🙏 We all should hope the US economy can avoid recession. Really.
Also: A Q&A with … economist Alex Whalley on the economics of moonshot R&D spending
Quote of the Issue
“This I believe: America again can enjoy the material and societal benefits of fast technological progress and rapid, innovation-driven growth. For that to happen, however, America must again become what I call an Up Wing country. Up Wing is my shorthand for a solution-oriented future optimism, for the notion that rapid economic growth driven by technological progress can solve big problems and create a better world of more prosperity, opportunity, and flourishing. The most crucial divide for the future of America isn’t left wing versus right wing. It’s Up Wing versus Down Wing.” - James Pethokoukis, The Conservative Futurist: How to Create the Sci-Fi World We Were Promised
Now on sale everywhere: My new book The Conservative Futurist: How To Create the Sci-Fi World We Were Promised
The Essay
🙏 We all should hope the US economy can avoid recession. Really.
A brief thought experiment: Imagine you’re someone who opposes the economic policies of the current American president, and there’s an election a bit more than a year away. Should you hope for recession so that the incumbent POTUS would be at least marginally less likely to win a second term?
The obvious, first-order, humane answer here is “no.” With recessions comes rising unemployment. Losing a job is no fun, to say the least, either for the worker or their family. (It was certainly shattering for my family back during the nasty 1981-82 recession.) If the Federal Reserve is raising interest rates to combat inflation, one should always hope the central bank can bring inflation down without pushing the economy into a downturn, a so-called soft landing.
But what if the presidential challenger would implement all the good pro-growth, pro-progress, Up-Wing policies that are promoted by this newsletter? Even setting aside the damage from higher unemployment, the answer is still “no” — and for a hard-headed reason, one found in the recent NBER working paper, “Zero-Sum Thinking and the Roots of U.S. Political Divides” by economists Sahil Chinoy (Harvard University), Nathan Nunn (Vancouver School of Economics), Sandra Sequeira (London School of Economics), and Stefanie Stantcheva (Harvard University).
Two critical findings from that paper, as I recently wrote:
In environments where resources are limited, a zero-sum mentality—where one group's gain is perceived as another's loss—often emerges. This is particularly observable in smaller, pre-industrial societies with finite resources and during periods of economic stagnation. Conversely, periods of economic growth may lead to a more positive-sum viewpoint, where an increase in resources for one does not necessarily mean a decrease for another.
Those who grow up in times of prosperity and expanding opportunities are more likely to believe the economic pie can continue growing, so that more people can benefit. They tend to see the economy in positive-sum terms, where win-win outcomes are possible through innovation and hard work. In contrast, those whose formative experiences included significant economic struggle and lack of social mobility are understandably more skeptical. They tend to view the economy in zero-sum terms, where gains for some necessitate losses for others.
These two charts from the Financial Times illustrate the findings of the study:
Look, from 2007 through 2022, the American economy grew at less than half the pace of the previous multi-decade period extending back to the end of World War Two, experiencing both a Great Recession and Great Pandemic during that span. What this country desperately needs now is an extended period of rapid economic growth driven by rapid technological progress and innovation. That sort of success would help contribute to a virtuous circle of greater economic optimism and willingness to accept the inevitable risk and disruption from change, all in the hope for a brighter future for ourselves and future generations.
Which brings us to the September employment report, released earlier today. I would guess the most common interpretation is that blockbuster job numbers — over 300,000 new jobs added, the most since January — increase the likelihood of more Fed rate hikes. As JPMorgan’s economics team puts it:
The unemployment rate was unchanged at 3.8%, as was the participation rate at 62.8%. More generally, the details of the household survey were less boomy than the establishment survey. Despite the strength in hiring, average hourly earnings increased only 0.2% last month, the second consecutive downside surprise. While these other details are all nice and consistent with the soft landing story, it’s hard to turn the conversation away from the headline employment figure. Senior Fed leaders have recently sounded content with policy on hold, a leaning that has been reinforced by the ongoing tightening in financial conditions. While we’re sticking with our call for rates on hold, if today’s number is followed by hot inflation data the Fed may get pulled into another hike. And if that happens the already-tenuous case for avoiding recession next year gets harder to make.
Fingers crossed, though, that the New Roaring Twenties have finally lifted off and next year will be one of sustainable acceleration where good economic news really is good economic news.
Q&A
💡 A Q&A with … economist Alex Whalley on the economics of moonshot R&D spending
What if the Space Race never ended? That’s the counterfactual explored in the fantastic Apple TV+ series, For All Mankind. (You can read about my love for the show here.) In the FAM universe, the Soviets beat us to the Moon, and we just keep on racing. Continued global technological competition pushes the frontier forward: Fusion energy and lunar bases are just two of the marvels enjoyed by 1990s Americans in the show. That vision of what could have been neatly presents the case for greater federal R&D spending going forward. As I recently told Politico, “I think one of the biggest mistakes we’ve made is that we didn’t follow Project Apollo with something else on that scale.”
Of course, all of this raises an interesting question: What effect did the Space Race against the Soviet Union actually have on long-term economic growth in the United States? And that’s exactly what economists Shawn Kantor (Florida State University) and Alexander T. Whalley (University of Calgary) try to figure out in their NBER working paper, “Moonshot: Public R&D and Growth.” It’s a fascinating paper and well worth the read, but for a taste, check out my Q&A with Alex Whalley below.
Whalley is an Associate Professor of Economics at the University of Calgary and the Haskayne School of Business.
1/ What question were you trying to answer with your “Moonshot” paper?
We were trying to answer this question of, does the moonshot generate broad-based economic spillovers? Is this a strategy for economic growth? Are you generating new technologies, new things that are used in other industries, other sectors? Or is it really narrowly focused? Is it focused just on the space sector and doesn’t generate these broad spillovers? There's a quote from Obama in his State of the Union address in 2011 where he is saying, “We need to have another moonshot to create millions of jobs.” And well, what happened to the first moonshot? Did it create millions of jobs across the American economy or did it just kind of stimulate the space sector?
2/ What did you find about the impact? Was it broad or was it narrow?
We find a pretty narrow impact. We find it's really focused within the space sector itself. We don't find the other sectors really benefited very much. If you're next door to a space firm or you're in a sector that's close by to the space sector, you don't really benefit that much. It really seems like the space sector is where the effects are concentrated.
3/ Is your methodology able to capture spinoff technologies that ended up creating jobs or boosting productivity?
We can capture some of it, but not all of it. We're looking at the manufacturing sector, and so we're going to capture some of those local effects that are next door to a space company and things like that. We do measure productivity pretty carefully, so we have pretty good data on that. We think if technology improves, firms get more productive, they can produce stuff at lower cost or they have new products that they can sell to customers they didn't have before. We should capture those. We expected to find bigger, broader-based effects. And we were certainly surprised by what we ended up finding. There are not a lot of careful evaluations of NASA in terms of the economic impacts. It really surprised us. We thought there would be a bunch of papers in the ‘80s or ‘90s trying to do this assessment, and we might come to it with better data, better methods. But really, there's really not very much there at all. So it's kind of shocking that this is one of the first papers to really investigate this question.
4/ So how different then was NASA spending than any other kind of government spending on growth and job creation?
Our conclusions is, really, it doesn't seem that different from other things. If you go back, there's a really interesting interview they did with a bunch of space scientists in the early 1970s. They asked them to reflect on NASA being involved in the space program: What technologies did they develop and how did NASA impact the technological development? And in those interviews, what comes through is that NASA is really speeding up the pace of technology; it's not generating that many completely new technologies nobody has ever thought of. And so I think that's really what it does. It kind of accelerates. It's kind of like Operation Warp Speed with vaccine development: A lot of the elements were there already, and so having massive government investment, having the regulatory burden reduced, this kind of national priority to meet this goal, I think that really accelerates innovation. But I'm not sure it's a completely different animal.
5/ NASA bought a lot of the computer chips that were being created and built in the 1960s, and as I understand it, there's some reason to believe that it may have helped that sector expand. Is that something you looked at?
I think it's a really interesting idea. I’ve definitely read that in historical records. Before the Space Race, most computer technology used vacuum tubes, and then you get integrated circuits. And NASA is one of the first customers to use that. Part of the reason is that you can't take a lot of vacuum tubes up into space because you have to replace them in space when they wear out. So they decided to go with integrated circuits and were an early customer there. Definitely, there's an aspect where NASA is a leader in that space. We don't see it in our data. Our data might not be fine grained enough to really see those aspects. But of course, at the same time, there is a lot of private-sector interest in the development of computer technology. We have massive investments in computer technology in the 1960s. Teasing out NASA's role versus other factors is kind of a challenge.
6/ How would you decide on a goal for a moonshot project?
I think that really comes down to society's priorities. For the Space Race moonshot, there was this technological potential that was already there. There were already a lot of the building blocks for success in the space program. Kennedy and the leadership at the time were very conscious of being able to win the Space Race. When they went in it, they wanted to feel that they could win. And so when Kennedy first started thinking about it, the goal was to get to the Moon in 1967, because that was 50 years after the communist revolution. That's what they thought the Soviet target was. They wanted to try to go for that target. But some of the advisors talked them back and said, “Hey, let's go for the end of the decade. Give us a couple more years so we can really get there.”
I think it is an aspect of having that technological potential where you can see that, if you invest the scientific resources, you can get there. And then matching that up with society's goals. I think some of the other moonshot areas where it's social programs or social problems, those are harder to see, where the solution is not necessarily just a new technology. So I think it is picking and choosing the right areas.
7/ What should be your economic expectations of a moonshot project?
What we've learned is the moonshot should be motivated by the goal of the moonshot. The goal of the Space Race moonshot was to send a manned crew to the Moon and safely return them to Earth. And so it was very successful in doing that. It's an amazing technological achievement. When you're thinking about a moonshot, you should think about those specific outcomes that are tied to the mission. You shouldn't necessarily expect these kind of broad-based economic effects, like the whole economy will be transformed by the moonshot. You should really focus on that goal. Climate change might be another example of a moonshot: We should focus on trying to achieve that goal rather than focusing on how that's going to just generate all kinds of spillover effects across the economy.
8/ There’s a lot of talk about creating tech hubs across the United States, especially in “left-behind” areas, like in the upper Midwest. Does your paper offer any lessons on government’s ability to do that?
Absolutely. I think it definitely offers messages there. You can attract that skilled population by making a persistent technological investment. And the high-skilled labor force is pretty mobile. Acientists and high-skilled workers move around quite a bit, so they will be attracted by the opportunity. One aspect of technological hubs you have to think about is, are you just moving people around or are you making the whole economy bigger? If we have a tech hub in one area of the United States, is it just kind of sucking in brains from other parts of the country where you're having brain drain, or are you actually making the pie bigger? And so that's something we try to figure out in our paper. We don't really find that it's just displacing people. It seems like the pie is getting bigger in the space sector, so there is something there happening.
Micro Reads
▶ How the Big Chip Makers Are Pushing Back on Biden’s China Agenda - Tripp Mickle, David McCabe, and Ana Swanson, NYT |
▶ Elon Musk Says SpaceX Could Land on Mars in 3 to 4 Years - Kenneth Chang, NYT |
▶ How Nvidia Got Huge—and Almost Invincible - Dan Gallagher, WSJ |
▶ Harnessing the power of X: Promoting research on social media pays off - Ali Önder and Sascha Schweitzer, VoxEU
▶ Why the first-ever space junk fine is such a big deal - Jonathan O’Callaghan, MIT Technology Review |
▶ A glimpse inside how the James Webb Space Telescope was put together - Gege Li, NewScientist |
▶ World’s largest space conference succeeds in making a Starship update boring - Stephen Clark, Ars Technica |
▶ Profits Are Awesome, and All around Us - Walter Block, FEE |
▶ Why Japan’s demographics scream ‘buy’ - Leo Lewis, FT |
▶ Productivity has grown faster in western Europe than in America - Economist |
▶ The ‘New Conservatism’ Is Driven by Bad Economics - Norbert Michel, Cato |
▶ What a striking new study of death in America misses - Dylan Matthews, Vox |
▶ American Apocalypse? 71% Don’t Trust U.S. Government To Prevent Doomsday - Chris Melore, StudyFinds |
▶ What Do We Owe the Octopus? - Emily Mullin, WIRED |
▶ US Higher Education Needs a Revolution. What’s Holding It Back? - Tyler Cowen, Bloomberg |
▶ Is There Really a 1 in 6 Chance of Human Extinction This Century? - Steven Stern, RealClear Science |
Apollo was a campaign in the Cold War. It taught the Soviets not to compete head-to-head with the USA, and the West more generally. Debacles like the TU-144 only re-enforced that lesson, not that they still didn’t have to re-learn it periodically. It’s why they believed the USA would make SDI work. It’s why their networks of agents of influence opposed SDI.
Considering the current labor market presented to employers, I must argue that maybe a slow down is much needed to realign the mindset of many employees. A robust adaptation to automation and disruption via LLM implementation would be the preferred alternative, but I sense that the day of successful human employment is near its end. In the interim, a recession may be needed to correct these misalignments. Faster Please! I can't wait!