Human Capital and Chainsaw Arms

Noah Smith offers this:

So how should we think about human capital? Here’s an analogy that I think works well. You agree that a chainsaw is capital, right? OK, now imagine a chainsaw that you graft permanently onto someone’s arm, like Bruce Campbell in the movie Evil Dead 2. It’s so thoroughly grafted on that you can’t remove it without making it permanently useless.

This chainsaw is very very much like human capital.

My prediction is that this metaphor will become increasingly apt, as implants, drugs, and genetic enhancements become a larger share of human capital. Today’s mouse capital is a preview.

New Commanding Heights Watch

From the NYT.

Ms. Waugh, like many other hard-working and often overlooked Americans, has secured a spot in a profoundly transformed middle class. While the group continues to include large numbers of people sitting at desks, far fewer middle-income workers of the 21st century are donning overalls. Instead, reflecting the biggest change in recent years, millions more are in scrubs.

Pointer from Tyler Cowen. The New Commanding Heights are health care and education. As they increase employment at the margin while manufacturing production work decreases at the margin, male participation in the labor force continues to decline. Note, however, that female labor force participation has been trending down in this century, also.

Four Forces Watch: Larry and the Robots

Mike Konczal writes,

There’s been a small, but influential, hysteria surrounding the idea is that a huge wave of automation, technology and skills have lead to a massive structural change in the economy since 2010.

He goes on to say that Larry Summers has demolished this notion, by pointing out that we have not seen rapid productivity growth over this period.

This looks suspiciously like a straw man to me. I am about as big a believer as there is in the significance of structural change, but I do not see a “huge wave of automation” that has taken place over the past five years.

My thoughts:

1. What I do see are the four forces: the New Commanding Heights (demand for physical goods tapering off while demand for health care and education rises); demographic dispersion–what Charles Murray calls Coming Apart; factor-price equalization (American workers confronting stiffer foreign competition); and Moore’s Law (improvements in computers and communication).

2. These four forces have been operating for decades, and there was nothing peculiar about the 2010-2014 period. The New Commanding Heights force has been operating for more than 50 years. The demographic dispersion force got started about 50 years ago, but for the first 25 years or so the impact was small. Instead, the most notable demographic change from 1965 to 1990 was the increase in female labor force participation. Factor-price equalization had to await liberalization of the economies of China and India, which did not really get started until the 1980s and even then took a while to have an impact. Moore’s Law was articulated in the 1960s, but as recently as the late 1980s Robert Solow’s quip that we see computers everywhere but in the productivity statistics seemed apt.

3. The four forces cause the economy to move in the direction depicted in Neal Stephenson’s The Diamond Age. In that novel, we see Thetes, who work very little and live inexpensively (think of a consumption basket dominated by big-screen TVs). And we see Vickies, who work creatively and hard in order to consume unnecessary luxury services (think of high-tuition education, high-end precautionary medical care, and exotic vacations).

4. Larry Summers looks at the last twenty years and sees a “secular stagnation” in aggregate demand, interrupted by the dotcom bubble and then the housing bubble. Instead, I look at the last 15 years and see The Diamond Age starting to become reality. The housing bubble gave Thetes the impression of being wealthier than they really were, and when it popped they had to adjust to reality. (Although one could argue that, illusions aside, they did not lose home equity, because they did not have any in the first place.) The process of adjusting to reality can take time–look at Greece.

5. Consider the statement, “If we had more aggregate demand, then more non-high-skilled people would have jobs and wages would be higher.”

I do not believe that statement, Instead, I believe that nothing short of direct intervention in labor markets (government make-work jobs and wage subsidies, or you could hope for an impact from changes in means-tested programs that reduce implicit marginal tax rates) will change macroeconomic outcomes. But as long as jobs and wages are lower than what Summers/Krugman/Sumner think they should be, there is no way to falsify the statement that “if we had more aggregate demand….” The alleged lack of jobs and wages can be viewed from their perspective as proof that there is insufficient aggregate demand. There is no measure of “sufficient aggregate demand” that exists independently from the desired result of a larger wage bill. Indeed, Sumner would say that the wage bill is a measure of aggregate demand that can be targeted by the Fed.

The Harm of Government Debt

Tyler Cowen writes,

I worry that the general decline of discretionary government spending may make politics less stable (but also more interesting, not necessarily in a good way). When there is plenty of spending to bicker about, politics revolves around that question, which is relatively harmless. When all the spending is tied up, we move closer to the battlefield of symbolic goods, bringing us back to “less stable and more interesting.” If that is a cause, this trend is likely to spread.

For a longer essay on the way that government borrowing creates political friction, see my essay Lenders and Spenders.

Four Forces Watch: Coastal Incomes

Derek Thompson reports,

For Flint, Detroit, Youngstown, Cleveland, and Milwaukee, the demise of manufacturing, steel production, and other off-shored blue-collar work have gutted these foundries of good middle-class jobs.

Pointer from Mark J. Perry, who provides two interesting tables and much interesting analysis, including

Not surprisingly, more than half (11) of the top 20 metro areas with the highest median incomes for Americans ages 18-34 in 1980 were in Midwest or Rust Belt states (Flint, Detroit, Chicago, Milwaukee, Youngstown, Cleveland, Minneapolis-St. Paul, Pittsburgh, Toledo, Grand Rapids and Cincinnati). By 2009-2013, only three of the top 20 metro areas by income for young Americans were in Midwest or Rust Belt states: Minneapolis-St. Paul, Chicago and Des Moines (and none of those cities have a strong manufacturing base), and almost all of the top 20 metros by income for young Americans were in East Coast or West Coast states (San Jose, San Francisco, Washington, DC, Boston, New York, Philadelphia, Baltimore, Seattle, etc.).

The force that this illustrates is the New Commanding Heights. As income rises, the demand for manufactured goods tapers off, and much more of the increased income is spent on education and health care.

The Closed Network of Faculty Hiring

Colleen Flaherty reports on a study of academic hiring.

The study, published this week in Science Advances, is based on hand-curated data about placements of 19,000 tenure-line faculty members in history, business and computer science at 461 North American institutions with doctoral programs. Using a computer-aided, network-style analysis, the authors determined that just 25 percent of those institutions produced 71 to 86 percent of tenure-line professors, depending on discipline.

My guess is that if you were to study the economics field, the concentration would be even higher.

You can think of this as a very natural equilibrium. A few graduate schools get good reputations. They then get a huge share of the best students. With the best students, they place students well. This reinforces their ability to attract the best students. etc.

The actual quality of teaching does not matter in this equilibrium. In fact, MIT, where I went, had a reputation of caring more about teaching than other top departments. In hindsight, the few classmates with whom I keep in touch think that the classroom instruction was really poor. Some of the courses in the required sequences were a complete waste of time (Ray Fair, I’m looking at you.) Tom Rothenberg, who visited for a semester from Berkeley (and then quickly fled the Boston weather), was by far the best teacher we had. In fact, the core was taught much more by visiting professors (Fair, Dixit, Begg, Rothenberg) than by permanent faculty, which tells you how much the permanent faculty really cared about teaching.

I don’t have a problem with an equilibrium in which the best students are attracted to a few departments. But when only a few dissertation advisers control entire sub-fields, you get a dreadful monoculture. I have said many times that I think that macro suffered from this. The field became completely dominated by students of Thomas Sargent at Minnesota and Stan Fischer and Rudi Dornbusch at MIT. Together, they produced nothing but a giant garbage factory.

You Won’t Think I’m Being Charitable

Do you think I should submit this essay somewhere?

The central concept of the sociologists is privilege. Privilege is like status, except that it is based on membership in a group rather than in characteristics of the individual. One’s privilege is based on his her membership in a economic class, race, religious group, or sexual category. Rich people enjoy a lot of privilege, while poor people are underprivileged. In America, whites are privileged, while African-Americans and Hispanics are not. Similarly, Christians are privileged, and Muslims are not. Male heterosexuals are privileged, and people with other sexual orientations are not.

It goes on to claim that this is how the Obama Administration views terrorism. I actually don’t think I’m being uncharitable. I think I could pass an ideological Turing test as a sociologist or as a member of the Administration.

Economic Report of the President, 2015

I have only glanced through it, but I like what I see. Previous reports under President Obama I found to be long on cheerleading for the his policies and much shorter on substance than what we used to see. This one appears to represent a return to substance. Greg Mankiw points out the way in which the report hints that the median household income has been hurt more by slow growth than by increased inequality.

I give the authors credit for putting a lot of focus on labor force participation trends. They write,

Overall, the most important factor affecting the aggregate participation rate in the recession and recovery has been the aging of the population. But there are a number of important trends and developments relevant for understanding the changes in participation of different subgroups of the population:
• Increased participation by older Americans, which may be attributable to an increase in skills among this population and also to changes in Social Security retirement benefits;
• Reduced participation by younger Americans as they stay in school longer;
• Continuation of an at least 65-year long trend of declining male labor force participation, which is especially stark for young minority men; and
• Tapering of the long-term trend of increasing female labor force participation, which dates back to before World War II.

Don’t get me wrong. I don’t think much of the policy recommendations in the report. I also think that if you are looking for clues to declining labor force participation, you should pay some attention to the high implicit marginal tax rates faced by people who are eligible for food stamps and other government benefits. As regular readers will remember, I favor replacing the hodge-podge of means-tested programs, including Medicaid, with a single cash grant that tapers off gradually as income rises (I would suggest that the implicit marginal tax rate be limited to something like 20 or 25 percent).

Old Predictions of Mine, Mostly Wrong

An editor of a publication asked if it would be ok to reprint this essay. Since it is 15 years old, I thought it would look pretty silly if it were reprinted now. There are a few lines in the essay that I still like.

All of these features are feasible with existing technology. The problem is that if you tried to combine them into a single device, you’d probably need to carry around a power pack the size of a cantaloupe.

Today, a teacher in a classroom or a speaker in a meeting has a presumptive ownership over the attention of the audience. My guess is that within five years or so this will have broken down completely. You simply will take it for granted that while you address an audience, people will be engaged in electronic communication with external parties, only intermittently tuning in to what you have to say.

But mostly, there are clunkers like this:

I do not see signs of mobile Internet devices crossing the chasm. Palm Pilots have been around for a few years now, and I am still waiting for a compelling reason to buy one. I’m sorry, but the way see it, if I need something to keep myself occupied when I’m traveling, I can pack a book.

IQ and Institutions

Jason Collins dares to write,

Those nations with high-IQ, educated populations tend to have higher levels of economic development. Although rich countries tend to have good political institutions and policies that are not completely crazy, the direction of causation is population to institutions. If you have the “right” people in a nation, decent political frameworks tend to follow.

You can read my cross-country study, which supports Jason’s view. The appendix is where I introduce an IQ variable, which is very powerful. If you don’t like my dependent variable, which is an index of economic freedom, you could redo the analysis using the United Nations human development index and get very similar results.