Category Archives: Four Forces Watch

Sentences I Might Have Written

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from Megan McArdle:

1950s health care isn’t expensive; this same regimen would be a bargain at today’s prices. What’s expensive is things that didn’t exist in 1950. You can say that “health care” has gotten more expensive—or you can say that the declining cost of other things has allowed us to pour a lot more resources into exciting new health products that give us both longer and healthier lives.

In Crisis of Abundance, I wrote,

The American middle class can still afford the wonderful health care that was available in 1975–easily. . .as a thought experiment, a return to 1975 health care standards would completely resolve what is commonly described as America’s health care crisis.

You know, that book was written 10 years ago (it came out in 2006), and at the time I said it would have a shelf life of ten years, meaning that I thought that it would still accurately describe the issues for another decade. In fact, it is looking like it will be valid for another ten years. I would say that the majority of popular books on politics and economics expire much more quickly.

Four forces watch: In addition to the New Commanding Heights, McArdle’s essay also touches on the Demographic Divide.

while the college educated class seems to have found a new equilibrium of stable and happy later marriages, marriage is collapsing among the majority who do not have a college degree, leaving millions of children in unstable family situations where fathers are often absent from the home, and their attention and financial resources are divided between multiple children with multiple women.

Other sentences are reminiscent of The Reality of the Real Wage. There, I recycled a bit from my book.

My guess is that if you could find a health insurance policy today that only covered diagnostic procedures and treatments that were available in 1958, the cost of that policy would not be much higher than it was then. Much of the additional spending goes for MRIs and other advanced medical equipment, as well as for health care professionals with more extensive specialization and training than what was available 50 years ago.

I recommend McArdle’s entire essay. Brink Lindsey adds more statistics, such as

In 2011, 87 percent of kids who had at least one parent with a college degree were living with both their parents. For the children of high school dropouts and high school grads, the corresponding figures were 53 and 47 percent, respectively.

Finally, on this same topic, a reviewer (Francis Fukuyama) of an about-to-be-released Robert Putnam book writes,

One of the most sobering graphs in Our Kids shows that while the proportion of young children from college-educated backgrounds living in single-parent families has declined to well under 10 per cent, the number has risen steadily for the working class and now stands at close to 70 per cent.

Pointer from Tyler Cowen.

Differences in College Completion Rates

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Timothy Taylor writes,

It turns out that if are someone from a family in the top-quarter of the income distribution who enters college, you are extremely likely to complete a bachelor’s degree by age 24; if you are in the bottom of the income distribution, you only have about a 22% chance of having a bachelor’s degree by age 24.

Read the whole thing. As he does so well, Taylor manages to locate an interesting report and extract fascinating material from it.

In terms of the Demographic Divide (one of the Four Forces), I think that the high-income college entrants are likely to have several advantages. First, they are more likely to have inherited high IQ and high conscientiousness. Second, their parents are more likely to have had their children after they were married and to have remained married after they had children. Third, the parents are likely to have better skills for identifying and dealing with their children’s needs. Finally, the parents have more financial resources to support the child. The report seems to emphasize only the last of these.

Attention St. Louis

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I will be here on March 11.

The Discussion Club meets at the Racquet Club Ladue. Doors will open at 5:30 and the formal speaker introduction will begin at 6:00 sharp. The presentation plus one or two questions from the audience will finish around 6:45. Afterwards, members are invited to complementary hors d’oeuvres and drinks with the speaker from 7 to 8.

Talking about the four forces.

I don’t use slides, but if I did I would include this comic strip from Frank and Ernest.

Four Forces Watch: Gentrification

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Luke Juday and others report,

  • Since 1990, downtowns and central neighborhoods in cities across the country have attracted significantly more educated and higher-income residents.
  • Young adults (22-34 years old) have increased as a proportion of residents in the center of nearly every city in the country, while falling as a proportion across all other areas.
  • Older residents (ages 60 and up) form a smaller proportion of the inner-city population than they did in 1990.
  • In most cities, a decrease in income and education levels from 1990 to 2012 is evident several miles outside the core. How far outside depends on the city, with the sharpest drop being anywhere from 4 to 15 miles from the center.
  • Households below the federal poverty line are migrating outwards from city centers. The poverty rate has increased significantly several miles outside the core in many cities.

Pointer from WaPo.

This is gentrification. I view it as largely resulting from the New Commanding Heights. Universities and hospitals locate in cities, providing employment opportunities for affluent professionals. At the margin, this drives some poor people out of cities and into close-in suburbs. Meanwhile, close-in suburbs are affected by the decline in employment opportunities for low-skilled workers, which comes in part from factor-price equalization and Moore’s Law.

New Commanding Heights Watch

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From the NYT.

Ms. Waugh, like many other hard-working and often overlooked Americans, has secured a spot in a profoundly transformed middle class. While the group continues to include large numbers of people sitting at desks, far fewer middle-income workers of the 21st century are donning overalls. Instead, reflecting the biggest change in recent years, millions more are in scrubs.

Pointer from Tyler Cowen. The New Commanding Heights are health care and education. As they increase employment at the margin while manufacturing production work decreases at the margin, male participation in the labor force continues to decline. Note, however, that female labor force participation has been trending down in this century, also.

Four Forces Watch: Larry and the Robots

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Mike Konczal writes,

There’s been a small, but influential, hysteria surrounding the idea is that a huge wave of automation, technology and skills have lead to a massive structural change in the economy since 2010.

He goes on to say that Larry Summers has demolished this notion, by pointing out that we have not seen rapid productivity growth over this period.

This looks suspiciously like a straw man to me. I am about as big a believer as there is in the significance of structural change, but I do not see a “huge wave of automation” that has taken place over the past five years.

My thoughts:

1. What I do see are the four forces: the New Commanding Heights (demand for physical goods tapering off while demand for health care and education rises); demographic dispersion–what Charles Murray calls Coming Apart; factor-price equalization (American workers confronting stiffer foreign competition); and Moore’s Law (improvements in computers and communication).

2. These four forces have been operating for decades, and there was nothing peculiar about the 2010-2014 period. The New Commanding Heights force has been operating for more than 50 years. The demographic dispersion force got started about 50 years ago, but for the first 25 years or so the impact was small. Instead, the most notable demographic change from 1965 to 1990 was the increase in female labor force participation. Factor-price equalization had to await liberalization of the economies of China and India, which did not really get started until the 1980s and even then took a while to have an impact. Moore’s Law was articulated in the 1960s, but as recently as the late 1980s Robert Solow’s quip that we see computers everywhere but in the productivity statistics seemed apt.

3. The four forces cause the economy to move in the direction depicted in Neal Stephenson’s The Diamond Age. In that novel, we see Thetes, who work very little and live inexpensively (think of a consumption basket dominated by big-screen TVs). And we see Vickies, who work creatively and hard in order to consume unnecessary luxury services (think of high-tuition education, high-end precautionary medical care, and exotic vacations).

4. Larry Summers looks at the last twenty years and sees a “secular stagnation” in aggregate demand, interrupted by the dotcom bubble and then the housing bubble. Instead, I look at the last 15 years and see The Diamond Age starting to become reality. The housing bubble gave Thetes the impression of being wealthier than they really were, and when it popped they had to adjust to reality. (Although one could argue that, illusions aside, they did not lose home equity, because they did not have any in the first place.) The process of adjusting to reality can take time–look at Greece.

5. Consider the statement, “If we had more aggregate demand, then more non-high-skilled people would have jobs and wages would be higher.”

I do not believe that statement, Instead, I believe that nothing short of direct intervention in labor markets (government make-work jobs and wage subsidies, or you could hope for an impact from changes in means-tested programs that reduce implicit marginal tax rates) will change macroeconomic outcomes. But as long as jobs and wages are lower than what Summers/Krugman/Sumner think they should be, there is no way to falsify the statement that “if we had more aggregate demand….” The alleged lack of jobs and wages can be viewed from their perspective as proof that there is insufficient aggregate demand. There is no measure of “sufficient aggregate demand” that exists independently from the desired result of a larger wage bill. Indeed, Sumner would say that the wage bill is a measure of aggregate demand that can be targeted by the Fed.

Four Forces Watch: Coastal Incomes

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Derek Thompson reports,

For Flint, Detroit, Youngstown, Cleveland, and Milwaukee, the demise of manufacturing, steel production, and other off-shored blue-collar work have gutted these foundries of good middle-class jobs.

Pointer from Mark J. Perry, who provides two interesting tables and much interesting analysis, including

Not surprisingly, more than half (11) of the top 20 metro areas with the highest median incomes for Americans ages 18-34 in 1980 were in Midwest or Rust Belt states (Flint, Detroit, Chicago, Milwaukee, Youngstown, Cleveland, Minneapolis-St. Paul, Pittsburgh, Toledo, Grand Rapids and Cincinnati). By 2009-2013, only three of the top 20 metro areas by income for young Americans were in Midwest or Rust Belt states: Minneapolis-St. Paul, Chicago and Des Moines (and none of those cities have a strong manufacturing base), and almost all of the top 20 metros by income for young Americans were in East Coast or West Coast states (San Jose, San Francisco, Washington, DC, Boston, New York, Philadelphia, Baltimore, Seattle, etc.).

The force that this illustrates is the New Commanding Heights. As income rises, the demand for manufactured goods tapers off, and much more of the increased income is spent on education and health care.

Four Forces Watch

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Seth G. Benzell, Laurence J. Kotlikoff, Guillermo LaGarda, and Jeffrey D. Sachs write,

over time, as the stock of legacy code grows, the demand for new code and, thus for high-tech workers, falls.

The resulting tech bust reflects past humans obsolescing current humans. . .these robots contain the stuff of humans – accumulated brain and saving power. Take Junior – the reigning World Computer Chess Champion. Junior can beat every current and, possibly, every future human on the planet. Consequently, his old code has largely put new chess programmers out of business.

. . .tech busts can be tough on high-tech workers. In fact, high-tech workers can start out earning far more than low-tech workers, but end up earning far less.

Furthermore, robots, captured in the model by more code-intensive good production, can leave all future high-tech workers and, potentially, all future low-tech workers worse off. In other words, technological progress can be immiserating

They use an overlapping generations model, which would not be my first choice for this sort of analysis. In fact, it makes me highly skeptical of the value of this paper.

I am starting a new category, called Four Forces Watch, for my pointers to pieces on the four forces that I see shaping the economy over the longer term: New Commanding Heights (health care and education absorbing more resources); Marriage Stratification; Factor-price Equalization (aka globalization); Moore’s Law. The piece quoted above falls under Moore’s Law.