**Over at Grasping Reality**: [Today’s Economic History: John Maynard Keynes’s 2924 Obituary of Alfred Marshall](http://www.bradford-delong.com/2015/05/todays-economic-history-john-maynard-keyness-obituary-of-alfred-marshall.html)
Category: Equitablog
Must-Must-Read: Matthew Yglesias: Brookings Did a Symposium
: “Brookings did a symposium on the 40th anniversary of Arthur Okun’s famous book…
Equality and Efficiency: The big tradeoff. There’s some interesting stuff in the transcript and also in Brad DeLong’s commentary, but… the big story… people on the liberal side of the divide are… hesitant to go truly guns blazing after how fundamentally misguided the political economy thinking behind this tradeoff talk is.
Oligarchy isn’t efficient: All societies have some inequality. At times, the people on the ‘winning’ side of that inequality are able to influence the political process to further enrich the already rich. When people are in a position to do that, do they normally go about doing so by enacting ‘efficient’ growth-friendly policies that maximize GDP? Of course not. Hedge fund managers get their income taxed at a preferential rate. Pharmaceutical companies hijack the global trade process to push for stronger patent rights. Medical doctors stifle competition from immigrants and nurse practitioners. Big companies seek rents, and when they do so successfully their shareholders and executives are duly rewarded…. There are some policies that both increase growth and increase inequality. But there’s no reason to believe that such policies are typical or that this is the big tradeoff that exists in practical political economy.
Dire poverty isn’t efficient: Conversely, there’s very little reason to think that a society with better living standards at the bottom will be less growth-friendly. Imagine if everyone in America managed to afford a house in a safe neighborhood that was close to a good school and that featured convenient commuting to job opportunities. That would be a much more egalitarian society. But it would also be much more growth-friendly…. What if no kids suffered from lead poisoning or the developmental problems associated with the cortisone surged induced by poverty-relayed stress? What if every pregnant woman had great prenatal and neonatal health care?…
Communism isn’t egalitarian: Last but by no means least… in the Soviet Union or North Korea… actual outcomes are not at all egalitarian…. It’s oligarchy under the red flag….
The real issue in all cases is… who, in practice, is the policy process accountable to. If it’s accountable to a narrow band of rich people that is worse than if it is accountable to the interests of average people. If it’s accountable to an even narrower band of elite party members, that’s even worse. But effective, accountable government is good for both equality and growth.
Must-Read: Lawrence Summers (2011): A Conversation on New Economic Thinking
Must-Read: Lawrence Summers (2011): A Conversation on New Economic Thinking: “We have a bunch of people who kind of assume that the regulators are smart…
…and that the private sector is greedy and that they’ll figure things out right. And that we have a bunch of people who assume that the private – that the government always gets co-opted and the regulators always end up working for the regulated. And we have sort of a dialog of the deaf between them.
And the truth is the regulators haven’t done a terrific job. The truth is we have a broad social problem that covers everything from finance, to deep sea drilling, to nuclear, and that in all kinds of areas that are technical and hugely important to society there’s roughly nobody who knows about them who doesn’t have some set of deep interest in them. And that creates all kinds of questions of legitimacy and knowledge. So we don’t really want legislation by the co-opted. But we also don’t really want regulation by the ignorant. And there’s hardly anybody who is both knowledgeable and un-co-opted.
And how we think about the design of regulatory institutions to address those structures – I think we economists have a tendency to spend too much time on whether the Basle system should say 7% or 7.8%, and not enough time thinking about how over many years as accounting conventions have to be set – as there are all kinds of interactions between the regulated and the regulator, how the system will adopt in terms of incentives of all the actors is important.
The public choice school has taken that very seriously, but they have driven it relentlessly towards nihilism in a way that isn’t actually helpful for those charged with designing regulatory institutions. But their recognition that regulators who are people that have incentives too is, I think, a very important one. And so that would be an additional area that I would highlight to research…
Must-Read: Brad DeLong: Inflation Expectations and Recovery from the Depression in 1933
…we show that inflation expectations increased dramatically [in the second quarter of 1933]. Second, using an event – studies approach, we identify the impact on financial markets of the key events that shifted inflation expectations. Third, we gather new evidence — both quantitative and narrative — that indicates that the shift in inflation expectations played a causal role in stimulating the recovery….
Must-Read: Marshall Steinbaum: What Explains Rising Wealth Inequality?
…‘that’s all well and good in practice, but how does it work in theory?’ That… captures the state of knowledge about rising wealth inequality, both its causes and its consequences…. Mariacristina de Nardi of the Federal Reserve Bank of Chicago attempt[s] to match theory with reality…. People want to secure their children’s wellbeing through bequests…. Entrepreneurs need capital to finance otherwise-constrained new businesses…. Economists typically highlight individual or inter-generational mobility within the wealth distribution as both a reason not to care that the distribution itself is unequal and as an argument that having wealthy parents (or not) doesn’t matter that much for children’s outcomes…. But… there’s scant evidence that parents leave larger inheritances to stupid children. Nor is there much evidence that native ability is the major determinant of earnings…. Why are some people rich while others are poor? What economists are just finding out (while others have known for awhile now) is, essentially, ‘because their parents were.’
Looking for the roots of total factor productivity growth
To paraphrase the legendary football coach Vince Lombardi, productivity isn’t everything when it comes to economic growth; it’s the only thing. That might be a bit of hyperbole, but economists today agree that the efficiency of the production of goods and services given levels of capital and labor in an economy—its total factor productivity— is the key determinant of the pace of economic growth. Unfortunately, they have yet to figure out exactly what drives growth in total factor productivity, a critical task if we want to boost growth in the long run.
Let’s first take a quick look at the roots of total factor productivity. In two papers published in 1956 and 1957, Robert Solow, now an emeritus professor of economics at the Massachusetts Institute of Technology, showed that the source of long-run economic growth per capita wasn’t increased savings or faster population growth but rather a residual that he labeled “technology”. Calling something a “residual” usually doesn’t make your audience think that it’s the most important thing in the world, but Solow eventually won the Nobel Prize for this work—and the vast majority of economists today agree that this technological residual, now commonly known as total factor productivity, is the key source of long-run growth.
Economists who study economic growth have long been trying to understand the source for differences in total factor productivity. In a recently published working paper, Stanford University economist Charles Jones details a number of facts about economic growth including the role of total factor productivity growth. Jones cites one calculation that 80 percent of the growth in economic output per person since 1948 is due to such growth. And the difference in output per person across countries is very strongly related to differences in total factor productivity.
Jones breaks down total factor productivity into two factors. The first is the stock of knowledge in an economy, which is probably what most people think of when they hear the word technology. A larger stock of knowledge helps economic growth as individuals know how to best use labor and capital to boost economic growth. The second factor is what Jones calls “M.” One possible interpretation of “M,” he says, is that it stands for “misallocation.” Higher total factor productivity growth could be the result of less misallocation in the economy. Jones cites a study that look at how less discrimination against women and black workers in higher-level jobs increased economic growth in the United States as just one example of his M factor,
But “M” might also stand for the “measure of our ignorance,” as Jones points out. Indeed, the possible sources of total factor productivity growth are myriad: misallocation, better government and labor market institutions, “culture,” and a variety of others. In short, M could well stand for Mysterious.
If the concept of M were not daunting enough, economists are also looking at how they measure and conceive of productivity itself. Dietz Vollrath, an economics professor at the University of Houston, points out that the current categorization system for economic firms is tilted toward better understanding of manufacturing firms. The system was created when manufacturing was a larger portion of high-income countries. The result of this better data has been that most studies looking at productivity look at manufacturing firms. In today’s economy that misses out on the majority of economic activity in the services sector
Ryan Decker, a graduate student at the University of Maryland, agrees and adds that data aren’t the only problem. The concept of total factor productivity, at least at the firm level, was conceived for understanding manufacturing firms. It might be difficult to graft that concept onto service-sector firms. As Decker puts it, “The further you get from producing widgets with machines, the harder it is to map the TFP concept to the real world.”
The possibility that the most studied and discussed productivity concept might be flawed is discouraging at best, but perhaps the flaws Vollrath and Decker identify aren’t that large, which would be encouraging. But then economists would still have the task of understanding what actually drives the growth of total factor productivity. Let’s hope that task doesn’t take the economics profession as many centuries as it did before Solow detailed his “residual.”
Things to Note on the Afternoon of May 12, 2015
Must- and Should-Reads:
- : “It might, however, be what you’d expect in a market that is still pretty close to a high-unemployment equilibrium, but one that expresses the insufficiency of effective demand via underemployment rather than unemployment. If we were, that would explain why it is so difficult to reduce the deficit and why wages are so poor, and also why productivity is so poo…”
- (1999): “It’s possible to summarize what [Tom] Friedman has to say fairly quickly… it’s what you read in just about every … Business Week. Information technology… has made the world a small place… richly rewards countries and societies that meet its needs… strong property rights, open minds, and a flexible attitude…. This story is told via hundreds of anecdotes, most of them involving the author…. [Friedman’s] clear implication of his various parables and metaphors is that Japan is in trouble because it is hidebound and inefficient…. Yet, as Friedman himself points out, Japan’s export sector remains world-class…. The immediate problem is not inadequate supply but inadequate demand. Put in a nutshell, the Japanese simply save too much; that is, although Friedman’s only reference to Keynes is a disparaging one… Japan is in fact suffering the most classically Keynesian crisis since the 1930s. And the United States…. If the role-reversal between the United States and Japan has more to do with old-fashioned macro-economics than with the inexorable new logic of globalization, maybe the rules of the game haven’t changed as much as Friedman thinks–and maybe, also, America’s winning streak is not forever. Did somebody say ‘bubble economy’?”
- Must-Read: : Finally, war on Prop. 13 breaks out
- Must-Read: : How Do Net International Positions Matter?
- : Six Economic Facts About Transportation Infrastructure in the United States
- Must-Read: : The Magnificent Five: Some Ridiculously Kind Words from Tren Griffin
- Must-Read: : Medicaid Expansion Is Producing Large Gains in Health Coverage and Saving States Money
- (2011): Managing the Eurozone’s Fragility
- (2011): The Pain in Spain
- (2011): Macroeconomics: what is it good for?
- Must-Read: : The Trans-Pacific Partnership: A Threat To Global Health?
- : Nail salon workers aren’t the only ones who need protection from abusive workplaces
Must-Read: Medicins sans Frontieres: The Trans-Pacific Partnership: A Threat To Global Health?
…The TPP would lower the standard for patentability of medicines… force TPP governments to grant pharmaceutical companies additional patents for changes… [that] provide no therapeutic benefit… [thus] facilitat[ing] ‘evergreening’ and other forms of abuse of the patent system…. ‘Data exclusivity’… blocks competing firms from using previously generated clinical trial data to gain approval for generic versions of these drugs and vaccines. If pharmaceutical companies have their way, the TPP will block generic producers of biologics from entering the market for at least 12 years…. The Federal Trade Commission finds that no years of data exclusivity were necessary to promote innovation in biologic drugs. Twelve years of data exclusivity is not only unprecedented in any trade agreement, it is not the law in any of the TPP negotiating countries outside of the U.S…. The Obama Administration has actually called for data exclusivity to be reduced to seven years at home, so it is puzzling that the U.S. Trade Representative would be aggressively pushing for these terms in the TPP. These provisions and others currently included in the TPP are at direct odds with the U.S. government’s own long-standing commitments to global health…
Department of “Huh?!”: Noah Smith Claims the British Economy Today Is Not in a Keynesian Slump
Real production in Great Britain is far below what we thought back in 2007 it would be today if British growth proceeded according to trend:
There are no signs looking at wages and prices that this is due to any adverse supply shock–that the reason production is so much lower than expected is not because aggregate demand has fallen short of potential output, but because something bad has happened to destroy the productive potential of the British economy:
Thus there seem to be no reasons looking at wages, prices, and output to believe that the British economy right now is a full-employment at-capacity-utilization economy. And only in such an economy would monetary and fiscal policies that boost spending simply boost prices and not production.
Yet smart young whippersnapper Noah Smith says:
…Austerity is unlikely to cure the British economy, but there’s not much reason to think fiscal stimulus would either…
Why does he say that fiscal stimulus is likely to be counterproductive? Because usually a depressed sub-potential economy has depressed employment as well, and the British economy does not:
Does the fact that the employment share of British adults is actually high mean that the British economy is, in fact, at potential output? That stimulative monetary and fiscal policies risk rising inflation for no gain? And that it is time to normalize? Certainly Mark Carney at the Bank of England does not believe that is so:
And the Monetary Policy Committee says:
The pickup in output growth of the past two years had been largely met by a significant reduction in slack in the economy, particularly in the labour market, rather than by any increase in productivity. Although there was considerable uncertainty about the remaining extent of labour market slack, it was unlikely that activity growth could be maintained at its current pace for long, without generating greater inflation in wages and prices, in the absence of some material improvement in labour productivity…
The key phrase is: “considerable uncertainty about the remaining extent of labour market slack”. That means:
We do not understand how the labour-market indicators we monitor are consistent with both the output figures and the readings we have on wage and price inflation. The wage and price data suggests to us that there has been a sharp rise in desired labor-force participation since 2008 that has accompanied a collapse in labor productivity. But we find such a steep rise implausible. And we do not understand what might have produced it.
From my point of view, why so many Britons have taken so many low-pay low-productivity jobs in the past three years is a mystery. But that they have gives us little reason to think that the British economy is now a full-employment at-capacity-utilization economy in which aggregate demand is now equal to potential output.
Must-Read: Zeynep Tufekci: Social Media Exercise
@stevenbjohnson We mostly moved out of manual labor, hence we exercise. We have social structures designed to polarize, hence we… TBD.
— Zeynep Tufekci (@zeynep) May 12, 2015