Neil Irwin, the Washington Post’s indispensable economics reporter, briefly summarized a new report from Goldman Sachs on the state of the economy and it’s likely near-term trajectory:
Activity in each of these areas [housing, capital spending, autos and other durable consumer goods, employment] fell so much during the recession that they just don’t have much more room to fall, even if the recovery continues to disappoint. So while sluggish growth may be with us for a while, it’s unlikely that there would be a return to actual contraction in economic activity.
This leads me to a fascinating July report from Michael Mandel on the case for countercylical regulatory policy [PDF], published by the center-left Progressive Policy Institute. Mandel begins by asking why job growth has proven so disappointing in innovative sectors.
Certainly there are a wide range of reasons why innovative job growth has fallen so far short of expectations. Offshoring accounts for part of the job loss, especially in the infotech hardwareindustry. Internet-related businesses took yearsto recover after the dot-com crash. In someindustries, notably pharmaceuticals and biotech, important innovations took longer than expectedto get from scientific discovery to commercial products.
But the intensified regulatory regime that followedthe tech bust—notably the Sarbanes-Oxley Actof 2002, which set new accounting standards—clearly has to be part of the explanation for the joblosses in the innovative sector. Congress imposed greater compliance costs on companies, including start-ups, in order to deter the excesses of the tech boom. Studies have produced a wide rangeof estimates for the size of extra costs, but it’s only common sense that such regulations weigh heavier on new companies.
Similarly, over this period, the Food and Drug Administration moved to tighten up approvals of new drugs, especially after the 2004 Vioxx debacle.Once again, the intensified regulatory regime wasdriven by good intentions, but the negative effecton innovation may have been significant.
I think this is tremendously important, and not very well understood. Scott Winship and I have a piece in the new National Review that offers an explanation as to why job growth has taken the pattern it has, and that offers a program of reform designed to help reduce job-lock and other inefficiencies that stifle growth. But there’s much more to say.
For Mandel, the communications sector appears to be an important source of future economic and job growth:
This interconnected and self-reinforcing collection of industries is reminiscent of the early stages of past booms, which were never driven by a singleindustry. In this case, the employment expansion of several communications-related industries, despite the overall weak labor market, is a sign that the broad communications sector is going to be a leader in the coming recovery.
As Mandel goes on to explain, sectors that shrink during a downturn tend not to grow very quickly during a recovery. Sectors that grow through a downturn tend to pick up a head of steam. The policy upshot of Mandel’s paper isn’t terribly dramatic: he proposes, among other things, a pause in the FCC’s efforts to regulate broadband.
Robert Litan and Hal Singer have made a related case against new net neutrality regulations in Harvard Business Review, which I find convincing. The debate over net neutrality has been too ideological for my tastes, with advocates taking an apocalyptic view of so-called “priority delivery” and opponents accusing proponents of being crypto-Marxists. My instincts are with supporters of open standards and protocols, yet I tend to think that regulation in the wireless — not necessarily the wireline — space is an inferior alternative to competition.
I’ll soon have more to say on reforming regulatory policy to encourage job growth. For now, I think Mandel makes a solid case for FCC restraint. Mandel has also written a very insightful post on the changing complexion of the journalism profession. His basic take is that the gloom-and-doom narrative about journalism is profoundly wrongheaded, and I tend to agree.