Brad DeLong’s History Lesson, and another Puzzle

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Interesting throughout, and difficult to excerpt.

You would imagine, therefore, that once the iron-hulled ocean-going screw-propellered steamship and the submarine telegraph cable had made their appearance, factory work worldwide would have rapidly gone to where labor was cheap. Yet from 1850-1980 that was not the case. Factory work by and large stayed where labor was expensive. And those economies that did manage to figure out how to utilize British Industrial Revolution and Second Industrial Revolution technologies at near-frontier levels of efficiency rapidly joined the club of rich economies that was the Global North.

I actually disagree with DeLong’s answer to this puzzle, which is that the underdeveloped world failed to industrialize because the countries of the Global South lacked strong home markets. I take the view that differences in culture and institutions were the key factors. I believe that it is Gregory Clark who pointed out that when early cotton manufacturing entrepreneurs took factories to India, they found that the workers did not function effectively.

Expensive Cities and Labor Immobility

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Peter Ganong and Daniel Shoag write,

Though lawyers still earn much more in the New York area in both nominal terms and net of housing costs, janitors now earn less in the New York area after housing costs than they do in the Deep South. This sharp difference arises because for lawyers in the New York area, housing costs are equal to 21 percent of their income, while housing costs are equal to 52 percent of income for New York area janitors. While it may still be “worth it” for skilled workers to move to productive places like New York, for unskilled workers New York’s high housing prices offset the nominal wage gains.

Once again, land-use regulation is accused of being a major culprit. And along those lines, discussing Tokyo, Alex Tabarrok writes,

Rising housing prices are not an inevitable consequence of growth and fixed land supply–high and rising housing prices are the result of policy choices to restrict land development.

However, note that in a post devoid of politics or vitriol, Paul Krugman writes,

In today’s world, core headquarters functions – the stuff done by top executives and highly paid experts – can be unbundled from the more mundane operations of a company. These high-end functions are also the ones that benefit most from the agglomeration economies of a big city; not to mention the amenities such a city offers to people whose salaries are enough to let them afford decent housing despite high prices.

Meanwhile, it’s no longer necessary to have all the back-office operations in the same place, requiring that a lot of less-well-paid workers deal with high rents even as they suffer on the long subway ride in from Queens.

Pointer from Mark Thoma.

The point is that with modern communications technology, the upper echelons no longer have to be close to all of their mid-level staff.

This particular form of unbundling may or may not be the major factor. However, I think that patterns of specialization have shifted in ways that allow the affluent to invade some major cities and drive out the less-affluent. My view is that, as with colleges, affluent residents are a powerful attraction to other affluent residents, so that you head toward an outcome in which there is competition for “admission” to the high-end cities. For a variety of reasons, including differences in tastes, many of the less-affluent do not enter this competition.

The New Voodoo

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John Cochrane writes,

Economics is a work in progress. But it is certainly brand-new, made-up-on-the spot economics, designed to buttress policies decided on for other reasons.

He is describing the economic analysis that claims that policies to distort labor markets to try to increase wages will increase aggregate demand, so that instead of reducing employment these policies will raise employment.

I am reminded of the made-up-on-the spot economics of the Laffer Curve, which claimed that cutting taxes would reduce budget deficits. That became known as “voodoo economics.”

So where once we had supply-side voodoo economics, we now have demand-side voodoo economics. Just what we needed.

Dietrich Vollrath on Brad DeLong’s Manufacturing Puzzle

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Vollrath writes,

everything makes sense if ϵI=0.77. That is, if the income elasticity of demand for manufactured goods is a little less than one. An elasticity less than one means that if your income goes up by 10%, your expenditure on manufactured goods rises by less than 10%. It goes up, but not by a similar percent. This income elasticity less than one acts a lot like the “demand shift” that DeLong dismisses in his first scenario. If you like, I’ve just given a very specific form to that demand shift.

Which is point (3) in my post on the puzzle.

Pointer from Mark Thoma.

Temporary Benefits of the Trump Candidacy

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Today’s WaPo writes,

scholars of the presidency say that Barack Obama, George W. Bush and their predecessors have added so many powers to the White House toolbox that a President Trump could fulfill many of his promises legally — and virtually unchecked by a Congress that has proven incapable of mustering much pushback for decades.

It’s nice to see the Post say something positive about checks and balances. Of course, if Mrs. Clinton wins in November, I expect the paper will return to bemoaning Congressional obstructionism and gridlock.

Rights and Consequences

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I read the latest (final? I hope not, because I have some critical comments) draft of Tyler Cowen’s Stubborn Attachments, which he describes as follows:

I outline a true and objectively valid case for a free and prosperous society, and consider the importance of economic growth for political philosophy, how and why the political spectrum should be reconfigured, how we should think about existential risk, what is right and wrong in Parfit and Nozick and Singer and effective altruism, how to get around the Arrow Impossibility Theorem, to what extent individual rights can be absolute, how much to discount the future, when redistribution is justified, whether we must be agnostic about the distant future, and most of all why we need to “think big.”

One of the issues that Tyler raises that I think ought to be resolved somewhat differently is that of the role of rights in consequentialism. In a sense, basic rights, like property rights, dangle awkwardly in a consequentialist philosophy. If I can create more happiness by giving your corn to someone else, why should you have the right to keep it?

I am inclined to give a Hayekian account of why you should have the right to choose whether to eat, plant, trade, or donate your corn. That is, you are likely to know the best of use of your corn, including the best moral use of it, thanks to your local knowledge. Thus, the consequences are likely to best if you make the decision rather than I make the decision.

In fact, in cases where we think that you are not competent to make the decision (a child, or someone with severe mental deficiencies), we do not treat property rights as absolute. Thus, our intuition about rights is tied up with the issue of how much we respect the person’s local knowledge.

One view of moral philosophy is that our intuitions are basically right, and it is the philosopher’s job to come up with a system of thought that accounts for and perhaps codifies our intuitions. While I would not go to this extreme, it is always something to consider in moral philosophy.

On the other hand, if you told me that economists’ intuitions about what constitute high-quality research are basically right, and the job of economic epistemology is to come up with a system of thought that accounts for and perhaps codifies our intuitions, I would be inclined to object. But perhaps I am willing to say that it something to consider in economic epistemology.

Does War Improve Cooperation?

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I review Peter Turchin’s book from 2005. My final paragraph:

For libertarians, these are crucial questions. In order for markets to function well, they must be embedded in cultures that promote pro-social behavior and are conducive to trust. If the absence of external conflict weakens the bonds that prevent internal conflict, then the libertarian goal of peaceful cooperation in all domains will prove elusive.

Coincidentally, the Journal of Economic Perspectives that just came out has an article on this topic by Michal Bauer, Christopher Blattman, Julie Chytilová, Joseph Henrich, Edward Miguel, and Tamar Mitts. They conclude,

Most of the papers in this emerging literature agree on one central matter: that the data strongly reject the common view that communities and people exposed to war violence will inevitably be deprived of social capital, collective action, and trust. Across the 16 studies from economics, anthropology, political science, and psychology, the average effect on a summary index of cooperation is positive and statistically significant, if moderate in magnitude.

A More Timely Measure of Rent Inflation

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Adam Ozimek writes,

As I proposed in my work, CoreLogic utilizes an approach that mirrors the S&P/Case-Shiller house price index. This approach measures current market prices by using only new leases, and controls for housing quality by tracking the same units over time.

Pointer from Tyler Cowen.

The standard BLS measure is more like a smoothed lagging indicator. Relative to the BLS path for rental inflation since 2008, Ozimek’s revised path shows inflation dipping by more early in the recession and then climbing by more during the recovery (should I say “recovery”?).

Unlike Ozimek, I see this as having zero impact for the macroeconomic theory of the Phillips Curve. That theory deals with the rate of wage change, and changing how you measure rent inflation does not change the history of wage inflation. To show a meaningful trade-off between wage growth and unemployment in recent years, you are going to have to find another data-massaging trick.

Of course, I admit that I used consumer prices in my recapitulation of Phillips Curve history. If I were extending that essay today, I would say that the Phillips Curve died again in 2008-2016, which is another period in which conventional macro does poorly. The Kling/FischerBlack view of inflation, which is not confounded by recent data, is presented in my latest book.

Zoning After 100 Years

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Justin Fox writes,

Fischel has a long list of explanations for this intensification of zoning that I won’t go into here, other than to mention the one that drives me the craziest — the dressing-up of self-interested economic arguments in the language of environmentalism and morality.

Pointer from Mark Thoma.

My thoughts:

1. In urban areas, there are important spillover effects from development. Your new building might block my view, create noise or congestion, and so on. In theory, this would be resolved in a Coasian manner–either you compensate me for the harm that you do or I compensate you for not allowing you to build. But in practice the mechanisms for Coasian bargaining do not exist. Hence, these spillovers are dealt with by the political process.

2. Land-use regulation is a major source of political power. If the teachers’ unions ultimately determine who can and cannot be elected in Montgomery County, Maryland, then the ability to fund a campaign comes from developers. The developers are effectively bribing the county council to get their projects approved.

3. I am not sure what the free-market equilibrium looks like for major cities. Perhaps there would be a bit more high-rise apartments built and somewhat less upward pressure on prices and rents. But do not be so sure that the effect would be large.

4. Economists and pundits look at the higher incomes in San Francisco and New York relative to small-town Ohio and see missed opportunities caused by zoning restrictions. I think that these observers under-estimate the differences in lifestyle preferences.

The WikiLeaks Story You May Have Missed

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In its coverage of the story of the leaks about the Democratic National Committee and Bernie Sanders, the Washington Post has covered many angles, including the possible preference of Russia for Mr. Trump being a factor in the leaks. However, the WaPo has had no coverage of one interesting fact to emerge, which is the cozy relationship between two of its prominent staffers and the DNC. Even if you think that no journalistic ethical boundaries were crossed, just the tone of the relationship is smarmy. It makes me want to say to the journalists and the Democratic staffers, “Get a room.”

As for the DNC itself, I am reminded of Richard Nixon’s Committee to RE-Elect the President, which went by the appropriate acronym, CREEP. Given the dirty tricks that the DNC contemplated against Mr. Sanders, imagine what they have been doing to Republicans.

UPDATE: It appears to me that the Post is (a) really going out of the way to stress the Russia angle and (b) that this is probably in coordination with the DNC. But I never thought that linking in the public’s mind the words “Russia,” “email,” and “Clinton” was a good plan for the Democrats. Mr. Trump seems to agree.