Must-read: Tim Worstall: “Brookings Is Wrong On The Productivity Slowdown”

Posted on by Brad DeLong

Must-Read: Tim Worstall: Brookings Is Wrong On The Productivity Slowdown: “My own favoured example being that in our current GDP numbers globally…

…we have Facebook marked down as providing some $18 billion of economic value, that should then translate into perhaps $36 billion of consumer surplus, which is the true measure of how we’ll we’re doing as humans. And yet that’s obviously ridiculous: something that 1 billion people do for an average 20 minutes a day simply cannot be valued at such a low number. If we measured that time at US minimum wage (maybe not right, but indicative) then we’d have $800 billion or so of time value. Or, alternatively, we should be valuing the time people spend on Facebook at 10 cents or whatever an hour….

Brookings has a new paper out:

We find little evidence that the slowdown arises from growing mismeasurement of the gains from innovation in IT-related goods and services…. Many of the tremendous consumer benefits… are, conceptually, non-market…. These benefits do not mean that market-sector production functions are shifting out more rapidly than measured, even if consumer welfare is rising.

And that’s a horrible assumption, a terrible line of reasoning. As Delong says:

Isn’t ‘measuring consumer welfare’ the point? We (a) arrange atoms (b) in forms we find pleasing and convenient, and then use them in combination with (c) information and (d) communication to accomplish our purposes. That our measures of economic growth are overwhelmingly ‘market’ measures that capture the value of (a), much of the value of (b), and little of the value of (c) and (d) is an indictment of those measures, and not an excuse for laziness by shrugging them off as ‘non-market’ and claiming that measuring the shifting-out of market-sector production functions is our proper business….

Consumer welfare… is the thing…. Market economic activity… are only a proxy… because we want to be able to calculate it in something close to real time… [and] to have objective rather than highly subjective numbers…. But we must never forget that it is only a proxy…. Consider WhatsApp. Currently it charges no fee… and… carries no advertising…. Anyone want to claim that WhatsApp adds nothing?… Thus we know absolutely that we’ve got a measurement problem here. Our only question is how bad is it?… And yes, obviously, this spills over into public policy…. We do indeed have 1 billion of those guys’n’gals getting their telecoms for free: what do you mean this isn’t making people richer?

Must-read: Isaac Shapiro et al.: “It Pays to Work: Work Incentives and the Safety Net”

Posted on by Brad DeLong

Must-Read: Isaac Shapiro et al.: It Pays to Work: Work Incentives and the Safety Net: “Some critics of various low-income assistance programs argue that the safety net discourages work…

…In particular, they contend that people receiving assistance from these programs can receive more, or nearly as much, from not working — and receiving government aid — than from working.  Or they argue that low-paid workers have little incentive to work more hours or seek higher wages because losses in government aid will cancel out the earnings gains…. Such charges are largely incorrect…. Adults in poverty are significantly better off if they get a job, work more hours, or receive a wage hike….

There are really only two options to lowering marginal tax rates.  One is to phase out benefits more slowly as earnings rise; this reduces marginal tax rates for those currently in the phase-out range. But it also extends benefits farther up the income scale and increases costs considerably, a tradeoff that many policymakers may not want to make. 

The second option is to shrink (or even eliminate) benefits for people in poverty so they have less of a benefit to phase out, and thus lose less as benefits are phased down. This reduces marginal tax rates, but it pushes the poor families into — or deeper into — poverty…. The ‘solution’ that some who use marginal-tax-rate arguments to attack safety net programs advance — block grants with extensive state flexibility — doesn’t resolve these difficult tradeoffs.  Instead, it passes the buck in making these trade-offs from federal decision-makers to state decision-makers.

Must-read: Charles Steindel (2009): “Implications of the Financial Crisis for Potential Growth: Past, Present, and Future”

Posted on by Brad DeLong

Must-Read: Charles Steindel (2009): Implications of the Financial Crisis for Potential Growth: Past, Present, and Future: “The scale of the recent collapse in asset values and the magnitude of the recession…

…suggest that activities connected to the increase in values over the 2002-07 period—notably, expansion of the financial markets, homebuilding, and real estate—were overstated. If this is true, aggregate U.S. economic growth would have been overstated, implying that previous rates of potential gross domestic product (GDP) growth may also have been overstated and that the trajectory of potential GDP may be slower going forward. Slowing growth in the finance, homebuilding, and real estate sectors could hold back aggregate growth. A detailed examination of these sectors’ direct contributions to GDP, however, suggests that overstatements of past growth would likely not have made a large difference in recorded GDP growth. Slower growth in these sectors would have, at most, a moderate direct effect on aggregate economic activity. The recent experience’s longer term effects on GDP would seem to stem largely from factors other than the retrenchment in these sectors.

Must-read: Simon-Wren Lewis: “The Strong Case Against Independent Central Banks”

Posted on by Brad DeLong

Must-Read: Simon Wren-Lewis: The Strong Case Against Independent Central Banks: “In the post war decades there was a consensus…

…that achieving an adequate level of aggregate demand and controlling inflation were key priorities for governments. That meant governments had to be familiar with Keynesian economics…. A story some people tell is that this all fell apart in the 1970s with stagflation. In the sense I have defined it, that is wrong. The Keynesian framework had to be modified… but it was modified successfully. Attempts by New Classical economists to supplant Keynesian thinking in policy circles failed…. The more important change was the end of Bretton Woods and the move to floating exchange rates. That was critical… allowed the creation of what I have called the consensus assignment. Demand management should be exclusively assigned to monetary policy, operated by ICBs pursuing inflation targets, and fiscal policy should focus on avoiding deficit bias. The Great Moderation appeared to vindicate this consensus.

However the consensus assignment had an Achilles Heel… the Zero Lower Bound…. Although many macroeconomists were concerned about this, their concern was muted because fiscal action always remained as a backup. To most of them, the idea that governments would not use that backup was inconceivable…. That turned out to be naive. What governments and the media remembered was that they had delegated the job of looking after the economy to the central bank, and that instead the focus of governments should be on the deficit….

Macroeconomists were also naive about central banks. They might have assumed that once interest rates hit the ZLB, these institutions would immediately and very publicly turn to governments and say we have done all we can and now it is your turn. But for various reasons they did not. Central banks had helped create the consensus assignment, and had become too attached to it to admit it had an Achilles Heel….

Economists knew that the government could always get the economy out of a demand deficient recession, even if it had a short term concern about debt. The fail safe tool to do this was a money financed fiscal expansion. This fiscal stimulus paid for by the creation of money was why the Great Depression could never happen again. But the existence of ICBs made money financed fiscal expansions impossible when you had debt-obsessed governments, because neither the government nor the central bank could create money for governments to spend or give away…

Must-watch: Thomas Piketty, Paul Krugman, and Joseph Stiglitz: “The Genius of Economics”

Posted on by Brad DeLong

Must-Watch: Mark Thoma sends us to: Thomas Piketty, Paul Krugman and Joseph Stiglitz: The Genius of Economics: “Piketty, arguably the world’s leading expert on income and wealth inequality…

…does more than document the growing concentration of income in the hands of a small economic elite. He also makes a powerful case that we’re on the way back to ‘patrimonial capitalism,’ in which the commanding heights of the economy are dominated not just by wealth, but also by inherited wealth, in which birth matters more than effort and talent,’ wrote Paul Krugman in The New York Times. Krugman and his fellow Nobel laureate Joseph Stiglitz (author of The Great Divide) join Piketty to discuss the genius of economics.

Must-reads: March 6, 2016

Posted on by Brad DeLong

Must-read: Justin Fox: “The U.S. Could Use a New Economic Strategy”

Posted on by Brad DeLong

Must-Read: Justin Fox: The U.S. Could Use a New Economic Strategy: “In his four-plus years as the country’s first treasury secretary…

…Alexander Hamilton crafted an economic strategy that helped the U.S. rise from agrarian former colony to global economic power… [write] Stephen S. Cohen and J. Bradford DeLong write in their brand-new book, Concrete Economics: The Hamilton Approach to Economic Growth and Policy…. No U.S. leader since has articulated and then put in place an all-encompassing economic plan in quite the way Hamilton did. But the country has always followed some sort of economic strategy, even if it has seldom been clearly defined… a succession of strategies–culled from Cohen and DeLong’s book, but given titles by me–that went something like this: The era of free stuff…. The era of intervention…. The era of investment…. The era of financialization…. It is at least possible that this last era has come to an end, with the beginning of financial re-regulation in the U.S. and a halt to the long upward trend in global trade that accompanied the rise of the East Asian export economies. It’s not at all clear, though, what’s going to replace it.

DeLong… and Cohen… don’t offer a plan. They simply recommend that discussion of economic policy focus on the concrete–what works–rather than theory and ideology. How’s that been going lately? Donald Trump’s economic platform, however muddled and unrealistic, is at least a break from the narrow ideological orthodoxy on economics that has held the national Republican Party in thrall for the past couple decades. On the Democratic side, Bernie Sanders and Elizabeth Warren have offered a challenge to the financial-sector-friendly approach that the party’s mainstream settled on in the 1990s. Some in that mainstream have been reconsidering their stance as well…. The economics profession’s turn away from theory and toward empirical work, which I wrote about in January, will presumably offer pragmatically inclined policy makers more material to work with in the coming years.

Still, it’s not easy to figure out what the U.S. should do next. Nations playing catch-up… have concrete examples…. But the U.S. of 2016 is the biggest economy on the planet…. In the latest World Economic Forum global competitiveness rankings, for example, it trailed only Switzerland and Singapore. There is surely much we can learn… but… the U.S. remains largely sui generis.

I’m almost certain that more infrastructure investment would be a smart part of any new U.S. economic strategy. But I’m not so sure what should be built and where, or what else…. Got any suggestions?…

For an explanation of this, I recommend ‘Cabinet Battle #1’ from the musical ‘Hamilton.’

Must-read: David M. Byrne et al.: “Does the United States Have a Productivity Slowdown or a Measurement Problem?”

Posted on by Brad DeLong

Must-Read: Is it really credible that the rapid growth in potential output over 1995-2004 was 90+% an “anomaly… upward shift in the level of productivity rather than… thanks to the Internet, the reorganization of distribution sectors, and the like…” and 10-% a supply-side consequence of a high-pressure economy? Surely the coincidence of sustained high demand relative to current potential in this one single decade of the past four and rapid potential output growth create a strong and unrebutted presumption that the split is 50%-50% or 70%-30% and not 95%-5%?

David M. Byrne et al.: Does the United States Have a Productivity Slowdown or a Measurement Problem?: “After 2004, measured growth in labor productivity and total-factor productivity (TFP) slowed…

…We find little evidence that the slowdown arises from growing mismeasurement of the gains from innovation in IT-related goods and services…. Underlying macroeconomic trends–not mismeasurement of IT-related innovations — are responsible for the slowdown in U.S. labor productivity and total factor productivity (TFP) since the early 2000s…. Because the slowdown predated the Great Recession, and growth was similar in the 1970s and 1980s to what it’s been since 2004, it was the fast-growth of 1995-2004 period that was the anomaly — a one-time upward shift in the level of productivity rather than a permanent increase in its growth rate – thanks to the Internet, the reorganization of distribution sectors, and the like. ‘Looking forward, we could get another wave of the IT revolution. Indeed, it is difficult to say with certainty what gains may yet come from cloud computing, the internet of things and the radical increase in mobility represented by smartphones,’ they write. Still, those hypothetical benefits have not appeared yet.

I also confess to being annoyed by:

Second, many of the tremendous consumer benefits from smartphones, Google searches, and Facebook are, conceptually, non-market: Consumers are more productive in using their nonmarket time to produce services they value. These benefits do not mean that market-sector production functions are shifting out more rapidly than measured, even if consumer welfare is rising…

Isn’t “measuring consumer welfare” the point? We (a) arrange atoms (b) in forms we find pleasing and convenient, and then use them in combination with (c) information and (d) communication to accomplish our purposes. That our measures of economic growth are overwhelmingly “market” measures that capture the value of (a), much of the value of (b), and little of the value of (c) and (d) is an indictment of those measures, and not an excuse for laziness by shrugging them off as “non-market” and claiming that measuring the shifting-out of market-sector production functions is our proper business.

What is the economy’s speed limit?

Posted on by Brad DeLong

More on the very-sharp Ryan Cooper’s gotten one mostly wrong…

The two questions are (a) how much higher could expansionary fiscal and cooperative monetary policy permanently push annual GDP up above its current trend without triggering massive inflation, and (b) how large would the expansionary policies have to be to push the economy up that far? My guesses are 5% to (a)–that we could permanently raise annual GDP $800 billion relative to our current trajectory without triggering an upward spiral in inflation–and that we would need $300 billion more of annual government purchases. to get us there to (b).

Ryan Cooper:

Ryan Cooper: Who’s Afraid of John Maynard Keynes?: “Does the economy have room to grow?…

…Could we create many more jobs and wealth if we really tried, or have we reached the limits of what we can produce? This… is at the heart of a recent dispute among academic economists… nominally centered on Bernie Sanders’ economic plan, but also illustrates a major fault line in the practice of theoretical economics today…. [Gerald] Friedman… assumed a model in which Sanders’ huge stimulus would push the economy up to full capacity (meaning full employment and maximum output), after which it would stay permanently at a higher level…. However, the key assumption behind the mainstream model is that an economy always tends towards full employment…. [But] even by conservative assumptions we are still something like $500 billion under total economic capacity, productivity has been consistently very weak, and there is absolutely nothing on the horizon that looks like it will return us to the level of employment we had in 2007, let alone 1999…. What’s more, a Friedman-style model in which a stimulus delivered to a depressed economy returns it to full capacity, after which it stays there, is not ridiculous…

Let’s start with one of my favorite workhorse graphs:

Playfair equitable graphs

Starting in 2006 residential construction fell to the very bottom of the chart, and it has stayed there: more than 1.5%-points of GDP below its 2007-peak share of potential GDP. Starting in 2008 business investment fell to the very bottom of the chart, and then took a long tine to recover from its nadir of 2.5%-points below its 2007-peak share of potential GDP. Between 2007 and, say, the end of this year the cumulative shortfall has been some 18%-point years of residential construction not undertaken, and some 8%-point years of business investment not undertaken.

In a world with a capital-output ratio of 3 and a capital share of income of 30%, that shortfall would generate (under somewhat heroic analytical assumptions) a reduction of some 2.6%-points of GDP in the cumulative growth of potential output relative to what it would otherwise have been. That is the damage done to growth in America’s long-run economic potential from the investment shortfall since 2007. And then there is the equal or larger reduction in the growth in America’s long-run economic potential from the labor shortfall–workers not trained, workers not gaining experience, the breaking of ties to people who might hire you or might know of people who might higher you. Add up those two, and I get a 6%-point reduction in what our productive potential is relative to the pre-2008 trend. Thus 6%-points of the current gap between production now and the pre-2008 trend has been lost to the years that the locust hath eaten. And 5%-points remains as a gap that could quickly be closed by expansionary fiscal policy.

And we should close that gap. But a mere $140 billion or so of increased government spending is very unlikely to get us there. That would require a multiplier of nearly six–that only 17.5% of dollars earned as income from higher government spending leak out of the flow of spending on domestically-produced commodities either as savings or as spending on imports. And we know that it’s more like 33%-40% of dollars that so leak. That gives us a multiplier of 2.5-3. And that gives me my desire to see $300 billion more of government purchases.

What if we don’t get that extra spending? Well, perhaps we will get a residential construction boom to return us to economic potential. But don’t bet on it. Perhaps we will get an export boom to return us to economic potential. But don’t bet on it. Perhaps businesses will become wildly more optimistic about the future and a business investment boom will return us to economic potential. But don’t bet on it. Perhaps consumers will decide–after just living through 2007-2016–that they have not borrowed enough, and go on a spending spree to run their debts up further. But don’t bet on it.

No, if we don’t take active steps to boost spending, what will happen is not that economic growth will accelerate to return us to an economic potential that is itself growing at 2+%/year. What will happen is that low investment and underemployment will continue to do damage to the growth of potential and our economic potential will grow at 2-%/year until actual output is once again at potential output. But that will not be because actual has sped up its growth to catch up to potential. It will be because potential has slowed down to fall back to actual.

And the claim that in the long run (in which we are all dead) the economy’s actual level of output converges to potential? Four things can cause this to happen:

  1. Potential can slow.
  2. Something–a spending boom by somebody–can boost actual.
  3. Deflation can lead to lower interest rates as deflation carries with it a decline in the intensity of demand for a stable nominal stock of money. But in the modern world we certainly do not have inflation. We double-certainly do not have central banks that keep the nominal stock of money stable. And we triple-certainly have no room for interest rates to fall further
  4. The gap between potential and actual production can lead the central bank to lower interest rates. That cannot happen. It could lead the central bank to resort to additional extraordinary stimulative measures. But that is not going to happen either.

You may ask: Why can’t we recover more than 5%-points of the 11%-point gap between current production and what we thought back in 2007 was our trend growth destiny? If a low-pressure economy can reduce potential, why won’t a high-pressure economy increase potential? The key is easily recover. Easily. When a lack of markets or a lack of financing keeps investments that had obvious payoffs from being made, the costs are large. When a boom encourages investments to be made that look profitable only as long as the boom and the exuberance that accompanies it lasts, the long-run benefits are smaller. We as a country did benefit from MCI-WorldCom’s investments in the fiber-optic backbone in 1998-2000. But we did not benefit by nearly as much as MCI-WorldCom was calculating in its irrational exuberance bordering on fraud.

I would love to be wrong. I would love to discover that a high-pressure economy with spending more than halfway back to the pre-2008 trend would be consistent with relatively-stable inflation and with rapid-enough growth of economic potential to quickly catch us back up to that trend. But I don’t expect that that would be the case.

Must-read: Ryan Cooper: “Who’s Afraid of John Maynard Keynes?”

Posted on by Brad DeLong

Must-Read: I think the very-sharp Ryan Cooper has gotten this mostly wrong. The two questions are (a) how much higher could expansionary fiscal and cooperative monetary policy permanently push annual GDP up above its current trend without triggering massive inflation, and (b) how large would the expansionary policies have to be to push the economy up that far? My guesses are 5% to (a)–that we could permanently raise annual GDP $800B relative to our current trajectory without triggering an upward spiral in inflation–and that we would need $300B more of annual government spending to get us there:

Ryan Cooper: Who’s Afraid of John Maynard Keynes?: “Does the economy have room to grow?…

…Could we create many more jobs and wealth if we really tried, or have we reached the limits of what we can produce? This… is at the heart of a recent dispute among academic economists… nominally centered on Bernie Sanders’ economic plan, but also illustrates a major fault line in the practice of theoretical economics today…. [Gerald] Friedman… assumed a model in which Sanders’ huge stimulus would push the economy up to full capacity (meaning full employment and maximum output), after which it would stay permanently at a higher level…. However, the key assumption behind the mainstream model is that an economy always tends towards full employment…. [But] even by conservative assumptions we are still something like $500 billion under total economic capacity, productivity has been consistently very weak, and there is absolutely nothing on the horizon that looks like it will return us to the level of employment we had in 2007, let alone 1999…. What’s more, a Friedman-style model in which a stimulus delivered to a depressed economy returns it to full capacity, after which it stays there, is not ridiculous…