Category Archives: Growth Causes and Consequences

Kevin Williamson on Government Stagnation

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He writes,

Social Security made sense in the context of 1935 demographics. It’s as obsolete as those suitcase-sized portables that Sandberg-Diment was scoffing at 50 years later. But we’re stuck with it, because there’s not much evolution in political programs. Government programs don’t die.

His point, which is obvious but ignored, is that markets evolve more rapidly than government. If you think of government programs as technology, they are hopelessly behind. We regulate communications using the FCC, which is 1930s regulatory technology. We address health care for the elderly with Medicare, which is 50-year-old technology.

In the private sector, when an enterprise becomes technologically obsolete, it falls by the wayside. In government, it gets larger.

I still like the idea of re-chartering regulatory agencies every three years.

India as an Outlier

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Arvind Subramanian says,

Of course, everyone knows that the Indian development experience, certainly in the last 30-35 years, has been driven by services, and that’s fairly special. The other way of understanding this precocious model is that in some ways India is trying to grow and develop not by worshipping or deifying its comparative advantage but by defying it. We have a lot of unskilled labour but we are not using it; we are using much more of our skilled labour.

I echo Alex Tabarrok’s recommendation to read the whole thing.

Working More = Markets Working

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Tim Harford writes,

A few years ago, the economists Mark Aguiar and Erik Hurst published a survey of how American work and leisure had evolved between 1965 and 2005. Both men and women had more leisure time — although nothing like as much as Keynes had expected. But some people defied this trend. The best educated and the highest earners, both men and women, had less free time than ever. Starting in the mid 1980s, this elite began to drop everything and work ­furiously.

Pointer from Mark Thoma.

What Harford does not mention is what I think is the most important trend, which is the drop in “home production.” We are making much better use of our non-work time, because we enjoy genuine leisure rather than doing unpaid tasks that we do not like.

Several decades ago, when an economist colleague bragged about building a deck on his house, I pronounced the aphorism “Do-it-yourself is a market failure.” He should have been able to earn more income by working more hours as an economist, and then pay someone else to build the deck. But he worked in a fixed-salary position for an employer that did not allow outside consulting.

The main trend is that people are doing less unpleasant work. As Harford notes, some people now enjoy their jobs. People are doing less unpaid housework (as I write this, a paid worker is mowing my lawn). Many people whose unpleasant jobs have been “lost” are now out of the labor force.

Cities and Marriage

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Brink Lindsey speaks for many economists when he suggests that getting rid of excessive building regulations in cities would raise productivity by allowing more people to move to those cities. I want to push back a bit.

I want to apply the Stevenson-Wolfers theory of modern marriage to modern cities. Their story is that back in the 1950s, marriage was about production complementarity. The man worked in the market, and the woman did housework. However, as women moved out of housework and into market work, marriage became about consumption complementarity. You wanted a partner who shared similar interests and cultural inclinations.

Perhaps the same holds true of cities. There was once a lot of production complementarity from having people in a similar industry close by. Perhaps now, that is not so much the case, and what cities attract are people who like the lifestyle of those cities. Maybe Silicon Valley is an exception where production complementarity still matters, but even there, one hears that San Francisco has become more chic among the techie hipsters.

Why this matters:

1. Moving people from small-town Ohio to New York City might do little or nothing for productivity. Yes, productivity is higher in New York, but the causality could run from consumption externalities + restrictive building codes => high rents and high salaries => high productivity to cover the high salaries. It’s not that New York generates high productivity. It selects for high productivity, because people who are not highly skilled find it difficult to afford to live there.

2. Getting rid of building restrictions would allow highly productive people to live in New York less expensively, increasing their wealth (and perhaps driving up inequality). But it would allow less productive people to live in New York, thereby bringing down average productivity in New York.

Some random comments:

One of my daughters moved from Tucson to New York a few years ago. From a career standpoint, the move was a slight step backwards. From a social standpoint, it was a big step forward. She exemplifies the consumption complementarity story. The sorts of people she wanted to hang out with were much more prevalent in New York.

I was stimulated to think about this when I came across Dean Baker the other day. He was jogging and I was biking, and when I recognized him I doubled back and went with him a few hundred yards. We had a conversation that included this topic. That illustrates that there is still some production complementarity going on. It is not a conversation I would have had living in a different area.

A Robot Cambrian Explosion?

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The Journal of Economic Perspectives, which Timothy Taylor has been editing since its inception, has a symposium on robotics. One of the articles is by Gill A. Pratt.

The exponential growth in computing and storage performance has led researchers to explore memory-based methods of solving the perception, planning, and control problems relevant to the development of additional degrees of robot autonomy. Instead of decomposing these tasks into a set of hand-coded algorithms customized for particular circumstances, large numbers of memories of prior experiences can be searched, and a solution based on matching prior experience is used to guide response.

… human beings communicate externally with one another relatively slowly, at rates on the order of 10 bits per second. Robots, and computers in general, can communicate at rates over one gigabit per second—or roughly 100 million times faster. Based on this tremendous difference in external communication speeds, a combination of wireless and Internet communication can be exploited to share what is learned by every robot with all robots. Human beings take decades to learn enough to add meaningfully to the compendium of common knowledge. However, robots not only stand on the shoulders of each other’s learning, but can start adding to the compendium of robot knowledge almost immediately after their creation.

He does not predict when it will occur, but he thinks that at some point these sorts of capabilities will result in a rapid increase in robot intelligence.

Questions that came up at lunch yesterday

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Organized by Tim Kane, with John Cochrane, several GMU stalwarts, Tevi Troy, Brink Lindsey, and others. These were some of the questions I asked.

1. Are colleges deteriorating in quality as fast as I think they are? This was a side conversation, and several participants expressed the viewpoint (wishful thinking?) that all but the most well-endowed colleges could find themselves suddenly overwhelmed by alternative modes of education and credentialing.

2. In the 1950s, many of the large successful businesses (McDonalds, Holiday Inn) were founded by men who never attended college. Why does that seem unlikely today? One answer given was that in the 1950s, you could have only a high school education and still be well above average in terms of cognitive skills, self-control, and other traits.

3. There was a lot of talk about how things are not really as bad for the middle class as the left makes them out to be. I asked, if things are not so bad, then imagine giving a talk to people in a small town in Ohio or in rural Oklahoma. What sorts of advice about future jobs would you give? Some of the answers were glib (“Move to the city.”) Others suggested that the jobs would be in fields like nursing. But not everyone is cut out to be a nurse.

4. Think of a world with momentum investors (“the trend is your friend”) and contrarian investors “If something cannot go on forever, it will stop.”) Can we get bubbles when for a period of time momentum investors overwhelm contrarian investors? The response (I’ll take a risk that I am violating some implicit rules and give away that it was John Cochrane who gave it) is that this sort of thing is more likely to happen in real estate markets than in financial markets, because in real estate markets transaction costs are high. You cannot go short. It is hard to take a large long position (you buy one house at a time, not many houses).

One question that came up concerned the effect of Chinese exports on American wages. With manufacturing a relatively small share of GDP, it was argued that the effect on overall wages cannot be large. Still, the effect on some niches of workers seems to be large.

Someone else asked about the narrative that American workers are worse off than they were 50 years ago or 100 years ago. To those of us at lunch (all on the right side of the political spectrum), that seems ridiculously inaccurate. Yet it holds sway on the left, and it seems to work with the general public.

One answer is that people who take a pessimistic view of recent decades may be thinking in terms of the second derivative. That is, the standard of living is still increasing, but it is increasing much more slowly than it did 40 years ago, and thus it has disappointed expectations.

Another possible answer is that “average is over.” If you are poor and not always employed, then between government benefits and low-cost goods, you can get by. But if you work full time and aspire to be middle class, your consumption basket is more expensive and government is not helping you.

Later, it occurred to me that the left’s story has the advantage that there is a villain. The evil CEOs and capitalists have taken away something from ordinary workers. No matter how many facts you throw back at them, any story with a villain is more compelling than one without one.

Incidentally, that makes it pretty futile for conservatives to try to play the compassion card (sorry, Arthur Brooks). People respond to villains. To compassion, not so much.

Scott Sumner on Greece

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He writes,

To summarize, given that Greece has chosen to use a non-market economic model, its done amazingly well. It’s done something no other sizable non-market economy has done–achieved developed country status without vast oil wealth. This may partly reflect its long-time inclusion in the EU, partly the fact that it is both small in population and has highly desirable tourist attractions, and partly the entrepreneurial skill of its citizens. But for whatever reason it is vastly outperforming expectations. Greece is doing shockingly well, given its economic model.

Read the entire post, which is interesting. However, my guess is that the Heritage economic freedom index makes Greece seem worse than it really is. However, the Fraser economic freedom index also makes Greece look bad.

But I am going to guess that it is much easier for an international company to do business in Greece than in other countries with low indices of economic freedom. And if that is true, there is probably more competitive life in the Greek economy than there is in those other countries.

The Trade Slowdown

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Bernard Hoekman writes,

Slow trade growth has led to worries that the world economy has run into a ‘peak trade’ constraint, i.e. the ratio of global trade to GDP has reached a limit (Economist 2014). Global trade increased 27-fold between 1950 and 2008, three times more than the growth in global GDP. As a result, according to the World Bank’s World Development Indicators database, the trade-to-GDP ratio for the world as a whole rose from roughly 25% in the 1960s to 60% today. The slow (absence of) growth in trade since 2009 has meant no change in this ratio since 2008. If the recent decline in trade is sustained, this 60% may turn out to be a peak for the world as a whole.

Pointer from Tyler Cowen.

To be clear, “trade” is not slowing down. All economic activity is trade. The ratio of “trade to GDP” is the ratio of trade across borders to total trade, which includes trade that takes place inside national borders. Some thoughts:

1. As the share of GDP devoted to the New Commanding Heights (education and health care) increases, we might see a slowdown in cross-border trade. Note, however, that cross-border trade could pick up if distance learning and distance health care catch on.

2. As incomes rise in China and India, the “Samuelson effect” starts to kick in. That is, the comparative advantage of cross-border trade is reduced. That is, you do more production in China when American wages are 10 times Chinese wages than when they are only 4 times Chinese wages (using made-up numbers here).

3. As the cost of robots comes down, they displace workers in all countries, and this also reduces the comparative advantage of cross-border trade.

Vickies, Thetes, and Artisans

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Allison Schrager writes,

Harvard economist Lawrence Katz thinks that when the economy shifts, those who lose out experience “retroactive unemployment” in pursuit of jobs that no longer exist; however, he anticipates a bright future for men in the new economy. As an expert in the ways technology affects the middle class, Katz predicts the rise of the “new artisan” as a substantial trend in middle-class employment.

His theory holds that technology will commoditize and cheapen products in all industries but that artisanal workers will offer a superior interpersonal experience coupled with unique goods and services, commanding premium prices in turn. Men, he notes, are especially well suited to such roles.

Pointer from Tyler Cowen. This sounds like something straight out of Neal Stephenson’s The Diamond Age, except that Katz’s vision strikes me as more fictional.

Brink Lindsey on Progressive Deregulation

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He writes,

Despite today’s polarized political atmosphere, it is possible to construct an ambitious and highly promising agenda of pro-growth policy reform that can command support across the ideological spectrum. Such an agenda would focus on policies whose primary effect is to inflate the incomes and wealth of the rich, the powerful, and the well-established by shielding them from market competition. A convenient label for these policies is “regressive regulation”—regulatory barriers to entry and competition that work to redistribute income and wealth up the socioeconomic scale. This paper identifies four major examples of regressive regulation: excessive monopoly privileges granted under copyright and patent law; restrictions on high-skilled immigration; protection of incumbent service providers under occupational licensing; and artificial scarcity created by land-use regulation.

The subtitle is “Low-hanging fruit guarded by dragons,” by which he means that “the interest groups that benefit from the status quo are politically powerful, well organized, and highly motivated.” For me, it is clear that concentrated political power can explain why three of the four regressive regulations persist. The book publishers and incumbents in the entertainment industry want infinite copyright protection, and patent lawyers want powerful patent laws. Hair braiders and interior decorators want occupational licensing. Owners of developed property want land-use regulation.

The one I don’t quite get is high-skill immigration. Employers want it, and the high-skilled workers who might be threatened by it do not have a formidable lobbying organization.

I do not follow the issue closely, and I could be wrong about this, but I believe that Democrats do not want any legislation passed on immigration that is not comprehensive, and the Republican base does not want comprehensive immigration legislation that includes a path to citizenship for illegal immigrants. The high-skilled immigration question is caught in the middle.