Great Questions of Economics
Arnold Kling
Applying Introductory Economics Every Day

Archive of posts 201-210 of GQE

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The Case Against Amtrak

Amtrak supporters say that it needs subsidies in order to maintain unprofitable routes. "Jane Galt" sees this as illogical.

Go figure? We're not giving Amtrak any money because NO ONE IN THE COUNTRY WANTS TO RIDE THE TRAIN! You've probably noticed this, manifested in the lack of passengers on most of your trains.

Discussion Question. What, if anything, makes passenger trains a public good?

The Case for Sweatshops

If a conservative economist had written this, it would not be news.

Indeed, talk to third world factory workers and the whole idea of "sweatshops" seems a misnomer. It is farmers and brick-makers who really sweat under the broiling sun, while sweatshop workers merely glow.

But this argument that "sweatshops" benefit workers in underdeveloped countries was made by bleeding-heart New York Times columnist Nicholas D. Kristof. That makes it news.

Discussion Question. What would happen if there were a minimum wage requirement at "sweatshops"?

Europe Missing the IT Revolution?

Brad DeLong says that the information technology revolution has yet to show up in European productivity data. Although the problem could be European "red tape" (see below), DeLong thinks that the most likely explanation is that

the dog is just waking up--for there is a range of places from Finland to Sweden to Ireland to Australia where the high-tech boom is clearly audible.

In other words, he think that the high-tech boom in productivity is just getting started in other developed countries.

Discussion Question. Will the high-tech boom spread around the world, or will it be limited to English-speaking countries, as Paul Krugman once suggested?

Labor Market Restrictions

Many economists (including Prescott, below) attribute some of Europe's problems to labor market restrictions. In the New York Times, Alan Krueger focuses on Italy.

A study led by Stefano Scarpetta of the O.E.C.D. released last week found that the average American company that survives two years increases its employment 160 percent, while the average Italian one that survives as long grows only 20 percent. Although many factors are undoubtedly at work, stiff firing restrictions probably account for some of Italy's lower job growth.

Discussion Question. Labor market restrictions like those in Italy make businessmen leery of hiring too many workers. How might this lead to relatively high productivity?

Outbreaks of Laziness?

Almost 25 years ago, economists were embroiled in a debate over the extent to which unemployment was involuntary. I recall that Franco Modigliani fumed, "What was the Great Depression--a spontaneous outbreak of laziness?"

In the American Economic Review that came in the mail yesterday, Edward Prescott offers such a theory.

France is currently depressed by about 30 percent relative to the United States with the labor factor accounting for nearly all the depression...market time is about 30 percent lower in France than it is in the United States.

Prescott looks at output per working-age person as the indicator of macroeconomic performance. This depends on hours worked per working-age person, capital per working-age person, and a productivity factor. What he is saying is that in France, the shortfall is in hours worked per working-age person--an outbreak of laziness, if you will. He says that this can be accounted for by high marginal tax rates, which discourage market-based work and consumption. Think of a situation in which sales and income taxes are so high that you are better off puttering around the house than working more hours and spending income on goods and services produced by others.

Conversely, Prescott looks at Japan and does not see a shortfall of hours worked per working-age person. Instead, he sees low productivity relative to hours worked and the amount of capital. That is, the Japanese economy is very inefficient.

Discussion Question. Do you think that it is possible for unemployment to be as high as 25 precent of the labor force (as it did in the U.S. in the 1930's) because people choose to putter around the house?

Blogging and Open Source

My two most recent essays discuss the economics of blogging and why Unix and Open Source are not the salvation of mankind.

The Internet and Productivity

Reporting on a study that he did with Robert Litan, Hal Varian writes,

Using the Internet to attract new customers is great for profitability, but that's not the same as improving the productivity of an entire industry. Since new customers tend to come from within the same industry, such gains tend to have relatively low impact on aggregate productivity.

They seem to be saying that using the Internet for marketing instead of cost-saving is bad for productivity. I tend to disagree. Marketing is an activity that uses resources. If the Internet allows you to reduce the resources used to obtain customers, then it raises productivity just as surely as if it were to lower supply-chain costs. And if it does not allow you to reduce the resources used to obtain customers, then it would not increase profitability.

Discussion Question. Is it useful to distinguish investments used to obtain customers from investments used to reduced costs?

Imported Inequality

How much of the income inequality of the 1990's was imported? A New York Times story on unequal income growth in the 1990's says,

"You see how the arithmetic works?" asked Gary Burtless, an economist at the Brookings Institution. "When you have a lot of people entering from the rest of the world, and many of them enter at the lower rungs of the wage distribution, then you can have a situation where everyone is prospering and the median income is declining."

Discussion Question. How could increased immigration reduce world inequality while increasing inequality within the U.S.?

Bubble Worries

Brad DeLong writes,

Few people recognize how far out of whack the stock market still is today. Even though stock prices--especially the prices of high-tech stocks--have fallen substantially relative to their early-2000 peak values, there is still a large disconnect between current stock-market values and traditional valuation ratios relative to measures like earnings and dividends.

He points to a column by Dean Baker, warning that advocates of using the stock market to "solve" the social security problem could be miscalculating badly. He sees it as

almost impossible that real stock returns will be as high in the future as the in the past, or even reach the 6.0 percent level that is the central assumption in the actuary office’s analysis of the plans put forward by President Bush’s Social Security Commission.

I do not think you have to go through a very detailed analysis to show that 6 percent real growth in the stock market is not going to happen. The ratio of corporate profits to GDP is approximately constant over long periods. If real GDP grows at a rate of 3 percent for the next twenty years (which is toward the optimistic end of the range of scenarios given by most economists), then corporate profits will grow at 3 percent. That will be the return on stocks. In the unlikely scenario in which the economy grows quickly enough to support 6 percent real returns in the stock market, social security will be solvent no matter how we finance it.

Speaking of bubbles, DeLong points to this Morgan Stanley analysis of the overvalued dollar.

After aggressively accumulating US assets over the past few years, many global investors find their portfolios saturated with US assets... But that said, we are not in the camp of an en masse abandonment of the US credit market. Rather, it’s about saturation and the gradual process whereby foreign investors lighten up their US-dollar holdings.

Discussion Question. How are the high valuations of the stock market and the U.S. dollar related?

Baseball and Socialism

In my latest TechCentralStation column, I write,

Today, our local governments run the schools, and private owners run professional baseball teams. My modest proposal is to reverse those two arrangements.

Discussion Question. What actual or prospective innovations would you like to see banned from baseball?