Must-read: Noah Smith: “101ism in Action: Minimum Wage Edition”

Must-Read: Noah Smith waxes wroth about really lousy economics perpetrated by Alex Tabarrok, Mark Perry of the invariably-execrable American Enterprise Institute (sorry Norm Ornstein: you inhabit a really bad neighborhood), and a guy who puts things on the internet while remaining anonymous. It need not to be said that randomly tweeting art put on the internet by guys who do not have real names rarely ends well…

But it does need to be said that, for Noah, “Econ 101ism” involves pretending that Econ 101 says things that it does not–that it involves getting the elementary economics 180 degrees wrong, all the while claiming that you are merely parroting elementary economics.

I suggest renaming it: “False-Flag Econ 101ism”. But Noah is right on the big point. This one is a beauty, for Econ 101–the real Econ 101–tells us that the first-order effect of a minimum wage is to transfer wealth from consumers and business owners to low-wage workers…

Noah Smith: 101ism in Action: Minimum Wage Edition: “American Enterprise Institute scholar Mark J. Perry tweeted the following

Noahpinion 101ism in action minimum wage edition

…I was annoyed by the word ‘actually’…. So I started giving Mark a hard time about ignoring the empirical evidence on the minimum wage question. That’s when Alex Tabarrok jumped in and defended the cartoon, saying that it’s just a basic supply-and-demand model…. But that’s not right…. While the cartoon and the D-S model both predict that minimum wage causes job loss, it’s only a coincidence–they’re not the same model at all… some sloppy political crap made by a cartoonist who doesn’t remember his intro econ class very well…

Must-read: Noah Smith: “Your Landlord Is a Drag on Growth”

Must-Read: Noah Smith: Your Landlord Is a Drag on Growth: “After many decades of essentially ignoring the role of land…

…economists are starting to reconsider. Some are worried that landlords are hurting growth by making it too expensive to live in highly productive cities. Now, some are starting to think about how land figures in the rise in inequality. The basic idea is that landlords use their local political power to stack the deck…. That unpleasant narrative might now be playing out in the U.S. Jason Furman, the chairman of the Council of Economic Advisers…. According to Furman, some of the change may be due to more zoning. Since the late 1970s, land-use regulation has skyrocketed in the U.S….

The new spotlight on zoning is causing even traditional proponents of government intervention to call for regulatory reform. Paul Krugman… “[T]his is an issue on which you don’t have to be a conservative to believe that we have too much regulation. … New York City can’t do much if anything about soaring inequality of incomes, but it could do a lot to increase the supply of housing, and thereby ensure that the inward migration of the elite doesn’t drive out everyone else.”… [But] existing landlords have lots of power in local politics, while potential landlords and tenants, because they are still living elsewhere, have zero…

Must-read: Noah Smith: “Book Review: ‘Economics Rules'”

Must-Read: Noah Smith: Book Review: “Economics Rules”: “I love a good book about econ philosophy-of-science…

Economic Rules: The Rights and Wrongs of the Dismal Science, by Dani Rodrik, is my favorite book in this vein to come out in quite some time…. I do have one big problem: the first two chapters. These chapters consist entirely of Rodrik’s very general thoughts on economic models, and what they should and shouldn’t be used for. The problem with these early chapters is the audience. Economists will already have heard most or all of these philosophical ideas. Non-economists, in contrast, will probably not understand…. These early chapters… fall into an uncanny valley, too old-hat for economists but too inside-baseball for non-economists.  So I fear that many readers may get turned off early….

Rodrik really shines when he talks about his own field, development econ. He gives a vivid recounting of the Washington Consensus – why it was adopted, why it went wrong, and how the mistakes could have been avoided. The story of the Washington Consensus provides the perfect backdrop for Rodrik’s ideas about what economists and models should do. The episode demonstrates why it’s important for policy advisors to look at a bunch of alternative models, and use personal judgment to choose which ones to use as analogies for reality. It is the perfect example of the ‘models as fables, economists as doctors’ worldview that Rodrik is trying to lay out. In fact, I wish more of the book had been about trade and development….

I find myself pretty much in agreement…. It’s very difficult to sum them all up (so go read the book), but here’s a few that really stood out: Rodrik notes that economists tend to present a much more simplistic, pro-market stance to the public than they show in their research and behind closed doors…. Rodrik strongly criticizes the New Classical and RBC macro theorists…. Rodrik tries to counter the criticism that economists ignore things like norms. In doing so, he basically says ‘The evidence shows that norms often matter, and economists pay attention to the evidence.’… This is a great book, and a quick read. Get it and read it if you haven’t.

Must-read: Noah Smith: “Don’t Blame ‘Uncertainty’ for the Slow Recovery”

Noah Smith: Don’t Blame “Uncertainty” for the Slow Recovery: “Since Baker, Bloom and Davis came out with their uncertainty hypothesis…

…there has been a large and sustained drop in the index of uncertainty. But the rate of the U.S. economic recovery has remained slow and steady, leading many to question whether uncertainty is just a sideshow…. Sydney Ludvigson… Sai Ma… and Serena Ng…. Their statistical technique requires some bold assumptions, but allows for interpretation of cause and effect. Ludvigson, Ma and Ng find that financial uncertainty seems to cause every other type of economic uncertainty… finance… drive[s] the real economy. 

So what does this result mean for the policy uncertainty hypothesis?… [If] policy [were] to be the cause… it would have to do so through its impact on financial markets. Legal challenges to Obamacare or increased regulation of aircraft manufacturing would be unlikely causes of recessions. So what policies, in 2008, threatened U.S. financial markets? Before the crash, financial regulation… wasn’t a major plank of  Barack Obama’s or John McCain’s presidential campaigns…. When financial regulation actually did come, in 2010 in the form of Dodd-Frank, it did very little to hurt asset markets. Therefore there is good reason to be skeptical of the hypothesis of Baker, Bloom, and Davis. It is difficult to lay blame for the Great Recession, or the slow recovery from that recession, at the feet of either the Obama administration or the Republicans in Congress…. The financial industry imploded all on its own, and that the Great Recession was the result.

Must-Read: Noah Smith: Unlearning Economics

Must-Read: Noah Smith is pushing me towards thinking that Econ 1 needs to teach a lot more than supply-and-demand plus macroeconomic externalities that can be dealt with by stabilizing monetary and maybe fiscal policy…

Noah Smith: Unlearning Economics: “Right now we’re in the middle of an empirical revolution in econ, and…

…unsurprisingly–a ton of standard, common theories are just not matching reality very well. For example: 1…. Minimum wages should harm employment in the short term. But the data shows that they probably don’t. 2…. A big influx of immigrants should depress the wages of native-born workers of comparable skill. But the data shows… the effect is very small.  3…. Welfare programs barely reduce observable work effort. 4…. Social norms (or morals, broadly conceived) matter to people…. The stuff… [of] Econ 101… are being smacked down by the heavy hand of new data. We’re slowly unlearning economics…. Econ 101 courses around the country probably need an overhaul…. Teachers should still teach the simple, classic theories that the new facts are beginning to kill… but mainly as a way to show how data can tell us when we’re wrong.

Must-Read: Noah Smith: Case-Deaton and the Human Capital Debate

Noah Smith: Case-Deaton and the Human Capital Debate: “A tendency toward healthy behavior is a powerful and important form…

…of human capital. It is not at all clear that this kind of human capital can (or will) be created by MOOCs, self-study, or other forms of online learning that are being touted as replacements for college. In fact, right now it looks like the health-related human capital boost from college is all that is holding it together for our upper middle class.

Must-Read: Noah Smith: It Isn’t Just Asian Immigrants Who Thrive in the U.S.

Must-Read: Noah Smith: It Isn’t Just Asian Immigrants Who Thrive in the U.S.: “Nicholas Kristof… ask[s] the ‘awkward question’ of why Asian-Americans have been so economically successful….

…The focus on East Asians, and ‘Confucian’ culture, seems misplaced…. More than 43 percent of African immigrants hold a bachelor’s degree or higher…. That education translates into higher household income. Nigerian-Americans, for instance, have a median household income well above the American average, and above… those of Dutch or Korean descent. This isn’t the power of Confucius. It’s the magic of high-skilled immigration…. Every society has its own version of what Kristof calls Confucian values. They are universal. And skilled immigration brings the families with those values to the U.S….

This isn’t to ignore the contribution of low-skilled immigrants, who work hard, pay taxes and commit relatively few crimes, despite what some conservative politicians now claim… [who] have enriched the U.S. enormously…. Nor should the U.S. worry about inflicting harm on the source countries…. Skilled people [who] move to the U.S…. end up helping their ancestral nations…. Instead of singing the praises of Confucian culture, the U.S. should be harnessing the power of its immigration system…. An economy with more smart, dedicated, ambitious people–no matter where they come from–is good for everyone, but especially for the working class.

Must-Read: Noah Smith: Star Trek Economics: Life After the Dismal Science

Must-Read: Noah Smith: Star Trek Economics: Life After the Dismal Science: “I grew up watching ‘Star Trek: The Next Generation’ (easily the best of the Star Trek shows)…

…There’s one big, obvious thing missing from the future society depicted in the program. No one is doing business…. Food and luxuries are free, provided by ‘replicators’…. Scarcity… seems to have been eliminated. Is this really the future?… Current world annual gross domestic product per capita… is only about $13,000–enough to put food on the table and a roof over one’s head. What happens when it is $100,000, or $200,000?… This is the basic Star Trek future. But actually, I think that the future has a far more radical transformation in store for us. I predict that technological advances will actually end economics as we know it, and destroy scarcity, by changing the nature of human desire…. Instead of a world defined by scarcity, we will live in a world defined by self-expression. We will be able to decide the kind of people that we want to be, and the kind of lives we want to live, instead of having the world decide for us. The Star Trek utopia will free us from the fetters of the dismal science.

Albert Hirschman’s linkages, economic growth, and convergence yet again…

When you think about it, broadly speaking, the question of why we have seen such huge rises in the real wages of labor–of bare, unskilled labor not boosted by expensive and lengthy investments in upgrading what it can do–is somewhat puzzling.

We can see why overall productivity-per-worker has increased. We have piled up more and more machines to work with per worker, more and more structures to work in per worker, and develop more and more intellectual blueprints for how to do things. But why should any of these accumulated factors of production be strong complements for simple human labor?

Karl Marx thought that they would not: he thought that what more accumulation of capital would do would be to raise average production-per-worker while also putting strong downward pressure on the wages and incomes of labor, enriching only those with property. Yet the long sweep of history since the early 18th century invention of the steam engine sees the most extraordinary rise in the wages of simple, unskilled labor.

There are, again broadly speaking, two suggested answers:

The first is that the accumulated intellectual property of humanity since the invention of language is a highly productive resource. Nobody can claim an income from it by virtue of ownership. Therefore that part of productivity due to this key factor of production is shared out among all the other factors. And, via supply and demand, a large chunk of that is shared to labor.

The second is that there is indeed a property of the unskilled human that makes its labor a very strong complement with other factors of production. That property is this: our machines are dumb, while we are smart. Human brain fits in a breadbox, draws 50 W of power, and is an essential cybernetic control mechanism for practically everything we wish to have done, to organize, or even to keep track of. The strong and essential complementarity of our dumb machines and our smart brains is the circumstance that has driven a huge increase in labor productivity in manufacturing. And, by supply and demand, that increase has then been distributed to labor at large.

Both have surely been at work together.

But to the extent that the second has carried the load, the rise of the robots—the decline in the share of and indeed the need for human labor in manufacturing—poses grave economic problems for the future of humanity, and poses them most immediately for emerging market economies.

So let me give the mic to smart young whippersnapper Noah Smith, playing variations on a theme by Dani Rodrik:

Noah Smith: Will the World Ever Boom Again?: “Let’s step back and take a look at global economic development…

…Since the Industrial Revolution… Europe, North America and East Asia raced ahead… maintained their lead… confound[ing] the predictions of… converg[ance]. Only since the 1980s has the rest of the world been catching up…. But can it last? The main engine of global growth since 2000 has been the rapid industrialization of China… the most stupendous modernization in history, moving hundreds of millions of farmers from rural areas to cities. That in turn powered the growth of resource-exporting countries such as Brazil, Russia and many developing nations that sold their oil, metals and other resources to the new workshop of the world.  The problem is that China’s recent slowdown from 10 percent annual growth to about 7 percent is only the beginning….

But… what if China is the last country to follow the tried-and-true path of industrialization? There is really only one time-tested way for a country to get rich. It moves farmers to factories and import foreign manufacturing technology… the so-called dual-sector model of economic development pioneered by economist W. Arthur Lewis. So far, no country has reached high levels of income by moving farmers to service jobs en masse…. Poor nations are very good at copying manufacturing technologies from rich countries. But [not] in services…. Manufacturing technologies are embodied in the products themselves and in the machines… used to make the products…. Manufacturing is shrinking… all across the globe, even in China… a victim of its own success…. If manufacturing becomes a niche activity, the world’s poor countries could be in trouble…

By “a niche activity” I read “does not employ a lot of workers”–the value added of manufacturing is likely to still be very high and growing, certainly in real terms, just as the value of agricultural production is very high and growing today. But little of that value flows to unskilled labor. Rather, it flows to capital, engineering, design, and branding.

Noah’s points about economic development are, I think, completely correct.

The point is, however, one of very long standing. The mandarins of 18th-century Augustine Age Whitehall had a plan for the colony that was to become the United States. They were to focus on their current comparative advantages: produce, I’m slave plantations and elsewhere, the natural Reese source intensive primary products that the first British Empire wanted in exchange for the manufactured goods and transportation services the first British Empire provided that made it so relatively ridge for its time.

Alexander Hamilton had a very different idea. Hamilton believed very strongly that the US government needed to focus on building up manufacturing, channels through which savings be invested in industry, and exports different from those of America’s resource-based comparative advantage. The consequence would be the creation of engineering communities of technological competence which would then spread knowledge of how to be productive throughout the country. Ever since, every country that has successfully followed the Hamiltonian path–that is kept its manufacturing- and export-subsidization policies focused on boosting those firms that do actually succeed in making products foreigners are willing to buy and not havens for rent-seekers–have succeeded first in escaping poverty and second in escaping the middle-income trap.

The worry is the China will turn out to be the last economy able to take this road–that after China manufacturing will be simply too small and require too little labor as computers substitute for brains as cybernetic control mechanisms to be an engine of economy-wide growth. And the fear is that a country like India that tries to take the services-export route will find that competence in service exports does not more than competence in natural-resource exports to produce the engineering communities of technological competence which generate the economy-wide spillovers needed for modern economic growth that achieves the world technological and productivity frontier.

Very interesting times. Very interesting puzzles.