New Commanding Heights Watch

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Two posts from Matthew Klein.

First

96 per cent of America’s net job growth since 1990 has come from sectors known to have low productivity (construction, retail, bars, restaurants, and other low-paying services were responsible for 46 percentage points of total growth) and sectors where low productivity is merely suspected in the absence of competition and proper measurement techniques (healthcare, education, government, and finance explain the remaining 50 percentage points)

Second

since 1990. . .a whopping 88 per cent of the total rise in the price level boils down to four sectors of the US economy [health care, education, housing, and prescription drugs]:

Pointer from Tyler Cowen. There is much to chew on, and probably much to quibble about. What I want to suggest is that the relative price shifts involving the New Commanding Heights sectors of health care and education in relation to goods-producing sectors ought to be considered much more important than the comparatively trivial amounts by which the “aggregate price level” (a concept for which I have little use, but so be it) has wiggled around.

Over the past 25 years we have had major structural shifts in the economy. I claim that those structural shifts have played a larger role than monetary policy in the behavior of employment and “the aggregate price level.” But if you look at both the journalistic accounts and the academic literature, I am confident that you will find many more mentions of monetary policy than of structural change in interpreting economic events. If I had any influence, that would change.

Asking Different Questions

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Tyler Cowen writes,

note that essentially none of those income gains went to rural areas. That meant a 7.4% wage gain for larger cities — does the raise the import of the case for deregulating building?

I think that he took his figures from the Census report, but I cannot be sure. I think that “wage gain” should be “income gain,” but again I cannot be sure.

I would ask different questions:

1. Does it raise the import of the case for looking carefully at making cost of living adjustments that differ by location? If the cost of living fell in rural areas, then they had some real income gains. If the cost of living soared in larger cities, then they had less real income gains than are reported if one uses an aggregate price index as the denominator in a real income estimate.

2. In which location–rural areas or large cities–are government transfer payments a larger share of household income? My guess is that transfers make up a larger share in rural areas. In that case, in spite of (1), the report may under-estimate the relative economic strength of larger cities.

Two Random Thoughts on Artificial Intelligence

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I attended a talk and two panels, one of which was moderated by Alex Tabarrok.

1. Susan Athey said that companies like Facebook and Google are learning rapidly by doing many large randomized controlled trials. This gives them a way to lever their leadership positions. It suggests that “deep learning” might boost economies of scale.

2. Colin Allen suggested that if self-driving cars are programmed to stop for pedestrians, and pedestrians know this, pedestrians could become more reckless and aggressive. Hmmm.

Technical Difficulties

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I continue to have problems reaching this blog (which means I have a hard time updating it). Others are also reporting problems.

The best advice I have gotten has been to re-start my router. This has worked a couple of times, including just now. I have no idea why the router wants to stop talking to the site. It is fine with arnoldkling.com in general, but getting to arnoldkling.com/blog often fails, and logging into wordpress often fails.

An Abundance of Workers?

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I received an advance electronic copy of Ryan Avent’s forthcoming The Wealth of Humans. I have not read very far, but he seems to say that a major social problem these days is an over-abundance of workers. However, consider this WSJ blog post.

traits that are hard to define, but ever-present among good employees: professionalism, determination and adaptability and the ability to communicate, work together and take criticism. Or even just show up on time and follow a dress code.

The claim as that these soft skills are in short supply.

I am going to be old-school and say that whenever you see a “shortage” or an “over-abundance” you should ask what is wrong with the price mechanism. If you are having trouble finding workers with the traits that you want, then you are not paying enough for those traits.

Back to Avent. If there appears to be an over-abundance of workers, then what is going wrong? Maybe those individuals have, in Tyler Cowen’s evocative phrase, Zero Marginal Product. Also, it could be that the required marginal product is high because of minimum wages and labor market regulation. Or it could be that labor supply is reduced because of government programs that subsidize non-work and tax work.

Avent wants to assign a large causal role to capital equipment, especially smarter capital equipment. I think that is only one of the four forces, the others being: a shift toward the New Commanding Heights (education and health care) where soft skills matter more; factor-price equalization, meaning that foreign workers now compete more with domestic workers; and assortive mating, which breeds greater inequality.

When journalists and academics warn of a future with a job shortage, the cynic in me is inclined to say, “You mean a shortage of jobs that journalists and academics think of as appropriate for themselves.” Keep in mind that many colleges attempt to indoctrinate students that business is unfulfilling and profit is evil. But profit-seeking businesses are motivated to find uses for otherwise-idle productive resources. The fate of the next generation of Ryan Avents is not to be unemployable. Rather, some of them may end up in business jobs that journalists and academics might have trouble picturing themselves doing.

My Early Prediction of I-Phone’s Latest Innovation

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When I saw this story,

Now it’s headsets: spending on wireless headsets overtook wired ones last year, says Steven LeBoeuf, founder of Valencell, a developer of biometric sensor technology for wearable devices.

I was reminded that back in 2001 I wrote,

I can imagine a world in which everyone spends several hours a day wearing a headset. There will be a software industry devoted to building applications for the headset platform, which consists of earphones, a microphone, and something that I call a “tuner.”

It is an amusing essay to read–wrong in many respects, but actually quite prescient in others.

When Price Regulation is the Solution. . .

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Scott Alexander writes,

Some people have talked about funding research via “prizes” rather than through an investment-and-profit model. Some people say we should fund it publicly through the NIH or something, which we already sort of do to a degree. Still other people say that we should abolish the FDA, cut the costs of drug development by an order of magnitude, and, um, see what happens. I don’t know about any of those things. I just feel like until you’re ready to set these up and have some idea that they work, do the thing that probably is going to result in people having the best access to the most life-saving drugs. Which right now looks like no price control.

Read the whole thing. His point is that, holding other policies equal, price controls would result in less pharmaceutical innovation and considerable harm.

I am going to drop the “other policies equal” assumption to make a point. That is, whenever someone proposes price controls as a solution, I assume that some other government policy is the problem. In the case of pharmaceuticals, the FDA really does impose huge costs, and those are what feed into drug prices.

To use another example, rent control is often a “solution” to the problem of restrictive land-use regulation. The minimum wage is a “solution” to the problem that payroll taxes and labor market regulations create a large wedge between the cost to firms of employing workers and the take-home pay that finds it way into those workers’ pockets. Price controls in medical care are a “solution” to the problem of government policy that subsidizes demand and restricts supply.

Economies are Embedded in Cultures

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Peter Richerson, et al, write,

Economic competition is an important and typically peaceful form of CGS.

CGS is “cultural group selection.” Pointer from Joseph Henrich in comments on a Tyler Cowen post.

In my view, cultural group selection fits well with Austrian economics but poorly with Chicago economics. Hayek and others pay attention to cultural norms, while Chicago economics is more purely individualistic. See Erwin Dekker’s book.

For example, if you take the Chicago view that focuses on atomistic optimization by individuals, then racial discrimination seems to be unlikely in a market economy. Someone who is willing to hire blacks seems likely to out-compete someone who only hires whites.

However, suppose that you have a group norm in which refusing to hire blacks is considered cooperation and hiring blacks is considered defection. Also, suppose that groups that are more effective at rewarding cooperators and punishing defectors tend to be more successful. In that case, racial discrimination could persist because of cultural group selection.

The theory of cultural group selection can create discomfort if you like to believe that social outcomes are purely deterministic. Instead, with group selection a wider range of outcomes becomes possible, with the potential for norms and practices to survive that seem arbitrary or even counter-productive. While one might object that this makes the theory messy, I think it is realistic.

I believe that one of the important limitations of what in Specialization and Trade I disparage as MIT economics is that it ignores cultural context. Instead, I believe that the fact that economies are embedded in cultures is very important.

Alan Kirman on Microfoundations

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He writes,

Although in fields such as statistical physics, ecology and social psychology it is now widely accepted that systems of interacting individuals will not have the sort of behaviour that corresponds to that of one average or typical particle or individual, this has not had much effect on economics.

Note that in macroeconomics, an economist will say that a model is “microfounded” if (and, seemingly, only if) you use a representative individual to represent the entire economy. Kirman, like me, objects to this. However, in my opinion one does not need a lot of floofy rhetoric about “complex adaptive systems” to know that this is wrong. It is sufficient to recognize the importance of specialization in the economy.