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Posted at 11:00 AM ET, 01/31/2011

'The Great Stagnation,' Part II

By Ezra Klein

Karl Smith disagrees with Tyler Cowen. The problem isn't with innovation, he says. It's with us:

To the extent we are throwing money at unproductive uses, is this a supply problem as Tyler posits or a demand problem, as I tend to think?

In other words is it that innovation has just become so darn hard or is it that higher salaries are luring all of our bright kids into becoming doctors and hedge fund managers, while relatively fewer are becoming engineers and teachers.

The net effect of my story is that there less human intellect devoted to productive innovation and that the typical American – by dearth of K12 education – is further from the technological frontier.

Tyler hints at a demand side solution when he says we need to raise the status of scientists, but my question is whether we have actually run out low hanging fruit or have simply stopped picking it?

I don't see this as particularly either/or. Perhaps we've organized ourselves away from innovation because innovating has become too hard, and the rewards have become too uncertain. Better to head to Wall Street and skim a bit off the top of the innovators. Or perhaps we've just made some bad organizational decisions. The solution is the same, either way: Make it more lucrative to join innovative professions than parasitic ones. But we don't do that. To give just one example, an engineer who comes up with an important product has his salary taxed as income. A hedge-fund manager who rides a bubble or gets cheap money to carry trade through a bust gets his income taxed at the much-lower capital gains rate. Getting rid of this distortion -- which would also improve the budget deficit -- is, so to speak, low-hanging policy fruit, and we've not picked it.

By Ezra Klein  | January 31, 2011; 11:00 AM ET
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Ezra, I think this misses a lot about how engineer's are actually paid, at least in Silicon Valley. The primary compensation for early stage startups is ISO stock options that are taxed as long-term capital gains. ISO options are expensive, prohibitively so for a public company, which means you pretty much have to get into a startup early to get any (or be an executive).

Now, whether this leads to an unhealthy obsession to find the next Wall Street / Sand HIll Road favorite, instead of true innovation, is a different story...

Posted by: missionpeak | January 31, 2011 11:34 AM | Report abuse

More spending on "green" projects? Stop the scam now we can not afford Obama selling us out to GE any more! USA - Dr. Edward F Blick, Professor of Meteorology and Engineering at University of Oklahoma retired Air Force atmospheric scientist, rejected man-made climate fears in 2007.
"Is their any solid evidence the earth is warming due to man's use of fossil fuels transferring excessive amounts of CO2 in our atmosphere? The answer is NO!" Blick wrote on June 17, 2007 in an article titled "The Religions of Global Warming."
"The amount of CO2 that man puts into the atmosphere each year is about 3 billion tons per year. But this is insignificant compared to the 39,000 billion tons in our oceans, 2,200 billion tons in our vegetation and soils, and 750 billion tons in our atmosphere. Much of the CO2 generated by man is consumed by vegetation," Blick explained. "Man cannot control the weather, but he can kill millions of people in his vain attempt to control it, by limiting or eliminating the fuel that we use," US scientist "Hal Lewis resigned from his post at the University of California at Santa Barbara". He admitted global warming climate change was nothing but a scam in his resignation letter. "It's just another attempt of the left to grab power in any fashion that they can."It's too bad the ClimateGate emails don't show what you want them to.I can be contacted at work and yes please keep those jokes coming in you guys have been making my day. GE building better weapons to sell to our wonder Obama is so close to them! Obama he sure loves his war! Four more years! Come on Dems chant with me Four more years! Four more years!Of war in Afghanistan! Lets hope Cheney agrees to be on the ticket in 2012 Obama/Cheney warmongers you can believe in!

Posted by: Loxinabox | January 31, 2011 12:00 PM | Report abuse

The enduring myth that America faces a shortage of scientists never ceases to amaze me. As a former scientist (Physics PhD), I can't speak for engineers which have a very different career path, but the reason I left physics is simple. It was the prospect of a stable job which paid more than I could've gotten straight out undergrad before I was 40.

To get more scientists you don't need to change American society to treat them as gods or pay them ludicrous salaries, you just need to hire them to do science.

Posted by: jondnix | January 31, 2011 12:10 PM | Report abuse

Problem is, it's NOT "low-hanging fruit." It's more like sour grapes. All that Wall Street money guarantees a high, sturdy branch.

Posted by: jpmillertx | January 31, 2011 12:11 PM | Report abuse

"The net effect of my story is that there less human intellect devoted to productive innovation"
Let me rephrase that "...devoted to money making innovation." And the powers that be want to pay as little as possible to the real innovators. However, it is like starving ones plow horse. Works for a while, but in the end one will have no horse at all.

Posted by: denim39 | January 31, 2011 12:36 PM | Report abuse

Innovative ideas are everywhere. Innovative ideas that are easily acceptable are rare. This point is overlooked universally. Humans evaluate innovation based on relative advantage, compatibility with status quo, complexity and how easy it is to try it and perceive the difference. On top of this, we often misunderstand or simply don't know about them. If an environment is unstable or insecure, resistance to change increases. Don't forget vested interests organize resistance to competing innovations. IMO this is a cultural immune system to prevent adoption of change until it is broadly proven. When one grasps these concepts, it is easier to understand why change seems slow. It doesn't however promote education, comminication, involvement, support and facilitation which are required to speed acceptance.

Posted by: BertEisenstein | January 31, 2011 1:22 PM | Report abuse

I just want to endorse and amplify jondnix's comments. The problem we face is an economic system that does not reward the accomplishments of creative and innovative people nearly so well as the work of people who are skilled at moving money around. We increasingly use immediate financial returns as the only determinant of the value of work. More often than not this simply multiplies the reward for work already done rather than rewards new innovation. Our economy and society is certain to suffer over the long term.

Posted by: dollarwatcher | January 31, 2011 4:46 PM | Report abuse

Two points:

First, it's a proven fallacy that high compensation attracts the best and the brightest. In fact, at the very top, there is a clear negative correlation between pay and performance. There is a growing body of peer reviewed literature that supports this. High pay simply attracts those who are more greedy.

Second, I agree wholeheartedly with eliminating the capital gains tax break. And that's just what it is: a tax break. Liberals have never been very good at communicating this point. And conservatives act as if it's a tragedy that capital gains are taxed at all. Let's start calling it what it is: a tax break or a loophole, and stop ceding the debate to the Tea Party types.

Posted by: DaveBrown1 | January 31, 2011 6:25 PM | Report abuse

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