declined slightly. Some other recent studies relying on other data sources have suggested increases in household and family income volatility, but  various problems in the surveys used in those studies may be contaminating those results.” (Emphasis added.) 

As we went to press, the CBO’s final report had not yet been released. 

Sources: Congressional Budget Office, “Trends in Earnings Variability Over the Past 20 Years,” April 2007; CBO Director’s Blog, January 7, 2008.

Uncle Sam’s Green Thumb
The United States is often flayed for its ‘profligate’ energy use. But the charge doesn’t bear scrutiny.

Is America a “wasteful” or “profligate” energy consumer? It’s an accusation we hear frequently. But as American Enterprise Institute scholar Steven F. Hayward shows in a new report, it doesn’t hold up.

“In 1910,” Hayward writes, “the nation’s population was only 92 million people, per-capita income (in current 2007 dollars) was only $5,964, and total GDP (also in current 2007 dollars) was about $551 billion—about one-twentieth the size of the U.S. economy today. While the economy has grown more than twenty-fold in real terms since 1910,  fossil fuel energy consumption only grew six-fold, and per-capita CO2 emissions only doubled—from 10.9 tons to 19.4 tons. This is not the profile of a nation that is profligate with energy.”

Hayward also makes an interesting point about U.S.-Europe comparisons: if “differences in standard of living and transportation density are normalized, America’s per-capita greenhouse gas emissions would not be much different from Western Europe. And here lies the main paradox of the misperception on this issue: it is precisely because the United States is highly energy efficient that we are able to afford and consume more energy than European nations on a per-capita basis. One obvious implication of this analysis is that the United States cannot currently achieve European-level greenhouse gas emissions unless it reduces American output and lowers the nation’s standard of living.”

Source: Steven F. Hayward, “The United States and the Environment: Laggard or Leader?” AEI Environmental Policy Outlook, February 2008.

The Buck Starts Here
A new book explains how the dollar became the premier global currency—and why its dominance is now being threatened.

At a time of widespread dollar-bashing and euro-boosting, Wall Street Journal reporter Craig Karmin has published a useful new book, Biography of the Dollar, which puts the greenback’s slide in perspective.

Despite everything, he writes, the mighty U.S. buck is still the global currency of choice.  It figures in nearly 90 percent of all trades in the more than $3.2-trillion-a-day foreign exchange market. Nearly two-thirds of the world’s central bank reserves are held in dollars.” But the euro is gaining ground. “In 1999,” Karmin observes, “about 71 percent of world reserves were held in dollars and 18 percent in euros. By 2006, the dollar figure had fallen to 66 percent, while the euro reserve total rose to 25 percent.”

Karmin also points out that, “since 1971, the year when the gold standard ended and  currency trading began,” the U.S. dollar “has experienced five extended trading cycles.” These include: “a weakening dollar from 1971 to 1978, a strengthening dollar from 1978 to 1985, dollar weakness again from 1985 to 1995, dollar strength again from 1995 to  2002, and another period of weakening from 2002 to the present day.” It’s important to note that “the dollar lost more ground during the weak years than it made back during the strong ones.”

Even still, we found this anecdote both telling and amusing: “While Saddam Hussein, in an act of rebellion against the United States, used to insist on being paid in euros for Iraqi oil, his captors found in his possession $750,000, all in neat stacks of one hundred dollar  bills. There was not a euro among them.” Of course, the late Iraqi dictator was captured in December 2003. Would he have been so pro-dollar in 2008?

Source: Craig Karmin, “Biography of the Dollar: How the Mighty Buck Conquered the World and Why It’s Under Siege” (Crown Business, 272 pp., $25.95).

More Progressive All the Time
The wealthiest Americans now pay a significantly greater share of federal taxes than they did when Ronald Reagan first took office.

It’s springtime for economic populists. Spend a day on the campaign trail, and you might come away thinking that the richest Americans are now shouldering less of the federal tax burden than they did in recent decades. But you’d be wrong—very wrong.

As The Wall Street Journal’s Stephen Moore wrote in these pages last year (“Guess Who Really Pays the Taxes,” November/December 2007), “Lower tax rates have made the tax system more progressive, not less so.” The latest Congressional Budget Office (CBO) statistics continue to bear this out.

According to the CBO, the highest quintile of income earners paid 68.7 percent of all federal taxes—including individual income taxes, social insurance taxes, corporate income taxes, and excise taxes—in 2005, the most recent year for which data are available. To put that figure in perspective, the top quintile paid only 56.4 percent of federal taxes in 1981. The bottom quintile barely pays any federal taxes: its share of the burden has fallen from 1.8 percent in 1981 to 0.8 percent in 2005.

What about the middle classes? Well, the second quintile has gone from paying 6.8 percent of federal taxes in 1981 to paying 4.1 percent in 2005. The middle quintile has seen its burden drop from 13 percent in 1981 to 9.3 percent in 2005. The fourth quintile paid 21.8 percent in 1981 and 16.9 percent in 2005.

Of course, there’s a huge caveat: the top quintile earned more than half of all income in 2005, and the top 10 percent earned more than one-third of all income. But we must compare those numbers to the relevant tax burdens.

In 2005, the top 1 percent of income earners paid 27.6 percent of federal taxes.

In 2005, the top quintile earned 51.6 percent of all income after taxes but paid 68.7 percent of federal taxes. Likewise, the top 10 percent earned 37.4 percent of after-tax income but paid 54.7 percent of federal taxes. The top 5 percent earned 27.8 percent of after-tax income but paid 43.8 percent of federal taxes. The top 1 percent earned 15.6 percent of after-tax income but paid 27.6 percent of federal taxes.

As for the other four quintiles, each one earned a significantly higher percentage of after-tax income than it paid in federal taxes.

Sources: Congressional Budget Office, “Historical Effective Federal Tax Rates: 1979 to 2005” (December 2007); “Effective Federal Tax Rates, 1997 to 2000” (August 2003); and “Effective Federal Tax Rates, 1979–1997” (October 2001)

A Closer Look at Brazil’s Energy ‘Miracle’
Robert Bryce explains why it couldn’t be replicated in the U.S.—and why it had little to do with ethanol.

In recent years, Brazil has virtually eliminated its reliance on imported oil, while drawing attention for its production of sugarcane ethanol. Not surprisingly, ethanol boosters have pointed to the Brazilian “miracle” as an example of how the United States can achieve “energy independence.” In his new book, Gusher of Lies, energy expert Robert Bryce offers “a big reality check.”

For starters, “Brazil has about 190 million people, but just 23 million automobiles. The U.S. has 110 million more people than Brazil and more than 10 times as many motor  vehicles.” Brazilians also pay much higher prices for their gasoline. As a result, “Brazil’s oil consumption is relatively small: about 2.1 million barrels of oil per day, or about one-tenth as much as the amount used by the U.S.,” Bryce notes. “On a per-capita basis, the average Brazilian uses about 0.5 gallons of oil per day. The average American uses six times as much—about 3 gallons per day.”

To replicate Brazil’s “miracle,” we’d have to “convince every American to use as little oil as the average Brazilian does.” That would require “an 84 percent reduction in oil consumption for every American.”

What about ethanol? “Brazil’s ethanol sector is an important part of that country’s economy, but it’s not nearly as important as oil,” Bryce writes. “That can be proven by following the money. In 2007, Petrobras [Brazil’s national oil company] announced that it wanted to increase its ethanol production and export capacity. Toward that end, by 2012, it will spend about $1.6 billion upgrading its ethanol production, storage, and transportation capabilities. That’s a substantial investment. And yet, during that same period, Petrobras will spend $38 billion—about 24 times as much—on its oil and gas exploration and production activities.”

Indeed, Brazil has become a powerhouse oil producer. “Between 1997 and early 2007, oil production at Petrobras more than doubled.” Last November, “the company announced that its new offshore Tupifield may hold up to 8 billion barrels of oil equivalent.”

Ethanol supporters will continue to hail Brazil as “a biofuel paradise.” Yet as Bryce concludes, “The truth about Brazil’s energy ‘miracle’ is that it has almost nothing to do with ethanol and everything to do with Petrobras’s ability to continue increasing its oil production—the vast majority of which is coming from Brazil’s offshore waters.”

Source: Robert Bryce, “Gusher of Lies: The Dangerous Delusions of ‘Energy Independence’” (PublicAffairs, 371 pp., $26.95).

The Great Trade Debate
Some perspective amid the election-year demagoguery.

The election season has triggered fierce handwringing over the number of American jobs destroyed due to free-trade policies. Yet we rarely hear about the new U.S. jobs created thanks to foreign trade.

Political candidates at all levels would do well to consult a recent study by economists Andrew B. Bernard of Dartmouth’s Tuck School of Business, J. Bradford Jensen of Georgetown’s McDonough School of Business, and Peter K. Schott of the Yale School of Management, which examines “globally engaged” American companies that trade goods.

“We find that trading firms increase employment more rapidly than non-trading firms between 1993 and 2000,” the authors report. “We also observe that firms switching their trading status during the sample period have more extreme changes in employment growth than firms with constant trade status. The average firm that opens up to trade between 1993 and 2000 experiences employment growth of close to 100 percent, while the average firm that quits trading over this period experiences a decline on the order of 10 percent.”

More specifically, “exporters over the sample period increase their employment by 94.3 percent, from 3.9 million to 7.4 million. Firms that become importers or switch into both importing and exporting experience similar increases.” Meanwhile, “Firms that quit exporting, quit importing, and quit both importing and exporting witness declines of 12.3, 16.6, and 10.1 percent, respectively.”

Between 1993 and 2000, the number of workers “employed by a firm that was directly engaged in the international trade of goods” jumped from 38.1 million to 47.9 million. (And if anything, the authors note, these figures “are probably an understatement.”) Those 47.9 million workers represented more than one-third of America’s entire civilian workforce.

Ultimately, “the most globally engaged firms, i.e., those that export as well as import from related parties, have substantial influence: they both account for a significant share of U.S. employment and mediate a dominant portion of U.S. trade flows.”

‘International trade does not necessarily mean a loss of jobs for the United States.’

No question, trade has led to factory closings and lost manufacturing jobs in states such as Ohio and Pennsylvania. But according to economists Martin Neil Baily of the Brookings Institution and Robert Z. Lawrence of Harvard’s Kennedy School of Government, only 11 percent of overall manufacturing job losses between 2000 and 2003 were a result of trade—and “falling exports, not rising imports, were responsible. Service sector offshoring destroyed even fewer jobs. These figures are tiny relative to the millions of positions lost and created every year in the United States by normal market forces.”

We would also point to a 2005 study by three economists at the Federal Reserve Bank of New York, which concluded that “the number of jobs embodied in U.S. net imports is small relative to total employment in the United States—2.4 percent of the total, at the most—both historically and in recent years. Moreover, this estimate is sometimes positive and sometimes negative, suggesting that international trade does not necessarily mean a loss of jobs for the United States.”

Sources: Andrew B. Bernard, J. Bradford Jensen, and Peter K. Schott, “Importers, Exporters, and Multinationals: A Portrait of Firms in the U.S. that Trade Goods,” May 2007; Martin Neil Baily and Robert Z. Lawrence, “Don’t blame trade for U.S. job losses,” The McKinsey Quarterly, 2005, Number 1; Erica L. Groshen, Bart Hobijn, and Margaret McConnell, “U.S. Jobs Gained and Lost through Trade: A Net Measure,” Current Issues in Economics and Finance, Volume 11, Number 8, August 2005.

Afraid of a Tiger
Economist Jennifer Brown argues that golf’s biggest superstar reduces the performance (and the pay) of his top-tier rivals.

Is it the case that harnessing the power of competition always bolsters effort?” asks UC-Berkeley economist Jennifer Brown. In certain situations, perhaps not. Brown has found evidence that “the presence of a ‘superstar’ in a competition can lead to reduced efforts from tournament participants.”

Consider the case of golf superstar Tiger Woods and his top-tier rivals in the Professional Golfers Association (PGA). Using “round-by-round scores for all players in every PGA tournament from 1999 to 2006 and hole-by-hole data for all tournaments from 2002 to 2006,” Brown studied “the impact of the superstar’s presence on the scores of other golfers.”

Her conclusions are fascinating. “The presence of a superstar in a tournament is associated with reduced performance from other competitors: On average, highly-skilled (exempt) PGA golfers’ scores are almost one stroke higher in tournaments with Tiger Woods, relative to their scores when Woods is not in the field,” she reports. (“Exempt” golfers are those who qualify automatically for PGA Tour events.) “Reduced performance is not attributable to ‘riskier’ strategies: The variance of players’ hole-by-hole scores in PGA tournaments is not statistically significantly higher when Woods is in the field, relative to when he does not participate.”

To be sure, Brown adds, “Superstars must be ‘super’ to create adverse effects: The adverse superstar effect is large in streak periods when Woods is particularly successful and disappears during his slumps.”

Her findings raise an interesting question: “How much would Tiger Woods’s earnings have been reduced if his competitors played as well as they did when he was not in the field?” According to Brown, “Woods’s PGA Tour earnings would have fallen from $48.1 million to $43.2 million between 1999 and 2006 had his competitors’ performance not suffered the superstar effect. Woods has pocketed an estimated $4.9 million in additional earnings because of the reduced effort of other golfers—prize money that would otherwise have been distributed to other players in the field. Viewed in this light, the superstar effect is economically substantial.”

Source: Jennifer Brown, “Quitters Never Win: The (Adverse) Incentive Effects of Competing with Superstars,” November 2007.

Illustrations by Mick Wiggins. Feature image by Getty Images.