Vaclav Smil

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Interviewed here. He comes across as the opposite of George Gilder, in that he is very much a materialist.

we consume so many more products that there’s been no absolute dematerialization of anything. We still consume more steel, more aluminum, more glass, and so on. As long as we’re on this endless material cycle, this merry-go-round, well, technical innovation cannot keep pace.

Pointer from Tyler Cowen.

I once got to hike with Smil during a break in a conference put together by John Baden. That was a treat.

Hydraulic Modeling

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[Irving] Fisher designed a hydrostatic machine to illustrate the economic “‘exchanges’ of a great city” that revealed the ways that the values of individual goods were related to one another. When Fisher adjusted one of the levers, water flowed to affect the general price level of the range of goods. The device resembled a modern-day foosball table but with various cisterns of different shapes and heights representing individual consumers and producers….A series of levers along the side of the machine altered the flow of water, thus changing the price level not only for an individual but throughout the entire economy. The machine revealed the way in which prices, supply, and consumer demand interrelated. For example, if the price of a good fell (and the level of water rose), more consumers would purchase it, and a new equilibrium would emerge.

The quote is from Fortune Tellers, a historical work by Walter A. Friedman that I received as a review copy. He tries to recover the era of economic forecasting between 1900 and 1940, before the computer and before Keynesian economics.

Macro Wars: They’re Ba-a-a-ack!

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Two pointers from Mark Thoma.

1. Simon Wren-Lewis writes,

An alternative and I now think better, vision would give more emphasis to how economics developed. Economic history would play a central role. Economic theory would be seen as responding to historical events and processes. For example placing Keynesian theory in the context of the Great Depression is clearly useful, given the events of the last five years. I think it is also important to recognise the links between economic theory and ideology. This is partly to understand why governments might not act on the wisdom of economists, but it also leads naturally to recognising that economists need to adapt to the social and political context in which they work. We should also be more honest that our wisdom might be influenced by ideology. Given the limits to experimental and econometric evidence, but with a very clear axiomatic structure, methodology is always going to be an important issue in economics.

Which reminds me, I need to recover the momentum on the book I am writing.

2. Miles Kimball and Noah Smith write,

Patrick Kehoe, one of the economists dismissed from the Fed, is a key figure in a school of economics called “Freshwater Macroeconomics” (the other, Ellen McGrattan, is his frequent co-author). The labels “Freshwater” and “Saltwater” go back to the arguments and new ideas generated by the double-digit inflation in the 1970s.

I wrote about this conflict over a decade ago. Back then, I considered myself on the freshwater side. Now I am more “a pox on both your houses.”

Kimball and Smith describe the appeal of each school of thought. My book will attempt to do that, also. But I also will explain why I came to reject both schools and instead turn to PSST.

Mc has soared

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John C. Williams writes,

since the start of the recession in December 2007 and throughout the recovery, the value of U. S. currency in circulation has risen dramatically. It is now fully 42% higher than it was five years ago

Pointer from Timothy Taylor’s column in the Journal of Economic Perspectives.

Williams argues that people are holding cash as a safe asset, in the form of $100 bills. Keep in mind, though, that another source of the demand for $100 bills is the underground economy.

Failure is the Most Likely Option

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Clay Shirky writes,

Failure is always an option. Engineers work as hard as they do because they understand the risk of failure. And for anything it might have meant in its screenplay version, here that sentiment means the opposite; the unnamed executives were saying “Addressing the possibility of failure is not an option.”

He talks about what I call the suits vs. geeks divide. Recall that I originally coined this to describe the unwillingness of financial executives to listen to geeks who worried about the risk in mortgages.

When a large organization, such as government or a legacy media organization, undertakes a new initiative, they are in effect starting a new business. Most start-ups fail, so that failure is in fact the most likely outcome. But if you have spent your whole life playing office politics (or real politics) to get to the top of an established organization, you may not have had any training in dealing with something as fragile as a new enterprise.

If you start a new enterprise, it is a good idea to start small and build incrementally. In fact, that is how President Kennedy’s initiative to put a man on the moon was carried out.

But the health care law was designed to be big and complex from the beginning, and nobody wanted to allow for the possibility of failure. Even now, many progressives deny that it will fail. My sense is that the law is in fact a total failure, with the web site perhaps the least of its problems.

Joel Mokyr on Economic Growth.

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He talks with Russ Roberts.

And so people were asking, could the Chinese have built a steam engine? And the basic answer, is: No, unless they had discovered what the Europeans discovered in the 17th century, which is the existence of an atmosphere.

Later,

my example of a very small invention for which we could ask this question is anesthesia. So you go to somebody who is about to have surgery and you ask him, How much would you demand to be paid if I took out your appendix without anesthetizing you, without putting you to sleep? Nobody would agree. The sum would be infinite. What can anesthesia contribute to GDP when it was introduced in the 1850s and 1860s? Russ: Could not be very much. Guest: Nothing. It’s very small. But that is exactly the kind of thing we fail to account for in our calculations. So that’s why I gave that whole list of things; and we could make this list infinitely large. It is the small things that actually don’t amount to an awful large part of our income and product that actually have improved life a great deal and that we really wouldn’t want to do without any more.

Recommended.

Skeptics on Pre-School

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Grover J. “Russ” Whitehurst writes,

Unfortunately, supporters of Preschool for All, including some academics who are way out in front of what the evidence says and know it, have turned a blind eye to the mixed and conflicting nature of research findings on the impact of pre-k for four-year-olds. Instead, they highlight positive long term outcomes of two boutique programs from 40-50 years ago that served a couple of hundred children.

Pointer from Tyler Cowen. I take the first sentence to be a swipe at James Heckman.

Whitehurst summarizes the results of a larger, more recent study, and concludes

This is the first large scale randomized trial of a present-day state pre-k program. Its methodology soundly trumps the quasi-experimental approaches that have heretofore been the only source of data on which to infer the impact of these programs. And its results align almost perfectly with those of the Head Start Impact Study, the only other large randomized trial that examines the longitudinal effects of having attended a public pre-k program. Based on what we have learned from these studies, the most defensible conclusion is that these statewide programs are not working to meaningfully increase the academic achievement or social/emotional skills and dispositions of children from low-income families.

I received a review copy of The Smart Society, by Peter D. Salinas, a former provost for the State University of New York. Unlike me, he takes a fairly optimistic view that school reform can have a big effect on outcomes. Continue reading →

Skeptics on Job Polarization

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Lawrence Mishel, Heidi Shierholz, and John Schmitt take on a popular story.

The early version of the “skill-biased technological change” (SBTC) explanation of wage inequality posited a race between technology and education where education levels failed to keep up with technology-driven increases in skill requirements, resulting in relatively higher wages for more educated groups, which in turn fueled wage inequality (Katz and Murphy 1992; Autor, Katz, and Krueger 1998; and Goldin and Katz 2010). However, the scholars associated with this early, and still widely discussed, explanation highlight that it has failed to explain wage trends in the 1990s and 2000s, particularly the stability of the 50/10 wage gap (the wage gap between low- and middle-wage earners) and the deceleration of the growth of the college wage premium since the early 1990s (Autor, Katz, and Kearney 2006; Acemoglu and Autor 2012). This motivated a new technology-based explanation (formally called the “tasks framework”) focused on computerization’s impact on occupational employment trends and the resulting “job polarization”: the claim that occupational employment grew relatively strongly at the top and bottom of the wage scale but eroded in the middle (Autor, Levy, and Murnane 2003; Autor, Katz, and Kearney 2006; Acemoglu and Autor 2012; Autor 2010). We demonstrate that this newer version—the task framework, or job polarization analysis—fails to explain the key wage patterns in the 1990s it intended to explain, and provides no insights into wage patterns in the 2000s. We conclude that there is no currently available technology-based story that can adequately explain the wage trends of the last three decades.

Pointer from Mark Thoma.

Read the whole thing. One of the problems that the authors find with the job polarization story is that a lot of inequality of wages has emerged within occupations rather than between occupations.

Think of the bimodal distribution of starting salaries that has emerged in the market for lawyers. Is that evidence against computer-driven job polarization? Perhaps not. Perhaps with the help of computers paralegals can now do a lot more, driving down the wage of the median lawyer. However, firms that need the most sophisticated legal work will pay up for the top lawyers.

Secstag: All Things to All People?

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Daniel Davies writes,

The US economic policy structure was aware that they were accommodating China and NAFTA, and aware that the tool of demand management was consumer spending. They might or might not have been aware that the consumer spending was financed by borrowing against housing wealth, but if they weren’t, they thundering well should have been. They got a structural increase in personal sector debt because they wanted one and set policy in order to create one. There’s no good calling it a “bubble” or a “puzzle”

Pointer from Tyler Cowen. Read Davies’ entire post.

We have the basic identity

S – I = (T-G) + (X-M)

That is, the excess of domestic savings over investment equals the government surplus plus the trade surplus. This is true whether we are in a recession, a boom, or anywhere in between.

What Davies seems to be saying is that China wanted a lot of (X-M), which gave us a big negative (X-M). Holding (T-G) constant, this gives us a big negative S-I. Since we didn’t do much I, we did a lot of dissaving. And this drop in personal saving is yet another meaning for the very plastic phrase “secular stagnation.”

Oy. Scott Sumner comments,

There can’t be a structural shortage of demand, because demand is a nominal concept.

For decades after The General Theory, there were arguments over what Keynes really meant. Seeing what Larry Summers has unleashed, one can understand how this happens. At a time when economic performance is disappointing and people are groping for explanations, a guy who is known to be a great economist offers an answer that is vague but sounds clever. He then leaves it to other people to come up with a precise version. Unfortunately, the precise versions are problematic, meaning that they are either unsound in terms of theory, inconsistent with evidence, unable to support the explanation and policy implications of the vague version, or all three. We proceed to cycle back-and-forth between the clever-sounding vague version and the precise, problematic versions.