Monthly Archives: December 2016

Clayton Christensen’s PSST Story (?)

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He wrote,

There are three types of innovations. The first are “empowering” innovations. These transform complicated, costly products that previously had been available only to a few people, into simpler, cheaper products available to many. The Ford Model T was an empowering innovation, as was the Sony transistor radio.
Empowering innovations create jobs for people who build, distribute, sell and service these products.
The second type are “sustaining” innovations. These replace old products with new. The Toyota Prius hybrid is marvelous — yet every time a customer buys a Prius, a Camry is not sold. Sustaining innovations replace yesterday’s products with today’s products. They keep our economy vibrant — and, in dollars, they account for the most innovation. But they have a zero-sum effect on jobs and capital. The third type are “efficiency” innovations. These reduce the cost of making and distributing existing products and services – like Toyota’s just-in-time manufacturing in carmaking and Geico in online insurance underwriting. Efficiency innovations almost always reduce the net number of jobs in an industry, allow the same amount of work (or more) to get done using fewer people.

Pointer from James Pethokoukis.

Christensen says that you need a balance between “empowering innovations” and “efficiency innovations.” We have been getting mostly the latter, and that results in a net loss of jobs.

This sounds like a PSST story. However, I think that for the story to work, you need heterogeneity of labor. If you think of “labor” as homogeneous, then when workers in the “efficiency innovation” sector (say, manufacturing) are let go, there is some place where they could be hired (say, health care aides for the elderly). To get unemployment, you have to postulate that the adjustment takes a very long time, because labor is heterogeneous in some way. I think that’s a reasonable way to go.

Labor heterogeneity matters. The challenge is for entrepreneurs to find something profitable to do with the types of workers released by the efficiency innovations.

If government is going to fix the problem, it cannot simply throw some generic stimulus at it. The government has to figure out something that will employ the types of workers released by the efficiency innovations. To do this in a sustainable way, the government has to solve the problem better than entrepreneurs. Of course, that is unlikely.

Protectionism Equals Charity

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Russ Roberts writes,

the only way to get him his job back was to keep people from buying cars they preferred to buy elsewhere and force up the prices of those cars and have him share in that. It’s a form of charity, you just don’t see it. That’s the problem with protectionism as a way of helping those out of work workers. It’s a form of charity. And it destroys the expansion of opportunities that trade and innovation create.

Pointer from Mark Thoma. Read the entire piece.

The one element that I think that Roberts could have added is what I might call “Protectionism for me but not for thee.” Many white-collar professionals have protection in the form of occupational licensing. That’s a lot of charity for people who think of themselves as elite.

Manufacturing Jobs in Global Perspective

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James Pethokoukis puts up a chart showing that over the past 25 years several other countries have lost manufacturing jobs at a faster rate than in the U.S. And of course, manufacturing output has increased.

I should point out that the statistics on manufacturing jobs include white-collar workers, which have been increasing as a share of manufacturing jobs. The percentage of the labor force doing manufacturing production work has shrunk even more.

Manufacturing is in a situation that is comparable to agriculture, where a tiny share of the work force produces a tremendous amount of output.

Assortative Mating has not increased?

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So say Rania Gihleb and Kevin Lang.

Some economists have argued that assortative mating between men and women has increased over the last several decades, thereby contributing to increased family income inequality. Sociologists have argued that educational homogamy has increased. We clarify the relation between the two and, using both the Current Population Surveys and the decennial Censuses/American Community Survey, show that neither is correct. The former is based on the use of inappropriate statistical techniques. Both are sensitive to how educational categories are chosen. We also find no evidence that the correlation between spouses’ potential earnings has changed dramatically.

I have not read the paper. It certainly would throw cold water on one of the four forces.

Other Calls to Disperse the Federal Government

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David French writes,

the basic idea — relocating agencies to struggling heartland cities — is sound. Memphis, for example, could use 20,000 new white-collar jobs. And civil servants would benefit from the lower cost of living and — more importantly — the experience of life outside the DC bubble.

…Perhaps it’s time for a broader discussion.

I also think that the Federal government could promote dispersal of private sector jobs through a program of subsidizing companies that build multi-worker facilities in depressed areas.

Can Men Be Socially Reconstructed?

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Betsey A. Stevenson writes,

Women’s new role clashed with social norms around femininity, but they were able to merge the two. (Remember “I can bring home the bacon, fry it up in the pan?”) By contrast, men are being asked to embrace traditionally feminine roles at work and at home, including helping with the cooking and laundry.

Pointer from Greg Mankiw.

Suppose that in terms of the five-factor personality model, men tend to score lower than women on agreeableness.
When women were moving from the home to the labor force, they moved into office work, where agreeableness was not a drawback. In fact, it is often a plus.

But if you want men to move from a factory to becoming home health care aides, then you are asking them to take on jobs that require a high level of agreeableness. It is not such an easy transition.

Martin Gurri on the post-election Media

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He writes,

Far more consequential, in terms of failed objectivity, is the journalistic tone of moral contempt for politicians, officeholders, and the democratic process in general. News is a rhetorical style, a form of persuasion: and the rhetoric of political coverage pours out toxic levels of cynicism and distrust. People in politics are assumed to be liars and cheats. As long ago as 1992, when Thomas Patterson asked “several of the nation’s top journalists” why they chose to portray the presidential candidates as liars, the usual response was “Because they are liars.” Candidates are depicted as making promises they never intend to keep. They say things that are incredibly ignorant or insensitive – often self-detonating by means of the dreaded “gaffe.” Elections are decided by money rather than a gullible electorate, in any case. Elected officials, the wise consumer of news must conclude, are pawns to powerful but unaccountable interests.

Read the whole post. I do not entirely agree. I think that the press in dealing with President Obama was quite far from “toxic levels of cynicism and distrust.” However, the Obama case may be an anomaly.

Most of his essay is on the “fake news” issue. He adopts the view that social media works to correct and filter out fake news. I am not so sure. I think that whether or not fake news has an effect gets caught up in the larger issue of political cognition, and I am not confident that anyone understands that very well.

The WaPo’s Chris Cillizza writes,

In the general election, 77 percent of the coverage of Trump was negative as compared with 64 percent of the Clinton coverage. (For the entire campaign — including the primary — Clinton had the more negative coverage — 62 percent to 56 percent.)

He cites a Harvard study. But how this coverage affected political cognition is not clear. For example, suppose that the public’s (unstated) baseline assumption is that the Republican candidate will receive 60 percent negative coverage and the Democratic candidate will receive 40 percent negative coverage. Relative to those hypothetical expectations, the coverage of Mrs. Clinton may have actually come across as the worst of the two candidates.

Note that the Harvard study looks at positive and negative content of stories, not at whether the stories were biased. As Cillizza points out, if Mr. Trump was genuinely bad, then negative coverage by the Harvard study definition does not indicate bias. Instead, it might indicate the antagonism toward politicians that Martin Gurri discusses.

Oliver Hart on Vertical Integration

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He says,

if I’m Firm A, I’m acquiring control over all the non-human assets that Firm B had, which might be machines, land, buildings, but also less physical things like patents, copyrights, existing contracts that Firm B had with other firms. The name of Firm B, all sorts of things like that.

To the extent that the initial contract was incomplete, and will always be incomplete, whatever contract we write will be incomplete. Having, owning those things now means that I can get to decide how they are used to the extent that the contract was silent about that. Whereas previously, it was the owner, Firm B, that wasn’t me, who had those rights. That’s a real change. That, we would argue, is one of the key reasons that Firm A is acquiring Firm B, to get those residual control rights.

Pointer from Mark Thoma.

The whole interview is interesting. Hart shared the 2016 Nobel Prize. Of the last 10 years of Nobel Prizes, I could make a case that 6 have been awarded for the study of institutional arrangements.

2007 Hurwicz, Maskin, and Meyerson: mechanism design
2008 Krugman: agglomeration
2009 Ostrom, Williamson: governance
2012 Roth, Shapley: mechanism design
2014 Tirole: industrial organization and regulation
2016 Hart and Holmstrom

That is a notable trend, and I think it is a good one. When you focus on institutional arrangements, there is more of a tendency to say that the economist’s first challenge is to understand how things operate in the real world. A lot of other areas of focus tend to find the economist creating a hammer (a particular mathematical technique, or a model that is fun to work with) and looking around for nails in the real world that may or may not exist.

Did SarbOx concentrate wealth?

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Marc Andreessen points out,

Microsoft went public in 1986, valued at $300m. It went to $300bn. Public shareholders got a thousand-time rise. When Google went public in 2004, it had about a $30bn valuation and went to about $300bn. Investors got about a 10-time rise. Facebook went public at about $100bn. It’s now $200bn, so public investors have had a two-time rise.

Pointer from Tyler Cowen.

Why is more value being captured in the pre-public phase than in the post-public phase? My guess is that Sarbanes-Oxley and the hostile environment to public corporations in general probably accounts for some of it. The consequence is that ordinary Americans capture a smaller share of wealth creation from growing companies than they used to.

The Gentrification Phenomenon

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Derek Hyra writes,

Gentrification, in some places, is associated with political and cultural displacement. Some gentrifying areas once dominated by low-income minorities demonstrate an association between the movement of upper-income people and a loss of minority political representation. Remember, it was presumed upper-income people moving to low-income neighborhoods would bolster civic society, and it appears, in some circumstances, it has. Often, however, newcomers take over political institutions and advocate for amenities and services that fit their definition of community improvement. This process of political displacement can be linked with cultural displacement, a change in the neighborhood norms, preferences, and service amenities.

You don’t think that those poor urban residents appreciate the new bike lanes?

Thanks to Timothy Taylor–I took a small excerpt from his interesting post. Read the whole thing.

As you know, I think of gentrification as driven by the shift toward the New Commanding Heights of health care and higher education. These sectors create jobs for the affluent in urban areas.