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Posted at 10:25 AM ET, 12/13/2010

Knowledge is power -- and also money

By Ezra Klein

In his column today, Paul Krugman argues that "the root of our current troubles lies in the debt American families ran up during the Bush-era housing bubble." The best way to understand our economy now is that we're still digging our way out of debt, and that's meant we don't have much money to spend, or much basis on which to grow. Michael Mandel's response? "No, no, no." The credit boom wasn't the problem, he says, but a symptom of the problem. The problem was that America's stock of economically valuable knowledge became less valuable as it leaked beyond our borders, and we haven't done enough to replace it:

U.S. prosperity has always depended far more on our accumulated store of knowledge capital than on our physical investments. Knowledge capital includes accumulated education, research and development, and business-knowhow – all the intangibles that underly a modern economy.

The value of knowledge capital depends, in part, on how rare it is. The more companies or countries that possess the same knowledge (say, about how to make a commercial airliner), the less valuable that knowledge is. This is just Economics 101, applied to intangibles.

Over the past 10-15 years, the strengthening of information flows into developing countries meant that knowledge capital was being distributed much more quickly around the world. As a result, the normal process of knowledge capital depreciation greatly accelerated in the U.S. and Europe – beneath the radar screen, because no statistical agency constructs a set of knowledge capital accounts.

What we should have been doing is boosting our investment in knowledge capital creation – education, R&D, business innovation. Instead, we borrowed to support consumption. Instead, we got Republican and Democratics administrations that were more concerned with punishing innovative industries and ladling on additional security and economic regulations.

By Ezra Klein  | December 13, 2010; 10:25 AM ET
 
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Comments

Rubbish.

Posted by: leoklein | December 13, 2010 10:44 AM | Report abuse

Mandel's piece is just plain nonsense. If you look across the spectrum the US is still the leader in most knowledge-based fields (software, chip design, bioscience, etc). The big issue is the transfer of the manufacturing base ex-US because of currency and other financial issues. The statistics are pretty clear that the US cannot support itself as a financial and service economy in the long run.

Posted by: agoldhammer | December 13, 2010 11:20 AM | Report abuse

I have no problem supporting a massive increase in education spending, R&D, necessary infrastructure, etc.

Ultimately, prosperity rests on the productivity and intellectual capital of the population (unless you're very rich in natural resources).

In order to have the money to support these efforts, we need a stronger economy which at the moment means more aggregate demand, as Krugman keeps saying.

Posted by: fuse | December 13, 2010 11:22 AM | Report abuse

It's no secret that the number of people going into STEM (science-technology-engineering-mathematics) disciplines has been declining for decades. Some people tend to blame this on our public schools or the attitudes of teh young folks out there. But in all honesty, I think young people of today are making a very smart decision not to go into these industries. I happen to work in a STEM field and I love my job. The problem is that the pay is middling and my top salary is WAAY below what someone in the business or law sector makes. Plus I was in grad school for seven years before I landed a post-doc for about $50k. Does that sound like a good deal to you. Let me repeat that I love my job and I'm happy with my career path, but I don't blame anyone who thinks it's a crappy deal and would rather start making six figures in their mid-20's selling financial products to hospitals. Our economy is entirely geared toward brokering deals rather than producing things. This didn't happen overnight and it isn't a product of regulation. It's the value we've placed on buying crap we don't need on credit. Reaganism taken to its logical extreme.

Posted by: willows1 | December 13, 2010 11:25 AM | Report abuse

That is so ignorant that its hard to even know how to respond.

Posted by: endaround | December 13, 2010 11:26 AM | Report abuse

agoldhammer- Pick up a science or mathematics journal and look at the names of the authors on the best manuscripts in the journal and you tell me where the mathematics and engineering knowledge base is. It's easy to look at complicated journal articles and think that they're just garbled nonsense, but in a few decades, some of those papers will be the intellectual basis for the next great invention.

Posted by: willows1 | December 13, 2010 11:29 AM | Report abuse

Ezra -- this has nothing to do with what Krugman's saying. Krugman is talking about why we are in a deep recession with high unemployment and what it's going to take to get out of it. This guy is saying something about his opinion on the overall competitiveness of the US economy, but how exactly does that account for the sudden events of 2008 and the continuing high unemployment, low demand, low capacity utilization ever since?? C'mon, making this a "refutation" of Krugman is ridiculous.

Posted by: kenm3 | December 13, 2010 11:39 AM | Report abuse

I couldn't agree more that America needs more funding for R&D. I would also add infrastructure to the investment mix. But what are these onerous "punishments" and "regulations" Mandel mentions at the end without giving any examples? If this is about restrictions on stem cell research, I agree, those are unnecessary and counterproductive. If it's a whine about how Microsoft needs more H1B visas, I'm not convinced.

Posted by: csdiego | December 13, 2010 11:48 AM | Report abuse

@willows1, I know the issues quite well having an advanced degree in chemistry and spending my whole career in and around the biopharmaceutical industry. American research-based companies are in very good shape but jobs are limited at the high-end and as long as manufacturing is moved overseas, we won't see a major employment move.

Posted by: agoldhammer | December 13, 2010 11:51 AM | Report abuse

agoldhammer - I agree with your point about manufacturing, but would just add that having the knowledge base in the US is not a guarantee, particularly in the long term. And that part of the reason for this is that younger folks are disproportionately drawn toward non-science fields for very practical reasons.

Posted by: willows1 | December 13, 2010 12:11 PM | Report abuse

Apples and oranges comparison. Krugman is talking about the macro of our present economy, and Mandel is giving us a specifics-free opinion on how the economy could be improved.

I don't doubt that "knowledge capital" is very valuable. It would be nice though if Mandel could be more specific about what policies he thinks have been wrong and what going forward would improve the economy. His story basically tells us that since knowlege capital is depreciating faster now, we need to invest in it more (!), which in and of itself is not a compelling story.

Also Willows1 - don't just look at the *names* on a journal article, look also at the institution from which they come. There are a lot of foreign names on articles in math and science, but many of them are foreign names working at US universities. What that means is that despite the "punishing" regulation, or whatever, many of the top foreign minds are coming to this country to study and live. (Although that brings up restrictive immigration policy as one actual example of regulation punishing innovation...)

Posted by: sanjait | December 13, 2010 12:17 PM | Report abuse

I would think it is the otherway around.

Innovation and knowledge transfer is accelearating and as a result old business models are disrupted.

Spending on R&D and education has been soaring. I don't have data on hand, but I'd be willing to guess that America is in the top 10 for total R&D and education spending per person, and is #1 in per capita spending for any country with more than 25 million people, and is #1 in terms of total spending.

That said, I don't think marginal dollars are that valuable.

How much value does the excess inflation in education really provide? Does adding another 1% of the population to the pool of bachelor degree holders really make a difference? Does adding 20% to any organization's R&D budget produce 20% more "innovation"? Even 5% more? How are government officials looking at everything from 1,000 feet supposed to know the correct amount of investment? Why should we believe there would have been no credit crisis had another X% of GDP been devoted to education/R&D?

Posted by: justin84 | December 13, 2010 12:36 PM | Report abuse

sanjait - I'm not saying this is because of regulation, I'm saying that going into math & science just isn't very popular. But I don't think it's just a fad, I think younger folks are making a very rational decision that our economy is based on brokering deals much more than it is on invention or the hard, often invisible, work of science.

Posted by: willows1 | December 13, 2010 12:41 PM | Report abuse

"U.S. prosperity has always depended far more on our accumulated store of knowledge capital than on our physical investments. Knowledge capital includes accumulated education, research and development, and business-knowhow – all the intangibles that underly a modern economy"

Krugman is right about the last 20-30 years or so but completely wrong historically. Prior to WW II and throughout most of our history, abundant natural resources and low cost labor were the basis for our national wealth. There isn't any real dispute about this among historians.

The oovious fallacy in Krugman's argument is that he doesn't consider Wall Street, and financial creativity "knowledge capital" when in fact it might be it's purest form.

So for the second time today, give Krugman a half credit. It IS Christmas time after all.

Posted by: 54465446 | December 13, 2010 1:26 PM | Report abuse

corporate America sold our knowledge abroad - the leak theory is absurd - we know engineers in many fields who've spent months in China, India, etc training their replacements, building the machinery that powered our economy - as jobs went, incomes fell, families took on debt - some government policies facilitated this transfer of knowledge and wealth - a few people got very rich - they had well-placed friends - Mr. Krugman is correct on the debt and spending results of this disaster -

Posted by: winchestereast | December 13, 2010 1:33 PM | Report abuse

p.s. a government focused on supplying tax breaks to billionaires, simultaneously cutting spending on infrastructure, R & D, education, may be held accountable and Mr. Krugman is correct to point this out - this didn't happen in a vacuum -

Posted by: winchestereast | December 13, 2010 1:38 PM | Report abuse

Mandel: "Instead, we got Republican and Democratics administrations that were more concerned with punishing innovative industries"...

Which administrations, and precisely how were they "punishing innovative industries"? By daring to require that they pay any corp tax at all? My observation is that compared to other industrialized countries the U.S. treats corporations very nicely: especially the hi-tech innovative ones.

There are still millions of competent and sometimes brilliant experienced Americans working in the STEM fields, but their hours have gotten longer, their pay has been flat, their social status has gone down - partly due to disinformation campaigns against them emanating from foreign offshoring lobbying groups. The reason young Americans are running away from the hard sciences today is because most of the new STEM jobs are running away to overseas locales or are being given to low-cost foreign workers on H-1B or L-1 visas.

The following link should provide some more insight into why young Americans are running away from Information Technology careers:

http://www.post-gazette.com/pg/10344/1109632-28.stm

Posted by: USVoter1 | December 13, 2010 5:19 PM | Report abuse

Wow, Krugman's right in that unsustainable consumer borrowing caused our economy to grow at unsustainable rate and that it must shrink to a size supportable by a safer amount of credit. Next up, unsustainable government borrowing...

Here's why Mandel's off- the "problem" is that some people are willing to do a job for less money than others. The cost of living in the US has grown too high- driven largely by the borrowing and tax subsidized housing prices, the government subsidies in health care that have driven prices and usage up, and the government subsidies in higher education that have driven prices up. We need to support low cost innovations in all of these areas, not find new ways for the make all of them cost more.

Posted by: staticvars | December 13, 2010 10:11 PM | Report abuse

Wow, Krugman's right in that unsustainable consumer borrowing caused our economy to grow at unsustainable rate and that it must shrink to a size supportable by a safer amount of credit. Next up, unsustainable government borrowing...

Here's why Mandel's off- the "problem" is that some people are willing to do a job for less money than others. The cost of living in the US has grown too high- driven largely by the borrowing and tax subsidized housing prices, the government subsidies in health care that have driven prices and usage up, and the government subsidies in higher education that have driven prices up. We need to support low cost innovations in all of these areas, not find new ways to make all of them cost more.

Posted by: staticvars | December 13, 2010 10:15 PM | Report abuse

Rubbish - machines and engineers didn't just get less productive because Koreans also know engineering.

Posted by: albamus | December 14, 2010 5:55 AM | Report abuse

Root of our workfoce power is a employer employee loyalty partnership. Businesses and university campuses worldwide are into a phase of creative disassembly where reinvention and adjustments are constant. Hundreds of thousands of jobs are being shed by Lockheed Martin, Chevron, Sam’s Club, Wells Fargo Bank, HP, Starbucks, Yahoo etc. and the state, counties and cities. Even solid world class institutions like the University of California Berkeley under the leadership of Chancellor Birgeneau & Provost Breslauer are firing employees, staff, faculty and part-time lecturers through “Operational Excellence (OE) initiative”: 1,000 fired; 0 Vice-Chancellors (management) fired. Yet many employees, professionals and faculty cling to old assumptions about one of the most critical relationship of all: the implied, unwritten contract between employer and employee.
Until recently, loyalty was the cornerstone of that relationship. Employers promised work security and a steady progress up the hierarchy in return for employees fitting in, accepting lower wages, performing in prescribed ways and sticking around. Longevity was a sign of employer-employee relations; turnover was a sign of dysfunction. None of these assumptions apply today. Organizations can no longer guarantee work and careers, even if they want to. Senior managements paralyzed themselves with an attachment to “success brings success’ rather than “success brings failure’ and are now forced to break the implied contract with their employees – a contract nurtured by management that the future can be controlled.
Jettisoned employees are finding that their hard won knowledge, skills and capabilities earned while being loyal are no longer valuable in the employment market place.
What kind of a contract can employers and employees make with each other?
The central idea is both simple and powerful: the job or position is a shared situation. Employers and employees face market and financial conditions together, and the longevity of the partnership depends on how well the for-profit or not-for-profit continues to meet the needs of customers and constituencies. Neither employer nor employee has a future obligation to the other. Organizations train people. Employees develop the kind of security they really need – skills, knowledge and capabilities that enhance future employability. The partnership can be dissolved without either party considering the other a traitor.
Let there be light!

Posted by: Transparencynow | December 16, 2010 3:11 PM | Report abuse

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