Category: Equitablog

Why the mismeasurement explanation for the U.S. productivity slowdown misses the mark

Posted on by Bridget Ansel
After a period of strong growth during the late 1990s and the early 2000s, U.S. productivity growth has slowed since 2004.

With the rise of new internet-based companies and the smartphone as an essential part of many people’s lives, it can be hard to believe that the U.S. economy is lacking for innovation and productivity enhancement. But that’s exactly what research on the state of U.S. productivity growth says. After a period of strong growth during the late 1990s and the early 2000s, U.S. productivity growth has slowed since 2004.

This apparent decline in the face of seeming technological bounty has caused some economists and analysts to wonder if the productivity statistics are accurately capturing the gains from new technology. In other words, our measures of economic output—and therefore productivity—may be understating reality. A new working paper, however, throws some cold water on that argument.

The mismeasurement explanation for the slowdown in productivity growth can be summarized as such: Many of the technological advances of the last decade are seemingly free to consumers as they don’t have to directly pay for the service. Google, for example, can greatly enhance one’s productivity, although there’s no fee to use it. The rise of these “free” internet services understates the output growth of the U.S. economy and therefore productivity growth.

On its face, this argument makes sense. But a look at the data, such as this analysis by economist Chad Syverson of the University of Chicago Booth School of Business, shows how implausible it is that mismeasurement can explain the vast majority of the decline in productivity growth. Syverson takes four cuts at the data and finds the mismeasurement story lacking.

First, the United States isn’t the only country where productivity growth has declined. In fact, it’s declined in pretty much every country that’s a member of the Organisation for Economic Co-operation and Development, whose membership is usually a sign of a high-income economy. But there’s quite a bit of variation in the extent to which those countries produce and consume the information and communications technologies at the heart of the supposed mismeasurement. If traditional measures weren’t capturing the gains of these technologies, we’d expect countries with higher levels of ICT production and consumption to have productivity drop more. But that’s not what Syverson finds; instead, he finds that there’s no relationship at all between the two.

Second, there’s already research on the extent to which the internet and related technology has given consumers added utility, increasing what economists call “consumer surplus.” As Syverson shows, even the largest of these estimates can only explain a third of the supposed gap in output from mismeasurement. Furthermore, all this consumer surplus would have to not be included in the price of things like broadband internet services. This seems unlikely.

The third test Syverson runs is to look at the specific sectors’ contributions to the overall U.S. economy—their value added—to see how much larger they would have to be for the mismeasurement story to make sense. For mismeasurement to explain even a third of the hypothesized output gap, the value added of internet-related industries would have needed to increase by 170 percent from 2004 to 2015, which is three times the actual growth rate.

Finally, Syverson looks at the difference between U.S. gross domestic product and gross domestic income. Both are measurements of economic output that should be the same in theory but come from different data sources—GDP is based on expenditure and GDI on income. For the last several years, GDI has been higher than GDP. The difference between the two may be an indication that GDP isn’t capturing technological gains. But the difference started in 1998 during an increase in productivity growth, and most of the difference is due to higher payments to capital.

It’d be nice if the recent spate of internet-related advances could rescue the U.S. economy from a low-growth future in deus ex machina fashion. But that just doesn’t seem to be the case. Instead, we need to hunker down and really think through the sources of innovation and productivity growth.

Must-read: Paul Krugman: “Bonds on the Run”

Posted on by Brad DeLong

Must-Read: Paul Krugman: Bonds on the Run: “Something scary is going on in financial markets…

…Bond prices in particular are indicating near-panic…. Bond markets are a bit less flighty than stocks, and also more closely tied to the economic outlook. (A weak economy has mixed effects on stocks–low profits but also low interest rates–while it has an unambiguous effect on bonds.)… Plunging rates tell us is that markets are expecting very weak economies and possibly deflation for years to come, if not full-blown crisis…. A very bad place into which to elect a member of a party that has spent the past 7 years inveighing against both fiscal and monetary stimulus, and has learned nothing from the utter failure of its predictions to come true.

Email chatter:

JGB ten years at 0. Wow. Just wow. What a widowmaker…. Excepting buying assets at the dawn of QE, every EXPLICIT trade that hinged on relying on industrial core Central Bank inflation credibility has been a widowmaker…

It is starting to look, I must say, that [the U.S. Fed’s] triggering the taper tantrum and then doubling down on the proposition that triggering the taper tantrum was not an error is going to be judged very harshly when people look back at this decade or so from now…

I’m adding [U.S.] Q4 at a bit over 1%…. Q1 gets to 2%, but some of that is the mild winter. I do have growth staying in the 2 to 2 1/2% range after that, but I have to admit that assumes that exports crawl back to some growth, the consumer stays steadfast, there’s some inventory rebuilding, and S&L spending holds up–much of that is a wing and a prayer…

I have been much more wrong about, and much more worried by, their failure to deliver in the last 12-18 months when their intent was to raise inflation. Nowhere so more than Japan, where they did everything largely as prescribed…

it is over-ambitious to assume that projections about exchange rate expectations dominate over other factors. There is long demonstrated home bias, reinforced by Reinhart-esque longstanding structures and practices of financial repression. In the data, it is bizarre but evident over decades that Japanese private capital flows are opposite of most places: when the economy slows (speeds up), net capital flows are in (out), so the exchange rate moves the ‘wrong’ way…

Richard Koo has been saying that stout talk from the Fed about boosting rates (Jim Bullard is one thing, but say it ain’t so, Stan) is helping to spook the market. I’m getting inclined to agree…

“Whatever it takes” worked for Draghi as a signal of long-term commitment and a regime shift from Trichet. From Kuroda, my take is it was viewed as an act of desperation. Accordingly, Japanese investors took more about this as bad news on the Japanese economy and about BOJ capabilities than they did as evidence of stimulus…

The tendency of my dear friends to never admit error or wish to retrace steps bug[s] me…. Independence is to be used, and stop being so frigging afraid of Paul Ryan! QE4, anybody?…

The broader and more significant issue of why what the BOJ has done has not been enough to sustainably raise inflation, and it hasn’t worked in EU and US either…

Must-read: Josh Barro: “Rubio Tax Cut Got Bigger and Bigger”

Posted on by Brad DeLong

Must-Read: Josh Barro: Rubio Tax Cut Got Bigger and Bigger: “If you want an insight into what Senator Marco Rubio’s instincts on policy are…

…just look at what happened when he got his hands on another senator’s tax cut plan: It became about three times larger, and way more tilted toward the rich. Mr. Rubio’s recently announced tax plan is a descendant of the ‘Family Fairness and Opportunity Tax Reform Act,’ introduced in 2013 by Mr. Rubio’s fellow Senate Republican, Mike Lee…. The Lee plan went for a sizable tax cut: $2.4 trillion over 10 years, or about 6 percent of then-projected federal revenues…. The top 1 percent of taxpayers would have gotten a 2.8 percent increase to their after-tax income…. (The top 0.1 percent did better, with a 3.8 percent increase to income.)…

As Mr. Rubio got involved, the price started to soar. The plan was rebranded as the Economic Growth and Family Fairness Tax Plan, and as usual, ‘economic growth’ was code for large tax cuts for owners of capital…. Rich people with capital income weren’t the only big winners under the Rubio-Lee plan; there was also a large new benefit for people with low incomes. The original Lee plan had included a $2,000-per-person tax credit replacing the standard deduction, but you could take the credit only against income tax you actually owed. The Rubio-Lee plan generously revised this credit to be ‘refundable,’ meaning it could lead to a negative income tax bill for people with low incomes. But there’s a catch: It’s not clear the senators had decided exactly how refundable the tax credit would be….

Rubio apparently was not yet done with his Oprah act. In October, now running for president, Mr. Rubio announced his own stand-alone version…. Mr. Rubio’s current plan would cost $6.8 trillion over the 10-year budget window. That is, 16 percent of currently projected federal tax revenues over that period, and nearly three times the size of Mr. Lee’s plan from less than three years ago…. Rubio’s biggest tax cuts, by far, are at the top. His new plan would raise incomes for the top one-thousandth of taxpayers by 8.9 percent — that is, an average tax cut of more than $900,000 per year — because of its sharp cuts in tax rates on business income and capital income. Of course, all that assumes Mr. Rubio could find a way to finance a 16 percent overall cut in federal taxes…

Must-read: NPC Newsmakers: “Feb. 11 Newsmaker Panel Asserts that the Proposed Trans-Pacific Partnership’s ISDS Provision Will Undermine U.S. Courts and Legislative Bodies”

Posted on by Brad DeLong

Must-Read: As I understand it, all precedent suggests that ISDS provisions are not a problem for the United States. ISDS panels make their determinations, and as a result other countries gain or fail to gain the right to impose countervailing duties on U.S. exports–and then the negotiations begin, with the first move being the U.S. negotiators say: “Do you really think this company of yours now waving around an ISDS panel ruling has a strong enough case that you want to seriously risk pissing us off?” It is much easier all around for everyone if the ISDS panel rules for the United States–and the pattern of rulings in the ten years we have watched this instrumentality at work strongly suggest that that is how it works.

Of course: things could change. And ISDS panels do rule against other countries’ governments–that is, after all, why the U.S. has put ISDS into this agreement: to give its companies protection.

But the disturbing thing is that I do not understand these institutions very well–neither how they are formally supposed to work, how they work in practice, and why they work the way that they appear to do:

NPC Newsmaker: Feb. 11 Newsmaker Panel Asserts that the Proposed Trans-Pacific Partnership’s ISDS Provision Will Undermine U.S. Courts and Legislative Bodies: “What are the ramifications of the Trans-Pacific Partnership…

…and in particular will the Investor-State Dispute Settlement (ISDS) provision of TPP take the enforcement of U.S. laws out of the hands of the nation’s courts and legislatures in favor of corporate-controlled tribunals? On Feb. 11, at 10 a.m., in the National Press Club’s Bloomberg Room, three experts on trade and investment law will address a National Press Club Newsmaker news conference…. Joseph Stiglitz… Lise Johnson… Ralph E. Gomory

Audio

Mid-February musings on the economics, sociology, and psychology of Obamacare implementation

Posted on by Brad DeLong

ObamaCare: How Is It Doing?

There have been three very surprising things with respect to Obamacare implementation so far.

The first is the surge in enrollment in employer-sponsored insurance. The fear was that people and employers would find the coverage offered on the exchanges irresistible, and that there would be a great deal of disruptive churn as the exchanges started up. The penalty for large employers who did not offer health insurance was constructed to guard against this. Yet it seems to have been needless. The appearance of the exchange option appears to have led to more rather than fewer employers offering insurance.

Kevin Drum February 2016 Mother Jones

This is a problem for economists: alternatives are supposed to be at most irrelevant, and certainly their appearance is not supposed to lead to more people voting with their feet for something that was always there. This is a victory for psychologists and sociologists, who if they did not predict this consequence are at least unsurprised by it. The implementation of Obama care thanks health insurance more salient in workers’ minds, and so more highly valued. This shift in valuation induces more employers to offer it as they try to find their compensation sweet spot.

The second surprising thing is the failure of national health expenditures to rise as ObamaCare has been implemented more rapidly than was projected in the baseline. There was, everyone agreed, a great deal of pent-up demand for medical care from people who had been unable to get affordable insurance. When this wave hit, everybody expected, spending would surge–especially as, while ObamaCare did a great deal to expand demand for medical services, it did little to expand supply. The initial surge would, people thought, eventually ebb. But the ebb would leave national health spending on a higher trajectory: people who had not had access to affordable medical care would have it, and they would use it.

The hope of ObamaCare’s advocates was that a system with near-universal coverage would be a more rational and more cost-conscious system. Rather than treating patients and then scrambling for someone with deep pockets who could be made to pay not only their own but others’ bills, a rational calculus of treatment costs and benefits would become at least possible. And, down the road, this plus increased competition would bend the cost curve—and, if not, then whatever additional regulatory steps would turn out to be necessary would be taken.

But the cost curve bent itself.

The cost curve bent itself before Obamacare implementation even began.

And the bending of the cost curve continues. Some attributes the bending to the lesser depression and to a consequently poor society.

As a full explanation, this seems highly strained. Once again, it looks like a victory for the psychologists and the sociologists. The public debate around ObamaCare raised the salience of cost control, of avoiding overtreatment, and of being good stewards of what might be increasingly limited medical care resources in a context in which more people were able to draw on those resources.

All in all: a substantial surprise for us economists. Perhaps we should be cast down from our high seats in the Ttmple of policy analysis?

And there is, of course, the third surprising thing about ObamaCare implementation.

The unreliable rumor on the street is that when Chief Justice Roberts decided to rewrite the Affordable Care Act from the bench—lawlessly, in a technical sense: in a manner with no support in president, law, or the Constitution—Roberts and his clerks thought that they were throwing Americas right wing a bone, but a nothingburger bone. The money to finance Medicaid expansion was more than free to the states: everybody who could do the arithmetic knew that as the federal government paid for the Medicaid expansion, other ancillary draws on state treasuries would decline, leaving states in a better fiscal position. One-third of the Medicaid expansion money would provide more employment in healthcare, as people without affordable access to medical care gained it. One-third would beef up the shaky finances of those healthcare providers who do treat Americas poor. And one-third would flow into the medical industrial complex which would no longer be informally taxed to pay for services that the federal government was now willing to pay for.

How could you turn this down?

Unless, that is, you are a psychopath or a madman for whom treating the poor and paying those who do treat the poor is a minus, Medicaid expansion was and is a no-brainer.

And even if you are a madman and a psychopath, you are also a politician. You draw heavily upon the medical-industrial complex for your campaign contributions. Would you seek to anger the MIC over real money, for nothing except a symbolic declaration that all of the works of the hated Kenyan-Muslim-socialist were rotten? Particularly since those works had originally been the core social policy platform of your own 2012 presidential nominee?

The answer is: yes.

Mad men, and psychopaths, and totally unfazed by the idea of inciting the ire of the MIC. Ohio Governor John Kasich said, apropos of his acceptance of Medicaid expansion money:

You know how many people were yelling at me? I go to events where people are yelling at me. You know what I tell them? I mean, God bless them, I’m telling them a little bit better than this. But I said, there’s a book. It’s got a new part and an old part. They put it together. It’s a remarkable book. If you don’t have one, I’ll buy you one. And it talks about how we treat the poor…

And the response, from then Louisiana Governor Bobby Jindal and current South Carolina Governor Nikki Haley, was this:

At a closed-door donor forum in Palm Springs hosted by the Koch brothers, Kasich was attacked by two fellow Republican governors, Nikki Haley and Bobby Jindal, for, in the words of a source who attended the event, “hiding behind Jesus to expand Medicaid.” The source added, “It got heated”…

So: contrary to what sources who may or may not be reliable concerning Chief Justice John Roberts’s assumptions about the ability of some of his party colleagues to do the math, not a nothingburger bone of a concession at all…

Once again: we economists are in trouble. Politicians turning down free money? Politicians alienating powerful lobbying groups that are in large part inside their coalition for no gain?

Now in the long run it may all work out for the economists. How long will the wave of cost control enthusiasm last? How long will the provision of health insurance remain salient and thus a cheap way for more employers to please their workers? How long will the Brownbacks and their flacks continue to claim, largely falsely, that Medicaid expansion props up inner city hospitals that ought to close because they treat Black people? How long will those who elect and reelect the Brownbacks continue to buy this, as rural hospitals that treat white people continue to call out for the life preserver that the Brownbacks? continue to refuse to throw?

But in all three of these cases the long run is certainly taking its own sweet time in arriving…

Must-Read: Richard Mayhew: The Hope of Health Care Cost Stabilization: “We knew that there was going to be a massive amount of catch-up [health] care…

…as people who either were uncovered, sporadically covered or had no usable insurance because the cost sharing was atrocious got coverage through either Medicaid expansion or the Exchanges. The big question was always how much catch up care was happening and if/when would it subside as crisis care converted into maitenance care. There is starting to be some evidence that the catch up care wave is subsiding…. This uncertainty about catch-up care was why there were the three R’s of risk adjustment, risk corridors and re-insurance. No one knew how many expensive surprises were out there.

https://www.balloon-juice.com/2016/02/03/the-hope-of-stabilization/

Why it’d be nice if the “job-hopping” Millennial story were true

Posted on by Bridget Ansel
One stereotype of Millennials is that they are constantly hopping from one job to another, unable to hold one down. Unfortunately for that narrative, the data don’t seem to back it up, and young workers today are less likely to switch jobs than in the past.

If Horace Greeley were alive today, his advice to young people would probably have less to do with physically moving as much as moving jobs. Moving from job to job early in a career is a positive sign for earnings and wage growth as young workers gain experience, find what career path they might enjoy, and climb the job ladder to higher-paying jobs. So while we should be focused on the total amount of quitting and job-to-job movement as a sign of the health of the labor market, we should keep a particular eye on these trends for young workers. And it’s worthwhile to dispel some myths about young workers and their propensity to switching jobs.

The entrance of the Millennial generation (those roughly 18 to 34 years old) into the U.S. workforce has caused a bit of consternation among older generations, even provoking deep study into the generation by some managers. One stereotype of the younger generation is that they are constantly hopping from one job to another, unable to hold one down. Unfortunately for that narrative, the data don’t seem to back it up. Both Jeff Guo of the Washington Post and Ben Casselman of FiveThirtyEight have written pieces citing data showing that young workers today are actually less likely to jump from job to job than in the past.

Yet the narrative endures. Last week, Natalie Kitroeff wrote a piece for Bloomberg Business in which she asks if these younger workers are less likely to stick to a job. Millennials, in her telling, “seem categorically opposed to spending their lives at one desk.” Because the quits rate data from the Job Openings and Labor Turnover Survey can’t be broken down by worker age, however, she says she can’t tell if young workers are quitting and switching jobs at a higher rate.

But data from the Job-to-Job Flows data set are broken down by age, so we actually can tell how job switching is changing across the age distribution. Like JOLTS, the Job-to-Job Flows data set goes back to 2000. Looking at the data, young workers are more likely to switch jobs than older workers today, but that’s been true for the entire time the data set covers.

Since 2000, the job-to-job transition rate for all U.S. workers has been on the decline. From the peak of the overall transition rate in the third quarter of 2000 to the third quarter of 2013, the rate for workers ages 25 to 34 declined by about 23 percent. Over that same period, the switching rate fell by 18 percent for workers ages 35 to 44, and by 16 percent for workers ages 45 to 54. The decline has been the largest the youngest workers.

The recovery in job switching has also been quite similar by age. From the second quarter of 2009—the end of the Great Recession according to the National Bureau of Economic Research—to the third quarter of 2013, the transition rate for 24- to 34-year-olds increased by about 37 percent. The increase for 34- to 55-year-olds was 42 percent and 35 percent for 45- to 54-year-olds.

So not only are young workers less likely to switch jobs than in the past, but the increase in job switching has been strongest for older workers.

This decline is worrying. Young workers have been increasingly working in low-paid industries since 2000, which means they’re starting their career low on the job ladder. Combined with a declining transition rate, this means young workers are less likely to move up the ladder, resulting in weaker wage growth and lower upward mobility during a lifetime. A labor market where young workers were increasingly likely to move from job to job would be a quite good thing. Sadly, the data tell us something else.

Update: Penultimate paragraph edited for clarity.

Must-read: Ada Palmer (2014): “Sketches of a History of Skepticism, Part I: Classical Eudaimonia”

Posted on by Brad DeLong

Must-Read: Ada Palmer (2014): Sketches of a History of Skepticism, Part I: Classical Eudaimonia: “Our youth, whom we shall now leave panicking on the riverbank along with Socrates…

…Descartes, Sartre and, hopefully, a comfortable picnic, has now received the full impact of why Zeno’s paradoxes of motion matter. They aren’t supposed to convince you there’s no motion, they’re supposed to convince you that logic says there is no motion, therefore we cannot trust logic. Their intended target is any philosopher cough Plato cough Aristotle cough who wants to make the claim that we one can achieve certainty by weaving logic chains together. Anyone whose tool is Logic. Meanwhile, the stick in water attacks any philosopher who wants to rely on sense perception cough Aristotle cough Epicurus cough and say that we know things with certainty through Evidence. When you put both side-by-side, and demand that Zeno shoot an arrow at the stick in water that looks bent, then it seems that both Logic and Evidence are unreliable, and therefore that… there can be no certainty! Don’t panic, be happy…

Must-reads: February 15, 2016

Posted on by Brad DeLong
  • Richard Mayhew: “The cost curve is bending. If prices can grow at roughly the rate of inflation and not even nominal GDP quite a few long term federal financing problems go from dire to manageable…”

Must-read: Henry Farrell: “Facebook’s Algorithms Are Not Your Friend”

Posted on by Brad DeLong

Must-Read: Ordinarily, buyers and sellers in a marketplace have a partial harmony of interests. All want to make a win-win deal. But all also want to, conditional on the deal being made, reduce the amount of surplus received by their counterparty by as much as they can. The interest vectors have a positive dot product. But they are not aligned.

However, when what is being sold is not the service to the user but rather the user’s eyeballs to an advertiser who may want to inform the user and may want to distort the user’s cognition and worsen his or her judgment, even the partial harmony of interest goes up for grabs. And now Henry Farrell is annoyed at Alex Tabarrok’s transfer of what was originally a valid intuition outside of its proper sphere:

Henry Farrell: Facebook’s Algorithms Are Not Your Friend: “Alex’s more fundamental claim–like very many of Alex’s claims…

…rests on the magic of markets and consumer sovereignty. Hence all of the stuff about billions of dollars ‘making its algorithm more and more attuned to our wants and needs’ and so on. But we know that the algorithm isn’t supposed to be attuned to our wants and needs. It’s supposed to be attuned to Facebook’s wants and needs, which are in fact rather different. Facebook’s profit model doesn’t involve selling commercial services to its consumers, but rather selling its consumers to commercial services. This surely gives it some incentive to make its website attractive (so that people come to it) and sticky (so that they keep on using it). But it also provides it with incentives to keep its actual customers happy–the businesses who use it to advertise…