Must-Read: Dietrich Vollrath (2016): The Returns to Societal Capital: “Brad DeLong… points out that much of our prosperity comes from a stock of societal capital that we unknowingly rely on every day…

…Trust: I think this is much of what DeLong has in mind. We are lucky to be in the “trust” or “cooperate” equilibrium in our repeated game of exhanging goods and services. If you like, call it the “stag hunt” equilibrium Nick Rowe talks about. Regardless, we benefit from the decisions of our ancestors to play this equilibrium, so that it is the default. If you want to say this is due to some institutions, or culture, or pure luck, it doesn’t matter. We’ve found our way to the trust equilibrium, and benfit from that immensely. Scale… I think it is as relevant as trust. Scale influences the potential profits from innovations, and so is crucial to growth. Bigger market, more profits, more incentives to innovate. But scale is not the same thing as trust, or institutions, or culture….

The heart of DeLong’s point is that neither trust nor scale are things that are owned by any firm or individual. You could say that we inherited them from our ancestors, or you could say these are emergent properties, or you could say that they are designed by the institutions we choose for ourselves. Regardless, trust and scale are “ideas” in the broadest sense, and are inputs into the production process in that trust and scale mean our set of rival inputs (labor, capital) can produce more with them than without.

How is it that scale and trust mean we are overpaid?… [I’ll] “hoist one from the archives” of this blog:

Dietrich Vollrath (2015): What Assumptions Matter for Growth Theory?: “Just to refresh, a production function tells us that output is determined by some combination of non-rival inputs and rival inputs.

…Non-rival inputs are things like ideas that can be used by many firms or people at once without limiting the use by others. Think of blueprints. Rival inputs are things that can only be used by one person or firm at a time. Think of nails. The income earned by both rival and non-rival inputs has to add up to total output. Okay, given all that setup, here are three statements that could be true.

1. Output is constant returns to scale in rival inputs
2. Non-rival inputs receive some portion of output
3. Rival inputs receive output equal to their marginal product

Pick two.

Resuming: The Returns to Societal Capital: The ideas of trust and scale are non-rival inputs to production. If we assume that output is constant returns to scale in rival inputs (point 1), then we have to pick either 2 or 3. As neither trust nor scale receive payments, we have essentially chosen 3. And in that sense DeLong means that rival inputs (our labor and our capital) are overpaid. We are not compensating anyone for the trust and scale that we inherited or created as a group…. Labor is overpaid because it earns returns that could be going to ideas like trust and scale. Whether we say that what it earns is the marginal product or not is irrelevant…. You may be wondering how the increasing returns to scale that DeLong mentions fits in here…. In terms of all inputs (labor, capital, and ideas) production is increasing returns to scale. If I doubled all of them, output would more than double.

Back to the main story. What DeLong does with this is to provide what I found to be a unique justification for the public sector. That is, taxes are a way of collecting the royalties on trust and scale that we inherited and/or create ourselves. Taxes are the rents to idea of playing “cooperate” or having scale. And the proper use of those rents, if I am reading him correctly, is in ensuring that those endowments are perpetuated and handed off to our own children.

What does it mean to perpetuate trust and scale? Part of it, I think, is in providing the insurance against the fluctuations that are the necessary corollary of the markets we create with trust and scale. Those fluctuations play havoc with local communities and ways of life, a la Polyani….

The issue with this, as DeLong spends most of his post working out, is that simply handing out those rents to people creates issues for everyone involved. Those paying taxes feel that they are being taken as suckers. Those receiving the rents – the members of disrupted communities – feel like deadbeats. No one wants to be in either of those positions….

The distribution of those rents is perhaps more palatable when seen not as a handout (which makes people feel like a deadbeat) but as something like a dividend on shared ownership of an asset. I feel like this would be one way to think of how a universal basic income could be framed – everyone is getting their share of the collective dividend payment due to the owners of the “ideas” of trust and scale. It is a sign of ownership, not dependence.

• Dietrich Vollrath (2016): The Returns to Societal Capital
• Dietrich Vollrath (2015): What Assumptions Matter for Growth Theory?
• Dietrich Vollrath (2015): Mathiness versus Science in Growth Economics:

Must-Read: The incredibly sharp Kaushik Basu is another one who makes what I regard as a substantial mistake in diagnosing the economic ills of our age. The loss of security and place by those who in an earlier age would have been blue-collar workers settled in stable firms with straightforward career paths is due to:

1. Technological progress which has–worldwide–greatly amplified manufacturing labor productivity, accompanied by limited demand for manufactured goods: few of us want more than one full-sized refrigerator, and very very few of us want more than two.

2. The failure to manage the economy to either prevent deep recessions or to insure a rapid bounce-back of employment in the industries that collapsed in the downturn. The Reagan administration, with Paul Volcker, delivered the disinflation shock in the early 1980s and then followed it with a bounce-back that was rapid but generated jobs elsewhere than in blue-collar manufacturing. The Bush administration delivered the 2007-2009 shock, and the Obama administration then failed to deliver a rapid bounce-back anywhere.

3. Macro policies–the Reagan and Bush tax cuts and the strong-dollar policy–that have turned the U.S. not into the trade-surplus capital-exporting economy that a rich economy should be, but a trade-deficit capital-importing economy, and in the process sent the market signals that large chunks, and very valuable chunks, of our manufacturing communities of engineering practice and blue-collar skilled worker pools are simply not wanted.

4. Basu says “globalization”–but globalization is really not on the list. Globalization deepens the division of labor, and does so in a way that is not harmful to high-paying manufacturing jobs in the global north. The high-paying manufacturing jobs that require skills and expertise (as opposed to the moderate-paying ones that just require being in the right place at the right time with some market power, and the low-paying ones) are easier to create and hold on to if you can be part of a globalized value chain than otherwise…

Kaushik Basu: America’s Dangerous Neo-Protectionism: “NEW YORK – US President Donald Trump is about to make a policy mistake…

…It will hurt – particularly in the short run – countries across Sub-Saharan Africa, Latin America, and Asia, especially emerging economies like China and Sri Lanka (which run large trade surpluses vis-à-vis the United States) and India and the Philippines (major outsourcing destinations). But none will suffer more than the US itself. The policy in question is… an attempt to “save” domestic jobs by slapping tariffs on foreign goods, influencing exchange rates, restricting inflows of foreign workers, and creating disincentives for outsourcing. On the other hand, it involves neoliberal financial deregulation….

Real wages have been largely stagnant for decades; the real median household income is the same today as it was in 1998. From 1973 to 2014, the income of the poorest 20% of households actually decreased slightly, even as the income of the richest 5% of households doubled. One factor driving these trends has been the decline in manufacturing jobs. Greenville, South Carolina, is a case in point. Once known as the Textile Capital of the World, with 48,000 people employed in the industry in 1990, the city today has just 6,000 textile workers left. But… the major challenge facing labor today lies only partly in open trade or immigration; the much bigger culprit is technological innovation and, in particular, robotics and artificial intelligence, which have boosted productivity substantially. From 1948 to 1994, employment in the manufacturing sector fell by 50%, but production rose by 190%….

While some forms of targeted protection may be able to play a role in supporting US workers, neo-protectionism is not the answer. And it would not just be ineffective; it would actually do substantial harm…. An effective solution to the problems facing American workers must recognize where those problems’ roots lie…. What workers need, however, is more wages. If they aren’t coming from employers, they should come from elsewhere. Indeed, the time has come to consider some form of basic income and profit-sharing…

Should-Read: Dietrich Vollrath (2015): What Assumptions Matter for Growth Theory?: “Somewhere along I-40 and I-81 I was able to get a little clarity…

…in this whole “price-taking” versus “market power” part of the debate. I’ll circle back to the actual “mathiness” issue at the end of the post…. Do inputs to production earn their marginal product?… Do the owners of non-rival ideas have market power or not?… Here are three statements that could be true.

1. Output is constant returns to scale in rival inputs
2. Non-rival inputs receive some portion of output
3. Rival inputs receive output equal to their marginal product

Pick two.

Romer’s argument is that (1) and (2) are true… through replication arguments… [and] an empirical fact. Therefore, (3) cannot be true…. I don’t need to say anything about how the non-rival inputs are compensated…. If they earn anything… the rival inputs cannot be earning their marginal product…. McGrattan and Prescott abandoned (1) in favor of (2) and (3). Boldrin and Levine dropped (2) and accepted (1) and (3)…. If there is a sticking point with McGrattan and Prescott, Boldrin and Levine, or other papers, it is not “price-taking” by innovators. It is rather the unwillingness to abandon (3), that factors earn their marginal products. Holding onto this assumption means that they are forced to abandon either (1) or (2).

From Romer’s perspective, abandoning (1) makes no sense due to replication…. Abandoning (2) also does not make sense for Romer. We clearly have non-rival ideas in the world. Some of those non-rival ideas are remunerated in some way, whether there is market power or not…. The “mathiness” comes from authors trying to elide the fact that they are abandoning (1) or (2). McGrattan and Prescott have this stuff about location, which is just to ensure that (1) is false. Lucas (2009), as Romer explained here, is abandoning (2), and asserts that this is something we know as a result of prior work. It’s not….

Now you can talk about market power or the lack of it. Romer, taking (1) and (2) as given, asks how non-rival inputs could possibly be earning output…. Non-rival ideas must be excludable, to some extent, in order to earn the output we see them earning in reality…. The lack of full market power here is fully compatible with (1) and (2) being true, and (3) being false. The issue with Boldrin and Levine isn’t that they allow people to compete with the innovator immediately, it’s that they dismiss the whole idea of non-rival ideas and abandon (2)…

• Dietrich Vollrath (2016): The Returns to Societal Capital
• Dietrich Vollrath (2015): What Assumptions Matter for Growth Theory?
• Dietrich Vollrath (2015): Mathiness versus Science in Growth Economics:

Should-Read: Michael Berube: Theory Tuesday III: “Sean [McCann]’s account of [how]…

…not literature, but Theory now is the special kind of expertise that challenges all other expertise, the unique kind of training that subverts all other discipline.

Contrast this account of theory with Brad DeLong’s narrative of How He Came to Grips with Foucault: for DeLong, a Foucauldian account of the history of economic brought him to see some things and take issue with others. And that’s all I would ever ask a theory to do, myself. at’s all I ever ask students to ask for, too…

Should-Read: Paul Krugman: Trump’s Rosy Scenario: “The claimed returns to Trumpnomics are close to the highest growth rates we’ve seen under any modern administration…

…Real GDP grew 3.4 percent annually under Reagan; it grew 3.7 percent annually under Clinton (shhh — don’t tell conservatives.) But there are fundamental reasons to believe that such growth is unlikely to happen now… demography..Trump did not, in fact, inherit a mess, both Reagan and Clinton did… both came into office… with unemployment above 7 percent… a substantial amount of slack to be taken up when the economy returned to full employment…. Maybe something awesome will happen: either driverless or flying cars will transform everything, whatever. But you shouldn’t be counting on it.

Should-Read: The centrist neoliberal project–use market means to achieve both social democratic ends and the rapid expansion of wealth–has crashed and burned. Now comes Ruy Texeira to lead the left that was kept off the plane and the center that has survived out of the mountains to a practical utopia…

Ruy Texeira tells leftists and centrists, cosmopolitans and communitarians, organizers and activists which is the way to a pragmatic utopianism based on the energy and accomplishments of humanity…

Ruy Teixeira: The Optimistic Leftist: “A new utopian vision for the left’s emerging coalition will… include…

…First… a commitment to abundance…. Material abundance is a very good thing…. It is only those that already have it that are inclined to downplay its importance…. Closely linked to this aspect of the left’s utopian vision will be a re-embrace of technology…. Technological progress will also have a central role in another aspect of the left’s vision—a green world where the environment is safeguarded and global warming is held in check…. A better world is also a global, interconnected world…. This means explicitly rejecting the idea that there is an intrinsically disadvantageous tradeoff between the welfare of the West and the welfare of the rest of the world….

The left will aim for a world where racial and gender equality are worldwide realities, where sexual orientation is a non-prejudicial, individual a air and where tolerance of others from different cultural, religious or national backgrounds is the rule…. Universal and deepened democracy…. Universal suffrage, with freedoms of the press, association, speech, etc., should be and can be the core governmental form in every country. In addition, the advance of information technology should be leveraged to provide citizens with far greater access to the workings of government and ease the costs of political participation across the world… an educated world… not just universal literacy but universal tertiary (college) education….

This vision does not include an embrace of “socialism”—much less a planned economy—and implicitly assumes that capitalism will continue in some form with a large role for the market. The key question is not “whether capitalism?” but rather “what form?”… Such a society will not be perfect. But perfection is not the point. The goal is to make society as close as it reasonably can be to the left’s new utopian vision, while making no heroic assumptions… pragmatic utopianism… a continuous process, a never-ending quest to improve society…. It is the signature of the optimistic leftist and of a twenty-first century that will be far, far better than you think. We live in extraordinary times; the left can and will make them extraordinarily good for humanity.

Should-Read: Kevin Drum: Charts of the Day: If Only Every State Could Be As “Out of Control” As California: “I feel like someone ought to defend the honor of California against our president, so why not me? Here you go…

Since the state GDP series started in 1997, California GDP has grown 12 percent more than the country as a whole. The number of workers has grown 7 percent more. If only every state could be as out of control as California.

UPDATE: I’ve gotten a bit of grief from folks suggesting that this difference is just because California’s population has grown faster than the rest of the US. Not so: between 1997 and 2015, California’s population increased about 20 percent while total US population increased about 18 percent. If the difference were bigger I would have gone to the trouble of calculating GDP and employment per capita, but there wasn’t much point.

Should-Read: James Kwak: Health Care and John D. Rockefeller’s Dog: “Few people actually want to live in a world where health care is distributed by a free market…

…Textbook markets allocate goods and services to the people who are willing to pay the most for them—on the assumption that this maximizes social welfare. As Paul Samuelson wrote in his seminal 1948 textbook, “John D. Rockefeller’s dog may receive the milk that a poor child needs to avoid rickets Why?… Because [supply and demand] are doing what they are designed to do.” If you have a chronic illness that is likely to require $30,000 in treatment, the correct market price for your health plan is more than $30,000. That’s not a market failure; that’s the price at which a profit-seeking company should sell you a policy. But as Jacob Hacker wrote in The Great Risk Shift, “Most of us think it’s fine that some people can’t buy fancy clothing or fast cars. But most of us draw the line at basic health care”…

Should-Read: Robert Waldmann: Buchanan, Smith, and Krugman: “There is no reason why macroeconomists can’t work on empirical microeconomics while also using old Keynesian models for forecasting and policy advice…

…Now one might argue that it would be better not to give advice until we have decent models based on empirical microeconomics. This would be true if macroeconomists’ forecasts were reliably worse than those of non-economists. (Indeed, I am glad that Prescott, who said that the then current problems were no big deal in early 2009, and Lucas, who claimed to know that public investment couldn’t cause increased nominal aggregate demand, are not actively contributing to the policy debate). [But that] is not a sensible criticism of Krugman. I think it is clear that old Keynesian models are useful, because they give better forecasts and conditional forecasts than the judgment of non economists.

I have nothing against empirical micro research. Trying to understand price setting, hiring, firing and saving decisions is worthwhile as pure social science in any case. But the idea that macroeconomists should be microeconomists for a while (how many decades?) ignores that fact that policy makers are making horrible mistakes, and that (some) macroeconomists have reliably warned in advance that they are mistakes.