Category Archives: Growth Causes and Consequences

Real Interest Rates and Secular Trends

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Commenter Handle writes,

There’s nothing an entrepreneurial employer can buy to augment his workers to increase their labor productivity. They’re no equipment or anything for him to invest in. There’s no point: labor productivity in NCH sectors cannot be increased.

Well, computers can increase productivity in health care and education, but I get the point. It’s not like you can buy equipment that makes humans 10 or 20 times more productive. Barring strong AI, the only way to make humans much more productive in the NCH sectors is to dramatically re-organize the process, and that does not require a big investment in equipment.

Another trend is the drop in labor force participation. If people do not want to work, then you do not have to buy equipment for them to work with.

But suppose that you could tell stories about trends that imply low interest rates. At some point, low interest rates should make capital projects really attractive. That leads me to the suggestion that risky investments still fact high interest rates, and it is only government debt that enjoys low interest rates. And that leads me to the further suggestion (which I think I can find in Rogoff) that government debt is crowding out investment.

Without government debt to work with, financial intermediaries would have to satisfy the demand for safe, liquid assets by undertaking maturity transformation and risk pooling. That is what financial intermediaries do. But with so much government debt awash in the system, the public’s need for safe, liquid assets is satisfied without financial intermediaries having to do any sort of transformation at all.

Brad DeLong on the Public Sector vs. the Private Sector

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He writes,

Now we know that as bad as market failures can be, government failures can be worse. We badly need new effective institutional forms. But the decreasing salience of “Smithian” commodities in the twenty-first century means that rational governance would expect the private-market sphere to shrink relative to the public.

Pointer from Tyler Cowen.

I think of Brad DeLong as a Jekyll-Hyde character. The bad Brad DeLong snarks and snarls. The good Brad DeLong is insightful. This post is the good Brad DeLong. Read the whole thing. I am only commenting on part of it now. I would like to comment more on his discussion of the risk premium, but I think I need to see a longer, less hurried version of it.

In the quoted passage, his point is that as the share of the economy that produces stuff decreases and the share that provides health care, education, and information increases, we will see more informational asymmetries and externalities. This might mean that we need an expansion of existing government. However, when I think of “new institutional forms,” I think of the organizations of civil society and entrepreneurs.

Recall that Tyler and Alex see informational asymmetry being conquered by the Internet and entrepreneurs who make use of it. Recall also my comments on reputation systems as regulators.

Recall also my catch-phrase: Markets fail. Use markets.

Four Forces Watch: Poor Children Have Smaller Brains

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The Washington Post did not put this story on page one.

>New research that shows poor children have smaller brains than affluent children has deepened the national debate about ways to narrow the achievement gap.

Most of the story goes with the assumption poverty causes smaller brain size. But amazingly enough, the story also includes this alternative interpretation:

But James Thompson, a psychologist at University College London, has a third theory.

“People who have less ability and marry people with less ability have children who, on balance, on average, have less ability,” he said. Thompson noted that there is a genetic component to intelligence that Noble and Sowell failed to consider.

“It makes my jaw drop that we’ve known for years intelligence is inheritable and scientists are beginning to track down exactly how it happens,” Thompson said. “The well-known genetic hypothesis has not even had a chance to enter the door in this discussion.”

The story also quotes Charles Murray.

“I would be astonished if children’s brain size were NOT correlated with parental income. How could it be otherwise?”

The politically correct presumption would be that the brain size of poor children can be increased using some government programs. Can we verify that by comparing brain sizes of identical children raised apart? Or by comparing brain sizes of children randomly chosen for pre-school programs with children from a control group?

Murray has more commentary here, including a historical scientific controversy over whether there even exists a relationship between brain size and intelligence among humans.

The Case for Taxing College Endowments

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Jorge Klor de Alva and Mark Schneider make the argument.

many of the richest universities in the country–sitting on hundreds of millions, if not billions, of dollars in tax exempt endowments, and garnering tens of millions of dollars of tax deductible gifts every year–receive government subsidies through current tax laws that dwarf anything received by public colleges and universities, institutions that educate the majority of the nation’s low- and middle-class students. For example, we estimate that in 2013, Princeton University’s tax-exempt status generated more than $100,000 per full-time equivalent student in taxpayer subsidies, compared to around $12,000 per student at Rutgers
University (the state flagship)

However, the flaw is not that rich educational institutions benefit more than other educational institutions from tax exemptions. The flaw is that our tax system has designated certain institutions as morally superior to others because they claim non-profit status.

The essay that I wrote on this topic is one of my favorites.

Other tax issues might be moot if instead of taxing income or profits we shifted to a tax on the consumption of goods and services. Such a tax system would place profit-seeking firms and nonprofits on an equal footing. It would continue to exempt donations from tax, but it would equally exempt other forms of saving and investment.

An Intriguing Sentence to Summarize Marx’s Ideal

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From Peter Lawler,

Happiness is the unobsessive life of the hobbyist who doesn’t have to work for a living.

Lawler claims that this is Marx’s ultimate vision, and not surprisingly Lawler says that it has some merit, although he thinks that in the end it fails as a philosophy. The post is mostly about a claim by Lawler that not having children undermines serenity. But Lawler should do more to flesh out his ideas.

Timothy Taylor on Batteries

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He writes,

For electric cars to be truly cost-competitive with gas-fueled vehicles, battery costs need to drop dramatically. The rule-of-thumb has been that the cost of the battery pack in an electrical car needs to drop to $150 per kilowatt/hour or less. A few years back, it was standard to read that battery packs in electric cars were costing $700 per kilowatt/hour or more. Given the historically slow pace of progress in battery technology, it looked as if achieving these costs savings might be three or four decades away.

…the market leaders for electric cars have already reached a cost of $300 per kilowatt-hour–that is, they aren’t just writing with another set of predictions for how batteries will improve, but arguing that they have already improved.

…On this trajectory, nonsubsidized electric vehicle would be commercially viable in about a decade.

I have my doubts that batteries will improve at a high rate going forward. I suspect that energy efficiency will improve at least as quickly. That means that in relative terms, all-electric cars will gain little, if anything, on gasoline-powered cars.

[UPDATE: A reader writes,

In March 2013 Bjorn Lomborg wrote a piece for the WSJ suggesting that electric cars have “a dirty little secret”: these cars are much more energy intensive to produce, especially because of the mining of lithium for the batteries. As a result, there are no environmental gains from such cars until they’ve been driven about 80,000 miles. So the real effect of the subsidies to get people to buy such vehicles is to allow upper income people to feel good about themselves. That’s a laudable goal for a government program, isn’t it?

This is a general problem with trying to be a “green” consumer. When X costs less than Y, the market is telling you that X uses fewer resources. When you think that X uses too much of a particular (seen) resource and you buy Y instead, then you use more of another (unseen) resource.

Another Thiel Theme: Short Globalization

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In his conversation with Tyler Cowen, this theme was not as pervasive as contrarianism, but I found it more interesting and more provocative. Thiel’s view is that globalization has peaked. Therefore, companies and cities that are tied closely to globalization will decline relative to companies and cities that are less outward looking. So Texas will do better than Virginia, because Texas is focused on its own domestic production, while Virginia’s strength (I would say this only about Northern Virginia, by the way) is its military and diplomatic connections overseas.

Think about the notion “globalization has peaked” from a PSST perspective. Economic activity consists of patterns of sustainable specialization and trade. Globalization means that new patterns are being created across countries more rapidly than within countries. What would drive that differential, and what would slow it down?

Think of the benefit of a new pattern coming from comparative advantage and specialization. The cost is the fixed cost of setting up the pattern. Compared with setting up a local pattern, setting up an international pattern will tend to have higher fixed cost but with a larger subsequent benefit.

One possibility is that the cost of setting international patterns fell as China and India allowed their economic institutions to conform more readily to U.S. standards. However, over time, as China and India climb their way into the middle class, international comparative advantage is being reduced. There was an infamous paper by Samuelson that envisioned such a scenario. (It was perhaps his last academic publication, and it was not well received, because he seemed to disparage free trade.)

Another possibility is that the “low-hanging fruit” of reasonably low fixed cost international setups has been picked. Manufacturing and call centers can be moved offshore at moderate cost. With the New Commanding Heights industries of education and health care, it is much more difficult.

Another possibility is that globalization has not peaked.

Regulation as a Fifth Force

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Scott Sumner writes,

Building restrictions are increasing rental income as a share of national income. Intellectual property rights are barriers to entry that tend to create a winner-take-all situation (although other factors like network effects also play a role.) And other types of regulations (financial, human resources, etc.) are especially burdensome for small firms, and this favors the growth of inequality-intensive large firms.

Megan McArdle writes,

Homeowners in low-density neighborhoods will fight like tigers to preserve what they have. We’ve given them the legal tools to frequently win that fight — and if you try to take those tools away, they’ll fight that, too.

In the Four Forces story, gentrification is driven by the New Commanding Heights and bifurcated family patterns. Universities and hospitals replace manufacturing firms as the leading enterprises in cities. They hire marshmallow-test winners, some of whom want to live near where they work. Other marshmallow-test winners, looking to marshmallow-test-winner mates, also move into cities. These gentrifiers like restaurants and trendy shops, but otherwise they want to try to re-create suburban living, with low-density housing and easy biking.

A Dissenting View on Bifurcating Families

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Nicole Sussner Rodgers writes,

according to a recent analysis of new census data on family structure, education and income from the Council on Contemporary Families (CCF). It found that financial security helps children more than does any particular family structure. Marriage is not a panacea for poverty: There are almost as many poor or near-poor children in two-parent families as there are in single-parent ones.

I believe that the analysis to which she refers is by Shannon Cavanagh. If you can find anything analytical in the piece, let me know. The last paragraph says,

Financial security, even more than household composition, shapes children’s everyday experiences in ways that contribute to growing inequality. Between the mid-1970s and the mid-2000s, the difference between what the richest 20 percent and the poorest 20 percent of parents spent on enrichment activities for their children nearly tripled (Duncan & Murnane, 2014). Today, a 20 percentage point difference in participation in extracurricular sports exists for children in families at or above 200 percent (42.5 percent) compared to those children in poverty (22.5 percent). The difference between children of two married parents and children with a single parent is only 10 percentage points (Hofferth, 2015). Although having a second parent in the household may be important, having financial resources may be even more important, and having a second parent by no means guarantees such resources.

I think that merely saying that “there are poor children in two-parent households, too” is not really the best strategy. I think that the long-term outcomes for children of two-parent households are demonstrably better than those for children of single-parent households. Robert Putnam is as forthcoming on that as anyone.

Instead, if you want to question the conservative advocacy of traditional families as a solution for poverty, I think you have at least two good arguments to make.

1. Correlation is not causation. That is, the greater presence of bad outcomes for children of single-parent households does not necessarily reflect a causal role for family structure. Of course, my suggestion that the correlation may be genetic is not exactly the sort of argument the left would like to use.

2. We know how to alleviate poverty by providing cash and other benefits. We do not know how to fix families.

But

My Talk on the Four Forces and Inspiration to Quality Comments

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First, the inspiration part.

Organizers say it will almost certainly be the first paper at the prestigious Brookings Papers on Economic Activity that was commissioned based on a blog comment. It is also a rare honor for a graduate student to present a sole-authored paper there; a quick scan of Brookings records shows a similar appearance by the now-renowned economist Jeffrey Sachs when he was a doctoral student in 1979.

“It’s made Matt famous,” said Tyler Cowen, the George Mason University economist who runs the Marginal Revolution blog, and who elevated Rognlie’s comment into a standalone post on his site. “It was brilliantly reasoned and right on target. And very elegant.”

More links here. Even more from Timothy Taylor.

Note that it should inspire high-quality comments, not quantity or snark.

The topic is inequality, which leads to a summary of my talk.

In 1965, the St. Louis Cardinals played their home games in Sportsman’s Park (aka Busch Stadium I). The most expensive seat in the ballpark, a box seat, cost $3.50. A blue-collar worker, who earned about $2 an hour at the time, could treat a family of four to a game in these most expensive seats for less than one day’s pay.

These days, the Cards play at the new stadium, Busch Stadium III. A typical blue-collar worker makes something like $20 an hour The cheapest seat in the stadium still costs less than an hour’s pay. But the most expensive seats cost somewhere north of $800. It would take a month for a blue collar worker to earn enough to treat a family of four to the best seats in the ballpark.

In fact, most seats at the new ballpark are out of reach of blue-collar workers. Why is this? Are the new owners more greedy than Augie Busch, who gave tickets away cheap because he was a nice guy? I think not.

The new owners charge high prices for most seats because nowadays they can. In 1965, the top third and the bottom third of the earnings distribution were not that far apart, so that if you charged prices way above what a blue-collar worker could afford, you would have had mostly empty seats. Today, the top third provide a cadre of highly affluent customers.

In 1965, if you were in the top third and went to a baseball game, chances are that there were people sitting nearby from the bottom third Today, the top third and the bottom third are not sitting in the same part of the ballpark.

I think that the explanation for this comes from the four forces.

1. The New Commanding Heights, which means that over the past 100 years more of the increase in total wealth has been spent on education and health care than on manufactured goods. This trend has become most noticeable in the last thirty years. It means that earnings are no longer split between corporate shareholders and a nearly-homogeneous work force. They are split between high-skilled professionals and low-skilled support staff.

2. Bifurcated marriage patterns. Fifty years ago, one often found a marriage between someone who originated in the top third of the distribution and someone who originated in the bottom third. Since the 1960s, that has become rare. That creates the Coming Apart phenomenon documented by Charles Murray and re-documented by Robert Putnam.

3. Factor-price equalization exacerbates the competitive pressure on low-skilled workers.

4. Moore’s Law means that when computers are able to do a task as well as humans, they soon surpass humans.

Policy interventions to try to stop these four forces or reverse their effects are likely to be futile. The future will be some combination of the Diamond Age scenario (everyone’s basic needs satisfied, with an upper class of Vickys enjoying handmade luxury goods) and a Beyond Therapy scenario, with everyone enhanced by genetic engineering, implants, and drugs.