Still the One
A new RAND report suggests that the ‘decline’ of America’s science and technology leadership has been overblown.

In recent years, many pundits and politicians have warned that the United States is “losing its edge in science and technology (S&T).” As a new report from the RAND Corporation demonstrates, these fears are overblown.

“We find that the United States continues to lead the world in science and technology,” write RAND authors Titus Galama and James Hosek. “Other nations/regions are not significantly outpacing the United States in R&D expenditures,” nor are they “outpacing the United States in S&T employment.”

In terms of science and engineering (S&E) jobs, “High growth in R&D expenditures, patents, and S&E employment, combined with continuing low unemployment of S&E workers, suggest that U.S. S&E has remained vibrant. These signs do not support the notion that jobs are being lost at substantial rates as a result of the outsourcing and offshoring of S&T.”

Consider these numbers: “The United States accounts for 40 percent of total world R&D spending and 38 percent of patented new technology inventions by the industrialized nations of the Organization for Economic Cooperation and Development (OECD), employs 37 percent (1.3 million) of OECD researchers [full-time employees], produces 35 percent, 49 percent, and 63 percent, respectively, of total world publications, citations, and highly cited publications, employs 70 percent of the world’s Nobel Prize  winners and 66 percent of its most-cited individuals, and is the home to 75 percent of both the world’s top 20 and top 40 universities and 58 percent of the top 100.”

Galama and Hosek do note that “there are potential weaknesses in the persistent underperformance of older K–12 students in math and science, in the limited attractiveness of S&E careers to U.S. students, and in the heavy focus of federal research funding on the life sciences, and we do not yet fully understand the consequences of an increasing reliance on foreign-born workers in S&E.”

Therefore, “While the United States is still performing at or near the top in many measures of S&T leadership, this leadership must not be taken for granted.”

Source: Titus Galama and James Hosek, “U.S. Competitiveness in Science and Technology,” RAND Corporation National Research Defense Institute, June 2008.

Follow the Leader
What do NBA statistics tell us about the importance of ‘expert knowledge’?

In a new study, economists Amanda H. Goodall of Warwick Business School, Lawrence M. Kahn of Cornell University, and Andrew J. Oswald of the University of Warwick use data from the National Basketball Association to explain “why some leaders are successful while others are not.” Their conclusions show how “expert knowledge” can significantly enhance leadership skills.

“We measure the success of National Basketball Association (NBA) teams between 1996 and 2004, and then attempt to work back to the underlying causes,” they write. “We have information on 15,040 regular season games for 219 coach-season observations, for which we compute winning percentages; in addition, we study post-season playoff success for these coaches. Perhaps unsurprisingly, a main explanatory factor is the quality of the group of players. But, less predictably, there seem also to be clear effects from the nature of a team’s coach. Teams perform substantially better if led by a coach who was, in his day, an outstanding player. This correlation is, to our knowledge, unknown even to experts in basketball (perhaps because, without statistical methods, it is hard to glean from even detailed day-to-day observation of the sport).”

Source: Amanda H. Goodall, Lawrence M. Kahn, and Andrew J. Oswald, "Why Leaders Matter? The Role of Expert Knowledge," June 2008.

Pay to Performance
How has executive compensation changed over the past seven decades?

Everyone agrees that CEO pay has ballooned since the early 1980s. Too often, however, the debate over executive compensation lacks any real historical perspective. Economists Carola Frydman of MIT’s Sloan School of Management and Raven E. Saks of the Federal Reserve set out to remedy that. After analyzing a full range of data on CEO pay from 1936 to 2005, they reached some surprising conclusions.

For starters, “executive compensation was remarkably flat from the end of World War II to the mid-1970s, a time in which firms grew rapidly. This stability contrasts sharply with the evidence from the 1980s to the present, when executive pay and firms expanded at almost the same rate.” Frydman and Saks also report that “stock option grants have been an important part of the compensation package since the 1950s.” (To be sure, “the value of option grants was low prior to the 1980s.”)

What about managerial incentives? Frydman and Saks reckon that the correlation between a CEO’s firm-related wealth and firm performance “strengthened considerably from the 1980s to the present,” although “this increase was not part of a long-run upward trend. The sensitivity of changes in wealth to performance was about the same in the 1930s, 1950s, and 1960s as it was in the 1980s, but somewhat lower in the 1940s and 1970s.”

It is hard to measure the precise magnitude of managerial incentives; but Frydman and Saks estimate that for “most of the twentieth century,” a CEO could have expected a 30 percent to 60 percent increase in firm-related wealth if he or she had boosted firm performance from the 50th to the 70th
percentile rate of return.

Source: Carola Frydman and Raven E. Saks, “Executive Compensation: A New View from a Long-Term Perspective, 1936–2005,” National Bureau of Economic Research Working Paper, June 2008.

The Globalization Factor
Economists Raphael Auer and Andreas M. Fischer show how trade with low-income countries has affected productivity and prices in the United States.

It’s a question that seems particularly relevant in an election year marked by economic anxiety: how has trade with low-income countries (LICs) affected “inflation, productivity, and industry structure” in the United States?

In a new paper, economists Raphael Auer and Andreas M. Fischer of the Swiss National Bank seek to measure “the true effect of the gradual increase in trade with the nine major LICs on U.S. industry productivity and prices.” They estimate that “when our nine LICs capture 1 percent market share in a sector, U.S. producer prices decrease between 2 percent and 3 percent.” As for productivity growth, Auer and Fischer reckon that “a one percentage point increase in the U.S. market share of LIC imports is associated with a productivity increase of about two percentage points.” Has trade with LICs depressed the incomes of unskilled workers? Not according to Auer and Fischer, who “do not find any evidence of a negative effect of LICs on the wages of unskilled workers.”

They conclude that “globalization has had a profound impact on U.S. relative prices and productivity, much larger than is commonly assumed. Our results, however, should be interpreted with care when making statements about the aggregate effect of LICs on U.S. inflation, productivity, and wages. We estimate the effect on relative prices, and due to the difference-in-difference type of identification, our methodology abstracts from factors such as the increase in global raw material prices that growth in LICs has brought about. “Given these limitations, a rough estimate is that from 1997 to 2006, the U.S. PPI [Producer Price Index] inflation rate in the manufacturing sector was reduced due to the trade with LICs by about two percentage points (each year), while productivity growth was increased by one to two percentage points in the sectors examined in this paper. China accounts for over one half of
the total effect.”

Source: Raphael Auer and Andreas M. Fischer, “The Effect of Trade with Low-Income Countries on U.S. Industry,” Federal Reserve Bank of Dallas Globalization and Monetary Policy Institute Working Paper, June 2008.

Where Goes the Neighborhood?
Some common assumptions about urban gentrification may be incorrect.

New research by economists Terra McKinnish and Randall Walsh of the University of Colorado at Boulder and Kirk White of Duke University sheds light on the consequences of urban gentrification. “Advocacy groups for low-income neighborhoods in cities across the U.S. have raised concerns about a potential link between gentrification and the displacement of existing low-income and/or minority residents,” they note. But their findings cast gentrification in a different light.

‘Gentrification creates neighborhoods that are attractive to middle-class minority households.’

McKinnish, Walsh, and White “take advantage of confidential Census data, specifically the 1990 and 2000 Census Long Form Data, to provide the richest study of gentrification to date. Overall, we find that rather than dislocating non-white households, gentrification creates neighborhoods that are attractive to middle-class minority households, particularly those with children or with elderly householders. Furthermore, there is evidence that gentrification may even increase incomes for these same households.

“Our specific findings are: 1) In-migration of college graduates, particularly white college graduates under 40 without children, is a key characteristic of a gentrifying neighborhood; 2) The presence of children, an elderly householder, or a householder with low educational attainment dampens the likelihood that a white household moves into a gentrifying neighborhood, but these same effects are not present, or even reversed, for black and Hispanic households; 3) We find no evidence of disproportionate exit of low-education or minority householders, but do find evidence that gentrifying neighborhoods disproportionately retain black householders with a high school degree; 4) Decomposition of the total income gains in gentrifying neighborhoods attributes the bulk of the gains to two key groups: black high school graduates (due to disproportionate retention and income gains) and white college graduates (due to disproportionate in-migration and high incomes).”

Source: Terra McKinnish, Randall Walsh, and Kirk White, “Who Gentrifies Low-Income Neighborhoods?” National Bureau of Economic Research Working Paper, May 2008.

Swingers
Which states will decide the 2008 presidential election?

A little Election 2008 numbers crunching: If Barack Obama won the full number of electoral votes (252) in the states that went for John Kerry in 2004, he would need 18 more to reach the magic number of 270.

In which case, Obama could eclipse 270 by, for example, picking up Virginia (13 electoral votes) and Colorado (9); or Virginia and Iowa (7); or Colorado, Iowa, and New Mexico (5); or Colorado, Iowa, and Nevada (5); or Colorado and Missouri (11); or Florida (27) or Ohio (20). On the other hand, even if John McCain lost Colorado, Iowa, and New Mexico or Nevada, he could still capture the presidency by keeping the rest of the Bush 2004 states and flipping Pennsylvania (21) or Michigan (17) or Wisconsin (10).

These are just a few potential scenarios. In mid-July, political analyst Stuart Rothenberg predicted that if the race stayed close, the five most important swing states would be Ohio, Michigan, Virginia, Colorado, and Nevada. He added this caveat: “It’s far too soon to know whether the presidential contest will blow open into a laugher or remain competitive from now until Election Day.” As we went to press, that caveat still applied.

Source: Stuart Rothenberg, “The Big 5: Picking the States That Will Pick the President,” July 17, 2008.

A Matter of Trust
What is the correlation between government regulation and social capital?

In a cross-section of countries, government regulation is strongly negatively correlated with social capital,” report economists Philippe Aghion and Andrei Shleifer of Harvard University, Yann Algan of the Paris School of Economics, and Pierre Cahuc of the École Polytechnique. “The correlation works for a range of measures of social capital, from trust in others to trust in corporations and political institutions, as well as for a range of measures of regulation, from product markets, to labor markets, to judicial procedures.”

The four economists rely on data from the World Values Survey. Not only do they find that “distrust fuels support for government control over the economy,” they also show that “distrust generates demand for regulation even when people realize that the government is corrupt and ineffective; they prefer state control to unbridled production by uncivil firms.”

According to Aghion, Shleifer, Algan, and Cahuc, distrust explains “more than one-third of the cross-country variation in the regulation of entry” (when the regulation of entry is measured by the number of steps required to open a business). This is partly why it is easier to open a business in “high-trusting” Nordic and Anglo-Saxon countries than it is in “low-trusting” Mediterranean, Latin American, and African countries. Ultimately, “the analysis points to a broad complementarity between social capital and free-market economics.”

Source: Philippe Aghion, Yann Algan, Pierre Cahuc, and Andrei Shleifer, “Regulation and Distrust,” July 2008.

Creating ‘Green-Collar’ Jobs
Expanding nuclear power would be good for both the economy and the environment.

Barack Obama and John McCain both want to create “green-collar” jobs that will boost the economy and aid the environment. As a new report by the industry-backed Clean and Safe Energy Coalition points out, nuclear power “has the potential to supply tens of thousands of these jobs across the United States.” America currently has 104 active nuclear reactors. In 2004, Idaho National Engineering and Environmental Laboratory and Bechtel Power Corporation estimated that the construction of 33 to 41 new Generation III reactors would add “approximately 610,000 jobs” to the U.S. economy, including (1) “37,000 to 38,000 nuclear manufacturing jobs,” (2) “72,000 to 79,000 plant construction and operations jobs,” (3) “another 181,000 to 250,000 indirect jobs in the nuclear power industry,” and (4) “218,000 to 242,000 jobs in the nonnuclear industries throughout the country.”

Nuclear plants help to slash carbon, mercury, sulfur dioxide, and nitrogen oxide emissions.

As Duncan Currie has written in these pages, low-carbon nuclear power is enjoying a nascent global renaissance, due largely to concerns over energy security and greenhouse gas emissions. Its supporters include such prominent greens as James Lovelock (developer of the “Gaia” hypothesis), Stewart Brand (creator of the Whole Earth Catalog), and Bruno Comby (founder of the group Environmentalists for Nuclear Power). Not only do nuclear plants help to slash carbon emissions, they also help to reduce mercury, sulfur dioxide, and nitrogen oxide emissions.

Yes, nuclear reactors are expensive to build; but once the reactors are brought online, nuclear power is relatively cheap. And yes, there are still legitimate concerns over nuclear waste disposal, an issue that won’t be resolved until the United States establishes a national repository at Yucca Mountain in Nye County, Nevada. That won’t happen while Nevada Democrat Harry Reid is Senate majority leader. But if the United States hopes to achieve major reductions in its carbon emissions, it simply must expand nuclear power.

As Gwyneth Cravens writes in her 2007 book, Power to Save the World, “If all the existing nuclear plants around the world were replaced by nonnuclear sources in the same proportions provided by the present mix of energy sources, annual carbon emissions would rise by 600 million metric tons” (emphasis added). Remember that the next time some politician talks about creating “green-collar” jobs.

Sources: “Job Creation in the Nuclear Renaissance,” Clean and Safe Energy Coalition White Paper, June 2008; C.R. Kenley, R.D. Klingler, C.M. Plowman, R. Soto, R.J. Turk, R.L. Baker, S.A. Close, V.L. McDonnell, S.W. Paul, L.R. Rabideau, S.S. Rao, and B.P. Reilly, “U.S. Job Creation Due to Nuclear Power Resurgence in the United States,” Volumes 1 and 2, Idaho National Engineering and Environmental Laboratory and Bechtel BWXT Idaho, LLC, November 2004; Gwyneth Cravens, “Power to Save the World: The Truth About Nuclear Energy” (Knopf, 464 pp., $27.95).

Flag on the Play!
Economist Trevon D. Logan says that ‘the conventional wisdom of college football is wrong.’

College football season is underway, which means it is time to revisit the perennial controversy over the lack of a playoff scheme to crown the national champion. Every year, fans argue passionately about what should—and should not—determine a team’s ranking in the polls; and every year, there are plenty of fans who feel burned by the system.

‘Defeating strong opponents does not yield any advantage in terms of ranking.’

In a recent paper, Ohio State University economist Trevon D. Logan decided to “test three pieces of college football’s conventional wisdom: (1) that it is better to lose earlier in the season than later in the season, (2) that teams are rewarded for playing stronger opponents, and (3) that winning by wide margins earns a team ‘style’ points that result in improved rankings.” In order to evaluate these claims, Logan used “a newly created data set of week-by-week AP poll results for 25 of the most prominent college football teams over a 25-year period.” His findings may surprise many longtime fans.

Logan reckons that “the conventional wisdom of college football is wrong. Rather than being penalized for losing later in the season, teams are actually rewarded for losing late in the season. In fact, this premium for losing late is sizable—teams that lose late in the season are re-ranked higher by roughly 3/4 of AP poll voters than they would have been if they had lost early in the season. Even if one wished to argue that an early loss gives teams more time to make up ground in the rankings, the results here suggest that late losses leave teams with less ground to make up. Similarly, defeating strong opponents does not yield any advantage in terms of ranking, but losing to strong opponents helps. Margin of victory matters—but only if you lose. While winning by large margins does not confer any ranking advantage (despite numerous claims to the contrary), losing by a blowout hurts, and losing to a strong team does not soften the blow.”

Source: Trevon D. Logan, “Whoa, Nellie! Empirical Tests of College Football’s Conventional Wisdom,” National Bureau of Economic Research Working Paper, November 2007.

The Best (and Worst) States for Business
What do America’s corporate executives think?

There is no shortage of lists that rank the “best” and “worst” states for business. But what do America’s corporate leaders think? Earlier this year, Development Counsellors International (DCI) polled thousands of top corporate executives (along with a smaller group of their advisors and consultants), as it has done on a regular basis since 1996.

When the DCI survey participants were asked to name the most favorable state business climates, Texas got the highest overall score, followed (in order) by North Carolina, Georgia, Florida and Tennessee (tied), Nevada, and South Carolina.

When participants were asked to name the least favorable state business climates, California topped the list, followed (in order) by New York, Michigan, New Jersey, Massachusetts, Illinois, and Oregon.

Source: “A View from Corporate America: Winning Strategies in Economic Development Marketing,” Development Counsellors International, July 2008.

Demography and Economic Destiny
Workforce age composition has played a significant role in reducing business cycle volatility.

Over the past quarter century, the United States has experienced a marked decline in macroeconomic volatility. Economists now refer to this phenomenon as “the Great Moderation.” As Federal Reserve Chairman Ben Bernanke noted in a 2004 speech (back when he was a Fed governor), “three types of explanations have been suggested for this dramatic change,” namely, “structural change, improved macroeconomic policies, and good luck.”

Economists Nir Jaimovich of Stanford University and Henry E. Siu of the University of British Columbia stress the importance of demography. Jaimovich and Siu show that workforce age composition “has a quantitatively large and statistically significant effect on measures of business cycle volatility.” More specifically, “the age profile of business cycle employment volatility can be characterized as roughly U-shaped, with large differences across age groups. The young and old display greater cyclical sensitivity than prime-aged individuals.”

‘Roughly one-fifth to one-third’ of the Great Moderation is explained by demographic change.

In terms of the Great Moderation, Jaimovich and Siu “find that demographic change accounts for roughly one-fifth to one-third of the moderation experienced in the U.S. Clearly,  demographic change is not the sole factor responsible for this episode; nevertheless, demographic change serves as a common factor relevant for understanding the evolution of business cycle volatility—not only in the U.S., but also in other G7 countries—over the past four decades.”

Sources: “The Great Moderation,” remarks by Governor Ben S. Bernanke, February 20, 2004; Nir Jaimovich and Henry E. Siu, “The Young, the Old, and the Restless: Demographics and Business Cycle Volatility,” National Bureau of Economic Research Working Paper, June 2008.

Illustrations by Mick Wiggins.