Tyler Cowen on Trends in Leisure and Work

The video is here. Recommended.

I agree with most of what he says, and to the extent that I differ I am probably wrong.

He frames the question in terms of Keynes’ prediction that by 2030 we would see a work week of about 15 hours. My thoughts:

1. As William Gibson said, the future is here, it is just not evenly distributed. Tyler says, correctly, that the elderly have grabbed a huge share of any increase in leisure. But “elderly” is not some different social class. It is us when we get to be that age.

2. Suppose that the median adult male in 1930 started working at age 16 and worked until he died, and that the median adult male today starts working at age 20, retires at age 60, and dies at age 80. Take those 20 years of leisure and spread them across the working ages of 20-60, and that amounts to 1/3 of a year of leisure. If you think that you have about 100 hours a week to allocate (otherwise you are engaged in required activities like sleeping), 1/3 of a week is about 33 hours. So maybe you can say that we’ve taken about 33 hours off the typical work week, but we’ve decided to save those 33 hours for when we’re old. So if you worked 60 hours in Keynes’ day, now in effect you work 27 hours, and he is not so far off.

3. Note that the natural distribution of leisure might be quite different, but the eligibility rules for Medicare and Social Security are a major influence.

4. Another point Tyler makes that I would have made also is that the disutility of work has fallen. My guess is that Keynes did not foresee this or take it into account.

5. In fact, one of Tyler’s claims, which I do not dispute, is that for many people the utility of work is actually positive. In any event, if you gave people the wealth they have in 2016 but they faced the composition of jobs that existed in 1930, I bet a lot fewer people would choose to work full time.

6. Tyler points out that one factor increasing reported work hours is women substituting market work for home production. Again, I agree. In a variation on (5), suppose you offered a modern working woman a chance to earn her current wage for doing housework and child care as it was done in 1930. How many women would take you up on that? I’m guessing not many.

7. Tyler predicts that more people will work more hours going forward. His reasoning is that in cross-section, we observe the highest earners tending to work more hours. If that same pattern holds in time series, and earnings go up, then we should see more hours of work.

I think that is a dubious inference. The “one percent” are different not just in terms of ability but also in terms of preferences. They choose wealth-maximization with more gusto than the rest of us.

There are plenty of reasons to choose something other than the wealth-maximizing career path. In my case, I have inexpensive tastes. I also have a low tolerance for interpersonal stress. Others may have a low tolerance for risk. Some may have a strong attachment to living in a location that does not offer the highest nominal salary.

There are many margins along which people can adjust to higher wealth. I do not think that we can extrapolate from the behavior of the “one percent” to predict how the rest of us will choose.

Related: Timothy Taylor on what is a good job.

A good job has what economists have called an element of “gift exchange,” which means that a motivated worker stands ready to offer some extra effort and energy beyond the bare minimum, while a motivated employer stands ready to offer their workers at all skill levels some extra pay, training, and support beyond the bare minimum.

Overblown, you say?

Timothy Taylor writes,

I’ll add my obligatory reminder here that just because past concerns about automation replacing workers have turned out to be overblown certainly doesn’t prove that current concerns will also prove out to be overblown. But it is an historical fact that for the last two centuries, automation and technology has played a dramatic role in reshaping jobs, and also helped to lower the average work-week, without leading to a jobless dystopia.

He quotes from a speech warning of technological displacement of workers that was given in 1927 by then Secretary of Labor James J. Davis.

Taylor writes as if the dire prediction proved false. And yet, within 5 years, unemployment hit 25 percent. Those dots connect in the PSST story, but too many economists are fixated on Keynesian AD.

Praise for the Council of Economic Advisers

1. Timothy Taylor writes,

When you read a CEA report, there is always a certain admixture of politics, and at some points over the roughly 40 years I’ve been reading these resorts, the partisanship has been severe enough to make me wince. But it’s also true that one can read just about any report looking for ways to discredit it. My own approach is instead to search for nuggets of fact and insight, and over the years, CEA reports have typically offered plenty.

2. Robert J. Samuelson writes,

Thumbing through the annual report of the White House’s Council of Economic Advisers (CEA) is always an education. This year’s 430-page edition is no exception. Crammed with tables and charts, it brims with useful facts and insights.

●On page 62, we learn that the growth of state and local government spending on services (schools, police, parks) has been the slowest of any recovery since World War II. One reason: Payments into underfunded pensions are draining money from services. . .

Probably a useful corrective to my typical focus on what I didn’t like about the CEA report.

The Secular Decline in Real Interest Rates

Lukasz Rachel and Thomas D. Smith write,

Our analysis suggests the desired savings schedule has shifted out materially due to demographic forces (90bps of the fall in real rates), higher inequality within countries (45bps) and a preference shift towards higher saving by emerging market governments following the Asian crisis (25bps). If this had been the whole story, we would have expected to see a steady rise in actual saving rates globally. But global saving and investment ratios have been remarkably stable over the past thirty years suggesting desired investment levels must have also fallen. We pin this decline in desired investment on a fall in the relative price of capital goods (accounting for 50bps of the fall in real rates) and a preference shift away from public investment projects (20bps). Also, we note that the rate of return on capital has not fallen by as much as risk free rates. The rising spread between these two rates has further reduced desired investment and risk free rates down (by 70bps). Together these effects can account for 300bps of the fall in global real rates.

Pointer from Timothy Taylor. Rachel and Smith expect that the forces driving down real interest rates will continue to operate. However, Taylor also cites and e-book on real interest rates in which the authors foresee a shift in the underlying fundamentals.

I believe that the outlook for real interest rates is most important for governments around the world, which have run up high debts. A rise in real interest rates could accelerate sovereign debt crises.

Prizes Have Not Worked Well

Timothy Taylor quotes from a paper by historian B. Zorina Khan.

industrial prizes faltered in part because of their lack of market-orientation, and even the democratic nature of economic institutions in the United States could not overcome such drawbacks in administered prize systems.Judges had to combine technical and industry-specific knowledge with impartiality, but even the most competent personnel could not ensure consistency; decision-making among panels was complicated by differences in standards, interpretation, capture, and risk-aversion. Such difficulties tended to lead to haphazard decisions, or were often overcome by simply making the award to the person or the firm with the most established reputation. Juries were not immune to the effects of outright bias, capture, cognitive dissonance, lobbying, and “marketing.” Prizes tended to offer private benefits to both the proposer and the winner, largely because they served as valuable advertisements, with few geographical spillovers. Winners of such awards were generally unrepresentative of the most significant innovations, in part because the market value of useful inventions would typically be far greater than any prize that could be offered by private or state initiative.

Suppose that the commercial value of an idea is highly uncertain before it has become embedded in a business product or service. This leads to what we might call market-valuation errors. You can think of many examples of companies that have come out with products that they thought would be successful but failed to excite consumers.

With a prize fund, these market-valuation errors are borne by whoever puts up the prize fund. For example, if the government creates a prize fund for somebody who develops a better wind turbine, but the wind turbine still fails to penetrate the market, then the taxpayers take the hit. Instead, if the wind turbine inventor is given a reward in the form of a patent, then it’s the inventor who suffers if the turbine fails in the marketplace.

Going from patents to prizes serves to separate two functions: guessing the value of a potential invention; and coming up with the invention. Separating those two functions may not be such a good idea.

Adam Smith raised this concern. See David Henderson’s response to Taylor’s post. Henderson writes,

Essentially, the problem is a central planning problem. A government that gives prizes has to know what to give prizes for. It could give a big prize for something that matters little or a small prize for something that matters a lot. It’s hard to know in advance. Patents, as Smith points out, solve that problem.

As Henderson indicates, patents are problematic also. They are susceptible to other forms of errors by governments.

Uncovered Interest (Dis?) Parity

Timothy Taylor reads a semi-annual update from the Fed, and is struck that

A divergence has emerged in the interest rates of advanced market economies, between the US and UK on one hand and the euro-zone and Japan on the other.

He produces a chart showing that the ten-year bond rate is about 150 basis points higher in the U.S. and the UK than it is in Germany or Japan. Years ago, Jeff Frankel adapted the Dornbusch overshooting model to say that this sort of thing would imply that the dollar and the pound are expected to fall about 1.5 percent per year for those ten years. This would make those currencies about 15 percent overvalued relative to the “long-run equilibrium,” it that is what we can call the exchange rate expected 10 years from now.

Note that in the short run, interest rate differentials and expected currency movements are tied together by covered interest parity. If I can earn 1.5 percent more on U.S. one-year securities than on one-year German securities, and the futures market were to offer me a one-year dollar/euro contract that assumes no depreciation of the dollar, then I have an arbitrage play of shorting German one-year securities and buying American ones, while buying euros in the futures market to eliminate currency risk.

On a ten-year basis, it tends to be harder to cover your currency risk. So there is, at best, uncovered interest parity.

Compared with 100 Years Ago

Timothy Taylor pulls some nuggets from an article by Carol Leon Boyd in the Monthly Labor Review.

BLS reported about 23,000 industrial deaths in 1913 among a workforce of 38 million, equivalent to a rate of 61 deaths per 100,000 workers. In contrast, the most recent data on overall occupational fatalities show a rate of 3.3 deaths per 100,000 workers.

That’s the sort of thing that doesn’t show up in GDP growth rate statistics.

There is much more at the link.

Timothy Taylor and Russ Roberts


Taylor says,

it just seems to me that often when people talk about growth, the first thing they talk about is not the role of the private sector or firms. They talk about how the government can give us growth, through tax cuts or spending increases or the Federal Reserve. When they talk about fairness and justice, they don’t talk about the government doing that. They talk about how companies ought to provide fairness and justice in wages and health care and benefits and all sorts of things. So it seems to me that our social conversation about those things is topsy turvy.

Bureaucratic Rump-Covering

Timothy Taylor points to a report by a new bureaucracy, the Office of Financial Research. Taylor writes,

The report emphasizes three main risks facing the US economy: 1) credit risks for US nonfinancial businesses and emerging markets; 2) the behaviors encouraged by the ongoing environment of low interest rates; and 3) situations in which financial markets are not resilient, as manifested in shortages of liquidity, run and fire-sale risks, and other areas.

There is a difference between actionable intelligence and bureaucratic CYA. If somebody says, “we are seeing a lot of chatter laately among these four terror cells. We had better watch these individuals closely,” that is actionable. If somebody says, “there is a risk that in the current climate terrorists will attempt a major attack,” that is not actionable, it is just CYA.

Reading Taylor’s post, I doubt that there is anything actionable in the OFR report. If the OFR had existed in 2006, we would have been told that the high level of house prices posed a potential risk. Which everyone already knew. They just did not have actionable intelligence about the state of the portfolios of key players, like Merrill Lynch, Citigroup, and Freddie and Fannie.