Must-read: Joshua Gans: “Ford hedges to deal with disruption”

Posted on by Brad DeLong

Must-Read: Joshua Gans: Ford hedges to deal with disruption: “The auto industry is facing a trio of disruptive technologies: electric batteries, autonomous vehicles, and the mobile phone…

…The first two have been long-standing threats, relatively speaking, and are embodied in one company, Tesla. Which is why the auto industry’s reaction to Tesla’s announcement on March 31 of its Model 3 is so strange. They feel a bit relieved, maybe even overjoyed. More than 325,000 people have made a $1,000 down payment to pre-order the Model 3, sight unseen, even though the excepted delivery date was two years away. CEOs of competing automakers are reassured to see a large group of consumers getting excited about purchasing cars again. Tesla may seem ahead in the electric car game, but that doesn’t take away from the fact that, this time around, they are playing a familiar game: find out what people want in a car and deliver it to them. Traditional car companies need to play catch up, for sure, and it’s not clear that they can. But at least they have a clear target.

But the mobile phone… has enabled ride-sharing apps…. If these apps continue to grow, then people could have less of a need to but own their cars since they can hire them at will. That could potentially force carmakers into business-to-business sellers rather than business-to-consumer sellers. And the specifications of what one wants in a car would change, too…. BMW… recently paired with a car sharing firm in Seattle. But Ford is taking the most interesting approach. It launched a spinoff company, Ford Smart Mobility, LLC, which will try to tackle these three potential disruptors at once…. Ford is handling disruption by investing in a separate business unit. This is a play straight out of Clay Christensen’s disruption playbook….

Here is the problem: none of the three disruptors I have outlined here are traditional Christensen-style innovations. They are supply-side architectural innovations…. Ford should go in the other direction: toward integration. Fujifilm, for example, outlasted Kodak not only because it changed from being a film to an image company two decades ago but because it built its entire organization around its new approach…. It’s a potentially reasonable decision for a company to decide that it can’t meet the challenge…. But, if they decide that they can meet the challenge, they should bet everything on that new world vision. They can’t hedge, like Ford is doing.

(Early) Monday DeLong Smackdown (Perhaps?): Carbon pricing, coal, free trade, comparative advantage, and technology transfer

Posted on by Brad DeLong

Typically smart thoughts by Paul Krugman on carbon pricing:

Paul Krugman: 101 Boosteris: “I see that @drvox is writing a big piece on carbon pricing…

…I don’t want to step on his forthcoming message, but what he’s said so far helped crystallize something I’ve meant to write about… ‘101 boosterism’… a takeoff on Noah Smith’s clever writing about ‘101ism’, in which economics writers present Econ 101 stuff about supply, demand, and how great markets are as gospel, ignoring the many ways in which economists have learned to qualify those conclusions in the face of market imperfections. His point is that while Econ 101 can be a very useful guide, it is sometimes (often) misleading…. My point is… even when Econ 101 is right, that doesn’t always mean that it’s… the most important thing…. Economists… delight in talking about issues where 101 refutes naïve intuition, but that doesn’t… mean… these are the crucial policy issues….

In my original home field of international trade. Comparative advantage says that countries are made richer by international trade, even if one trading partner is more productive than the other across the board, and the less productive country can only export thanks to low wages. Paul Samuelson once declared this the prime example of an economic insight that is true without being obvious–and to this day you get furious attempts to refute the concept…. [But] there are a variety of reasons why, despite this big insight, free trade may not be the right policy–that’s Noah’s 101ism. But… even if comparative advantage is a profound insight, does this make free trade versus protectionism a front-burner issue?…. The answer… from standard trade models… is, not as important as many people seem to think…. If you want enormous benefits to trade, you have to invoke things like technology transfer that aren’t in the very analysis that gives the case for free trade such prestige….

There’s a kind of bait and switch, in which people invoke Ricardo and the gains from trade to say “free trade good”, then tell scare stories… [which have] nothing to do with the classical analysis of the gains from trade.

It seems to me that there’s something similar involved in discussions of carbon pricing…. How important is it that our carbon-emissions strategy take the form of a universal or near-universal price on carbon? The answer… is that it depends on the complexity of the required response. If reducing emissions really has to involve moving on many fronts, anything that looks like an administrative solution… is going to be much more costly than carbon pricing that exploits all the possibilities. But if a large part of the solution is going to involve… putting a quick end to the practice of burning coal… getting to broad-based carbon pricing is much less central…. Just because Econ 101 makes a smart, counterintuitive point doesn’t make that point of central importance…. People should know what’s in the textbook…. But never imagine that it’s the be-all and end-all…

And–perhaps, perhaps not–this:

There’s a kind of bait and switch, in which people invoke Ricardo and the gains from trade to say “free trade good”, then tell scare stories… [which have] nothing to do with the classical analysis of the gains from trade…

is a deserved criticism and smackdown of me here on March 12:

The Benefits of Free Trade: Time to Fly My Neoliberal Freak Flag High!: So I guess it is time to say ‘I think Paul Krugman is wrong here!’ and fly my neoliberal freak flag high…

On the analytics, the standard HOV models do indeed produce gains from trade by sorting production in countries to the industries in which they have comparative advantages. That leads to very large shifts in incomes toward those who owned the factors of production used intensively in the industries of comparative advantage: Big winners and big losers within a nation, with relatively small net gains.

But the map is not the territory. The model is not the reality. An older increasing-returns tradition sees productivity depend on the division of labor, the division of labor depends on the extent of the market, and free-trade greatly widens the market. Such factors can plausibly quadruple The Knick gains from trade over those from HOV models alone, and so create many more winners.

Moreover, looking around the world we see a world in which income differentials across high civilizations were twofold three centuries ago and are tenfold today. The biggest factor in global economics behind the some twentyfold or more explosion of Global North productivity over the past three centuries has been the failure of the rest of the globe to keep pace with the Global North. And what are the best ways to diffuse Global North technology to the rest of the world? Free trade: both to maximize economic contact and opportunities for learning and imitation, and to make possible the export-led growth and industrialization strategy that is the royal and indeed the only reliable road to anything like convergence.

So I figure that, all in all, not 5% but more like 30% of net global prosperity–and considerable reduction in cross-national inequality–is due to globalization. That is a very big number indeed. But, remember, even the 5% number cited by Krugman is a big deal: $4 trillion a year, and perhaps $130 trillion in present value.

As for the TPP, the real trade liberalization parts are small net goods. The economic question is whether the dispute-resolution and intellectual-property protection pieces are net goods. And on that issue I am agnostic leaning negative. The political question is: Since this is a Republican priority, why is Obama supporting it without requiring Republican support for a sensible Democratic priority as a quid pro quo?

That said, let me wholeheartedly endorse what Paul (and Mark) say here:

as Mark Kleiman sagely observes, the conventional case for trade liberalization relies on the assertion that the government could redistribute income to ensure that everyone wins—but we now have an ideology utterly opposed to such redistribution in full control of one party…. So the elite case for ever-freer trade is largely a scam, which voters probably sense even if they don’t know exactly what form it’s taking….

Must-read: Benjamin Mitra-Kahn: “Keynes passed away 70 years ago today–his copyright follows”

Posted on by Brad DeLong

Must-Read: Benjamin Mitra-Kahn: Keynes passed away 70 years ago today–his copyright follows: “The most frustrating (or magical) thing about doing archival research…

…is the need to first identify and then physically inspect every box of unknown letters. But what if… we could… move the history of economics scholarship from dusty rooms around the world to the web…. The Carnegie Mellon University digitisation of Herbert Simon’s papers shows it can be done though. Building an on-line Keynes archive would be a sizeable task, but not impossible. Including Keynes’ published, unpublished (possible through Rod O’Donnell’s INET project) and uncategorised work could be a real boon to scholars and people interested in Keynes…. I think there are a number of institutions out there with a real interest in Keynes’s work, meaning this could be done…

Must-read: Noah Smith: “Policy Recommendations and Wishful Thinking”

Posted on by Brad DeLong

Must-Read: I must say I am getting more than a whiff of the disastrous trope that “it is the duty of an organic intellectual to support the Movement” here.

The technocratic view is that there will be a bunch of competing ideological views and material interests pulling and hauling, and that by always wading in and joining the tug-of-war side that has the better policy idea at the moment in the issue under dispute one will get better governance and higher societal well-being. The opposite view is: There is a Movement, the Movement is good because the Movement is supported by the class whose interest is the general interest and by Correct Ideological Thought, and all progressives must support the movement.

That is a disastrous pattern of thought. I am 100% with Noah Smith here:

Noah Smith: Policy Recommendations and Wishful Thinking: “There was a bit of a blow-up earlier this year over Gerald Friedman’s analysis of Bernie Sanders’ economic plans…

…To me, it seemed that the coup-de-grace was delivered by Justin Wolfers…. Friedman admits he made a mistake and then says that his conclusion was right anyway, because we can go find some alternative assumptions that make his original conclusion hold. To me this is transparently assuming the conclusion. That’s a big no-no, and while a lot of macroeconomists probably do this, it looks really bad to admit to it! (I’m also starting to realize that ‘Joan Robinson’ is a sort of an invincible rhetorical refuge for lefty macro types, the way ‘Friedrich Hayek’ is for righty macro types.)….

The fracas quieted down, but now it’s back. Friedman and allies are no longer saying that their analysis is ‘just standard economics’, since they had to switch to non-standard economics to make the conclusions come out the way they wanted. The line now is that Krugman, the Romers, et al. are just a bunch of pessimists, who are unintentionally playing into the hands of conservatives…. Krugman was not happy about this, and blogger ProGrowthLiberal was pretty mad:

The claim that economists like Christina and David Romer bought into the New Classical revolution is both absurd and dishonest…[W]e critics do admit we are below full employment and we have been calling for fiscal stimulus. On this score, the latest from J.W. Mason is even more dishonest than the latest from Gerald Friedman. Guys–you do not win a debate by lying about the other side’s position….

I don’t like what Friedman and Mason are doing. I think economists have a duty to look at the facts as objectively as they can, regardless of their emotions and desires. You shouldn’t prefer Model B over Model A just because one leads to ‘hope’ and the other to ‘hopelessness’…. Friedman and Mason seem to be arguing that our belief about the facts should be driven, at least in part, by our desire to avoid a feeling of powerlessness. They also seem to be saying that if the facts seem to support conservative policies, even a tiny bit, we should reinterpret the facts. I don’t like this approach. It seems anti-rationalist to me, and I think that if wonks behave this way, they’ll end up recommending lots of bad policies.

Cf. Henry Farrell’s 2011 attack on Matt Yglesias:

Henry Farrell (2011): The Limits of Left Neo-Liberalism: “[Doug Henwood is] wrong in the particulars…

…But… Doug is onto something significant…. Left neo-liberalism in the US… have always lacked a good theory of politics… tend[s] to favor a combination of market mechanisms and technocratic solutions to solve social problems. But… politics… requires strong collective actors…. I see Doug and others as arguing that successful political change requires large scale organized collective action, and that this in turn requires the correction of major power imbalances (e.g. between labor and capital). They’re also arguing that neo-liberal policies at best tend not to help correct these imbalances, and they seem to me to have a pretty good case…. It’s hard for me to see how left-leaning neo-liberalism can generate any self-sustaining politics. I’m sure that critics can point to political blind spots among lefties (e.g. the difficulties in figuring out what is a necessary compromise, and what is a blatant sell-out), but these don’t seem to me to be potentially crippling, in the way that the absence of a neo-liberal theory of politics (who are the organized interest groups and collective actors who will push consistently for technocratic efficiency?) is…

People should say that policies are good if they tend to do good things–to make people freer and richer. People should not say that policies are good if they tend to build the Movement, for there is neither Correct Ideological Thought nor a universal class whose interests are identical to the general interest. And people should, especially, not misrepresent what policies are likely to do in the interest of building the Movement.

And where the Movement is good, the policies that advance it will also be the policies that make technocratic sense…

Must-read: Noah Smith: “America Isn’t Going Broke”

Posted on by Brad DeLong

Must-Read: Noah Smith: America Isn’t Going Broke: “The U.S. government isn’t insolvent…

…Insolvency… [is] when liabilities are greater than assets. That’s very basic accounting. One of the U.S. government’s assets is its ability to tax…. The national debt–which includes debt held by the public and money owed to other branches of the government–is only equal to about six years’ worth of tax revenue. If the U.S. devoted a fifth of tax revenue to paying down the entire national debt, it would take 30 years to do it. That’s not insolvency….

The federal debt held by the public is now growing at about a 3 percent rate, while the economy is growing at about a 3.4 percent rate (these are both in nominal terms)…. the U.S. deficit is now perfectly sustainable. This represents a remarkable–possibly even excessive–display of fiscal responsibility by the U.S. government…. So the U.S. debt isn’t frighteningly large, nor is it growing in relation to the economy. In the future, it might do so, if health care prices accelerate again, or if the population ages more. But the U.S. can take steps to address those contingencies when they happen. For now, the U.S. is living in the greatest period of fiscal responsibility since the second Clinton administration.

Resist the urge to engage in debt hysterics, please.

Weekend reading: “Rents, retirement, and family economic security” edition

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

Two weeks ago, Heather Boushey and Kavya Vaghul showed how the increasing entrance of women into America’s paid labor force over the past few decades has propped up family income growth. In a new piece this week, Boushey and Vaghul show how these trends vary across race and ethnicity.

The rise of passive index investing and concerns about short-termism by corporations has sparked a debate about who gets to allocate capital in the United States. But in a way, this debate is also about who gets some of the increased profits of recent years.

A crisis is looming in the United States as many households haven’t saved enough for retirement. At the same time, we might have too much saving relative to investment opportunities. So how we should help improve retirement security?

The economies of high-income countries have become financialized over the past 30 years as credit has almost doubled as a share of gross domestic product. How does this affect the functioning of the macroeconomy? A new paper lays out some key stylized facts.

Links from around the web

The incarceration rate in the United States is incredibly high by both international and historical comparisons. As a result, sentencing laws are under increasing scrutiny. And the economic evidence, as Jason Furman and Douglas Holtz-Eakin argue, shows that the costs of incarceration now far outweigh the benefits. [nyt]

The welfare reform of the 1990s was intended to increase the labor force participation of women on the program. But the program also had extremely sharp benefit phase-outs, encouraging some women to work less in order to stay on the program. Patrick Kline and Melissa Tartari write up their paper on this topic. [microeconomic insights]

We’re all familiar with the dangers of subprime mortgages. But while those financial instruments have retreated from the scene, a new product has emerged that replicates many of their problems. Heather Perlberg looks into the rise of “seller-financed” home sales. [bloomberg]

Numerous writers and analysts (yours truly included) have raised concerns about increases in market concentration, declines in competition, and higher economic rents. Does this have a negative impact on economic growth? Dietz Vollrath says it depends, but it likely reduces innovation. [growth economics]

As the U.S. health care sector has more than a few problems, the Affordable Care Act aimed to change a wide number of things about the system—one of which is the medical debt. Margot Sanger-Katz details a new study on how the law is improving financial security. [the upshot]

Friday figure

Figure from “Across races, women bolster family economic security” by Heather Boushey and Kavya Vaghul

Must-read: Patrick Dunleavy: “Choosing Useless Titles”

Posted on by Brad DeLong

Must-Read: Patrick Dunleavy: Choosing Useless Titles: “The really useless title must be as similar as possible to a thousand others…

…or so obscure that its meaning completely evades readers. It could also miscue or mis-direct readers…. The top five most popular versions are:

  1. A ‘cute’ title using ‘ordinary language’ words with a clear meaning, but taken radically out of context… the author should know what it means, and as few other people as possible…. ‘I introduce my work in such esoteric ways, because I am so much cleverer than you’. It also ensures that anyone interested in the topic covered would be very unlikely to input these words into a search engine….

  2. A ‘cute’ title that is completely obscure. This is a variant of (1) where even the language the author includes in the title is incomprehensible….

  3. An ultra-vague, vacuous, completely conventional, or wholly formal title, preferably one that could mean almost anything. To be fully obscure here it is vital to pick vocabulary that is as general or unspecific as possible and is capable of multiple possible meanings…. ‘Accounting for ministers’ could be about politicians running government departments in parliamentary countries; or alternatively, a manual for vicars or priests doing their income tax returns.

  4. An empty box title…. For example: ‘Regional development in eastern Uganda, 1975-95′ gives you a location, a date range and a topic. But the key message is still: ‘I have done some work in this box (topic area), and I have some findings. But I’m not going to give you any clues at all about what they are’….

  5. The look-alike, empty box title… where the paper title… is devoid of any distinguishing or memorable features of its own. For instance: ‘John Stuart Mill on Education’…. ‘Key features of capitalism’….

  6. The interrogative title, which must always end with a question mark. Again vagueness is an asset in seeking obscurity…

Some new stylized facts for a financialized economy

Posted on by Bridget Ansel
Two traders watch the monitors on the floor of the New York Stock Exchange.

Fifty-five years ago, Nicholas Kaldor, a macroeconomist at the University of Cambridge, laid out six “stylized facts” about economies. Kaldor wasn’t just summarizing what economists had learned about macroeconomics at that point, but he was also outlining what macroeconomists should push forward with their research, as Charles Jones and Paul Romer note in their piece on “the new Kaldor facts.”

In the wake of the Great Recession, economists have started to grapple with the fact that their macroeconomic models didn’t fully appreciate the importance of the financial sector in the swings of the economy. Although they’ve already started this endeavor, a set of stylized facts about the influence of finance and credit might also be helpful. Luckily, a new paper provides such a list.

Written by economists Òscar Jordà of the Federal Reserve Bank of San Francisco, Moritz Schularick of the University of Bonn, and Alan M. Taylor of the University of California, Davis, the paper was part of the annual National Bureau of Economics Research conference on macroeconomics held last week in Cambridge. The paper is part of the economists’ research agenda looking at the long history of banking and credit and their effects on the macroeconomy.

After the ratio of credit to gross domestic product among high-income countries essentially stayed stable for a century, it has increased dramatically since the late 1970s. In 1980, the average bank-lending-to-GDP ratio for high-income countries was 62 percent. Thirty years later in 2010, it was 118 percent. It’s for good reason that economists call this jump the “financial hockey stick.” The increase is due primarily to more mortgage lending as households in advanced economies have become more and more leveraged.

So what does this increasing leverage and financialization mean for these economies overall? Very quickly, here are the paper’s topline results:

  • Higher credit is associated with less volatility in overall economic growth, consumption, and investment.
  • More credit is associated with lower average economic growth.
  • More credit is also associated with higher chances of more “spectacular crashes.”
  • All of these correlations are stronger in the period of high leverage since the 1980s.

Note that these are just correlations, so the paper isn’t saying that credit necessarily causes these outcomes. Rather, models of the macroeconomy should be able to account for the strong relationships between key measures (output, consumption, investment) and the amount of credit in the economy. In our financialized economy, it’s something we should figure out sooner rather than later.