Category Archives: Growth Causes and Consequences

The New Demographics

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Nicholas Eberstadt writes,

Europe’s most rapidly growing family type is the one-person household: the home not only child-free, but partner- and relative-free as well. In Western Europe, nearly one home in three (32%) is already a one-person unit, while in autonomy-prizing Denmark the number exceeds 45%. The rise of the one-person home coincides with population aging. But it is not primarily driven by the graying of European society, at least thus far: Over twice as many Danes under 65 are living alone as those over 65.

Pointer from Tyler Cowen. The entire essay is recommended.

My impression of the United States is that we have two marital cultures. One culture, more prevalent among the affluent, is traditional marriage, delayed and with fewer children, with reasonably low divorce rates. The other culture, more prevalent among the less-than-affluent, is child-bearing outside of marriage, with a low proportion of long-lasting marriages.

Eberstadt’s global tour makes it difficult to claim that a single factor, such as affluence or local culture or the welfare state, is causing the decline in traditional marriage.

One thought I have is that the traditional family is highly congruent with an agricultural society. Perhaps we are seeing a sort of delayed response to industrialization and urbanization.

Michael Mandel’s Question About Health Care Innovation

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At this event, he asked why we do not see any of the signs of an innovation boom in health care that we saw with personal computers and the Internet. No spectacular new companies. No surge in demand for life sciences knowhow comparable to the surge in demand for computer programming skills. As he wrote last year, he believes that the FDA’s requirement that new treatments be more efficacious than old ones has the effect of stifling disruptive innovation, in which new products first gain traction on the basis of lower price rather than better quality.

Others at the panel pointed out that it may not be the FDA that dictates the innovation pattern. It may be the fact that third party payments dominate American health care. Patients who are not paying for their own health care are not going to provide a market for radically cheaper treatments. And insurance companies are not going to want to pay for radically better treatments that cost a lot. So the only innovations that survive are incremental ones.

However, I want to go back to the original question of why we do not see an innovation boom. My thoughts:

1. My guess is that we have not yet reached a point where all the pieces are in place to produce an innovation boom. Remember that it took several decades to go from the invention of the transistor to the appearance of the personal computer.

2. We do not have an institutional breeding ground for biotech innovation. No equivalent of Bell Labs, or Xerox PARC or the Homebrew Computer Club.

3. Someone in the audience asked a provocative question about whether some other country provides a role model, which country provides a role model for health care innovation? If you thought that the only roadblocks were American customs and regulations, health care innovation would take place in other countries.

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.

Old Predictions of Mine, Mostly Wrong

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An editor of a publication asked if it would be ok to reprint this essay. Since it is 15 years old, I thought it would look pretty silly if it were reprinted now. There are a few lines in the essay that I still like.

All of these features are feasible with existing technology. The problem is that if you tried to combine them into a single device, you’d probably need to carry around a power pack the size of a cantaloupe.

Today, a teacher in a classroom or a speaker in a meeting has a presumptive ownership over the attention of the audience. My guess is that within five years or so this will have broken down completely. You simply will take it for granted that while you address an audience, people will be engaged in electronic communication with external parties, only intermittently tuning in to what you have to say.

But mostly, there are clunkers like this:

I do not see signs of mobile Internet devices crossing the chasm. Palm Pilots have been around for a few years now, and I am still waiting for a compelling reason to buy one. I’m sorry, but the way see it, if I need something to keep myself occupied when I’m traveling, I can pack a book.

IQ and Institutions

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Jason Collins dares to write,

Those nations with high-IQ, educated populations tend to have higher levels of economic development. Although rich countries tend to have good political institutions and policies that are not completely crazy, the direction of causation is population to institutions. If you have the “right” people in a nation, decent political frameworks tend to follow.

You can read my cross-country study, which supports Jason’s view. The appendix is where I introduce an IQ variable, which is very powerful. If you don’t like my dependent variable, which is an index of economic freedom, you could redo the analysis using the United Nations human development index and get very similar results.

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.

Response to George Selgin

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On this post, he comments,

So far as I’m aware, every innovation that caught on during the Industrial Revolution did so because it was a better response to prevailing scarcities than what existed before, and never despite the fact. I see no reason why this shouldn’t remain the case today.

I take his point to be that technology to replace labor will only emerge if labor is scarce. If there is plenty of unused labor around, then there is no need to develop robots to replace it.

I think that this argument is compelling if an incipient surplus of labor would cause wages to fall dramatically. At sufficiently low wages, it does not pay to use robots. However, for a variety of reasons, wages are not going to fall. Instead, workers will be driven to take more leisure. They may be counted either as unemployed or out of the labor force.