Tag: Economic Growth

Must-read: Justin Fox: “About That U.S. Manufacturing Renaissance…”

Posted on by Brad DeLong

Must-Read: Justin Fox: About That U.S. Manufacturing Renaissance…: “After a brutal period of downsizing and reorganizing…

…the U.S. manufacturing sector has become the most competitive in the world. Output per worker is higher than in any other major manufacturing country. Labor costs per unit of output are lower than in Brazil, Canada and Germany, and only slightly higher than in China. What’s more, writes Gregory Daco of Oxford Economics in the new report from which the above facts are taken, ‘the U.S. is ‘gifted’ with a stable regulatory framework, a flexible labor market, low energy costs and access to a large domestic market.’

So that’s great! Time for a manufacturing renaissance, right?… But… there are few signs of it actually happening yet. Yes, there are the almost 900,000 manufacturing jobs added in the U.S. since early 2010. But it’s important to see that for what it is–a modest rebound after a spectacular collapse…. Why isn’t reshoring taking off? Daco, of Oxford Economics, stressed that such shifts don’t happen overnight. ‘It takes quite a bit of time for a company to modify its supply chain,’ he said in a phone conversation. He also noted that ‘nearshoring’ to Mexico, where unit labor costs are still substantially lower than in the U.S., remains popular….

The countries of South and Southeast Asia… have labor forces that run into the hundreds of millions of workers, so the gradual shift of certain industries to other Asian low-cost countries is likely to continue…. Clothing- and furniture-making, for example, are unlikely to return to the U.S. in a big way. But in capital-goods manufacturing, labor costs matter less than technology and the existence of a local ecosystem of suppliers, consultants and skilled workers that can take a while to put together. In their rush to offshore, then, U.S. manufacturers may have permanently destroyed their ability to make certain products here. As Gary P. Pisano and Willy C. Shih wrote in a 2009 Harvard Business Review article:

In making their decisions to outsource, executives were heeding the advice du jour of business gurus and Wall Street: Focus on your core competencies, off-load your low-value-added activities, and redeploy the savings to innovation, the true source of your competitive advantage. But in reality, the outsourcing has not stopped with low-value tasks like simple assembly or circuit-board stuffing. Sophisticated engineering and manufacturing capabilities that underpin innovation in a wide range of products have been rapidly leaving too. As a result, the U.S. has lost or is in the process of losing the knowledge, skilled people, and supplier infrastructure needed to manufacture many of the cutting-edge products it invented.

This loss of capability could be what we’re seeing evidence of in the trade data. If so, a true U.S. manufacturing renaissance may be a long time coming.

Must-read: Ben Casselman: “The Next Amazon (Or Apple, Or GE) Is Probably Failing Right Now”

Posted on by Brad DeLong

Must-Read: Ben Casselman: The Next Amazon (Or Apple, Or GE) Is Probably Failing Right Now: “Amazon’s success was almost completely unpredictable, at least from the outside…

Policymakers concerned with entrepreneurship at both the local and national level have long favored what economist Robert Litan dubbed a ‘shots on goal’ approach: Try to encourage as many startups as possible. Most of those companies will fail. Of the survivors, most will never grow into major economic engines. But statistically, a few will turn out to be the next Amazon, with huge rewards for their local economies…. Scott Stern and Jorge Guzman call that… into question. Startups as a whole may be declining, they find, but the kind of entrepreneurship that economists care the most about–fast-growing, innovative companies like Amazon–hasn’t shown the same downward trend… But all is not well…. The U.S. may have as many would-be Bezoses as ever, but it’s getting fewer Amazons…. ‘It’s a scaling problem,’ Stern said. ‘The machine that turned those kinds of companies into that kind of economic engine seems to be less robust today.’…

Ambitious startups share certain qualities. Their names, for example, tend to be shorter and are less likely to include the founder’s name. They tend to be set up as corporations… often incorporated in Delaware… often apply for patents early…. Stern and Guzman calculate what they call an Entrepreneurial Quality Index…. When it was founded, Amazon would have scored in the top 1 percent of all new companies on the index….

Stern and Guzman used business-registration data from 15 states to calculate both quality and success indexes for different metro areas. Some, like Silicon Valley, showed both high rates of entrepreneurship and successful growth. Others, like Miami, have seen a steep drop in the number of high-potential startups in recent years. Perhaps not coincidentally, cities with high rates of startup activity have also experienced faster economic growth over the past decade…

Concrete Economics @ SXSW!: Speaking 12:30 PM Meeting 10AB Level 3 :: Signing 1:00 PM Bookstore Level 3

Posted on by Brad DeLong

I guess that is it: Concrete Economics @ SXSW!: Speaking 12:30 PM Meeting 10AB Level 3 :: Signing 1:00 PM Bookstore Level 3:

Stephen S. Cohen, J. Bradford DeLong: Concrete Economics: The Hamilton Approach to Economic Growth and Policy] (Allston, MA: Harvard Business Review Press:1422189813) http://amzn.to/22ds5TK

The benefits of free trade: Time to fly my neoliberal freak flag high!

Posted on by Brad DeLong

I think Paul Krugman is wrong today on international trade. For we find him in “plague on both your houses” mode. On the one hand:

Paul Krugman: Trade and Tribulation and A Protectionist Moment?: “Protectionists almost always exaggerate the adverse effects of trade liberalization…

…Globalization is only one of several factors behind rising income inequality, and trade agreements are, in turn, only one factor in globalization. Trade deficits have been an important cause of the decline in U.S. manufacturing employment since 2000, but that decline began much earlier. And even our trade deficits are mainly a result of factors other than trade policy, like a strong dollar buoyed by global capital looking for a safe haven.

And yes, Mr. Sanders is demagoguing the issue…. If Sanders were to make it to the White House, he would find it very hard to do anything much about globalization…. The moment he looked into actually tearing up existing trade agreements the diplomatic, foreign-policy costs would be overwhelmingly obvious. In this, as in many other things, Sanders currently benefits from the luxury of irresponsibility….

But on the other hand:

That said… the elite case for ever-freer trade, the one that the public hears, is largely a scam…. [The] claims [are] that trade is an engine of job creation, that trade agreements will have big payoffs in terms of economic growth and that they are good for everyone. Yet… the models… used by real experts say… agreements that lead to more trade neither create nor destroy jobs… make countries more efficient and richer, but that the numbers aren’t huge….

False claims of inevitability, scare tactics (protectionism causes depressions!), vastly exaggerated claims for the benefits of trade liberalization and the costs of protection, hand-waving away the large distributional effects that are what standard models actually predict…. A back-of-the-envelope on the gains from hyperglobalization — only part of which can be attributed to policy — that is less than 5 percent of world GDP over a generation…. Furthermore, 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….

And, Paul summing up:

Why, then, did we ever pursue these agreements?… Foreign policy: Global trade agreements from the 1940s to the 1980s were used to bind democratic nations together during the Cold War, Nafta was used to reward and encourage Mexican reformers, and so on. And anyone ragging on about those past deals, like Mr. Trump or Mr. Sanders, should be asked what, exactly, he proposes doing now.… The most a progressive can responsibly call for, I’d argue, is a standstill on further deals, or at least a presumption that proposed deals are guilty unless proved innocent.

The hard question to deal with here is the Trans-Pacific Partnership…. I consider myself a soft opponent: It’s not the devil’s work, but I really wish President Obama hadn’t gone there…. Politicians should be honest and realistic about trade, rather than taking cheap shots. Striking poses is easy; figuring out what we can and should do is a lot harder. But you know, that’s a would-be president’s job…. [But] he case for more trade agreements—including TPP, which hasn’t happened yet—is very, very weak. And if a progressive makes it to the White House, she should devote no political capital whatsoever to such things.

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: Jan Eberly and Jim Stock: “Spring 2016 BPEA”

Posted on by Brad DeLong

Must-Read: Jan Eberly and Jim Stock: Spring 2016 BPEA: “We have arranged the following program…

…Jesse Bricker [et al.]… on ‘Measuring Income and Wealth at the Top Using Administrative and Survey Data’. David M. Byrne [et al.]… on ‘Does the United States have a Productivity Problem or a Measurement Problem?’. Alberto Cavallo [et al.]… on ‘Learning from Potentially Biased Statistics: Household’s Inflation Perceptions and Expectations in Argentina’. Melissa Kearney… and Phillip Levine… on ‘Income Inequality, Social Mobility, and the Decision to Drop Out of High School’. Deborah Lucas… on ‘Credit Policy as Fiscal Policy’. Raven Molloy [et al]… on ‘Understanding Declining Fluidity in the U.S. Labor Market’…

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: 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.

Must-read: Rob Johnson: “The China Delusion”

Posted on by Brad DeLong

Must-Read: The extremely sharp Rob Johnson is in the camp of those who think that China’s principal short-run problems of problems of macroeconomic management–that investors are not confident that their investments in China will remain profitable–rather than the more-fundamental problems of political economy: the fear by investors that their investments in China are insecure. There’s a return-problems camp. There’s a risk-problems camp. Rob Johnson is in the first:

Rob Johnson: The China Delusion: “China’s transition from an export-led growth strategy to one propelled by domestic consumption…

…is proceeding far less smoothly than hoped. For some people, visions of the wonders of capitalism with Chinese characteristics remain undiminished…. The optimists’ unreality is rivalled by that of supply-siders, who would apply shock therapy to China’s slumping state sector and immediately integrate the country’s underdeveloped capital markets into today’s turbulent global financial system. That is a profoundly dangerous prescription. The power of the market to transform China will not be unleashed in a stagnant economy, where such measures would aggravate deflationary forces and produce a calamity.

The persistent downward pressure on the renminbi reflects a growing fear that Chinese policymakers have no coherent solution to the dilemmas they face. Floating the renminbi, for example, is a dangerous option. After all, with the Chinese economy undergoing wholesale economic transformation, estimating a long-term equilibrium exchange rate that will anchor speculation is virtually impossible, particularly given persistent doubts about data quality, disclosure, and opaque policymaking processes.

But if the current exchange-rate peg to a basket of currencies fails to anchor the renminbi and prevent sharp depreciation, the deflationary consequences for the world economy will be profound. Moreover, they will feed back on the Chinese export sector, thus dampening the stimulative impact of a weakened currency.

The key to stabilising the exchange rate lies in creating a credible development policy. Only then will the pressure on the renminbi, and on China’s foreign-exchange reserves, subside, because investors will see a clear way forward.

Establishing policy credibility will require diminishing the muddled microeconomic incentives of state control and guarantees. It will also require reinvigorating aggregate demand by targeting fiscal policy to support the emerging economic sectors that will underpin the new growth model…

Concrete Economics: The Hamilton Approach to Economic Growth and Policy

Posted on by Brad DeLong
Concrete Economics The Hamilton Approach to Economic Growth and Policy Stephen S Cohen J Bradford DeLong 9781422189818 Amazon com Books

Stephen S. Cohen and J. Bradford DeLong: Concrete Economics: The Hamilton Approach to Economic Growth and Policy: (Allston, MA: Harvard Business Review Press: 1422189813) http://amzn.to/1XxIyPV

Steve Cohen and I have a new book coming out from Harvard Business Review Press on March 1, 2016. A very short book. Easy and quick to read. Easy and quick to read because it tries to make one big and very important point, and avoid being distracted from it:

America’s debate about economic policy goes way wrong whenever it is ruled by ideology.

It doesn’t matter much which ideology—a rigid and ideologized Hamiltonianism would have been (almost) as bad as rigid-Jeffersonianism, an excessive attachment to outmoded industries or to ways of delivering social-insurance that were merely emergency expedients when adopted in the 1930s would be (almost) as bad as the market-worshipping sects of neoliberalism.
Thus we say:

America’s debate about economic policy goes largely right whenever it is ruled by pragmatism.

Successes come whenever the question asked and answered is: What concrete steps can we take, here and now, to make America more prosperous and to share the fruits of growth equitably? Failures come whenever the question asked and answered is: Do these policy proposals conform to the ideas of Adam Smith or Edmund Burke or William Beveridge or even John Maynard Keynes?—let alone those of the Karl Marxes, the Friedrich von Hayeks, and the Ayn Rands.

So I now have a problem. HBR Press would be extremely annoyed if I were to simply dump the book (or large parts of the book) online. But I really do want to do so. I am excited about the big idea. And I want this big idea to get out into the world undistorted.

So how should Steve and I tease this little book of ours?