Category Archives: Growth Causes and Consequences

The Null Hypothesis Holds at the Macro Level

Posted on by

Ricardo Hausmann writes,

In 1960, countries with an education level of 8.3 years of schooling were 5.5 times richer than those with 2.8 year of schooling. By contrast, countries that had increased their education from 2.8 years of schooling in 1960 to 8.3 years of schooling in 2010 were only 167% richer. Moreover, much of this increase cannot possibly be attributed to education, as workers in 2010 had the advantage of technologies that were 50 years more advanced than those in 1960. Clearly, something other than education is needed to generate prosperity.

Pointer from Tyler Cowen.

Note that this is not necessarily support for the null hypothesis. It could be that the “something other” is quality of education rather than quantity.

Engineered Babies

Posted on by

Frank K. Salter writes,

So when significant numbers of fertile women begin using IVF, we will know that market-based eugenics has left the launch pad. This could easily expand into positive eugenics where parents choose the best among healthy embryos in an attempt to give their children a better start in life. Most parents want their children to be not only healthy, but happy and successful. The surmise by James D. Watson, co-discoverer of the structure of DNA, is plausible: “Once you have a way in which you can improve our children, no one can stop it.” Watson wants parents to have access to genetic screening. That would aid negative eugenics but it would make the slope to positive eugenics more slippery.

The long article is interesting throughout. Pointer from Jason Collins. I should note that a recent issue of Technology Review carried the cover story “We Can Now Engineer the Human Race.”

The New Matchmaking

Posted on by

A reader suggests, probably correctly, that this story belongs under Four Forces Watch.

The company has come up with a secret algorithm that invites select users to access the app based primarily on LinkedIn résumés and friend networks. Ambition, Bradford says, is the biggest trait The League looks for within its community.

It is a dating application with a very limited, exclusive clientele.

I remember when some discos/nightclubs used a similar sort of business model.

The Hopeless Argument over Productivity Stagnation

Posted on by

Scott Sumner writes,

Do I believe these numbers? Not really, as I don’t believe the government’s price level numbers. Lots of this “growth” occurred in the 1990s and is just Moore’s Law in computers, not the US actually producing more “stuff.” I don’t consider my current office PC to be 100 times better than my 1990 office PC.

Well, Scott, Your current PC’s hard disk capacity is measured in gigabits. Your 1990 PC’s hard drive was measured in megabits. Let me know which of your applications and documents to wipe out to get what’s on your current office PC to fit on your 1990 PC.

Oh, and have fun surfing the net with that 2400 baud modem. That is, if you can figure out how to install a TCP-IP stack on Windows.

In fact, as James Pethokoukis points out, there are those who argue that the official statistics have more recently under-stated the improvement in computers. (The Commerce Department numbers no longer track Moore’s Law.)

Of course, nobody is arguing that we don’t have better personal computers. What we are trying to assess is the amount of the multiple. But I do not know how to make that assessment. Or what fraction (multiple) of a 1990 PC’s value to assign to a smart phone.

To argue for or against stagnation, you have to assign a value to total output in a year and divide it by what you think is an appropriate measure of (labor) input. Then you have to take the second difference of that ratio. Cyclically-adjusted, of course.

Seems futile to me.

Housing and the Punch Bowl

Posted on by

On Wednesday, I appeared on a panel discussing the state of credit underwriting in the housing market. I raised two questions:

1. Are national credit standards, set by Freddie, Fannie, and FHA, appropriate, or do they throw out too much local information?

I made a Four Forces argument that there are too many divergences in economic performance that make local information valuable. On the other hand, you could argue that simply by tracking search data, Google and Zillow have better information on local trends than would an on-site mortgage underwriter. Interestingly, the session chairman, Bob Van Order, presented information showing that after the crash loans under-performed relative to their known characteristics (including ex post home price performance) and over-performed more recently. This suggests that it is possible for underwriting to be looser or tighter than it appears based on observable characteristics, which in a way suggests that there is local information that is important.

2. Are we in 2004? That is, is the stage set for another housing bubble, and all that is needed is a loosening of credit standards?

One of the speakers, Sam Khater of CoreLogic, re-iterated what he wrote here, that “price-to-income and price-to-rent ratios are high.”

Very few mortgages originated since 2009 have defaulted. There are two reasons for this. One is that credit standards were tightened. The other is that the trend of house prices has been up. Now, there is all sorts of talk about the need to loosen standards. I pointed out that both the private sector and public officials tend to be very procyclical when it comes to mortgage credit–when the market is going up, they want to loosen standards, and after it crashes they want to tighten standards.

I would be ok with loosening standards on credit scores now, provided that the industry holds the line on down payments, meaning that we do not see an increase in the the proportion of loans with down payments below 10 percent. This is not the time for the FHA to make a big expansion in its high-LTV lending (Ed Golding, can you hear me?)

To encourage high-LTV lending now would be adding alcohol to the punch bowl just as the party is getting good.

Normal is an Economist’s Illusion

Posted on by

Tyler Cowen writes,

Once unsustainable economic structures begin to fail, it takes a significant improvement to make them viable again. Yet because of the difficulty of making major changes under our current political alignment, most new government policies today are no more than changes at the margin. Perhaps the most basic problem is that it is difficult to be sure when a reset is underway, and it is harder yet to raise public alarm about changes that seem to be gradual and slow.

If you have not done so already, read the whole thing.

On China, he writes,

Today’s China is sui generis. The country has grown so quickly that every decade or so there is a very new China. And so we cannot easily look to the past as a guide. In economic terms, China seven years ago is equally removed from China today as the United States about thirty-five years ago is removed from the United States today

I do not know China, but I imagine that this is an understatement.

Normal is over, and it has been over for a long time, particularly if you think of “normal” as workers being temporarily laid off and then getting re-hired to those same jobs when things are back to “normal.” It’s been at least 35 years since we have seen workers recalled from layoffs in any significant numbers.

Going further, I would suggest that the whole idea of “normal growth” is probably an attempt to impose an orderly pattern on processes that are not truly orderly. Economists do this all the time. They “seasonally adjust” data. They “de-trend” data. They draw lines connecting peaks in GDP and thus conjure “potential GDP” and “trend productivity growth” and make up stories about these artificial constructs.

Some of the elements of what Tyler calls an economic “reset” have been playing out for decades. The decline of manufacturing employment as a share of total employment began over 50 years ago. I continue to suggest keeping an eye on four forces, all of which were in place long before the financial crisis of 2008: the New Commanding Heights; bifurcated marriage patterns; factor-price equalization; and Moore’s Law.

Real Well-being, Mis-measured

Posted on by

I was surprised by the results of this IGM Forum poll. Agree or disagree with

The 9% cumulative increase in real US median household income since 1980 substantially understates how much better off people in the median American household are now economically, compared with 35 years ago.

The great majority agreed with the statement. My remarks.

1. When I first saw the question, I expected a sharp split. I figure there is a lot of “mood affiliation” with the view that the middle class is suffering.

2. It could be that economists are so well off that they have no sense of what life is like for the median household. They feel intuitively that median well-being is somewhere in between what the statistics show and their own well-being.

3. If you read through the response, the most common reasons for agreeing with the statement are improvements in health and in (the consumers’ surplus from) smart phones and such.

Vinod Khosla Talks His Book

Posted on by

He writes,

Just in the Khosla Ventures portfolio alone, entrepreneurs already are trying to use machine learning technologies to replace human judgment in many areas including farm workers, warehouse workers, hamburger flippers, legal researchers, financial investment intermediaries, some areas of a cardiologist’s functions, ear-nose-throat (ENT) specialists, psychiatrists and many others.

I have omitted links to the companies to which he refers.

The rest of the essay argues, rather repetitively, that technology is becoming increasingly a substitute for, rather than a complement to, human labor. It strikes me as a nod toward Robin Hanson’s view of the future, although Khosla thinks that human brain emulation need not play a part.

What I would watch for over the next 15 years are developments that enable humans to evolve more rapidly, in order to compete with machines. Note that the cover story of the latest MIT technology review says (a bit prematurely) We Can Now Engineer the Human Race.

Predict the Impact on Inequality

Posted on by

The WSJ reports,

Basically, the long-time “gap” between the fertility of educated versus less-educated mothers—more educated mothers have fewer kids—is closing.

This could help explain what’s happening with statistics on marriage and fertility. Data from the Centers for Disease Control & Prevention earlier this year showed that married U.S. women are having more children, while unmarried women are having less.

What I’m Reading

Posted on by

The Aggregate Production Function and the Measurement of Technical Change: ‘Not Even Wrong’ by Jesus Felipe and John S.L. McCombie. It is a long technical book. Here is my attempt to summarize one of the main arguments.

Suppose I give you two observations, which might come from otherwise-similar economies or from the same economy at two different points in time:

1. Output per worker = 400, capital per worker = 100.

2. Output per worker = 410, capital per worker = 110.

Can you calculate the elasticity of output with respect to capital?

The answer is “yes” if we are measuring physical units. Bushels per worker. Tractors per worker.

But suppose that we are using national income accounting data. Then our measure of output is GDP. And our measure of capital is income not going to labor. Now, in addition to having well-known aggregation problems in computing output and a capital index, we have to assume implicitly that the marginal product of the 10 additional units of capital is the same as the average product of the first 100 units of capital. But that amounts to assuming that you knew the answer before you even had the second observation. You are only pretending to learn from the data.

This calls into question a whole lot of empirical research purporting to describe economic growth or cross-country productivity differentials.