Trade in Services Begins to Blossom

At least since the writing of David Ricardo in the early 19th century, economists have taught their little lessons about the potential economic benefits of trade with examples that used goods. Ricardo's famous illustration of comparative advantage involved production of wine and cloth. Generations of modern textbooks have written about oil and wheat, cars and computers, and many other pairs of goods. But the notion of international trade as involving physical goods is eroding. Prakash Loungani and Saurabh Mishra lay out some of the patterns in "Not Your Father’s
Service Sector," appearing in the June 2014 issue of Finance & Development.

The basic story is that the revolution in information and communications technology has broken the old geographic bonds, where a service needed to be consumed where it was produced. Now, a wide array of services to be carried out in one place and consumed elsewhere. Loungani and Mishra write:

Using telecommunication networks, service products can be transported almost instantly over long distances. The range of service activities that can be digitized and globalized is expanding, from the processing of insurance claims and tax payments to the transcription of medical records to the provision of education via online courses. . . .And advanced market firms are stripping out the more standardized portions of their high value–added activities and relocating them to emerging market economies. Witness mushrooming business consulting and knowledge-processing offices and the boom in e-commerce and online retailers in emerging markets across the Middle East, Brazil, China, India, and Singapore. . . . The good news is that the spread of the service sector—and of service exports—in developing economies has outstripped the oft-cited example of information technology growth in India. Think of the mobile revolution that has transformed financial services in many countries in Africa, the Nigerian film industry, game design in Cambodia, accounting services in Sri Lanka, and human resources–processing firms in Abu Dhabi.

Trade in services has been growing almost three times as fast as trade in goods over the last decade or so. "Though measuring services trade is difficult, it appears that developing economies’ share in world service exports increased from about 14 percent in 1990 to 25 percent in 2011."

Along with the developments in information and communications technology, the other big change is that services are in the process of becoming a bigger share of the overall value even for  many products that are sold as physical goods. Loungani and Mishra quote the old Silicon Valley line that
“70 percent of hardware is software.” They also point out that, in a truly ugly neologism, some writers have labelled this change as the “servitization of manufacturing.”

This argument is often phrased in terms of the "smile" diagram credited to management
guru Ram Mudambi. It suggests that companies will set up production chains within and across national borders depending on the amount of value created at different stages of production. Mudambi argues that for modern manufactured good, much of the value-added for the final product is created in the early stages of R&D, design and commercialization,and in the late stages of marketing, logistics, and after-sales services.

As global trade shifts to a greater emphasis on services, I suspect that it will begin to change the fundamental ways in which we think about what international trade means.

Global supply chains in services are enabled by information technology, not by ports, planes, trains and highways. Trade in services may be able to shift very rapidly: after all, if a company is buying a service to be delivered on-line, it may have  allegiance to the geographic location where that service is being performed. As the capabilities of information technology increase, and the speed and clarity and immediacy of online connections deepen, my suspicion is that many types of production will end up being divided and subdivided between locations in ways we have not yet begun to imagine.

And ultimately, I expect that the growth in services trade will reduce pressures for protectionism. Instead of talking about hypothetical trade in hypothetical completed goods--like cars and computers--it will become clear that portions of the value-added are often being created in different places. Pushing for trade protectionism in the name of specific products made in other countries like cars or steel or televisions is one thing, but I'm not sure any similar protectionist movement will form to prevent, say, insurance record-keeping or checking diagnostic X-rays from happening in another country. In addition, countries will need to be wary of placing tariffs or other restrictions on imports, because many imports will be part of a global production chain, and domestic produces will be quick to point out how inhibiting their access to those global connections will injure the domestic economy.

Evaluating Low-Carbon Energy Alternatives

Consider five low-carbon energy sources: solar, wind, hydroelectric, nuclear, and natural gas. Which ones offer is the most cost-effective way to reduce carbon emissions? Charles R. Frank, Jr., ranks natural gas first, and wind and solar last in "The Net Benefits of Low and No-Carbon Electricity Technologies," written as Working Paper 73 for Global Economy & Development at the Brookings Institution (May 2014). Frank summarizes:

[A]ssuming reductions in carbon emissions are valued at $50 per metric ton and the price of natural gas is $16 per million Btu or less—nuclear, hydro, and natural gas combined cycle have far more net benefits than either wind or solar. This is the case because solar and wind facilities suffer from a very high capacity cost per megawatt, very low capacity factors and low reliability, which result in low avoided emissions and low avoided energy cost per dollar invested.

Frank's approach takes off from here: "The benefits of a new electricity project are its avoided carbon dioxide emissions, avoided energy costs [that is, cost of fuel] and avoided capacity costs." For a summary of Frank's approach, consider this table, which shows the benefits and costs in these three categories. Notice that that the benefits and costs are measured per megawatt of electricity generated, and the changes are expresses relative to producing a megawatt less by burning coal.

The key factor in these calculations is that wind and solar run at much lower capacity than do hydro, nuclear, and combined cycle natural gas. ("Combined cycle" means that the power plant "utilizes both a gas turbine and a steam turbine to produce electricity. The waste heat from the gas turbine burning natural gas to produce electricity is utilized to heat water and produce steam for the steam turbine to produce additional electricity.") As a result, you need to build a lot more solar or wind capacity to generate the same amount of electricity. Frank explains:

For example, adjusting U.S. solar and wind capacity factors to take account of lack of reliability, we estimate that it would take 7.30 MW of solar capacity, costing roughly four times as much per MW to produce the same electrical output with the same degree of reliability as a baseload gas combined cycle plant. It requires an investment of approximately $29 million in utility-scale solar capacity to produce the same output with the same reliability as a $1 million investment in gas combined cycle. Reductions in the price of solar photovoltaic panels have reduced costs for utility-scale solar plants, but photovoltaic panels account for only a fraction of the cost of a solar plant. Thus such price reductions are unlikely to make solar power competitive with other electricity technologies without government subsidies.

Wind plants are far more economical in reducing emissions than solar plants, but much less economical than hydro, nuclear and gas combined cycle plants. Wind plants can operate at a capacity factor of 30 percent or more and cost about twice as much per MW to build as a gas combined cycle plant. Taking account of the lack of wind reliability, it takes an investment of approximately $10 million in wind plants to produce the same amount of electricity with the same reliability as a $1 million investment in gas combined cycle plants.

Thus, when you adjust for the ability of the power plant to produce the same amount of electricity, the benefits of fewer carbon emissions, less need for fuel, and benefits from replacing capacity look much lower for solar and wind. Notice that this conclusion holds true even though the carbon emissions and costs of new energy from the solar and wind facilities are estimated as zero.

For some other recent posts on U.S. energy issues, see "The U.S. Energy Picture" (June 2, 2014), "Comparing Electricity Production Costs: Fossil Fuels, Wind, Solar" (April 24, 2014), and
"Clean Energy: A Global Perspective" (April 26, 2013).

Medical R&D and Actual Health Conditions

It's a simple question: How well does the scientific research on health care issues match up with what health conditions impose the highest costs on people? James A. Evans, Jae-Mahn Shim, and John P. A. Ioannidis tackle this question in "Attention to Local Health Burden and the Global
Disparity of Health Research," which appears in the April 2014 issue of PLOS One.

They make a plausible case that health care R&D is not correlated with actual health condisions. Measure the amount of health care R&D effort by looking at the number of research articles published in that area, labelled on the right-hand axis. Measure the effect of various health care problems by looking at estimates from the World Health Organzation on DALYs--which stands for disability-adjusted life years, on the left-hand axis. The idea of DALYs is not just to measure lives lost, but also to measure health costs that might, for example, result in losing half of one's ability work in a given year. The figure shows that these measures of actual health conditions and medical R&D do not line up well.

Of course, one wouldn't expect the correlation to be perfect. At any given time, some scientific areas are surely more "ripe" for discoveries than others. Making substantial progress against a disease with a smaller footprint beats making little or no progress against a disease with a larger footprint. But still, a correlation of essentially zero between health conditions and medical research should raise some eyebrows.

The authors argue that health care research tends to follow what is geographically common near that health care research, which is a nice polite way of saying that most health care research is in high-income countries and focuses on the health problems most common in high-income countries. Here are some differences in the burden of disease profiles across countries:

For example, consider the relative burden of infectious and malignant neoplasms (cancers) in rich and poor countries. Infectious diseases like diarrheal diseases, malaria and HIV naturally levy a much higher toll in less developed countries, while cancers incur a larger burden in more developed countries with longer life spans. Respiratory infections, perinatal conditions and injuries disproportionately afflict less developed countries, while neuro-psychiatric conditions like depression and schizophrenia and musculoskeletal diseases like arthritis and back pain represent a greater burden in wealthy countries. Note the conditions that most afflict poor populations only lightly affect the rich (e.g., infectious diseases, respiratory infections, perinatal conditions), while diseases that most afflict rich populations also levy a substantial toll on poor ones (e.g., cancers, neuro-psychiatric and musculoskeletal disorders). . . .

[M]alaria, tetanus, Chagas disease, measles, Vitamin A deficiency, lymphatic filariasis, schistosomiasis, and diphtheria most disproportionately afflict poor populations. Other conditions also inflict a greater burden in less developed countries, including fires, violence, drowning, and poisoning, as also glaucoma, peptic ulcers and ear infections.

The authors raise a potentially deeper problem as well: "Not only environmental but the biological context of disease is likely to be different in less developed countries." An understanding of certain disease based on the populations and environmental conditions of high-income countries may be only partly transferable to the occurrence of that same disease in low-income countries.

It seems clear that medical research is, to a considerable extent, chasing market size, not disease burden. When you consider the number of advertisements for treatments to grow hair or to improve the sex lives of older men, who can doubt it?

An Admirable College Book-Burning

I'm usually opposed to book-burning, but I've recently discovered that Haverford College, where I graduated in 1982, used to have a tradition of book-burning that seems to me admirable and even enviable. It worked like this: Back in the 1880s, the sophomore class was responsible for choosing their least favorite book. They then planned an elaborate ceremony--marches, costumes, songs--to be held near the end of the academic year. A common highlight of the ceremony was that the worst book was put on trial, with arguments for and against, and when the inevitable conviction was announced, a copy of the book was burned at the stake. Of course, the fact that a book was convicted and executed one year didn't mean that students were able to avoid reading it the next year.

Some details are available at at a website run by the Quaker and Special Collections part of the Haverford Library. Here's one of the invitations to the event (the pointing fingers are added to the image by the librarians, and at the website they link to comments and translations):

Here's a picture of students dressing in costume for the event.  

I should admit that this type of costumed ritual, whether it involves book-burning or not, is a transcontinental distance from my personality type. But what I do like about this particular book-burning ritual, of course, is that it is rooted in an intimate and detailed connection with the text--as well as with the demerits of other texts not ultimately worthy of cremation. My guess is that the curriculum for sophomores offered a lot less choice 150 years ago, and so a high proportion of students would all read the same books. Apparently, such book-burning rituals also occurred at other schools at around this time, including Penn, Princeton, Yale, and Rutgers.

The ritural reminds me of a a story I once heard from a an acquaintance once that after completing his Ph.D. dissertation, he saved one copy for a special purpose: he executed each separate page in a distinctive manner, through numerous variations on crumpling, burning, drowning, tearing. He limited himself to executing one page per day, so that he could prolong the experience. 

Hat tip: I heard about this book-burning practice through the Twitter feed David Wessel ‏@davidmwessel 49m. David is now Director of the Hutchins Center on Fiscal & Monetary Policy at the Brookings institution, and before that was at the Wall Street Journal for a number of years. But he also preceded me as a Haverford alum, in his case with the class of 1975.

Should U.S. Government Cost-Benefit Analysis Look Outside the U.S.?

When Americans consider the costs and benefits of policy actions, should we also be counting costs and benefits for people  in other countries? Ted Gayer and W. Kip Viscusi point out in "Determining the Proper Scope of Climate Change Benefits," (June 3, 2014) that U.S. environmental regulators seem to have started counting global benefits when looking at costs and benefits of U.S. policies with regard to climate change.

Of course, any benefits from reducing climate change have global effect. Gayer and Viscusi refer to one which estimated that for a global reduction in the effects of climate change, the United States would receive 7-10% of the benefits. They point out that if the U.S. benefited relative to it share of world GDP, it would receive 23% of the benefits from reducing effects of climate change. Here's a recent example comparing global benefits to domestic costs (footnotes omitted):

More recently, the EPA proposed regulations to limit CO2 from existing power plants.
For this rule, EPA estimated climate benefits amounting to $30 billion in 2030 using a 3 percent discount rate. However, assessing these benefits in a manner that is consistent with the methodology developed by the Working Group, only 7 to 23 percent of these benefits would be domestic benefits. As a result, the domestic benefits amount is only $2.1 billion-$6.9 billion, which is less than the estimated compliance costs for the rule of $7.3 billion. (Note, however, that EPA also claims substantial air-pollution co-benefits for this rule, associated with reductions in particulate matter and ozone.)

In other words, the estimates are that the global benefits of the rule exceed the costs, but the U.S. benefits are much smaller, and may possibly (depending on how other factors are counted) not exceed the costs.

This concept of counting global benefits of U.S. regulatory actions is a clear departure from established practice. U.S. environmental laws and guidance for regulations are quite careful to specify that the cost-benefit calculations should be done for Americans. Explicit guidance for regulatory authorities from President Obama, as from previous presidents, has emphasized that they are to consider costs and benefits for "the American people."As once example, Gayer and Viscusi write:

Subsequently, the U.S. Office of Management and Budget (OMB) developed a guidance document (known as Circular A-4) for regulatory impact analyses that maintained an emphasis on domestic benefits but permitted the reporting of foreign benefits if reported separately: “Your analysis should focus on benefits and costs that accrue to citizens and residents of the United States. Where you choose to evaluate a regulation that is likely to have effects beyond the borders of the United States, these effects should be reported separately.”

But even if this practice of counting global benefits in the cost-benefit calculation is a departure from the norm, should it become standard practice? Or is it the kind of practice that will only be followed when convenient? The practice of counting global effects in U.S. government cost-benefit decisions raises some tricky issues. As Gayer and Viscusi point out, if U.S. government actions are to take benefits to foreign citizens into account on a regular basis, the policy implications could be striking.

It is important to note that granting the GHG [greenhouse gas] benefits to non-citizens equally to the benefits to citizens represents a dramatic shift in policy, and if applied broadly to all policies, would substantially shift the allocation of societal resources. The global perspective would likely shift immigration policy to one of entirely open borders, as the benefits to granting citizenship to poor immigrants from around the world would dominate any costs to current U.S. citizens. It would suggest a shift away from transfers to low-income U.S. citizens towards transfers to much lower-income non-U.S. citizens, elevating policy challenges such as eradicating famine and disease in Africa to the most pressing concerns for U.S. policymakers, trumping most domestic efforts in terms of their impact on social welfare. And a shift in policy towards fully counting the costs and benefits towards citizens of all other countries would suggest a drastic change in defense policy. A shift in policies to foster such efforts, while in many cases worthwhile, would not be consistent with the preferences of the U.S. citizens who are bearing the cost of such programs and whose political support is required to maintain such efforts.

It's easy to imagine other difficult situations that would arise. Imagine that U.S. environmental standards are tightened, and that as a result some U.S. companies decide to locate their manufacturing elsewhere. In this case, the economic gains received in other countries would be counted as a plus for the policy, which would presumably could be used to offset any economic costs the policy created in the U.S. economy.

Even if one takes the reasonable position that the U.S should give weight to benefits and costs incurred in other countries, there is a question of who determines how much weight will be given. Imagine a U.S. law which requires that U.S. companies abroad operate in a way that has certain standards for lower pollution, worker safety, not bribing public officials, and the like. Now also imagine that the other country would prefer not to have such laws, or to have lower standards. If the government of another country does not favor such laws, does the U.S. claim that people of that country gain anyway?

Economists often work with models that assume a diminishing marginal utility of of income: that is, gains or losses to people with low levels of income should have more social value than same-sized gains or losses to those which higher levels of income. (For example, this is the standard justification why society should favor a degree of redistribution, because the social cost of transferring a certain amount of income from those with higher incomes is less than the social benefit received by the recipients who have lower incomes.) But if this kind of cost-benefit analysis is to be applied to the world as a whole, costs and benefits in low-income countries will receive a greater weight than costs and benefits of the same size in high-income countries.

It seems to me that as a practical matter, the current federal rules about evaluating costs and benefits of government regulatory policies are correct: that is, evaluate them first in terms of effects on U.S. citizens, and if there are also effects on the rest of the world, by all means list them--but list the non-U.S. effects separately.

Bayer and Viscusi write: "The question of whose preferences are to be counted in the calculation of net benefits is known as standing. There has been limited academic discussion about economic standing, with the more recent studies suggesting that standing cannot be resolved based on principles of benefit-cost analysis but instead depends on the ethical consensus of society ..." Of course, this is both true and a way for economists to make sure that the buck does not stop with them, but instead is handed off to "the ethical consensus of society."

Epilogue: When thinking about how people regard their own well-being, in comparison to how they regard the well-being of people who live in faraway places, I always remember the comment by Adam Smith in his first book, The Moral Sentiments (Chapter III, Part III), where he points out
that for most people, losing your little finger would feel like a much larger calamity than the death of hundreds of millions of people in a faraway place like China. (Here, I quote from the ever-useful version of the book at the Library of Economics and Liberty website.)

Let us suppose that the great empire of China, with all its myriads of inhabitants, was suddenly swallowed up by an earthquake, and let us consider how a man of humanity in Europe, who had no sort of connexion with that part of the world, would be affected upon receiving intelligence of this dreadful calamity. He would, I imagine, first of all, express very strongly his sorrow for the misfortune of that unhappy people, he would make many melancholy reflections upon the precariousness of human life, and the vanity of all the labours of man, which could thus be annihilated in a moment. He would too, perhaps, if he was a man of speculation, enter into many reasonings concerning the effects which this disaster might produce upon the commerce of Europe, and the trade and business of the world in general. And when all this fine philosophy was over, when all these humane sentiments had been once fairly expressed, he would pursue his business or his pleasure, take his repose or his diversion, with the same ease and tranquillity, as if no such accident had happened. The most frivolous disaster which could befal himself would occasion a more real disturbance. If he was to lose his little finger to-morrow, he would not sleep to-night; but, provided he never saw them, he will snore with the most profound security over the ruin of a hundred millions of his brethren, and the destruction of that immense multitude seems plainly an object less interesting to him, than this paltry misfortune of his own.

Smith goes on to argue that people should and in fact do care about those who live elsewhere. I would add that governments should care about those in other places, too. But whether it's the case of climate change, or some other issue, it's important first to be clear on whether U.S. policies have benefits that exceed costs for the U.S. population, and then to look at the global dimensions.

Turnover on the Federal Reserve Board of Governors

In August 2013, the Federal Reserve Board of Governors, the key decision-making authority, had a full complement of seven members. Since then, four of them have resigned and one had their term in office expire, meaning that President Obama has found himself with a need to fill five slots. Here's the membership from August 2013:

• Ben Bernanke  (chairman, resigned January 31, 2014)
• Janet Yellen (vice-chair, became chairman on February 3, 2014)
• Elizabeth Duke (resigned August 31, 2013)
• Sarah Bloom Raskin (resigned March 13, 2014)
• Daniel Tarullo (term expires January 31, 2022)
• Jeremy Stein (resigned May 28, 2014)
• Jerome Powell (appointed in 2012 to a term that expired January 31, 2014) 

The prospect of having one president appoint five of the seven positions on the Board of Governors at about the same time is not how this institution is supposed to work.  Each member of the Board of Governors is appointed to a 14-year nonrenewable term, with confirmation required by the U.S. Senate. This pattern is intended to guarantee that the president can make a new appointment once every two years.

But the reality of terms and appointments to the Fed has one key difference from how it is drawn up on paper. People often leave terms early--that is, in less than 14 years. In that case, the replacement appointee serves out the remainder of that term, and the replacement then can be appointed to their own 14-year term after that. For example, Alan Greenspan first joined the Federal Reserve Board of Governors in 1987 and served out the remainder of the term that expired in 1992, before then being appointed to his own 14-year term which expired in 2006. Ben Bernanke was filling out a partially completed term at the Fed when he was a member from 2002-2005, but was then appointed to his own 14-year term in 2006.

So far, President Obama has appointed Stanley Fischer, who was confirmed by the U.S. Senate for a spot on the Board of Governors on May 28, but needs to be confirmed again to become vice-chair. The president has sent the Senate two other nominations: one for Jerome Powell to begin his own 14-year term, and Lael Brainerd, who had been undersecretary of international affairs at the U.S. Treasury. Powell and Brainerd are wending their way toward confirmation votes before the U.S. Senate. But even if or when they are confirmed, two of the seven slots on the Board of Governors will be empty. [Added: Powell and Brainerd were confirmed by the Senate today, June 12.]

The Federal Reserve has highly competent staff, and it can certainly continue to operate with its current complement of three official members (or four, given that Powell is continuing to serve while waiting to be confirmed to a new term). But the rationale for a seven-member board rotating on a 14-year cycle is that debate and discussion among a cohesive group are important to diagnosing the economy and to making policy decisions in this area, and that there is a value in continuity of experience with a slow and occasional inflow of fresh voices.

The Fed faces a number of tough decisions in the next few years: when and how to back away from policies of quantitative easing and return interest rates to more historically normal levels; how to deal with its new regulatory and consumer protection responsibilities in the aftermath of the Dodd-Frank financial reform legislation; and more broadly how to think about U.S. monetary policy in a globalizing economy where the euro is a soap opera and the U.S. economy is a decreasing share of world output. Although the new arrivals at the Board of Governors are certain to have background experience in at least some aspects of central bank operations already, the only way to accumulate experience on the job is actually to do the job.

There's no particular blame to be placed here for the high level of turnover at the Fed. But it's not how the institution is supposed to work. Here's my pledge: In the extremely off-chance that I am nominated to fill one of the vacant Board of Governor slots, I will only accept with the intention of serving the full 14-year term.

U.S. Science; An Eroding Lead in a Global Economy

Yu Xie asks "Is U.S. Science in Decline?" in the Spring 2014 Issues in Science and Technology. The article is an abbreviated version of the Henry and David Bryna Lecture for 2013 that Xie gave at the National Research Council. The talk can be viewed here, and I'll lift a few of the slides from the talk for this post. As an overall perspective, Xie writes:

"Science is now entering a new world order and may have changed forever. In this new world order, U.S. science will remain a leader but not in the unchallenged position of dominance it has held in the past. In the future, there will no longer be one major world center of science but multiple centers. As more scientists in countries such as China and India actively participate in research, the world of science is becoming globalized as a single world community. . . .Just because science is getting better in other countries, this does not mean that it’s getting worse in the United States. One can imagine U.S. science as a racecar driver, leading the pack and for the most part maintaining speed, but anxiously checking the rearview mirror as other cars gain in the background, terrified of being overtaken. Science, however, is not an auto race with a clear finish line, nor does it have only one winner. On the contrary, science has a long history as the collective enterprise of the entire human race. In most areas, scientists around the world have learned from U.S. scientists and vice versa. In some ways, U.S. science may have been too successful for its own good, as its advancements have improved the lives of people in other nations, some of which have become competitors for scientific dominance."

Here's the story of China's rise to global scientific prominence in four graphs. One way to measure scientific output is the number of research papers published. The U.S. still leads the world in this area, but its lead is eroding. The sharp rise of China as a producer of scientific papers is clear (red line) but also notice the considerable rise in scientific papers from India (bottom light blue line). 

Perhaps these scientific papers from China tend to be on relatively unimportant subjects, while the really important work continues to be done in the United States? One way to measure this possibility is to look at how often papers from other countries are cited by other research. In the past, U.S. research was cited more than other countries, but that lead is also eroding. Scientific papers from the UK and Germany are now cited more often than similar papers from the US, and scientific papers from other countries, like China and India, have seen a rise in their citations relative to the U.S. level, too.

Underlying these trends in scientific papers are the number of people trained in science. The number of undergraduates getting scientific degrees in China has skyrocketed, and the number of science and engineering Ph.D.s in China now exceeds that in the United States. One can raise a valid concern that the quality of education in China might not in all cases be up to U.S. levels, but the overall trends and patterns remain remarkable. 

Of course, part of what feeds these trends is just China's overall economic growth. One can argue, as Xie does, that it's not so much a matter of the U.S. science and engineering effort being lower, as a matter of rapid catch-up elsewhere in the world. Xie writes: "Census data show that the [U.S.] scientific labor force has increased steadily since the 1960s. In 1960, science and engineering constituted 1.3% of the total labor force of about 66 million. By 2007, it was 3.3% of a much larger labor force of about 146 million." Xie is also quite correct to note that science and prosperity should not be viewed as zero-sum games. 

That said, my own belief is that the U.S. dramatically underinvests in research and development, which is to say that it underinvests in the activity that hires so many scientists. The U.S. R&D effort has been essentially stagnant at about 2.5% of GDP since the mid-1960s. Some economic studies suggest that the optimal level of U.S. R&D would be 2-4 times the current level. One troublesome sign is that the labor market rewards for scientists in the U.S. have not kept pace with those of other high-status professionals. Xie writes: 

[O]ur analysis of earnings using data from the U.S. decennial censuses revealed that scientists’ earnings have grown very slowly, falling further behind those of other high-status professionals such as doctors and lawyers. This unfavorable trend is particularly pronounced for scientists at the doctoral level. . . . [S]cientists who seek academic appointments now face greater challenges. Tenure-track positions are in short supply relative to the number of new scientists with doctoral training seeking such positions. As a result, more and more young scientists are now forced to take temporary postdoctoral appointments before finding permanent jobs. Job prospects are particularly poor in biomedical science . . .

At some deeper level, however, Xie's article doesn't quite come to grips with fundamental problem. Many people support public funding for scientific research because they believe that it will translate into a stronger U.S. economy, along with better-paying jobs and a rising standard of living over time. This argument as a strong historical foundation: that is, there are many examples in the U.S. and in other countries where scientist and industry interacted in this way. But in a globalizing economy, the linkage from science to the economy is less clear. If a new scientific discovery leads to a company with a U.S. headquarters and research lab, but production facilities someplace like Mexico, China, Indonesia, or South Africa, the economic payoff from that scientific discovery becomes less clear. Thus, while I would support a dramatic expansion of R&D efforts, I also believe that the U.S. needs to be rethinking the institutions and information pipelines that connect scientific discoveries, new and expanding companies, and a productive U.S. workforce.