Some very interesting thoughts from Ken Rogoff. But he does not seem to recognize that Shenzhen is now at least as much a global hub of hardware and manufacturing process innovation in small-scale high-tech devices as anywhere else in the world. World class communities of engineering practice are hard to build. But China looks to be building one. I would dearly love somebody to take a deep close look at Shenzhen and tell me to what extent it is already more than just “the great assembler”: Ken Rogoff: Will China Really Supplant US Economic Hegemony?: “Over the next 100 years, who takes over, Chinese workers or the robots?…

…If robots and AI are the dominant drivers of production in the coming century, perhaps having too large a population to care for–especially one that needs to be controlled through limits on Internet and information access–will turn out to be more of a hindrance for China. The rapid aging of China’s population exacerbates the challenge. As the rising importance of robotics and AI blunts China’s manufacturing edge, the ability to lead in technology will become more important. Here, the current trend toward higher concentration of power and control in the central government, as opposed to the private sector, could hamstring China as the global economy reaches higher stages of development…. The US needs to struggle with the problem of how to redistribute income internally, especially given highly concentrated ownership of new ideas and technology. But for China, there is the additional problem of how to extend its franchise as export superpower into the machine age….

The US has the potential to expand the size of its manufacturing base… in terms of output if not jobs. After all, today’s high-tech factory floors produce far more with far fewer workers. And the robots and AI are coming not just in manufacturing and driverless cars. Robo-doctors, robo-financial advisors, and robo-lawyers are just the tip of the iceberg…. China’s rapid growth has been driven mostly by technology catch-up and investment…. While China, unlike the Soviet Union, has shown vastly more competence in homegrown innovation… China’s gains still come largely from adoption of Western technology, and in some cases, appropriation of intellectual property….

In the economy of the twenty-first century, other factors, including rule of law, as well as access to energy, arable land, and clean water may also become increasingly important. China is following its own path and may yet prove that centralized systems can push development further and faster than anyone had imagined, far beyond simply being a growing middle-income country. But China’s global dominance is hardly the predetermined certainty that so many experts seem to assume…. The coming machine age could be a game changer in the battle for hegemony…

Noah Smith: Remember Karl Marx for the many things he got wrong: “Marx didn’t make it to 200, but the ideas he injected into the global conversation and the ideologies that bear his name far outlasted the German economist and philosopher…

…Respect for Marx is enjoying a bit of a resurgence…. But something about this celebration of Marx sits uneasily…. It’s hard to forget the tens of millions of people who starved to death under Mao Zedong; the tens of millions purged, starved or sent to gulags by Joseph Stalin; or the millions slaughtered in Cambodia’s killing fields. Even if Marx himself never advocated genocide, these stupendous atrocities and catastrophic economic blunders were all done in the name of Marxism. From North Korea to Vietnam, 20th century communism always seem to result in either crimes against humanity, grinding poverty or both…. Defenders of Marx will say that Stalin, Mao and Pol Pot exemplified only a perverted caricature of Marxism, and that the real thing hasn’t yet been tried…. Excuses ring hollow. There must be inherent flaws in the ideas that continue to lead countries like Venezuela over economic cliffs. The best way to look for those flaws is to follow Cooper’s advice and read Marx with judicious detachment.

My favorite example of this is a 2013 post in which University of California-Berkeley economic historian Brad DeLong tried to boil Marx’s big ideas down to their essentials, and evaluate each one…. [His] mistakes alone would be enough to hobble an economy and send any economic doctrine to the rubbish heap. Collectivization of agriculture seems to have been particularly disastrous for farm-based societies…. But they can’t explain why communism was so often accompanied by atrocities, or why leaders like Mao and Stalin persisted in failed policies long past the time when wise, benevolent leaders would have changed course. The brutality and insanity of communist leaders might have been a historical fluke, but it also could have been rooted in another of what DeLong sees as Marx’s mistake: the preference for revolution over evolution…

Alex Bell et al.: Who becomes an inventor in America? The importance of exposure to innovation: “Using deidentified data on 1.2 million inventors from patent records linked to tax records…

…Children from high-income (top 1%) families are ten times as likely to become inventors as those from below-median income families. There are similarly large gaps by race and gender. Data on test scores in early childhood suggest that differences in innate ability explain relatively little of these gaps…. Exposure to innovation during childhood has significant causal effects on children’s propensities to become inventors. Growing up in a neighborhood or family with a high innovation rate in a specific technology class leads to a higher probability of patenting in exactly the same technology class. These exposure effects are gender-specific: girls are more likely to become inventors in a particular technology class if they grow up in an area with more female inventors in that technology class….

The financial returns to inventions are extremely skewed and highly correlated with their scientific impact, as measured by citations. Consistent with the importance of exposure effects and contrary to standard models of career selection, women and disadvantaged youth are as under-represented among high-impact inventors as they are among inventors as a whole. We develop a simple model of inventors’ careers that matches these empirical results. The model implies that increasing exposure to innovation in childhood may have larger impacts on innovation than increasing the financial incentives to innovate, for instance by reducing tax rates. In particular, there are many “lost Einsteins”–individuals who would have had highly impactful inventions had they been exposed to innovation…

Noah Smith: Supply and Demand Does a Poor Job of Explaining Depressed Wages: “The standard framework that economists traditionally used to understand job markets is just supply and demand…

…But… even very large, sudden waves of low-skilled immigration didn’t hurt the wages of native-born Americans, as the theory suggested should happen when there’s a positive shock to labor supply. Adjusting the model to match this reality wasn’t too hard. Economists just had to assume that immigration produces a positive shock to labor demand as well as supply—immigrants buy things locally, creating jobs for the native-born. But the minimum-wage effect posed more of a problem to the theory—no matter how you slice it, price controls should lower employment in a competitive market. The likeliest reason that this doesn’t happen is that employers have market power—that it’s so costly and difficult for workers to find new jobs that they simply accept lower wages than they would demand in a well-functioning market. If employers have market power, modest minimum-wage rise will tend not to increase unemployment, because they force companies to move back toward the wage levels that would prevail if competition were working the way it should. In that model, a small increase in minimum wage could even increase the number of jobs.

New evidence is showing that employers have more market power than economists had ever suspected…. José Azar, Ioana Marinescu, and Marshall Steinbaum… Efraim Benmelech, Nittai Bergman, and Hyunseob Kim…. Together with the evidence on minimum wage, this new evidence suggests that the competitive supply-and-demand model of labor markets is fundamentally broken…. Textbook writers and instructors should respond by changing the baseline model of labor markets that gets taught in class. Students ought to start with a model of market power, in which a few companies set wages below levels found in a competitive market unless prevented from doing so. That model is about as easy to work with as the traditional supply-and-demand setup, but matches the data much better.

In any scientific discipline, theories should evolve as new evidence comes in. That’s true both of what gets used in research and what gets taught in class. The evidence on labor markets has evolved, and the dominant theories need to change with the times…

National Taxpayers Union: More Than 1,100 Economists Join NTU to Voice Opposition to Tariffs, Protectionism: “The lowering of trade barriers between nations has been one of the great achievements of the global economic system in the postwar era…

…Trade agreements have enriched economies around the world and allowed people access to goods that would have been unimaginable in a harsh climate of economic protectionism. The current political moment has seen new trade barriers erected as well as additional threats to rescind trade agreements and play politics with trade conventions that have benefited everyone. National Taxpayers Union is joined by more than 1,100 economists urging opposition to this new economic protectionism in the following letter…

Am I wrong to be appalled at how there are too many economists whose knowledge of models carries with it negative knowledge about the economy? I always thought that technique was to be in the service of understanding, not a substitute for it. Yet whenever I look at a David Andolfatto claiming that there is no relationship between unemployment and inflation or a Robert Lucas claiming that private decisions fueled by increasing money balances to spend affect production and prices but public decisions do not… or Eugene Fama and John Cochrane trying to resurrect Say’s Law 190 years after it had been abandoned by Jean-Baptiste Say… I am, to say the least, not impressed at all: Paul Krugman: Immaculate Inflation Strikes Again: “We’re currently well above historical estimates of full employment, and inflation remains subdued. Could unemployment fall to 3.5% without accelerating inflation? Honestly, we don’t know…

…I would also argue that the Fed is making a mistake by tightening now…. We really don’t know how low U can go…. The costs of getting it wrong are asymmetric…. Finally, there are very good reasons to believe that the Fed’s 2 percent inflation target is too low; certainly the belief that it was high enough to make the zero lower bound irrelevant has been massively falsified by experience.

But should we drop the whole notion that unemployment has anything to do with inflation? Via FTAlphaville, I see that David Andolfatto is at it again…. Even if you think that inflation is fundamentally a monetary phenomenon (which you shouldn’t, as I’ll explain in a minute), wage- and price-setters don’t care about money demand; they care about their own ability or lack thereof to charge more, which has to–has to–involve the amount of slack in the economy. As Karl Smith pointed out a decade ago, the doctrine of immaculate inflation, in which money translates directly into inflation–a doctrine that was invoked to predict inflationary consequences from Fed easing despite a depressed economy–makes no sense. And the claim that there’s weak or no evidence of a link between unemployment and inflation is sustainable only if you insist on restricting yourself to recent U.S. data. Take a longer and broader view, and the evidence is obvious….

Economics is about what people do, and stories about macrobehavior should always include an explanation of the micromotives that make people change what they do. This isn’t the same thing as saying that we must have “microfoundations” in the sense that everyone is maximizing; often people don’t, and a lot of sensible economics involves just accepting some limits to maximization. But incentives and motives are still key. And it’s ironic that macroeconomists who are deeply committed to the microfoundations project–or, as Trump might say, the “failing microfoundations project”–also seem to be especially likely, perhaps due to their addiction to mathiness, to forget this essential rule…

The question of whether the U.S. national debt is too high—and of what it should be—is a very knotty one. Interest rates are telling us that the debt is too low: that there are too few safe assets in the world, and that more U.S. Treasury debt would be very valuable in this world in which nobody trusts private sector organizations to create AAA assets, for which the demand is high. But asset quantities relative to historical norms and policy projections are telling another story. Is this one of those times when we should listen to financial markets’ judgments? Or is this one of those times when we should disregard them? Alan J. Auerbach, William G. Gale, and Aaron Krupkin: THE FEDERAL BUDGET OUTLOOK: EVEN CRAZIER AFTER ALL THESE YEARS: “New Congressional Budget Office (CBO) projections… prospect of routine trillion-dollar deficits… underlying problem is even more serious….

…First, the projections assume that the economy is at full employment, on average, over the next decade. If (when?) we face a recession, the medium-term fiscal outlook may look significantly worse. Second, under a “current policy” scenario similar to CBO’s alternative fiscal scenario–in which policy makers routinely extend temporary provisions–we project a debt-GDP ratio of 106.5 percent in 2028, which would be the highest ratio in U.S. history. This compares to CBO’s current-law debt-GDP projection of 96 percent in that year. Third, the situation only gets worse after the first decade. Under current policy, we find that to ensure the debt-GDP ratio 30 years from now does not exceed the current ratio would require a combination of immediate and permanent spending cuts and/or tax increases totaling 4.0 percent of GDP. This represents about a 21 percent cut in non-interest spending or a 24 percent increase in tax revenues relative to current levels. To put this in perspective, the 2017 tax cuts and 2018 spending deals will raise the deficit by slightly more than 2 percent of GDP in 2019. The required adjustments to keep long-term debt at its current ratio to GDP are about twice as big and in the opposite direction…