Category: Equitablog

Video: Are We Approaching Peak Human?

Posted on by Brad DeLong

Are We Approaching Peak Human?

Uncharted: The Berkeley Ideas Festival :: Freight and Salvage Coffeehouse :: October 16, 2015

Brad DeLong and Peter Leyden

https://www.youtube.com/watch?v=7hAHsGr76tY :: Reinvent.net

Transcript edited for clarity and coherence

Peter Leyden: For those of you who do not know Brad DeLong, he is a professor of economics here at U.C. Berkeley and has been so for a while. He also did a stint at the U.S. Treasury Department in the 1990s in the Clinton administration, working under Larry Summers—which has gotten some stories behind that one…

Brad DeLong: As Gene Sperling once said: “Being Larry’s friend is never dull!”

Peter Leyden: “Is never dull.” Exactly. But I think most people outside of those circles know of him through his weblog, in which he delves deeply into economics and politics. He is quite prolific. He is quite into social media, which he is probably still banging at right now, as he sits on stage. So, Brad, one of the themes that has emerged here—particularly in some of the conversations I have had here, but also through the whole day—is a sense of technology, artificial intelligence, automation, robotics. We had drones here. There is a lot of sense of the how the technology is pushing us in different directions, and kind of disrupting life as we know it. It is continuing to push and disrupt it, and will potentially displace a lot of folks in the economy to come.

Peter Leyden: And so I think, just to open it up, given your economist’s perspective, why don’t you give us just a sense of how you think of the disruption that comes from a lot of these new technologies.

Brad DeLong: First, the industrial disruption has been ongoing for 225 years, at least. The pace at which people have been disrupted has been accelerating, yes. At the start of the eighteenth century the amount of technological progress we get in one year took twenty. By the start of the nineteenth century it was down to what we see in one year they saw in five. By the start of the twentieth century it was down to one in two.

But it has produced enormous dislocations for all 225 years.

Andrew Carnegie’s father was sitting at home in Scotland making a pretty-good living as a skilled handloom weaver. All of a sudden technological improvements three hundred miles south in the form of the power loom destroys his livelihood. I don’t remember whether he starves to death or whether simply his children’s immune systems are so badly compromised by poor nourishment that they die like flies. But Andrew makes it to America. He promptly gets an entry-level job in the high-tech industry of that day as one of the first telegraph operators, one of the first people who makes it their business to sit in front of their telegraph and communicate via the code of Samuel Morse with others across hundreds of miles at lightspeed. And we are off and running.

This has been going on for quite a while. What has done most to illuminate in my mind, with the force of a thousand atomic bombs, was an article—an article that I was discussing this morning with other economists up at the QualComm Cafe on the Berkeley campus—a Wired article of long ago, an article by Neal Stephenson about the submarine telegraph cables of the nineteenth century, a brilliant article called “Mother Earth, Motherboard”. I just discovered in the green room that Peter edited it. And I must say that to edit Neal Stephenson so that not only is every paragraph a diamond of prose but the thing has a proper beginning, middle, and end—that demonstrates true genius.

Peter Leyden: Thank you.

Brad DeLong: If you want to take the really long sweep of history, the argument is this: Up until 6000 years ago by and large the kind of things that we invented were things that allowed us to use all of our human capabilities to do what we had done but do what we did better and more effectively. Spears allow us to hunt large animals—as opposed to throwing rocks at rabbits and hoping you get a lucky hit. Picking the pieces of grass that have really big seeds—what we turn into wheat—allows us to harvest and gather a lot more calories in our daily gathering if we have been lucky or smart enough to have scattered some of the seeds by the riverbank the year before. The invention of the loom allows us to actually weave grasses into cloth much more effectively. But we are are using all of our standard paleolithic human capacities to do so.

Then, in 4000 BC or so, something different happens, something unusual. We domesticate the horse. All of a sudden having people pull things is economically obsolete. Strong human backs and strong thighs are very useful whenever you have big things to move around. But once you have got a horse, a horse can do it better. Horses are much more useful. Horses make human backs and human thighs technologically obsolete as far as moving heavy objects is concerned.

Thus over the past six thousand years, the argument continues, first slowly and then more rapidly, we have had more and more places where things that used to be in the province of human excellence become activities that our draft animals, our domesticated animals, and our machines can and are doing better. The horse takes care of backs and thighs. We get the spinning jenny and the assembly line. They largely take care of fingers—of fine manipulation. We are no longer economically competitive moving things around with our big muscles or, for the most past, finely-manipulating things with our small muscles and nimble fingers. I find that on this iPhone here, in terms of nagging me to actually move around, the Withings App is significantly better than asking somebody to tell me to move around once an hour—not least because the Withings App does not have feelings of its own—not yet. And I cannot snap at the iPhone no matter how many frowny faces it shows me.

Peter Leyden: But do you think that the next generation—the AI brainpower robotics—will take it to the next level? Do you think there is any material difference in this?

Brad DeLong: Up until now, it has been the case that, every time we have domesticated an animal or invented a machine, it has removed the market value from some human excellences. But every such animal or machine or device is not intelligent. Every one requires a cybernetic control mechanism. The human brain is a supercomputer that fits in a breadbox and draws only 50W of power. That is a very impressive cybernetic control mechanism. And so—up until now—whenever you have a horse-guiding task or machine-running task or a machine-programming task or an accounting task, you had to have a human brain in the loop to control what the machines and what the software and what the animals were actually going to do. Now, however, for the first time, we can dimly envision the coming of an age in which machines will be smart enough to run themselves. They will no longer need human minders in the loop to control them.

We already know that a simple computer with the proper big-data regression underneath it could do a significantly better job at choosing which people to admit as graduate students in economics who are likely to succeed. And the faculty committees we currently hand this task to do not do that good a job. Faculty committees are always struck by stories that resonate with them. And such stories always lead them to place too-high a weight on replicating themselves in the next generation of professors, and giving too high a weight to the recommendations from their friends in their social network. The computer is an intelligence, vast and cool and unsympathetic, that does not suffer from such biases. We have reached the stage where it can crunch the data as well as—better than—I can.

Perhaps we are approaching “peak human”. Our last remaining really-strong comparative advantage was the ability of our brains to serve as cybernetic control mechanisms for dumb animals and dumb machines. Perhaps that is coming to an end.

Peter Leyden: But that does not seem to worry you. We were chatting about this before. A lot of that is taken away. How can this play out?

Brad DeLong: There are two roads: First is the road in which we genuinely have Turing-class machines and software assistants that can do for us everything that a human can do. They will serve as super-intelligent Jeeveses to our more-or-less inept [Bertie Woosters29. They will keep the trains running. They will keep us—with our inept bumbling lack of knowledge—from creating chaos and catastrophe. They will keep us from alienating our rich Aunt Agathas from whom we hope for large legacy inheritances, plus low-interest liquidity in the meantime. That road is very much that of the science-fiction novels of the alas!, late genius Iain M. Banks. In his “Culture” universe, every person has a robotic artificially-intelligent personal drone that follows them around and makes sure that their life doesn’t crash into chaos. And the drones—smarter than the humans—do this more-or-less as a hobby. It amuses them. It gives them something to do in the real world, while they use the rest of their brain power to do whatever else they want to do communicating with the other AIs and carrying out whatever projects the AIs have.

As Paul Krugman says, if we get to that point what we really have are not but robots but slaves. In that case, we face the Robot Uprising. That, however, is still very, very, very far away.

Brad DeLong: Second is the road that is well-marked not by science-fiction novels but rather by Regency Romance novels. Down this road, it is Regency Romances that present us with the image of our own future. In the works of Georgette Heyer—riffing off of Jane Austen in a peculiar way—wrote about a social class in a condition of material comfort that had absolutely no productive economic role to perform whatsoever. Even in Austen, neither Mr. Bingley nor Mr. Darcy have or ever will do a lick of socially-productive work in their lives in return for their £5000 or £10000 a year in income, respectively. And nobody expects either of them to a lick of socially-productive work. And everybody thinks that they are wonderful people because they have inherited £5000 or £10000 a year. They are good masters. They will bring you a basket down from the manor house if you are sick. Maybe they will forgive your rent for two months if you break a leg.

This is a society of material abundance for the upper class. Thus the entire narrative force of privation—of desperately trying to get the crops in before the hail smashes them or the grasshoppers eat them so the family of the Little House on the Prairie can survive The Long Winter—is absent. Material scarcity vanishes. So what do people then do? Well, look at what’s displayed at the supermarket checkout line. What people are interested in are: first, avoiding violent death, especially for their children; second, material subsistence, comfort, and fashion; and, third, who’s sleeping with whom. If you manage to greatly reduce the risks of the first and take worry about finding material subsistence away, what you are left with as the primary motive springs of human action and society are:

  1. The social dance that decides who is going to sleep with whom.
  2. The display of human excellence and the acquisition of status via the appreciation and exercise of comfort and fashion.

This is the Regency Romance world. Everyone in it—everyone in the Bon Ton of England in 1820—appears to be very happy engaging in this world. Wearing the right coat, wangling an invitation to Almacks, spending two hours a day tying their cravat so that it looks like they tied it carelessly in a hurry and yet it came out fine, choosing a gown color that compliments rather than clashes with their eyes. Combine that with the great mating-and-affection dance. The characters in Regency Romances manage to keep themselves very busy and occupied indeed. They do not feel like their lives are empty.

Peter Leyden: That assumes, of course, that society allowed for the very top to act like that. If we had this more mechanized society that would take care of material wants, the economy would have to be reorganized differently. In the near term, however, how do you deal with placing people? There has been some creative thinking about that. From the right, we have seen proposals for guaranteed incomes and other things that would essentially liberate people from the spur of material necessity and its trauma.

Brad DeLong: If not—if people have to earn their daily bread by the sweat of their brow by doing something economically-valuable—then we have an immense problem. We have needed a guaranteed income here in the North Atlantic since 1800 or so. Whenever we have not had a social-insurance system, the results of technological change in producing social terror and distress have been enormous. And we economists have more often than not been the bad guys on this.

My most unfavorite line from a nineteenth-century economist comes from Alexis de Tocqueville’s friend Nassau Senior, the first Professor of Political Economy at Oxford. I was, in fact, just an hour ago reciting this line to one of our brand-new assistant professors here at Berkeley, the brilliant young Danny Yagan, who we have been very lucky to hire. Senior was well-known for taking the position that the government of the United Kingdom should not spend any money relieving the distress of Andrew Carnegie’s father and the other handloom weavers whose livelihoods had collapsed out from underneath them with the invention of the power loom. Why not? Because the spur of material privation was necessary to induce them to shift occupations and find other jobs. And if you fed them in idleness to keep them from dire material deprivation and possible death, they wouldn’t search so hard for work. It would take them longer to find other jobs. And in the end the government would waste a great deal of money on outdoor relief without diminishing the total sum of misery created by technological displacement. Misery was the spur needed to induce people to get on their bikes and look for jobs.

The story is this: The Irish Potato Famine created by monoculture and blight stuck. The six million people of Ireland start to starve. It’s pretty clear that the comfortably-sustainable population of Ireland given mid-nineteenth century technology is more like four million or so. One million people, we think, die in the course of the Irish Potato famine. Classicist Benjamin Jowett, Master of Balliol College, distressed, asks Senior about what is going on—how disastrous will it be. Senior replies: “A million Irishmen will die—and that is not nearly enough.”

Peter Leyden: Let’s say we want…

Brad DeLong: Senior says: “We need another million to die to get Ireland down to a comfortably-sustainable population of four million.” What you should say is: We should give them an income—Britain is rich enough to pay. Or: We should move them to Britain, where there are plenty of jobs. Or: We should pay to ship them to Australia, Argentina, Canada, the United States—where there is a great deal of land that can be farmed, of trees that can be cut to build houses, a great deal of work in general to be done productively. People are useful and ingenious. You should give them the power and ability to be so—rather than concluding that they are social waste.

Peter Leyden: Now, this guaranteed income. It is not just a progressive thing. There are roots in conservative thinking too. There is some possibility that…

Brad DeLong: Well… There is, but that was an earlier generation of conservatives than we have here and now. There were roots in conservative thinking. Milton Friedman was always a very big backer of a simple negative income tax—something like the Earned Income Tax Credit we currently have, but more generous and not tied to your having a job. The one that Russell Long started and that Bill Clinton expanded his this property: you have to have a job, you have to work to receive it. Friedman thought it was profoundly undignified and unfree for people to have to justify to the welfare office or the IRS why they qualified for their benefit check. The overwhelming proportion of what we produce, he thought, was the joint collective product of everyone who has come before us and handed us our knowledge. That is our collective inheritance. That has all been given us for free by our predecessors, starting even before the people of Catal Huyuk noticed that the plant that was to become wheat had a really big and tasty seed, continuing with the guy named Ish-Baal or whatever in Phoenecia in 1200 BC who saw that a stylized picture of an ox could represent the phoneme “b” and thus invented the alphabet, on down to here and now. A good society, Friedman thought, would be a relatively unequal society, but it would not have a bottom extreme of dire poverty and people who were unfree because of the harsh spur of absolute material necessity.

But that was an earlier generation of conservatives.

Brad DeLong: That is vanishing from the right. That is, especially, vanishing from the right if the people who are kept out of poverty by social insurance are the wrong kind of people.

Consider what I saw crossing my desk last week. I was in Kansas City, MO, just across State Line Road from Samuel Brownback’s Kansas. Governor Brownback denounced the liberal churches of Kansas and the meager and powerless Democratic Party of Kansas for pushing for Kansas to expand Medicaid. Medicaid expansion is, at the state level, a true no-brainer. The people of Kansas are paying taxes to the federal government for Medicaid expansion all over the country. If they don’t expand Medicaid in Kansas, their tax money will go to pay for medical care for the poor and disabled and elderly disabled here in California and in New York and in Colorado and Arkansas and Illinois, and now Pennsylvania. If they do expand Medicaid they get value back for those federal taxes they are going to pay anyway. As long as Medicaid does not make its recipients sicker and the doctors, nurses, and hospitals who collect it worse off—which it does not—it is a true no-brainer.

Yet Brownback said that he was not going to do it. Why not? Because Medicaid expansion was Barack Obama’s Trojan Horse to keep alive “big city” hospitals that ought to close, and that were going to going to close.

Now, first, this is false. The big-city hospitals of Kansas City, KS, of Topeka, and of Wichita are in better shape than the rural hospitals.

It is small rural hospitals that are going to close. It’s small rural hospitals that white people go to that are under threat. But the only argument Brownback could think to make sotto voce was that Medicaid expansion gives free stuff to urban people who carry ghetto blasters. They are the ones who are going to benefit. And, Brownback hints to his audience of supporters: “We really don’t like that, do we?”

It is scary out on the prairie.

Peter Leyden: We do not have a lot of time here. And there are some interesting questions here. We have been talking about the long-term displacement from technology through a big picture lens. Right now, however, the pressing issue around here now is income inequality. This idea of our politics being trapped, and unable to deal with this. Any thoughts on what could be done relatively quickly, knowing what we know now or what we need to know soon, to shift gears on this and make some substantial progress?

Brad DeLong: First: higher taxes on the rich; more benefits for the poor. That is the first and most obvious plan. We have the least progressive tax-and-transfer system in the North Atlantic. There is no reason why we should. We are still one of the richest. So we should have a somewhat more progressive tax-and-transfer system than the average. We do not.

Second: Back at the start of the 1970s, I think we made a large collective mistake in deciding that we should charge for public colleges. At the time, that decision make some sense. People who are going to college colleges and graduate wind up being richer than average. Why should you tax the average taxpayer in order to subsidize the education of those who are going to, say, Berkeley who will be substantially richer than the average? That makes little sense—or so we thought back in the 1970s. The upper middle class do not need more subsidies.

But charging tuition for public universities has kept an awfully large number of people who ought to go to college from going to college. People are scared of taking on student loan debt. Moreover, this policy has enabled the growing-up underneath the tuition-price umbrella of for-profit universities of a group of for-profit universities—University of Phoenix, Stanley Kaplan University that until Jeff Bezos was showed up was married to the Washington Post as an investment of the Graham family and so had… massively outsized voice and influence over public policy toward education. For-profit universities are by and large unsuccessful in educating people. They are little better than thieves. Eliminating the for-profit college industry would, I think, be a major win from returning to tuition-free higher education. That plus eliminating the payday loan industry are the easiest things to do. They could be done very quickly.

Third: We have an enormous problem with figuring out how to work our technology. George Eastman was a marvelous inventor and innovator. He produced Kodak as we knew it, and brought middle-class prosperity to 50,000 engineers and to the surrounding city of Rochester New York for generations. Larry Page and Sergei Brin also had truly genius ideas. They grabbed Eric Schmidt to make their company run smoothly—who had grown up a lot since his days writing the Berkeley UNIX clone in the basement of Evans Hall. But Google has not produced broad-based middle-class prosperity for its workers anywhere. It has created a much-smaller group of very, very well-paid engineers, plus a few billionaires. Why did high-tech do one thing in the case of Kodak and another thing in the case of Google? Hell if I know. I wish I did.

Peter Leyden: It could be a very different kind of technology. Unfortunately, we have run out of time. We could probe your brain for a long time here. He gave us a lot of food for thought that we can continue to think about for the rest of the conference for the next couple of days. Thank you.

4041 words

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Thoughts: Unconventional Monetary and Exchange Rate Policies: The Final Jacques Polak Annual Research Conference Panel

Posted on by Brad DeLong

Live from the Sixteenth Jacques Polak Conference: Sixteenth Jacques Polak Annual Research Conference: “Unconventional Monetary and Exchange Rate Policies”

Adam Posen: To talk about misallocation of capital and added financial risk at great length without mentioning “regulation” once. And to talk about how quantitative easing has greatly added to systemic risk when its principal disappointment has been the failure of quantitative easing to persuade pension funds and corporations to extend themselves out the yield curve.

The argument that ultra-low interest rate policies add to systemic risk seems to be based on a view that they do both of:

  • inducing people to create more long-duration assets
  • increasing the duration of existing assets.

And that a world with a lot of long-duration assets is one of great systemic risk.

As we move into our post-December world, the Federal Reserve will have three levers to control 2.5 dimensions of policy:

  • The federal funds rate.
  • The rate of interest on reserves.
  • The size of its balance sheet.

What is our thumbnail measure of monetary policy in such a world?

Weekend reading

Posted on by Nick Bunker

This is a weekly post we publish on Fridays with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth has published this week and the second is work we’re highlighting from elsewhere. We won’t be the first to share these articles, but we hope by taking a look back at the whole week, we can put them in context.

Equitable Growth round-up

Last week, we got fresh data on U.S. wage and compensation growth for the third quarter of 2015, which showed no pick-up in wage growth. And while wage growth seemed to pick up in today’s employment situation report for October, there’s still no conclusive evidence of accelerating wage growth.

One of the major concerns about the post-Great Recession labor market has been that the millions of workers out of a job for 27 weeks or longer would be locked out of future jobs. But a new study used fake resumes to show that length of unemployment isn’t a detriment (for some workers) for getting called for an interview.

A new report by economists Anne Case and recent Nobel Prize winner Angus Deaton shows an alarming increase in mortality among middle-age whites in the United States. The reasons for this increase aren’t definitively known, but economic insecurity seems like a likely culprit.

Looking back at the efforts to rein in budget deficits so soon after the Great Recession shows the many problems with that approach. In fact, it may have hurt the potential growth of gross domestic product. And that has important implications for our conversations about secular stagnation.

Following this morning’s jobs report, Ben Zipperer takes a look at the stagnation of the employment rate for prime-age workers and links that to the new report from Case and Deaton.

Links from around the web

Jeff Guo looks at research as to why women are sometimes hesitant to compete against men, and comes away with a new argument for hiring quotas. This form of affirmative action can increase the number of qualified women who apply for a job. [wonkblog]

When accelerating wage growth shows up, will the acceleration be gradual or quick? Adam Ozimek looks at the relationship between unemployment and the Employment Cost Index among U.S. metro areas and finds that the acceleration will likely be smooth and steady. [moody’s]

When talking about how economic instability abroad threatens the U.S. economy, economists often mention that the United States is a relatively closed economy. But that might not be the case anymore, and that has important implications for when the Federal Reserve raises interest rates, according to Menzie Chinn. [econbrowser]

A new Pew Research Center survey shows the amount of stress that working parents experience. Claire Cain Miller discusses how, while both parents working is increasingly becoming the norm, “public policy, workplace structure and mores have not seemed to adjust.” [the upshot]

Household debt growth has remained tepid, at least compared to last decade, but who is this new credit flowing to? Four economists from the Federal Reserve Bank of New York find that most household debt is flowing more to higher-income households, with the major exception of student debt. [liberty street economics]

Friday figure

Figure from “Accelerating wage growth has yet to show up” by Nick Bunker

Must-Read: Paul Krugman: Austerity’s Grim Legacy

Posted on by Brad DeLong

Paul Krugman: Austerity’s Grim Legacy: “The consequences of the wrong turn we took look worse now…

…than the harshest critics of conventional wisdom ever imagined. For those who don’t remember (it’s hard to believe how long this has gone on): In 2010, more or less suddenly, the policy elite on both sides of the Atlantic decided to stop worrying about unemployment and start worrying about budget deficits instead. This shift wasn’t driven by evidence or careful analysis… was very much at odds with basic economics. Yet ominous talk about the dangers of deficits became something everyone said because everyone else was saying it… those parroting the orthodoxy of the moment [were the] Very Serious People. Some of us tried in vain to point out that deficit fetishism was both wrongheaded and destructive…. And we were vindicated by events. More than four and a half years have passed since Alan Simpson and Erskine Bowles warned of a fiscal crisis within two years; U.S. borrowing costs remain at historic lows. Meanwhile, the austerity policies that were put into place in 2010 and after had exactly the depressing effects textbook economics predicted; the confidence fairy never did put in an appearance…. [And] there’s growing evidence that we critics actually underestimated just how destructive the turn to austerity would be. Specifically, it now looks as if austerity policies didn’t just impose short-term losses of jobs and output, but they also crippled long-run growth….

At this point… evidence practically screams “hysteresis”. Even countries that seem to have largely recovered from the crisis, like the United States, are far poorer than precrisis projections suggested they would be at this point. And a new paper by Mr. Summers and Antonio Fatás… shows that the downgrading of nations’ long-run prospects is strongly correlated with the amount of austerity they imposed…. The turn to austerity had truly catastrophic effects…. The long-run damage suggested by the Fatás-Summers estimates is easily big enough to make austerity a self-defeating policy even in purely fiscal terms: Governments that slashed spending in the face of depression hurt their economies, and hence their future tax receipts, so much that even their debt will end up higher than it would have been without the cuts. And the bitter irony of the story is that this catastrophic policy was undertaken in the name of long-run responsibility….

There are a few obvious lessons… groupthink is no substitute for clear analysis… calling for sacrifice (by other people, of course) doesn’t mean you’re tough-minded. But will these lessons sink in? Past economic troubles, like the stagflation of the 1970s, led to widespread reconsideration of economic orthodoxy. But one striking aspect of the past few years has been how few people are willing to admit having been wrong about anything…

Noted for the Morning of November 6, 2015

Posted on by Brad DeLong

Must- and Should-Reads:

Might Like to Be Aware of:

Must-Read: Lucy Hornby: Du Runsheng, Chinese Farm Reformer, 1913-2015

Posted on by Brad DeLong

Must-Read: Lucy Hornby: Du Runsheng, Chinese Farm Reformer, 1913-2015: “Du, who has died aged 102, drafted the ‘household responsibility system’…

…that replaced the Communists’ disastrous experiment with farm communes. ‘You could make a case that Du was one of the most influential economists to have ever lived,’ wrote Beijing-based Andrew Batson in an online tribute. ‘If you measure influence by the sheer number of lives affected, then it seems Du would have to rank pretty high.’ In the late 1970s as Deng Xiaoping took power, China was on its knees…. Du, a civil war veteran whom Mao Zedong had purged 20 years earlier when he challenged the shift to Soviet-style communes…. drafted the policy document that, while maintaining the appearance of Communist ideals, let peasants again farm their own plots. ‘An unfair pattern of holding resources had arisen, fostering the rise of vested interests. These interests tended to be conservative, holding back reform in the name of socialist ownership,’ Du wrote in 2006. To avert opposition from within the party, he did not propose dismantling the communes or restoring private ownership. He also agreed to pilot the programme in the poorest areas, where grain warehouses were already empty. The result was electric. Within two years, the most impoverished areas of China were feeding themselves….

Du mentored many current leaders including Wang Qishan, today’s anti-corruption tsar, and an aspiring young cadre in rural Hebei province named Xi Jinping. ‘My grandfather wasn’t just a cadre. He was more like a teacher or a scholar,’ says his grandson, Du Fan. ‘He believed in the long-term principle of a better life for the farmers.’… He was one of only four party elders to oppose Deng’s 1989 military crackdown on student and worker protests in Tiananmen Square. ‘I really respected him,’ says Bao Tong, the most senior official jailed after the protests, adding: ‘He lived life fully.’

At a ripe old age Du enjoyed tennis and was an enthusiastic adopter of the annual flu shot, his grandson says. ‘He really liked the western approach to medicine. He believed in keeping fit through exercise.’ Born on July 18 1913 to a modest family in Shanxi… benefited from the local banking elite’s practice of sponsoring… education… entered Beijing Normal University… moved to a remote guerrilla base in the jagged Taiheng mountains… led the local land redistribution movement. On his return to Beijing he belonged to a group of officials who backed western-style agricultural co-operatives over Mao’s Soviet-inspired communes.

Like many rehabilitated party elites, Du did not like to discuss the turmoil he had lived through, his suffering in the Cultural Revolution or indeed his own part in the bloody land redistribution of the early 1950s. ‘There’s no way he would talk about that,’ says his grandson…. But crucial to his ultimate approach was a belief that ‘in order to have a prosperous countryside, you needed peasants’ voluntary participation’, says Mr Bao. The household responsibility system, allowing farmers to grow what they liked for themselves as long as they met their grain quotas, proved Du right.

The U.S. labor market and the health of workers

Posted on by David Hudson
A job fair at Dolphin Mall in Miami, Florida, October 6, 2015. (Photo by Wilfredo Lee, Associated Press)

Employment growth was strong in October, with the U.S. economy adding 271,000 jobs last month, according to the latest employment and earnings data released today by the U.S. Bureau of Labor Statistics. The unemployment rate, however, changed little, from 5.1 percent to 5.0 percent, and the employed share of the prime-age population (ages 25 to 54) remained stuck at 77.2 percent.

Last month, the hourly pay for private-sector workers was up 2.5 percent compared to the same time last year. Although this jump in wages may reflect true wage growth acceleration, there is some worry that this sudden jump is mostly a data correction given that hourly earnings were essentially unchanged between August and September. Earnings data for November and December will help clarify whether this jump was more of a correction or a true acceleration.

Most of the wage growth in October appears to be in the retail and wholesale trade sectors as well as utilities, where wages grew by 3.2 percent and 5.0 percent, respectively, at an annual rate. Wage growth continues to be slower for production and nonsupervisory workers, a group that comprises about 80 percent of the workforce. For these workers, wages grew by only 2.2 percent relative to last year, in contrast to 2.5 percent overall—an indication that wage inequality is on the rise. The rate of wage growth for production workers has been slower than the overall wage growth rate every month of 2015.

The U.S. economy added 271,000 jobs last month, with large increases in health care (56,700), food services (42,000), and retail (43,800). These three sectors accounted for more than half of the total job gains in October. The average monthly change over the past three months is now 187,000. The mining sector continued to shrink, losing 4,000 jobs last month, due in no small part to low energy prices. After some jobs gains in 2014, the mining sector has contracted every month of 2015.

In contrast to the positive growth in the establishment survey, the household survey found that unemployment in October fell only slightly to 5.0 percent, and the employed share of the prime-age population (ages 25 to 54) remained stuck at 77.2 percent. After increasing nearly a percentage point over 2014, the prime-age employment rate has stalled, staying in the range of 77.1 percent to 77.3 percent every month this year. The U.S. economy has not seen consistently strong, nominal wage growth in the past 25 years without prime-age employment rates close to 79 percent.

What’s more, the weaker employment-to-population rates in general may well be related to worker health, such as the recent rise in mortality uncovered by economists Anne Case and Angus Deaton of Princeton University. Case and Deaton found a striking increase in U.S. mortality rates since 1999 among white, non-Hispanic individuals between the ages of 45 and 54. The significant increase in suicides and poisonings for this group coincides with the general worsening of the U.S. labor market beginning around the 2001 recession. The employed share of the white population ages 45 to 54 rose relatively consistently until the year 2000, when it peaked at close to 82 percent. After the 2001 recession, the employment rate never recovered to its prior peak, and then fell sharply again during the Great Recession of 2007–2009. Now, it stands at less than 78 percent.

Incomes also fell very sharply for the group that Case and Deaton identified as seeing the largest increase in suicides and poisonings: white, non-Hispanics ages 45 to 54 with no college education. For this group, inflation-adjusted median family income rose by less than 3 percent between 1990 and 2000, before plummeting by almost 18 percent between 2000 and 2010, according to Current Population Survey data.

There is obviously a complex relationship between the health of individuals and conditions in the labor market—health-harming job losses could perhaps be offset by less pollution during a recession—but one common finding is that suicides are more frequent when the labor market is slack. There are many economic factors for policymakers to consider before raising interest rates, especially when it is not clear that there will be consistent, strong wage gains and employment growth going forward, but Case and Deaton’s research highlights another factor—the potential health costs of a weaker labor market.

History: John Maynard Keynes Getting One Very Right: There Is No Medium-Run Full-Employment Sheet-Anchor for the Economy

Posted on by Brad DeLong

Here we see Keynes getting one, I think, very right: denying that the full-employment equilibrium serves as a medium-run sheet anchor sharply damping short-run fluctuations:

John Maynard Keynes (1937): The General Theory of Employment: “Money, it is well known, serves two principal purposes…

…By acting as a money of account it facilitates exchanges without its being necessary that it should ever itself come into the picture as a substantive object. In this respect it is a convenience which is devoid of significance or real influence.

In the second place,it is a store of wealth. So we are told, without a smile on the face. But in the world of the classical economy, what an insane use to which to put it! For it is a recognized characteristic of money as a store of wealth that it is barren; whereas practically every other form of storing wealth yields some interest or profit.

Why should anyone outside a lunatic asylum wish to use money as a store of wealth? Because, partly on reasonable and partly on instinctive grounds, our desire to hold Money as a store of wealth is a barometer of the degree of our distrust of our own calculations and conventions concerning the future. Even though this feeling about Money is itself conventional or instinctive, it operates, so to speak, at a deeper level of our motivation. It takes charge at the moments when the higher, more precarious conventions have weakened. The possession of actual money lulls our disquietude; and the premium which we require to make us part with money is the measure of the degree of our disquietude.

The significance of this characteristic of money has usually been overlooked; and in so far as it has been noticed, the essential nature of the phenomenon has been misdescribed. For what has attracted attention has been the quantity of money which has been hoarded; and importance has been attached to this because it has been supposed to have a direct proportionate effect on the price-level through affecting the velocity of circulation. But the quantity of hoards can only be altered either if the total quantity of money is changed or if the quantity of current money-income (I speak broadly) is changed; whereas fluctuations in the degree of confidence are capable of having quite a different effect, namely, in modifying not the amount that is actually hoarded, but the amount of the premium which has to be offered to induce people not to hoard. And changes in the propensity to hoard, or in the state of liquidity-preference as I have called it, primarily affect, not prices, but the rate of interest; any effect on prices being produced by repercussion as an ultimate consequence of a change in the rate of interest.

This, expressed in a very general way, is my theory of the rate of interest. The rate of interest obviously measures–just as the books on arithmetic say it does–the premium which has to be offered to induce people to hold their wealth in some form other than hoarded money. The quantity of money and the amount of it required in the active circulation for the transaction of current business (mainly depending on the level of money-income) determine how much is available for inactive balances, i.e. for hoards. The rate of interest is the factor which adjusts at the margin the demand for hoards to the supply of hoards.

Now let us proceed to the next stage of the argument. The owner of wealth, who has been induced not to hold his wealth in the shape of hoarded money, still has two alternatives between which to choose. He can lend his money at the current rate of money-interest, or he can purchase some kind of capital-asset. Clearly in equilibrium these two alternatives must offer an equal advantage to the marginal investor in each of them. This is brought about by shifts in the money-prices of capital-assets relative to the prices of money-loans. The prices of capital-assets move until, having regard to their prospective yields and account being taken of all those elements of doubt and uncertainty, interested and disinterested advice, fashion, convention and what else you will which affect the mind of the investor, they offer an equal apparent advantage to the marginal investor who is wavering between one kind of investment and another.

This, then, is the first repercussion of the rate of interest, as fixed by the quantity of money and the propensity to hoard, namely, on the prices of capital-assets. This does not mean, of course,that the rate of interest is the only fluctuating influence on these prices. Opinions as to their prospective yield are themselves subject to sharp fluctuations, precisely for the reason already given, namely, the flimsiness of the basis of knowledge on which they depend. It is these opinions taken in conjunction with the rate of interest which fix their price.

Now for stage three. Capital-assets are capable, in general, of being newly produced. The scale on which they are produced depends, of course, on the relation between their costs of production and the prices which they are expected to realize in the market. Thus if the level of the rate of interest taken in conjunction with opinions about their prospective yield raise the prices of capital-assets, the volume of current investment (meaning by this the value of the output of newly produced capital-assets) will be increased; while if, on the other hand, these influences reduce the prices of capital-assets, the volume of current investment will be diminished.

It is not surprising that the volume of investment, thus determined, should fluctuate widely from time to time. For it depends on two sets of judgments about the future, neither of which rests on an adequate or secure foundation–on the propensity to hoard, and on opinions of the future yield of capital-assets. Nor is there any reason to suppose that the fluctuations in one of these factors will tend to offset the fluctuations in the other. When a more pessimistic view is taken about future yields, that is no reason why there should be a diminished propensity to hoard. Indeed, the conditions which aggravate the one factor tend, as a rule, to aggravate the other. For the same circumstances which lead to pessimistic views about future yields are apt to increase the propensity to hoard.

The only element of self-righting in the system arises at a much later stage and in an uncertain degree. If a decline in investment leads to a decline in output as a whole, this may result (for more reasons than one) in a reduction of the amount of money required for the active circulation, which will release a larger quantity of money for the inactive circulation, which will satisfy the propensity to hoard at a lower level of the rate of interest, which will raise the prices of capital-assets, which will increase the scale of investment, which will restore in some measure the level of output as a whole.

This completes the first chapter of the argument, namely, the liability of the scale of investment to fluctuate for reasons quite distinct (a) from those which determine the propensity of the individual to save out of a given income and (b) from those physical conditions of technical capacity to aid production which have usually been supposed hitherto to be the chief influence governing the marginal efficiency of capital.
If, on the other hand, our knowledge of the future was calculable and not subject to sudden changes, it might be justifiableto assume that the liquidity-preference curve was both stable and very inelastic. In this case a small decline in money-income would lead to a large fall in the rate of interest, probably sufficient to raise output and employment to the full. In these conditions we might reasonably suppose that the whole of the available resources would normally be employed;and the conditions required by the orthodox theory wouldbe satisfied.

My next difference from the traditional theory concerns its apparent conviction that there is no necessity to work out a theory of the demand and supply of output as a whole. Will a fluctuation in investment, arising for the reasons just described,have any effect on the demand for output as a whole, and consequently on the scale of output and employment? What answer can the traditional theory make to this question? I believe that it makes no answer at all, never having given the matter a single thought; the theory of effective demand,that is the demand for output as a whole, having been entirely neglected for more than a hundred years.

My own answer to this question involves fresh considerations. I say that effective demand is made up of two items–investment-expenditure determined in the manner just explained, and consumption-expenditure. Now what governs the amount of consumption-expenditure? It depends mainly on the level of income. People’s propensity to spend (as I call it) is influenced by many factors, such as the distribution of income, their normal attitude to the future and-though probably in a minor degree–by the rate of interest. But in the main the prevailing psychological law seems to be that when aggregate income increases, consumption-expenditure will also increase, but to a somewhat lesser extent. This is a very obvious conclusion…

Must-Read: John Thornhill: Lunch with the FT: Mariana Mazzucato

Posted on by Brad DeLong

John Thornhill: Lunch with the FT: Mariana Mazzucato: “The first time I saw Mariana Mazzucato in action…

…she intellectually eviscerated a guileless American venture capitalist at an economic conference in Italy. Anyone who has read… The Entrepreneurial State… could have probably guessed it would be a bad idea to argue within her earshot that Silicon Valley’s success was due solely to brilliant entrepreneurs doing whizzy things. But the venture capitalist was sloppy on his due diligence and was whacked by a formidable Mazzucato…. It was electrifying, especially if, as I do, you appreciate intellectual blood sports…. She chooses to meet at the Gilbert Scott restaurant in the renovated St Pancras hotel, right by the Eurostar rail terminal, close to her London home…. For the next three hours she talks at mind-spinning speed….

My mission was to change that debate. If we want to have more sustainable, long-run growth, rather than finance-driven, speculative growth, then we had better understand where growth comes from. If we actually look at the few countries that have achieved smart, innovation-led growth, you’ve had this massive government involvement. How can we square that with the whole austerity discourse?… As soon as I started looking at these issues, I started realising how much language matters. If you just talk about the state as a facilitator, as a de-risker, as an incentiviser, as a fixer of market failures, it ends up structuring what you do…. [But] you always require the state to roar….

One of the original engines of Silicon Valley’s creativity, she argues, was the Defense Advanced Research Projects Agency (Darpa), founded by President Dwight Eisenhower in 1958 following the alarm caused by the Soviet Union’s launch of the Sputnik rocket. Darpa, run by the US Department of Defense, has since pumped billions of dollars into cutting-edge research and was instrumental in developing the internet. According to Mazzucato, the publicly funded National Institutes of Health has played a similar role in nurturing the US pharmaceuticals industry. The Advanced Research Projects Agency-Energy (Arpa-E), set up by President Barack Obama and run by the US Department of Energy, is designed to stimulate green technology….

Mazzucato is talking so fast that she rarely has time to eat and only picks at her duck…. As we order two macchiatos, we turn to Europe, which she believes is learning all the wrong lessons from Silicon Valley’s success. Governments have rashly asked business what they should do to promote growth. Encourage venture capital, cut taxes and red tape, comes the reply. In many cases, Mazzucato argues, this amounts to no more than corporate welfare.

The irony, if not the tragedy, of what we have today is that not only do we not understand the Silicon Valley story correctly but we are also increasing the risk of free- riding, which worsens inequality. Businesses invest only where they really see future technological and market opportunities. If you bring their tax to zero, you’ve just made them richer, they will golf more. They will not invest…