Two Historical Tales of Productivity.

1. Dietrich Vollrath writes,

the weighted variance of log capital and log coal per worker is either 0.0188 (if you use Clark’s index of capital) or 0.0381 (if you use Clark’s data on looms equivalents). Either way, this is only 2.92% or 5.90%, respecitively, of the total variance in real wages. A tiny fraction of variation in real wages is driven by differences in capital per worker, and the rest must be explained by technology, human capital, or something else. Clark has disposed of technology as an explanation, so it could be human capital. Clark eliminates big human capital differnces (at least in terms of age structure or experience), so it has to be “something else”. That something else is either local effects or culture, depending on your choice of terms.

This refers to international comparisons of productivity in the cotton industry. Clark is Gregory.

2. Gerben Bakker, Nicholas Crafts, and Pieter Woltjer write,

Compared with Kendrick, we find that labour quality contributes more and TFP growth less. For this period as a whole, TFP growth accounted for about 60% of labour productivity growth rather than the 7/8th famously attributed to the residual by Solow (1957).1 Contrary to secular stagnation pessimism, TFP growth was very strong both in the 1920s and the 1930s, at 1.7% and 1.9% per year, respectively – well ahead of anything seen in the last 40 years. Regardless, even though the 1930s saw the fastest TFP growth in the private domestic economy before WWII, it was not the most progressive decade of the whole 20th century in terms of TFP growth. Both 1948-60 and 1960-73 were superior at 2.0% and 2.2% per year, respectively

Pointers from Mark Thoma for both.

Keep in mind that in (2), they are starting with output per worker in the aggregate economy, and certainly there are problems measuring the numerator. Then you adjust for capital per worker, and that raises another measurement challenge. Then, in order to calculate you take a percentage change, which amplifies measurement error. Then, to compare growth rates across time periods, you take the difference in percentage changes, which amplifies measurement error yet further. I’m not criticizing these specific results, but just raising a general caution.

Growth, like the future, is not evenly distributed

Larry Summers writes,

whereas my grandmother would have been at sea if returned to her girlhood home, I would miss relatively little if suddenly placed in the home I grew up in. It takes longer and is less comfortable to fly from Boston to Washington or London than it was 40 years ago. There are more highways now but much more traffic congestion as well. Life expectancy has continued to increase, though at about half the pace it did during my grandmother’s day. But the most important transformation—child death being an extraordinary event—had already happened by the time I was born.

Pointers from both Mark Thoma and Tyler Cowen.

If you compare 1900 to 1960, you can point to a few innovations that transformed America. The car, radio and television, and household appliances like refrigerators and vacuum cleaners.

Has there been comparable transformation since 1960? I would say that there has, but the improvements have been distributed differently and are not embedded as much in tangible goods. Continue reading

Olivier Blanchard and Joseph E.Gagnon: This Time is Different

They write,

the deviations of the P/E from its historical average are in fact quite modest. But suppose that we see them as significant, that we believe they indicate the expected return on stocks is unusually low relative to history. Is it low with respect to the expected return on other assets? A central aspect of the crisis has been the decrease in the interest rate on bonds, short and long. According to the yield curve, interest rates are expected to remain quite low for the foreseeable future. The expected return on stocks may be lower than it used to be, but so is the expected return on bonds.

Pointer from Mark Thoma.

Their point is that when interest rates are low, you can justify exceeding historical norms for the price-earnings ratio on stocks. I made a similar point about the price-earnings ratio for real estate relative to interest rates during the housing bubble.

Evidence for Nominal Wage Rigidity

Bruce C. Fallick, Michael Lettau, and William L. Wascher write,

Given the relative magnitudes of the various measures of rigidity at the 1- and 2-year horizons, it seems clear that nominal rigidities are less important when one takes the longer view of wage changes over more than one year, suggesting that time is, indeed, an ally of wage flexibility. Even at the 2-year horizon, however, operative wage rigidity appears to have increased in the low-inflation environment of recent years.

Pointer from Mark Thoma.

The paper thus goes against my own views. The excerpt I pulled out is the one that comes closest to giving comfort to my way of thinking.

As you know, I think that many macroeconomists rely much too heavily on the sticky-wage story, which says that real wage rates are strongly countercyclical. I do not think of the job market as a single firm, laying off and hiring workers. Instead, I think in terms of PSST.

The data on Job Openings and Labor Turnover show millions of jobs being lost and found each month. When the creation of new jobs is 10 percent less than the flow of lost jobs, you see a large increase in unemployment. If the creation of new jobs is too slow, I do not attribute much of that to the stickiness of wages in existing jobs.

Given that it took until 2015 for labor utilization to recover from its collapse in 2009 (and it might be argued that labor utilization remains below trend), I think that the sticky-wage story is hard to defend as a main causal factor. It is even more difficult to argue that the 2015 recovery was due to a dramatic upsurge in inflation and consequent decline in real wages.

Dean Baker on Health Industry Economics

He writes,

Ordinarily economists treat it as an absolute article of faith that we want all goods and services to sell at their marginal cost without interference from the government, like a trade tariff or quota. However in the case of prescription drugs, economists seem content to ignore the patent monopolies granted to the industry, which allow it to charge prices that are often ten or even a hundred times the free market price.

Pointer from Mark Thoma.

His point, with which I agree, is that we should try to find other ways to subsidize drug research, so that drug prices will be closer to manufacturing cost, which is low.

Otherwise, I disagree with a fair amount of his post. I do not think that the wage rate of American doctors is notably high relative to their foreign counterparts. Keep in mind that American wages in general are higher, so that opportunity costs are higher. Keep in mind that American doctors tend to work longer hours. Finally, keep in mind that the mix of American doctors is much more skewed toward specialists than the mix in other countries.

In Crisis of Abundance, I looked at various possible explanations for the high rate of health care spending in the U.S., and I decided that the relative price of medical services is not such a big factor. The main factor is that we utilize many more services that have high costs and low benefits. A government-run health care system, which Baker advocates, ultimately would have to address this issue through refusing to pay for services as readily as we do now. A more market-oriented system would force people to decide for themselves when a procedure has expected benefits that are low relative to costs and hence not worth undergoing.

Why Measure GDP?

EconoSpeak writes,

The questions we need to ask are: What do we really want to know and why? What purposes were we pursuing when we sought to measure economic activity? Is measuring GDP helping to achieve those purposes? Are those purposes still our priorities? If not, what should be? What different institutions might we invent to achieve our purposes as we NOW understand them?

Pointer fromMark Thoma, whose column stimulated the post quoted above.

Some possible reasons to measure GDP:

1. To provide an indicator of the economy’s capacity to produce the goods needed to win a war (including necessary consumer goods as well as arms).

2. To provide a measure of the economy’s ability to provide for consumer welfare.

3. To compare productivity across countries and over time.

4. To indicate the extent to which an economy is in a recession.

5. To measure economic activity at market prices.

I think that (1) would have been most useful around the time of World War II, when the outcome was very much affected by this sort of productive capacity. It probably is less useful today.

I think that (2) is a very interesting measure. But (a) why not just focus on goods and services consumed? (b) you need to think a lot harder about how to measure consumers’ surplus (c) you have to think a lot harder about how to measure the consumption services from durable goods, particularly housing (d) you need to think a lot harder about what Thoma refers to as “bads,” like pollution.

I think that (3) is useful, but stop pretending that you can be accurate to at least two significant figures. When someone says that productivity growth changed from X over a five-year period to Y over the subsequent five-year period, their view of the signal-to-noise ratio in the data is much more optimistic than mine.

I think that (4) relies too much on the AS-AD framework, to which I do not subscribe.

I think that (5) is useful, but our current approach is wrong. Most government services are not sold at market prices, and so I would exclude them from this sort of measure.

Dean Baker’s Libertarian Socialism

He proposes replacing the corporate income tax with having corporations give government shares of stock. He notes that this could be optional–corporations could choose to opt out of the corporate income tax by donating shares. However, one suspects that the cleaner approach would be to make it a requirement.

The shares would be nontransferable, except in the case of mergers or buyouts, but they otherwise would be treated just like any other shares. If the company paid a dividend to its other stockholders, then it would pay the same per share dividend to the government. If it bought back 10 percent of its shares, then it would buy back 10 percent of the government’s shares at the same price. In the event of a takeover, the buyer would have to pay the same per-share price to the government as it did to the holders of other shares.

Pointer from Mark Thoma.

This approach would get rid of the distortions and rent-seeking of the corporate income tax. It would align the interests of government and corporations, in that costly regulations would cut into tax revenue. In that sense, it is a step in a libertarian direction. Because government would have partial ownership of businesses, it looks like socialism, but I think one can argue that the power to tax is equivalent to partial ownership, and that if anything the government uses its taxing powers in more meddlesome ways.

The Case Against Economic Sanctions

Branko Milanovic writes,

They impose a collective punishment, over people who have no influence on the policies for which they are sanctioned.

Pointer from Mark Thoma. There is more at the link.

My view of economic sanctions is that they are an act of war. If you are not willing to declare war against another country, then my presumption is that economic sanctions are morally wrong.

Justin Fox on Academic Journals

He writes,

in economics almost every paper of significance is now available in some form free on the Internet before it is published in a journal. Yet economics journals that keep their articles behind paywalls and charge hundreds or thousands of dollars a year for library subscriptions continue to thrive.

This is apparently because the journal editors and referees are still needed to certify the quality of research, certification that informs hiring and tenure decisions and provides information on the relative quality of university academic departments. Also, scholars who want to cite others’ work in their own academic papers need access to the published versions to make sure they get the wording and the page numbers right.

Pointer from Mark Thoma.
These days, I am seeing the world through Martin Gurri’s lenses, as a conflict between the uncredentialed public and the credentialed elites. Thanks to the Internet, the uncredentialed public now has as much access to information as the credentialed elites. One consequence of this is that institutions like accreditation, selective college admission, faculty tenure, and publication come to be seen less and less as essential tools to promote scholarly quality and more and more as artificial gate-keeping.