Category Archives: Growth Causes and Consequences

Provocative Sentences

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From Tucker Carlson, profiled by McKay Coppins.

“Look, it’s really simple,” Carlson says. “The SAT 50 years ago pulled a lot of smart people out of every little town in America and funneled them into a small number of elite institutions, where they married each other, had kids, and moved to an even smaller number of elite neighborhoods. We created the most effective meritocracy ever.”

“But the problem with the meritocracy,” he continues, is that it “leeches all the empathy out of your society … The second you think that all your good fortune is a product of your virtue, you become highly judgmental, lacking empathy, totally without self-awareness, arrogant, stupid—I mean all the stuff that our ruling class is.”

Of course, assortive mating is only one of the four forces. But he is talking about it as a political force, not as an economic force.

My concern is that we are losing the ability to discuss ideas with people who disagree. Instead, we keep getting better and better at closing the minds of people on our side.

Four Forces Watch

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Laurie DeRose and W. Bradford Wilcox write,

By showing that cohabiting families are more unstable, even among the highly educated in Europe and the United States, our research suggests family instability is not only about socioeconomic forces. As Pascal-Emmanuel Gobry observed in response to our findings on cohabitation, education, and family instability, “The point about educational status, in particular, is important: The vaguely pseudo-Marxist idea that our family and life outcomes are entirely driven by economics is not credible; values, norms, and institutions also matter.” And, at least today, the values and norms associated with the institution of marriage remain clearly and powerfully tied to family stability. That’s why, as marriage becomes less likely to anchor the adult life course across the globe, growing numbers of children may be thrown into increasingly turbulent family waters.

As the authors point out, one cannot necessarily interpret their findings as a simple causal model running from choice of cohabitation to instability. I would add that, at least in the U.S., the rate of marriage is much higher among the affluent.

Arthur Brooks on the Dignity Deficit

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He writes,

even though poverty has become less materially miserable, it is no less common. In Martin County, just 27 percent of adults are in the labor force. Welfare is more common than work. Caloric deficits have been replaced by rampant obesity. Meanwhile, things aren’t much better on the national level. In 1966, when the War on Poverty programs were finally up and running, the national poverty rate stood at 14.7 percent. By 2014, it stood at 14.8 percent. In other words, the United States had spent trillions of dollars but seen no reduction in the poverty rate.

Of course, the poverty rate doesn’t take into account rising consumption standards or a variety of government transfers, from food stamps to public housing to cash assistance. But the calculations that determine it do include most of the income that Americans earn for themselves. So although the rate is a poor tool for gauging material conditions, it does capture trends in Americans’ ability to earn success. And what it shows is that progress on that front has been scant.

Read the whole essay, because it was hard to find a summary excerpt. He argues that the policy focus should be less on providing handouts and more on providing the dignity of employment.

This is easier said than done, of course. Most of Brooks’ suggestions strike me as reasonable, but I am skeptical that they would prove effective. And note that one approach, more vocational education, has a not-surprising down side, which is that today’s vocation can become obsolete tomorrow. Tyler Cowen points to an article by Hanushek and others.

with technological change, gains in youth employment may be offset by less adaptability and diminished employment later in life. To test for this tradeoff, we employ a difference-in-differences approach that compares employment rates across different ages for people with general and vocational education. Using microdata for 11 countries from IALS, we find strong and robust support for such a tradeoff, especially in countries emphasizing apprenticeship programs.

In The Diamond Age, the Thetes do not have much dignity.

My Thoughts on Cost Disease

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Scott Alexander writes

Any explanation of the form “administrative bloat” or “inefficiency” has to explain why non-bloated alternatives don’t pop up or become popular. I’m sure the CEO of Ford would love to just stop doing his job and approve every single funding request that passes his desk and pay for it by jacking up the price of cars, but at some point if he did that too much we’d all just buy Toyotas instead. Although there are some barriers to competition in the hospital market, there are fewer such barriers in the college, private school, and ambulatory clinic market. Why hasn’t competition discouraged administrative bloat here the same way it does in other industries?

1. At any given time, you will have sectors where demand is growing faster than productivity (think of health care and education) and other sectors where productivity is growing faster than demand (think of manufacturing). In the sectors where demand is growing faster than productivity, you have rising relative prices, or “cost disease.”

2. In health care and education, you also have a lot of government intervention, and government intervention almost always takes the form of subsidizing demand while restricting supply. Of course, that is going to cause relative prices to be higher, thereby exacerbating “cost disease.”

3. I would argue that there are plenty of barriers to competition in the college market. Accreditation is one such barrier. But there are natural incumbent advantages as well. You may be able to enter the market for high school graduates who are in no way prepared for college. But trying to enter the market at the level of a top 100 college is nearly impossible.

4. There are plenty of barriers in health care, also. Clinics are a good innovation, but the real expenses in health care are in chronic illnesses, and clinics do not compete to treat diabetes, Alzheimer’s, and so on.

5. It is in the nature of organizations for middle managers to try to build empires, adding to cost without necessarily creating value. In for-profit businesses, the owners have an incentive to check this, because the owners want to maximize profits. In non-profits, the natural checks operate only when revenues are not rising to cover the cost of expansion. Non-profits only worry about the bottom line when it threatens to go negative.

In short, some “cost disease” is natural. At any given time, some industries will have demand growing faster than productivity. However, much of it is artificial, as government subsidizes demand and restricts supply. Finally, some of it results from the fact that non-profits are less efficient than for-profit firms.

James Pethokoukis and Joel Kotkin

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No, it’s not a love match, just an interview. Kotkin says,

the valley that I used to cover back in the 80s, and even 90s, was filled with people who had been boat people, who had started PC board companies. You know, kind of somewhat people being able to make a career for themselves in the tech industry even if they didn’t, let’s say have a PhD or an MBA from an elite school. That’s just not the case anymore. I mean, you have a much more hierarchal order in Silicon Valley than you used to have and that is really reflected throughout most of this economy. I mean, what you see particularly here in California is wealthy, older property owners who are in pretty good shape because their property up, but young people can’t possibly buy a house.

He calls this “neo-feudalism” because it creates an order that is stable, but stagnant. I would argue that it is due mostly to natural forces, but there are policies at work as well. Read the whole interview.

The natural forces are the four forces that I often talk about.

1. The New Commanding Heights, as demand rises faster than productivity in education and health care.
2. Assortative mating and bifurcated family patterns.
3. Factor-price equalization (globalization).
4. The Internet and other new technology, which complements some skills and substitutes for others.

The policy forces at work include:

1. Credential requirements, which protect some workers by excluding others.
2. Subsidizing demand and restricting supply in health care and education. Credentialism does both, in that it adds to the demand for credential-providing schools and while restricting supply.
3. Subsidizing demand and restricting supply in housing markets. Environmental and other building restrictions in high-demand areas help to hold down supply and enable young professionals to outbid others for housing in places like San Francisco and Brooklyn.
4. The system of public education, which creates neighorhoods with “good schools” (meaning schools that have a lot of affluent students attending), leading people to bid up prices for those neighborhoods. If you had vouchers instead, parents probably would still bid up the prices of schools that attract affluent students (that is what happens in colleges–it is what the competition to get into “elite” colleges is all about), but at least this would not be linked as tightly to housing.
5. Various policies that redistribute income upward, particularly to the affluent elderly. Social security, Medicare, and public-sector pensions come to mind.

My Review of Mokyr

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I write,

A fundamental issue in all of the disciplines that study human society, including economics, is the relative role of material conditions versus human agency as causal forces. Many writers focus on material conditions. … Those of us on the other side of that debate, including Mokyr, assign more credit to intangible factors, notably ideas and culture.

The Protectionist Spirit

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Tyler Cowen concludes,

it has become harder for insiders to capture the gains from building more, opening up or liberalizing systems. And so they are closing off opportunities and limiting potential gains for everyone.

I have just started reading The Innovation Illusion, by Frederik Erixon and Bjorn Weigel. They take the view that capitalism’s main strength is its ability to adopt new and better methods while discarding what is inefficient. They also take the view that this strength has diminished in recent decades. If you read Tyler’s entire essay, you will see that his point is that the benefits from capitalism are tending to go toward people with less political power and the displacement from capitalism is tending to affect people with more political power.

Update on the Long-term Stories

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Over a decade ago, I suggested following five long-term stories:

productivity; cognitive neuroscience, solar power, cancer therapy, and mainstream media meltdown

It looks like mainstream media meltdown has proceeded quite far since then. People are just as happy to get their fake news from Facebook or Drudge as they are from the NYT or CNN.

Productivity is not such a clear story. If you include unsubsidized health insurance, college tuition, and housing in San Francisco in your cost-of-living index, it is obvious that real wages and productivity are going nowhere. Note that these are all sectors in which public policy subsidizes demand and restricts supply.

If you restrict yourself to consumer durables and non-durables, productivity growth might look decent. If you look at things from the perspective of the autodidact, productivity growth is tremendous. In the last ten years, the amount that you can learn on YouTube has exploded. Whether you need to fix your toilet, learn to play “Crossroads” on guitar, or study advanced academic subjects, it is all there.

I still think that the productivity story is important. The challenge is figuring out how best to follow it.

Cognitive neuroscience seems to me to be less exciting than I expected a decade ago. The Google trend for “cognitive neuroscience” seems to me to be flat/declining.

In 2005, the U.S. Department of Energy predicted that solar power would be price competitive by now. That was too optimistic. However, we can at least say that solar costs are moving in the right direction. And there are still plenty of optimistic articles out there. Six months ago, Peter Diamindis wrote,

for those who want to do the calculations, at a 30 percent annual growth rate, it looks like this: In five years, we go from 0.4 percent to 1.5 percent. In 10 years, we’re at 5.5 percent. In 15 years, we’re at 20 percent, and in 21 years, we’re at 98 percent.

That is, if the share of solar power in total energy production grows at 30 percent per year for a long time, it takes about 20 years to take over. Of course, if it “only” grows at 10 percent per year, it takes much, much longer.

Cancer therapy is proving to be a tough slog. But I think that one can say that the cure rate is increasing, and the death rate is declining. One can argue that, while cancer is still obviously very difficult and very important, some attention is now shifting to the diseases of the brain, such as Alzheimer’s.

Supply, Demand, and Immigration

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Don Boudreaux writes,

An increase in the supply of labor lowers wages only if nothing else changes. But when immigrants enter the workforce two very important other things change. First, immigrant workers spend or invest their earnings, both of which activities increase the demand for labor – thus putting upward pressure on wages. By focusing only on immigrants’ effect on the supply of labor, Mr. Burwell overlooks immigrants’ effect on the demand for labor.

A second change is one that was emphasized by Adam Smith: larger supplies of workers, as well as more consumers of the economy’s output, lead to greater specialization. Jobs change. As Smith explained, this greater specialization makes workers more productive. This increased productivity, in turn, causes wages to rise.

Peter Turchin would disagree. In Ages of Discord, he finds a strong historical correlation between periods of high rates of immigration and stagnant wages for ordinary workers. I have read through Turchin’s book once, and I mean to write a review. But I keep procrastinating. I am tempted to say that the book, while it appeared to be very interesting on a first pass, is un-rereadable. The data that lands in Turchin’s charts takes a very circuitous route to get there, and it hard for me to stay on top of the relationship between the underlying data and what Turchin says that they represent.

Manufacturing Jobs in Global Perspective

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James Pethokoukis puts up a chart showing that over the past 25 years several other countries have lost manufacturing jobs at a faster rate than in the U.S. And of course, manufacturing output has increased.

I should point out that the statistics on manufacturing jobs include white-collar workers, which have been increasing as a share of manufacturing jobs. The percentage of the labor force doing manufacturing production work has shrunk even more.

Manufacturing is in a situation that is comparable to agriculture, where a tiny share of the work force produces a tremendous amount of output.