Rethinking Productivity Growth: Fresh at Project Syndicate: Today, the world’s population is, on average, about 20 times richer than it was during the long Agrarian Age. Between 7000 BC and 1500 BC, resources were scarce, technological progress was slow, and Malthusian pressures kept almost all human populations at a near-subsistence level, with per capita daily income of less than $1.50 in today’s terms. In 2017, only around 7% of the world’s population is that poor. Read MOAR at Project Syndicate
Hoisted from the Archives: The Box That Changed the World (July 25, 2006): It is 40 feet long, 8.5 or 9.5 feet high, and eight feet wide.
It carries up to 29 tons in its 2,000 cubic feet of recommended available space – goods worth roughly $500,000 (or more) when sold at retail.
It, and what it carries, can be transported in a month anywhere in the world where there are suitable harbors, railways, locomotives, flatcars, truck tractors, diesel fuel, and roads.
It is the modern cargo container, and it is able to move non-fragile, non-perishable goods from any modern factory with a loading dock to any modern warehouse anywhere in the world for about 1% of retail value.
Indeed, it can be transported for a marginal cost of perhaps $5,000 – less than the price of a first-class airplane ticket, as Marc Levinson, author of the excellent The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger, puts it.
All of this has happened since 1960 or so. Back then, the costs of international trans-ocean shipment for most commodities could easily amount to between 10% and 20% of retail value. The cargo container has changed everything.
When my family bought a German-made washing machine from a warehouse store in San Leandro, California, more of its cost was absorbed in the ten minutes the saleswoman spent telling us about it than in the entire journey from the factory in Schorndorf, Germany, to the loading dock in San Leandro, or in forklifting it from the loading
dock to its place in the serried ranks of washing machines which filled that corner of the warehouse. In the end, it cost to us of getting our washing machine to our front door was about eight times the cost of the machine’s voyage from the German factory to the warehouse where we purchased it.
The world is certainly not “flat,” as the New York Times columnist Thomas Friedman believes. But, in an economic sense, it is extremely small for non-perishable, non-fragile goods. Every modern factory with outgoing volume large enough for container traffic and a suitable loading dock is next door to every modern warehouse with similar features.
Yet it is not the whole world that is so small, but only that part of it that is attached to the global container-handling network. Areas that lack the necessary infrastructure are still far away from the global trading system that carries high-end German manufactured washing machines from Westphalian factories to California warehouses for just a penny a pound.
For example, if your electricity is unreliable, so that you can’t count on being able to pump the diesel into the truck tractor, you are not attached to the network. If the volume of your production is too small to fill 2,000 cubic feet of space headed for a single country, you are not attached to the network.
Likewise, if the money to fix your roads was embezzled, so that nobody wants to risk their tractors on them, you are not attached to the network. If your courts function so badly that few outsiders are confident that what you say is theirs really is theirs, you are not attached to the network. If nobody has yet noticed what your workers can produce, you are not attached to the network. If your entrepreneurs cannot build organizations at container-scale without attracting politically well-connected extortionists, you are not attached to the network.
For any poor segment of the world economy, getting attached to the global container network is an immense opportunity. But it is an opportunity that requires that everything – infrastructure, scale, public administration, governance, and foreign knowledge of your production capabilities – work just right. And if you have not first built up the social networks that enable your workers and their bosses to know what kinds of manufactured goods would generate high demand in the rich post-industrial core of the world economy, it doesn’t matter even if you are attached to the global container network.
Many have written about how telecommunications technology is bringing about the “death of distance.” Indeed, nowadays, you can talk to anybody, anywhere. But it is the cargo container that appears to have brought about a more effective and – so far – more significant “death of distance.” For, in a commercial sense, at least, the goods we ship across oceans still far outweigh the words we chatter around the world.
Project Syndicate: Trade Deals and Alternative Facts: BERKELEY – In a long recent Vox essay outlining my thinking about US President Donald Trump’s emerging trade policy, I pointed out that a “bad” trade deal such as the North American Free Trade Agreement is responsible for only a vanishingly small fraction of lost US manufacturing jobs over the past 30 years. Just 0.1 percentage points of the 21.4 percentage-point decline in the employment share of manufacturing during this period is attributable to NAFTA, enacted in December 1993.
A half-century ago, the US economy supplied an abundance of manufacturing jobs to a workforce that was well equipped to fill them. Those opportunities have dried up. This is a significant problem: a BIGLY problem. But anyone who claims that the collapse of US manufacturing employment resulted from “bad” trade deals like NAFTA is playing the fool. Read MOAR at Project Syndicate
The biggest weasel-phrase–the biggest phrase that is not part of an argument, but rather a placeholder for the fact that I strongly believe that an argument here is needed but have not (yet) thought (my position on) it through (to my satisfaction)–is “proper nurturing of communities of engineering practice”.
Going through the big Vox piece <http://www.vox.com/the-big-idea/2017/1/24/14363148/trade-deals-nafta-wto-china-job-loss-trump> I find it in four places:
- “…firms embedded in our communities of engineering practice…”
- “…healthy communities of engineering practice…”
- “…burturing communities of engineering expertise…”
- “…the global treasures that are our communities of engineering practice…”
No. I am not going to deliver today. All I am going to do is point you to six things that you really should read on these issues:
- Sue Helper: Supply Chains and Equitable Growth
- Michael L. Dertouzos, Robert M. Solow, and Richard K. Lester (1989): Made in America: Regaining the Productive Edge (Cambridge: MIT Press: 0262041006) <http://amzn.to/2kH6JSv>
- Stephen S. Cohen and John Zysman (1987): Manufacturing Matters: The Myth of the Post-Industrial Economy (New York: Basic Books) <http://amzn.to/2kGX65V>
- Vaclav Smil (2013): Made in the USA: The Rise and Retreat of American Manufacturing (Cambridge: MIT Press: 0262528355) <http://amzn.to/2kg52u6>
- Chad Stone: No One Wins Trade Wars: Trump’s ‘America first’ trade policy will be bad for working Americans…
- Philip Delves Broughton: America business is the master, not victim, of globalisation: If businesses saw more value in investing in US workers, they could have done so…
Q: Has protectionism ever worked? Are there examples of countries throughout history that have embraced protectionist policies, and did that yield positive results? And what do these examples, if there are any, tell us about the economic plans of Mr. Trump?
A: If I were you, I would go grab Robert Allen’s Global Economic History: A Very Short Introduction <http://amzn.to/2kgt8pj>, and immediately read chapters 8 and 9.
First, chapter 8: Briefly, tariffs–but on the manufacturing goods of the first and early second industrial revolution where learning-by-doing and developing effective communities of engineering practice–is a piece but only a piece of the standard nineteenth century industrialization package: subsidizing railways, schools, banks, and (the right kind of tariffs). They don’t work without the other three components. They do work for a while–for the mid- and late-nineteenth centuries and into the twentieth, with diminishing effectiveness–if the entire package is successfully implemented.
(Note that the British dominions–Canada, Australia, New Zealand–do fine without the tariffs. They become rich in the late nineteenth century. But in the 20th they do fall behind to some degree because they are not strong in the industries where twentieth century productivity growth is initially most rapid. And note that for countries that already have dominant positions in leading edge high tech communities of engineering practice, tariffs are simply a drag.)
Second, chapter 9: After the standard nineteenth-century package is played out, successful rapid development requires a “big push” and a successfully implemented big push: Japan, South Korea, Taiwan, and now China. (The Soviet Union is an interesting case–I am not sure Allen has gotten it right.) And a great many other countries have tried for “big pushes”, and failed. Tariffs on the goods in which your economy is going to have a comparative advantage in a generation are useful, but only those tariffs…
Trump’s plans–whatever they may be, and nobody knows what they are, not even, or perhaps especially, not him–have nothing to do with past successful episodes of the right kind of tariffs as part of a pro-growth or pro-opportunity industrial policy mix.
Professor of Economics J. Bradford DeLong
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In many businesses, the explicit or implicit human-resources policy is LHFF–last hired, first fired. That means that workers who jump from a job in one firm to a job in another purchase a greater beta with respect to the business cycle along with the higher wages, better working conditions, and more interesting responsibilities that would lead them to jump. This seems the most likely explanation for the fact that more than one-fifth of the hiring we would expect to get at the current aggregate level of unemployment relative to job openings is not there. After the catastrophic downturn of 2008-9 and the subsequent half a decade noncovery, workers’ assessments of the risks taken on in jumping firms and thus going to the back of the tenure-in-job queue are likely to be greatly elevated. Everybody knows people who lost their jobs in 2008-9 and then had the devil’s own time finding another one.
How big a drag is this on productivity growth, if it is indeed the case that diminished risk tolerance is thus affecting not only physical investment but human capital investment in diminishing workers’ willingness to “invest” in a new (and better) employer-employee match? Does this have implications for where full employment is? My first thoughts are:
- If workers are indeed stickier, it becomes more expensive for firms to expand employment by raising wages–you have to raise everyone’s wages and yet you attract fewer good workers from other firms. This makes the Phillips Curve even flatter in a boom, and makes inflation less of a threat, meaning we are further from full employment than we thought.
Productivity growth is slower, which means that the NAIRU is higher in any model in which workers have labor market tightness-dependent expectations as to the warranted rate of real wage increase and the NAIRU equilibrates at a level at which that warranted rate is sustainable.
How big are these factors? I don’t even have a back-of-the-envelope guess as to whether they are important, or how important they are.
Nick Bunker: Labor Market Tightness and the Decline in Job Switching: “There’s less hiring for each job opening…
…Peter Diamond… and Ayşegül Şahin…. Hires of those out of the labor force are in line with previous recoveries, and hires of those who were unemployed are slightly lower, but… hires of… already employed workers has been quite weak compared to the tightness of the labor market. Such “job switching” has been trending downward for all age groups since 2000…. Something is amiss with either the willingness of workers to switch jobs or employers’ interest in hiring already employed workers…
Peter A. Diamond and Ayşegül Şahin: Disaggregating the Matching Function: :Decompositions of aggregate hires show how the hiring process differs across different groups of workers and of firms…
…Decompositions include employment status in the previous month, age, gender and education. Another separates hiring between part-time and full-time jobs, which show different patterns in the current recovery. Shift-share analyses are done based on industry, firm size and occupation to show what part of the residual of the aggregate hiring function can be explained by the composition of vacancies…
The worst possible “structural reform” program is one that moves a worker from a low productivity job into unemployment, where they then lose their weak tie social network that allows them to get new jobs. They then get used to sitting in their sisters’ basement splaying video games and surfing the internet all day. “Structural reforms” are extremely dangerous unless you have a high-pressure economy to pull resources out of low productivity into high productivity sectors.
The view in the high councils of Europe is that, when there is a high-pressure economy, politicians will not press for “structural reform”: there is no obvious need, and so why rock the boat? Politicians kick every can they can down the road, and you can only try “structural reform” when unemployment is high–and thus when it is likely to be ineffective if not destructive.
I don’t think this view is correct. But this is the view–in Europe. This creates a very difficult political economy puzzle for Europe. I really do not have any sort of solution.
Quite possibly we should simply drop “structural reform”. Most of the time, “structural reform” means policies that reduce the size of unproductive sectors and in the process create significant numbers of substantial losers. That is why people call it “structural reform” rather than some other, more properly descriptive phase.
We can (almost) all get behind “reduce product market monopoly power”. We can (almost) all get behind “reduce NIMBYist constraints on land development”–provided, that is, we can agree which restraints are and which are not NIMBYist. Calling those part of the suspicious portmanteau of “structural reform” does not materially aid their cause. We should drop the phrase “structural reform” in the interest of clarity about just what we are planning to do.
Comment of the Day: Sherman Robinson: On the Economics of BREXIT: “I largely agree with Simon Wren-Lewis’s comments, and with the quote from Maurice Obstfeld…
…The trade-productivity links they discuss, as Wren-Lewis notes, “all make common sense”.
However, I think it is very important to sort out the empirical relevance of the different causal mechanisms—it is impossible to consider policy choices without doing so. I see four mechanisms at work:
- Ricardian movement of factors to exploit comparative advantage from opening to international trade. Clearly true, but forty years of work with computable general equilibrium (CGE) models, both single-country and global, indicates that pure Ricardian effects on productivity are very small. In conferences, we often cite a “theorem” due to Arnold Harberger: “triangles” are smaller than rectangles”.
“Winds of competition” or “challenge/response” models. There is a large literature on such models, all arguing that opening up markets to competition forces firms to move to the production frontier and/or induces investment in technological change. These effects appear to be significant.
Explicit backward linkages between exporting and “learning better techniques”. These are also significant effects in particular cases, but would seem to be limited in coverage and probably not large enough to have much effect at the national/global levels.
Fragmentation of production processes that allows strong specialization and regional diversification of production of intermediate inputs. There are many examples of these value chains across economic activities: agriculture, manufacturing, and services. They allow producers to achieve “Smithian” gains in productivity through fine specialization. They are seen by later stages in the value chain as lowering input costs, which are not measured as, say, a TFP gain by the later-stage producer, but is very significant. I think that these Smithian productivity gains are very large and cover a wide range of economic activity for countries that have taken part in value chains.
These four mechanisms are not mutually exclusive—all are operating and are probably very complementary. For a nice discussion of the empirical importance of fragmentation of value chains, see the new book by Ricard Baldwin: The Great Convergence. He argues, and I agree, that this fragmentation has been a major driver of trade-linked productivity growth.
On Brexit. The UK is embedded in the EU and most of its trade involves imports and exports of intermediate inputs in complex value chains, so mechanism (4) is very important. Policies that interrupt value chains will be very damaging. For example, if the UK leaves the EU customs union, then the EU will have to impose rules of origin conditions that will impede trade. Firms may well prefer to move operations to the EU in order to keep the value chains operating smoothly. There are lots of other issues concerning how to support and foster value chains, beyond the scope of a short comment.
Ah. I see that Branko Milanovic has found the first draft of my opening lecture for Econ 115 next semester… https://twitter.com/BrankoMilan/status/804205835543019520 https://t.co/lK82RVQudb
I think whether it is more useful to do the tell of 20th century economic history as the “short” 1914-1989 (as Hobsbswm does) or the “long” 1870-2012 (as I want to) rests on two analytical judgments:
The first judgment that leads you to the “short” century is the judgment that Kuznetsian modern economic growth was implicit in the steam engine, the spinning Jenny, and the iron horse. The belief is that, after that breakthrough, more than two centuries of 1.5%/year frontier-economy TFP growth plus the full demographic transition were largely baked in the cake.
By contrast, the judgment that leads to the “long” century is the judgment that there were three big game-changers. The first was the British Industrial Revolution jump from 0.07%/year to 0.35%/year global TFP growth. The second was the subsequent jump to 1.7%/year. The third was that the world became rich enough and literate enough and feminist enough for the demographic transition to take hold. A world with TFP growth ebbing or even continuing at 0.35%/year is still a semi-Malthusian world. It is a world in which the demographic transition would have had a hard time taking hold. And that world would be a very different world than ours.
That world is very close to ours in some multiverse-timelines sense. As of 1870 and even as of 1919 the Malthusian Devil was still very visible in the mind’s eye. Recall J.S. Mill writing in 1871 in his Principles of Political Economy about the British Industrial Revolution:
Hitherto it is questionable if all the mechanical inventions yet made have lightened the day’s toil of any human being. They have enabled a greater population to live the same life of drudgery and imprisonment, and an increased number of manufacturers and others to make fortunes. They have increased the comforts of the middle classes. But they have not yet begun to effect those great changes in human destiny, which it is in their nature and in their futurity to accomplish. Only when, in addition to just institutions, the increase of mankind shall be under the deliberate guidance of judicious foresight, can the conquests made from the powers of nature by the intellect and energy of scientific discoverers become the common property of the species, and the means of improving and elevating the universal lot…
You can say that Mill wrote that in 1848 and–carelessly–did not revise it for even the 7th edition of 1870. But he did not revise it. And Mill’s Principles of Political Economy was still the Oxford textbook in 1919.
Recall John Maynard Keynes writing in 1919 in The Economic Consequences of the Peace:
After 1870 there was developed on a large scale an unprecedented situation, and the economic condition of Europe became during the next fifty years unstable and peculiar…. In this economic Eldorado, in this economic Utopia, as the earlier economists would have deemed it, most of us were brought up. That happy age [had] lost sight of a view of the world which filled with deep-seated melancholy the founders of our Political Economy. Before the eighteenth century mankind entertained no false hopes. To lay the illusions which grew popular at that age’s latter end, Malthus disclosed a Devil. For half a century all serious economical writings held that Devil in clear prospect. For the next half century he was chained up and out of sight. Now perhaps we have loosed him again…
The second judgment that leads you to the short century is the judgment that the big story is that of Leninism as the century’s tragic hero: confidently dreaming of utopia, confidently albeit brutally attempting to build utopia, exhausting itself saving the world from the monstrous dystopia of the Nazi abattoir, and then expiring in “a vast bureaucratic incompetence”. I agree that if you are going to do that tell, 1914-1989 is the 20th century that tells it. (And if you know ex ante that 1914-1989 is the 20th century, then that is the natural story that suggests itself.) But I believe that if you start thinking that the 20th century is 1900-2000, the natural story–the important story–is the more complex one that I want to tell. Then the natural thing to do is not to shorten the century but to extend it, and to extend it to 1870-2012.
Why did Hobsbawm write about the short century in his Age of Extremes? Three reasons:
- He was writing in the early 1990s.
- He had already written Age of Empire 1870-1914.
- There was no way in Heaven, in Hell, or here on God’s Green Earth that Eric Hobsbawm was going to write a triumphalist Fukuyamaesque “end of history” book about the triumph of liberal capitalist democracy. He has chosen his side in Germany in the 1920s. And a British gentleman did not turn his coat and change his side under any circumstances–even if it meant one had to spend a lifetime in bed with and making excuses for Josef Vissarionovich…
Eric Hobsbawm (1987): The Age of Empire http://amzn.to/2gYsn2A
Eric Hobsbawm (1995): The Age of Extremes http://amzn.to/2fOZYqt
John Maynard Keynes (1919): The Economic Consequences of the Peace http://amzn.to/2gJE24B
John Stuart Mill (1871): Principles of Political Economy http://amzn.to/2gLSJSw