Category Archives: Growth Causes and Consequences

Youth, Age, and Entrepreneurship

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Edward Lazear writes,

we found that young societies tend to generate more new businesses than older societies. Young people are more energetic and have many innovative ideas. But starting a successful business requires more than ideas. Business acumen is essential to the entrepreneur. Previous positions of responsibility in companies provide the skills needed to successfully start businesses, and young workers often do not hold those positions in aging societies, where managerial slots are clogged with older workers.

Pointer from Mark Thoma. Another interesting quote from Lazear:

The importance of youth is illustrated by the stark contrast between two neighboring countries, Japan and Korea. Using the GEM survey data, we found that Japan’s rate of entrepreneurship (the proportion of individuals who own a business that they founded in the past 42 months) is just 1.5%. In Korea the rate is a much higher, 8%. The median age in Japan is 43; in Korea it is 34. The U.S., with an entrepreneurship rate of 4.4% and a median age of 36, is in the middle of the pack on both entrepreneurship rates and median age.

Larry Summers on the Great Factor Substitution

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He said,

If there are only two factors, they have to be complements. If there’s more capital, the wage has to rise. Now imagine that…you can take some of the stock of machines and, by designing them appropriately, you can have them do exactly what labor did before…When capital is reallocated to substituting for [replacing] labor, the stock of effective labor rises and the stock of conventional capital falls, and so wage rates fall. Third, the capital share, understood to include the total return to capital of both varieties, rises. That’s just a corollary of output rising and wages falling. This pattern is similar to what we have seen take place. I suspect that this reflects the nature of the technical changes that we have seen: increasingly they take the form of capital that effectively substitutes for [replaces] labor.

Pointer from Tyler Cowen, who I’m surprised did not make a bigger deal about it.

My one quibble/criticism is that this describes a closed economy. In the real world, with China and India developing, factor-price equalization is at least as important as factor substitution. To put this another way, include those countries when you calculate trends in labor’s share of income.

Also, Summers writes,

Where production has taken place in the classic way we teach, productivity growth has continued. There has been progress. Real wages measured in those terms have increased substantially. It’s just that a larger and larger share of our economy is in sectors that are not well thought of as widgets produced by competitive firms. They are sectors where property rights, scarcities, intellectual property, and the like are of fundamental importance.

My take on this is to be wary of talking about “the” real wage. Your real wage is much higher if you abstain from making extravagant use of modern medicine and private colleges. See The Reality of the ‘real wage’.

He concludes by raising the issue that Nick Schulz and I called the New Commanding Heights. Summers writes,

Whether the expansion of those sectors as a share of the economy necessitates a growing share of the public sector in the economy, or whether the share of healthcare and education that takes place in the public sector should decline will be a matter of great public debate. As a country, and not without controversy, we do not seem to be moving toward a smaller public role in healthcare. Nor do other countries in the world. But that will, perhaps, change over time.

Robots

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The press is excited about Google’s purchase of robotics companies. For example, Popular Mechanics writes,

Car factories are stocked with powerful, precise robotic arms that assemble cars with uncanny speed and delicacy. Bringing that to our world—to our streets, nursing homes, warehouses—is the next big step in robotics. And Google bought its way into this future.

The interesting conflict in robotics is between those who want to build general-purpose, humanoid robots and those who want to build robots optimized for specific tasks. I lean more toward the latter. For example, I expect to wait a long time (perhaps forever) for a robot that can do all-purpose house cleaning. It is easier for me to picture a hotel using a toilet-cleaning robot, a shower-cleaning robot, a bed-making robot, etc., as such devices are invented.

Occupations of the Future

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David Brooks writes,

Millions of people begin online courses, but very few actually finish them. I suspect that’s because most students are not motivated to impress a computer the way they may be motivated to impress a human professor. Managers who can motivate supreme effort in a machine-dominated environment are going to be valuable.

Actually, I think that a big reason that people drop online courses is that those courses are a misfit for them. An advantage of a typical live course is that most of the students have been selected to have similar abilities and experiences. A lot of people sign up for online courses who otherwise would be discouraged from doing so. That is not necessarily a problem with online learning.

However, that is why MOOCs are not the answer, in my view. My line is that we need instruction that is many-to-one, not one-to-many. Indeed, Jonathan Haber suggests that MOOCs might be a step backward, and he links to something I wrote in 2002.

suppose that we had all of the highly-touted electronic technologies for distance learning, and then someone came along and invented the book. My guess is that the book would be greeted as a technological marvel–easy to hold, convenient to carry, outstanding resolution, and so forth. This thought experiment leads me to suspect that electronic distance learning is a fad.

On the subject of the future, my joke is that the ideal occupation will be a yoga instructor working in an old-age home. That lines up with the trends toward more spending on health care, education, and leisure, along with an older demographic.

Brad DeLong on Stagnation

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A lengthy, interesting essay. A brief quote:

In the future we are going to want to spend a greater share of our incomes and attention in areas where the market system works less well: information goods, public goods, increasing-returns goods, pensions, health care, education. The market works less well in these areas. But our alternative modes of collective organization, product [sic?] take some bureaucracy, not exactly cover themselves with glory in these areas either. Thus I suspect that not innovation exhaustion but rather institution design will be our big problem in keeping the pace of true economic growth going into the long-run future.

This is where I use my line: “Markets fail. Use markets.”

That is, I do not think that replacing markets where competition works imperfectly with technocrats shielded from competition entirely is the way to go. So while Brad and I might agree that institutional arrangements matter, we disagree on which institutional arrangements are likely to be most promising. I wish we could arrange it so that he lives in his technocratic utopia while I live in a messier decentralized system without having to create an impermeable boundary between us.

But do not let that deter you from reading Brad’s entire essay. One thing that he does well, compared to other discussions I find in the blogosphere and in the press, is wrestle with the meaning of “stagnation.” Too often, I see demand-side stagnation lumped in with supply-side stagnation, even though to me it seems that they are mutually exclusive. You cannot have both excess supply and excess demand at the same time in the aggregate (you can certainly have excess supply in one market and excess demand in another, but that is not what the sloppy thinkers are describing). Of course, I am willing to forget about demand-side issues altogether and just look at everything in terms of PSST.

As Brad also points out, you need to clarify which problems you think are temporary and which problems are embedded in long-term trends. My own view is that the decline in the value of unskilled (and some skilled) labor is embedded in a long-term trend. If there a lot of low GDP-per-worker folks out there, one has to ask whether the best use of their time is working (I think Brad hints at this issue, but perhaps he means something different).

This brings us down to the issue of whether pure innovation is going to be a favorable long-term trend going forward. I am optimistic, but I go back and forth between being more optimistic about information technology vs. biotechnology. I think that improvements in information technology and its applications are easier to achieve but less dramatic. Human biology strikes me as really complex (and perhaps more complex than many researchers were expecting 20 years ago), but the potential payoffs from biotech strike me as huge. For example, I expect chemicals to do much more to improve cognitive ability than any educational tools.

Vaclav Smil

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Interviewed here. He comes across as the opposite of George Gilder, in that he is very much a materialist.

we consume so many more products that there’s been no absolute dematerialization of anything. We still consume more steel, more aluminum, more glass, and so on. As long as we’re on this endless material cycle, this merry-go-round, well, technical innovation cannot keep pace.

Pointer from Tyler Cowen.

I once got to hike with Smil during a break in a conference put together by John Baden. That was a treat.

Skeptics on Job Polarization

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Lawrence Mishel, Heidi Shierholz, and John Schmitt take on a popular story.

The early version of the “skill-biased technological change” (SBTC) explanation of wage inequality posited a race between technology and education where education levels failed to keep up with technology-driven increases in skill requirements, resulting in relatively higher wages for more educated groups, which in turn fueled wage inequality (Katz and Murphy 1992; Autor, Katz, and Krueger 1998; and Goldin and Katz 2010). However, the scholars associated with this early, and still widely discussed, explanation highlight that it has failed to explain wage trends in the 1990s and 2000s, particularly the stability of the 50/10 wage gap (the wage gap between low- and middle-wage earners) and the deceleration of the growth of the college wage premium since the early 1990s (Autor, Katz, and Kearney 2006; Acemoglu and Autor 2012). This motivated a new technology-based explanation (formally called the “tasks framework”) focused on computerization’s impact on occupational employment trends and the resulting “job polarization”: the claim that occupational employment grew relatively strongly at the top and bottom of the wage scale but eroded in the middle (Autor, Levy, and Murnane 2003; Autor, Katz, and Kearney 2006; Acemoglu and Autor 2012; Autor 2010). We demonstrate that this newer version—the task framework, or job polarization analysis—fails to explain the key wage patterns in the 1990s it intended to explain, and provides no insights into wage patterns in the 2000s. We conclude that there is no currently available technology-based story that can adequately explain the wage trends of the last three decades.

Pointer from Mark Thoma.

Read the whole thing. One of the problems that the authors find with the job polarization story is that a lot of inequality of wages has emerged within occupations rather than between occupations.

Think of the bimodal distribution of starting salaries that has emerged in the market for lawyers. Is that evidence against computer-driven job polarization? Perhaps not. Perhaps with the help of computers paralegals can now do a lot more, driving down the wage of the median lawyer. However, firms that need the most sophisticated legal work will pay up for the top lawyers.

Wither 90 percent of employment?

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Some analysts at the Gartner group are buying into Average is Over.

From 2020 to 2030, “you are going to see the first human-free enterprise — nobody is involved in it, it’s all software, communicating and negotiating with one another,” said Diane Morello, a Gartner analyst, who has looked at how smart machines will reshape employment.

The upshot?

On an extreme end of the scale, he [Gartner’s Kenneth Brandt] put the impact of smart machines at 90% unemployment, which is either catastrophic or leads to a utopia, where basic needs are met and people are free from drudge work.

Wither the World’s Manufacturing Employment?

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Dani Rodrik writes,

Consider China. In view of its status as the world’s manufacturing powerhouse, it is surprising to discover that manufacturing’s share of employment is not only low, but seems to have been declining for some time. While Chinese statistics are problematic, it appears that manufacturing employment peaked at around 15% in the mid-1990’s, generally remaining below that level since.

Pointer from Tyler Cowen.

Rodrik’s main point is that newly-developing countries, like China and Brazil, seem to have maxed out on their manufacturing employment without reaching the levels of income achieved by earlier industrializers, such as South Korea. He is concerned that this means poor growth prospects in the newer developing countries.

When the US, Britain, Germany, and Sweden began to deindustrialize, their per capita incomes had reached $9,000-11,000 (at 1990 prices). In developing countries, by contrast, manufacturing has begun to shrink while per capita incomes have been a fraction of that level: Brazil’s deindustrialization began at $5,000, China’s at $3,000, and India’s at $2,000.

By the way, the title of my post is not a typo.

To think about this, start with the idea that employment increases in sectors where demand grows faster than productivity, and employment declines in sectors where productivity grows faster than demand. That is not a very deep theory–it is arithmetic.

In rich countries, the share of goods in consumption has been declining for decades. The best hope for manufacturing growth in the newer developing countries is that their own consumers will want to accumulate physical stuff, the way we did in the middle decades of the twentieth century.

However, households in China today are not going to want what households in the U.S. wanted fifty years ago. Analog television? Stereos? Landline phones? Cars that don’t last more than a few years?

Maybe no country today has to go through a phase in which 1/4 of its labor force works in manufacturing. Middle-class households around the world can get the stuff they want without devoting so much labor to that sector.

It may be that the cost of the manufactured goods that a middle-class household wants nowadays is so low that Brazil, China, and India are already middle class in that respect. Our own middle-class incomes are much higher, but we fritter that away on cost-ineffective health care and education.

I think that this is an important point about the nature of inequality, both in the U.S. and in the world. A higher proportion of people can afford food. A higher proportion of people can afford useful goods, ranging from refrigerators to cell phones. However, a lower proportion of people can afford elite schools and unsubsidizedinsulation from having to pay directly for health care.

This is not your grandfather’s inequality. It may be better or worse, but it is different.

Brink Lindsey on Growth Prospects

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He writes,

In the 21st century…all growth components have fallen off simultaneously

The number of hours worked per person has been falling secularly. Years of schooling per worker has grown slowly. Capital per worker is growing slowly. And the residual, or “total factor productivity,” has also grown slowly.

On the human capital issue, Alex Tabarrok points to a NYT story, which says

In the United States, young adults in particular fare poorly compared with their international competitors of the same ages — not just in math and technology, but also in literacy.

More surprisingly, even middle-aged Americans — who, on paper, are among the best-educated people of their generation anywhere in the world — are barely better than middle of the pack in skills.

My view is that growth will depend on luck in terms of discoveries. One possibility would be discovering a cure for obesity/diabetes. Another possibility would be discovering drugs that improve the ability of young people to learn, by increasing conscientiousness, cognitive ability, or both. Another possibility would be a discovery that makes solar power really inexpensive. Another possibility would be the development of very high skill at manipulating DNA, so that we can “grow a table,” in Rodney Brooks’ phrase.

I am not counting on any of these things happening. I am just saying that you need something really big in order to affect TFP growth.

As Brink points out, public policy could be changed in order to promote growth. However, I think we are less likely to have good luck on the policy front than on the discovery front. I think that policy has a lot of inertia.