Economist's View

Productivity and the Internet

What do you think of Robert Waldmann's theory?:

The Internet and the Productivity Speedup, Angry Bear: The unexpected increase in US productivity growth in the 90's and naughties is an economic puzzle. At the time it was widely argued that investments in information and communications technology had finally finally paid off, that computers and the internet allowed vastly improved corporation wide inventory control and the increased output given inputs reflected lower work in progress inventories. ... hmmmm maybe. ...

I ... think it has to do with office workers and, in particular, middle management. ...[M]iddle managers and affiliated secretaries and janitors and such count in the denominator of labor productivity. In the 90s there was a wave of downsizing and delayering. Basically top management in many firms decided to thin the ranks of middle management on the grounds that middle managers weren't doing anything useful. The outcome says that the top managers were ruthless and right.

Are Specialized Ants More Productive?

Specialist ants are no better at their jobs than non-specialists:

Are ants that specialize better at their job?, EurekAlert: Adam Smith ... wrote in 1776 that specialized labor provides benefits to human industry, and similar benefits have been suggested to explain the world-wide success of ants, and other social insects which live in colonies. Ants are found on every continent besides Antarctica, and their success has been attributed to the evolution of specialization – it has been theorized that this increases the efficiency of individual workers - but has rarely been measured. However, a new paper by Anna Dornhaus, published in this week's issue of PLoS Biology, shows that individual rock ants (Temnothorax albipennis) specializing on one task are no more efficient than those that perform multiple tasks.

Rock ants are not physically specialized for any particular task. Dornhaus ... measured how often and how readily individual ants performed certain tasks and considered an ant more specialized the more it concentrated its work on one particular task. She expected rock ants that specialized to work more efficiently, but that's not what she found. Dornhaus explains, "It turns out that the ones that are specialized on a particular job are not particularly good at doing that job."...

Although the specialists were not more efficient, they did put in more hours of work. Even though putting in longer hours might seem like the way to success, it wastes colony resources. Dornhaus found that specialists and generalists work equally fast. "Speed does matter because every minute they spend outside is dangerous and energy costly," she said. "They burn fuel, and they risk dying."

It's not known why ants choose the jobs they do, or why some are slow to begin work. She said it might be explained by how quickly an individual detects work to be done, like noticing dirty dishes in the sink. A person with a lower threshold will notice and wash the dishes as soon as there are one or two in the sink. However, a person with a higher threshold doesn't notice the dishes until there are at least 10 piled up. The dishes will still be washed, just not as frequently.

Dornhaus concludes that, at least in this species, a task is not primarily performed by individuals that are especially adapted to it. How much these results apply to the other tasks performed by these ants, or other ant species, or even social insects more generally, remains to be verified. Dorrnhaus's next step is investigating "switching costs," such as the time it takes to walk from one side of the nest to the other or the break in concentration when switching between tasks. Dornhaus suggests specialization might minimize such costs.

Adam Smith cited three benefits from specialization:

1. The worker would become more adept at the task.
2. The time saved from not changing tasks.
3. With specialization, tasks can be isolated and identified, and machinery can be built to do the job in place of labor.

Thought there are plans to look at Smith's second reason for an increase in productivity due to specialization, time saved from staying at one job all day, so far this research only looks at the first reason, dexterity. However, dexterity may not be the most important of the three reasons, and I think that Smith was thinking more about an individual's ability to learn by doing rather than inherent differences across workers. But to the extent that there are differences across workers, and to the extent that it matters for the job, humans may use a different selection mechanism than ants. As to the third reason, I'm not expecting ants to build much capital, so their long-run productivity - the wealth of the ant nation - may be quite limited.

I should note that Smith also thought there was a downside to specialization, i.e. that doing the same task over and over day in and day out dulls the mind.

Widening Inequality in Skills

Why aren't people responding to the skill premium by increasing their investment in education? One reason is that they are rational and realize that widening inequality is due to other forces:

"the most important factor" in rising inequality "is the rising skill premium, the increased return to education."

That's a fundamental misreading of what's happening.... What we're seeing isn't the rise of a fairly broad class of knowledge workers. Instead, we're seeing the rise of a narrow oligarchy: income and wealth are becoming increasingly concentrated in the hands of a small, privileged elite. I think of Mr. Bernanke's position ... as the 80-20 fallacy. It's the notion that the winners in our increasingly unequal society are a fairly large group ... the 20 percent or so of American workers who have the skills to take advantage of new technology and globalization...

The truth is quite different. Highly educated workers have done better than those with less education, but ... real earnings of college graduates actually fell more than 5 percent between 2000 and 2004. Over the longer stretch from 1975 to 2004 the average earnings of college graduates rose, but by less than 1 percent per year. ...

The notion that it's all about returns to education suggests that nobody is to blame for rising inequality, that it's just a case of supply and demand at work. And it also suggests that the way to mitigate inequality is to improve our educational system — and better education is a value to which just about every politician in America pays at least lip service.

The idea that we have a rising oligarchy is much more disturbing. It suggests that the growth of inequality may have as much to do with power relations as it does with market forces. Unfortunately, that's the real story.

And,

Decomposing the sources of inequality involves calculations that don’t belong in a family newspaper, but basically it seems that only around a third of the rise in inequality over the past generation is associated with a rising premium for education.

There has been considerable debate about this, but even if only a third of the change is due to the education premium, the change has been large and one third is enough to provide a decent incentive for action. Thus, even with the qualifications above in full force, it still seems like we should have observed more response to the rising premium on education than we can find in the data:

The anemic response of skill investment to skill premium growth, by Joseph G. Altonji, Prashant Bharadwaj, and Fabian Lange, Vox EU: Since 1980, the demand for skilled labour has risen faster than the supply of skills, fuelling a steady increase in the earnings premia found for measures of skills such as schooling or cognitive test scores.[1] The rapid rise in the skill premium represents a substantial increase in the economic incentive to acquire skills. For example, Heckman, Lochner, and Todd (2008) show that between 1980 and 2000 the internal rate of return for completing high school rather than dropping out after tenth grade has increased from approximately 40% to 55%. Standard economic theory suggests that such an increase in the skill premium should induce young adults to invest more in their skills and supply more skills to the labour market.

How rapidly and how much young adults respond to this increase in the returns to skills and how this response varies across the population have important implications for the development of the US economy. Young adults’ investment in their skills determines directly how much the US economy will be able to benefit from ongoing technological progress. And, whether earnings inequality within and between groups will decline during the next few decades depends, to a large extent, on how those who traditionally have acquired few labour market skills respond to the increase in the skill premium.

"I’m Sure Those Stupid Economists Have Never Thought of That!"

Paul Krugman explains why he is not as optimistic as as others that "human ingenuity and technological progress will solve all our problems":

Limits to growth and related stuff, by Paul Krugman: I’ve been getting some correspondence asking me where today’s resource concerns fit with the old “Limits to growth” stuff that received a lot of publicity 30+ years ago. Actually, there’s a bit of a backstory there.

In 1973-4, my junior and senior years in college, I was Bill Nordhaus’s research assistant, working on energy issues. (This is the same Bill Nordhaus who warned back in 2002 that the cost of the Iraq war would probably be a lot higher than the Bushies were letting on.) I spent much of the summer of 1973, in particular, in Yale’s wonderful geology library — though the real import of what I learned there didn’t sink in for a while, as I’ll explain in a bit.

Paul Krugman: Running Out of Planet to Exploit

Will increasing world demand for limited resource supplies pose a threat to world economic growth, or will technology keep peak oil and other such commodity peaks safely out in front of us?:

Running Out of Planet to Exploit by Paul Krugman, Commentary, NY Times: ...Last week, oil hit $117. It’s not just oil... Food prices have also soared, as have the prices of basic metals. And the global surge in commodity prices is reviving a question we haven’t heard much since the 1970s: Will limited supplies of natural resources pose an obstacle to future world economic growth?

How you answer ... depends largely on what you believe is driving the rise in resource prices. Broadly speaking, there are three competing views.

The first is that it’s mainly speculation — that investors ... at a time of low interest rates have piled into commodity futures, driving up prices. On this view, someday soon the bubble will burst and high resource prices will go the way of Pets.com.

The second view is that soaring resource prices do, in fact, have a basis in fundamentals — especially rapidly growing demand from newly meat-eating, car-driving Chinese — but that given time we’ll drill more wells, plant more acres, and increased supply will push prices right back down again.

The third view is that the era of cheap resources is over for good — ...we’re running out of oil, running out of land to expand food production and generally running out of planet to exploit.

I find myself somewhere between the second and third views.

There are some very smart people ... who believe that we’re in a commodities bubble... My problem with this view...: Where are the inventories? ...inventories of food and metals are at or near historic lows, while oil inventories are only normal.

The best argument for the second view, that the resource crunch is real but temporary, is the strong resemblance between ... now and ... the 1970s.

What Americans mostly remember about the 1970s are soaring oil prices... But there was also a severe global food crisis...

In retrospect, the commodity boom of 1972-75 was probably the result of rapid world economic growth that outpaced supplies,... bad weather and Middle Eastern conflict. Eventually, the bad luck came to an end, new land was placed under cultivation, new sources of oil were found..., and resources got cheap again.

But this time may be different: concerns about what happens when an ever-growing world economy pushes up against the limits of a finite planet ring truer now than they did in the 1970s.

For one thing, I don’t expect growth in China to slow sharply anytime soon. That’s a big contrast with ... the 1970s, when growth in Japan and Europe ... downshifted — and thereby took ... pressure off ... resources.

Meanwhile,... Big oil discoveries ... have become few and far between, and in the last few years oil production from new sources has ... barely ... offset declining production from established sources.

And the bad weather hitting agricultural production this time is starting to look more fundamental and permanent... Australia, in particular, is now in the 10th year of a drought that looks more and more like a long-term manifestation of climate change.

Suppose that we really are running up against global limits. What does it mean?

Even if it turns out that we’re really at or near peak world oil production, that doesn’t mean that one day we’ll say, “Oh my God! We just ran out of oil!” and watch civilization collapse into “Mad Max” anarchy.

But rich countries will face steady pressure on their economies from rising resource prices, making it harder to raise their standard of living. And some poor countries will find themselves living dangerously close to the edge — or over it.

Don’t look now, but the good times may have just stopped rolling.

The Short-Run Costs of Labor market Liberalization

Are employment growth and productivity growth negatively correlated in the short-run? If so, what does this mean for policy? Ian Dew-Becker and Robert Gordon use data from the EU to look at this question:

Europe’s employment growth revived after 1995 while productivity growth slowed: Is it a coincidence?, by Ian Dew-Becker and Robert J. Gordon, Vox EU: As of 1995, Europe (the EU-15) had almost caught up to the PPP-adjusted level of US labour productivity, while its per-capita income ratio to the US stagnated at only 70 percent. This discrepancy is explained by a decline over 1960-1995 in hours worked per capita in Europe compared to the US. Edward Prescott (2004) has blamed low hours exclusively on high labour taxes, while Prescott’s critics, although accepting a role for taxes, have broadened the list of culprits to employment protection legislation, product market regulation, a high average replacement rate of unemployment insurance, high union density, and high “corporatism” (cooperative bargaining between unions, management and the government). We label this group of potential explanatory factors as the “policy/institutional variables”.

The previous literature and many policy debates, especially in the US, have missed three important points.

"Mr. Kristol"

Dani Rodrik has been waiting for this chance:

Mr Kristol, you get a C in economics, by Dani Rodrik: There! I said it, and I feel better already.  I have waited a really long time to do this, and ... Bill Kristol finally gave me an opportunity with his column in today's New York Times. ...

[H]e was my dreaded instructor long ago in two of the classes that I took as a Harvard undergraduate. He was a doctoral student at the time in the Government Department (no relation to the HKS)...  The first course was Harvey Mansfield's political theory course (for which Kristol served as teaching fellow), and the second was a sophomore tutorial (a required course for government concentrators). 

In each course, we had to write short papers once every couple of weeks. I can say that my performance on these papers, which Kristol graded, was fairly consistent.  The essay on Machiavelli? Here is a C-.  The essay on the Federalist Papers?  Here is a C.  John Stuart Mill?  Well, how about, yes you guessed it, another C.  You can say that Kristol did his best to discourage me from pursuing a career in political science...

I remember well the very first time I saw  him.  It was the first meeting of the discussion session in Mansfield's course...  He walked into the classroom and his first words were: "Hello, my name is Mr. Kristol."  To underscore the point that he was that, and not Bill or any other friendly appellations by which we students may have chosen to address him, he went to the board and wrote "Mr. Kristol." I may have been a poorly adjusted Turk in my first year in the U.S., but this still struck me as odd. He was certainly the only graduate student I met in my four years as an undergraduate who insisted on being called by his last name.   

Well, Mr. Kristol's column today takes aim at Barack (and Michelle) Obama, and does so quite unfairly in my view.  ...  What caught my attention was this passage:

Michelle Obama, in the course of a stump speech, remarked...: “Life for regular folks has gotten worse over the course of my lifetime, through Republican and Democratic administrations. It hasn’t gotten much better.”

Now in almost every empirical respect, American lives have in fact gotten better over the last quarter-century.

Really? Look at the chart below, which comes from Frank Levy... It shows the median compensation since 1980 of different groups of prime-aged men, alongside productivity. ...

People like me with graduate degrees have done great.  But the median compensation (that includes fringe benefits, by the way) of high school graduate men has declined by about 10 percent since 1980!  Mr. Kristol: that means that for a high-school graduate, the odds that his compensation would have fallen by more than 10% is 50-50.  Note that even college graduates have not seen any income gains since around 2000. ...

What is special about the last quarter century, as Frank Levy makes clear, is that it followed a period when productivity increases were broadly shared by different groups in society. That is no longer the case...

So statistics aside, who do you think has a better sense of what has happened to "regular folk" since 1980? Michelle Obama or Mr. Kristol?

---

Update: Different topic: Dani Rodrik and Arvind Subramanian have an article in the Financial Times arguing that we need to limit the flow of financial capital on international markets:

We must curb international flows of capital, by Dani Rodrik and Arvind Subramanian, Commentary, Financial Times: First large downhill flows of capital – from rich countries to poor countries – led to the Latin American debt crisis of the early 1980s. In the 1990s similar flows begat the Asian financial crisis.

Since 2002 the flows have been uphill, from emerging markets and oil-exporting countries to the developed world, especially the US. But the outcome has not been very different. So, it does not seem to matter how capital flows. That it flows in sufficiently large quantities across borders – the celebrated phenomenon of financial globalisation – seems to spell trouble.

Robert Reich: David Brooks is Wrong

Another one from Robert Reich:

David Brooks is Wrong: America Can Afford What Needs to be Done, by Robert Reich: The rightward New York Times columnist David Brooks warned in his column yesterday that a new Democratic president would be engulfed in the same "Reich versus Rubin" choice that faced Bill Clinton in 1993 -- either fulfill your campaign promises and add to the federal budget deficit or forget your promises and satisfy Wall Street (Brooks didn't put it exactly this way, but that's what he was getting at).

What Brooks neglects to mention is that the REASON a new Democratic president might face such a choice is that he or she will be burdened by much the same spend-thrift legacy that Bill Clinton discovered when he arrived in the Oval Office in 1993. Then, it was deficits of $300 billion as far as the eye could see. In January of 2009 it will be deficits of $400 billion as far as they eye can see. The fiscal-political strategy of Ronald Reagan and George H.W. Bush, in other words, was the same as that of George W. Bush -- "starve the beast" through irresponsible supply-side tax cuts and military buildups that make it almost impossible for any subsequent Democratic president to deal with the nation's needs.

This doesn't mean that a new Democratic president would have to break the bank, however. Where to get the additional money needed for universal health care, better schools, and crumbling infrastructure? Three sources: (1) The peace dividend from ending the Iraq War, (2) a more progressive tax, and (3) modest deficit spending to cover public investments that generate economic growth.

1. According to government figures, the wars in Iraq and Afghanistan have so far cost the United States more than half a trillion dollars. Another four years would cost significantly more, because this figure doesn't include the ever larger costs of recruitment, the cost of replacing the equipment that's been used in the war so far, or the ballooning costs of taking care of America's permanently wounded and disabled. If a Democratic president pulls out of Iraq -- even if some troops need to be deployed to Afghanistan -- it's a safe estimated that the peace dividend would be more than $100 billion a year, even including the costs of attending to our wounded.

2. Rolling back the Bush tax cuts for the wealthy will yield some $200 billion more. But the new president should not stop there because the only people who have the money necessary to reverse the nation's troubling trends are at the top. ...

Only a relatively few at the top would need to pay more. ... By my calculation, a tiny annual wealth tax of one-tenth of 1 percent on all net worth exceeding $5 million -- a tax that would affect only 50,000 households, or fewer than one-tenth of 1 percent of the nation's taxpayers -- would yield an additional $100 billion.

Remember that a progressive income tax has been a cornerstone of our fiscal system since 1913 -- and our current non-progressive and often regressive tax is the anomaly. ...

3. Finally, the next president will need to wean the public off the false notion that fiscal austerity is necessarily good for the economy. There's a crucial difference between public spending that builds the future productivity of the nation's workforce -- spending on education and infrastructure, for example -- and spending that improves today's living standards. Borrowing in order to accomplish the former is wise because it enhances the capacity of the nation to produce goods and services... 

This obvious point should be illustrated in the annual budget. Such "investments" should be segregrated from ordinary spending. Annual spending should not exceed annual revenues, but investments should be judged by their potential for growing the overall economy. If the returns to the economy in terms of economic grow are greater than the costs of such borrowing, these public investments are appropriate.

You can also think of the benefits from spending on infrastructure being spread intertemporally. If we build a piece of infrastructure that lasts 100 years, then the benefits will be spread over that entire time period. So each generation could, in principle, pay for the benefits they receive (e.g. I could still be paying something for the benefits I receive from the highways that were present when I was born, or even for WWII since I presumably benefit from the outcome). This justifies deficit spending because the current generation would only pay for the portion of the infrastructure they consume, and the remainder of the asset and liability would be pushed forward to the next generation.

But I think we should remember that when we were born, we inherited a substantial amount of public capital that had already been paid for. If we let that capital depreciate, then start sending bills to future generations for its replacement, that doesn't quite seem fair.

Trend Productivity Growth Points Downward

Michael Mandel reports Robert Gordon's view of recent productivity trends:

Bob Gordon Has Bad News About Productivity, by Michael Mandel on February 06: Investors breathed a sigh of relief when they saw this morning’s productivity number—1.8% in the fourth quarter—was not as bad as expected.

But they may have exhaled too soon. The key number for the economy ... is the underlying rate of productivity growth, also known as ‘trend productivity’—and the news there isn’t good.

Robert Gordon, the Northwestern University economist and productivity guru, just sent me his latest estimate of trend productivity growth— and according to his calculations, the trend productivity growth is now back to 1995 levels! In other words, all the New Economy productivity surge seems to have disappeared.

More precisely, his calculations (including this morning’s numbers—amazingly fast work, Bob!) show trend productivity running at a 1.78% annual pace. The last time it was this low was the fourth quarter of 1995.

Here’s the chart:

Martin Feldstein: The Stimulus Package is Not about Long-Term Growth

Martin Feldstein discusses the ability of monetary policy to impact the economy when there are problems in the financial and housing sectors, and the relationship between stimulus to aggregate demand and long-run growth (yesterday's post discussing Andrew Samwick's commentary comes to the same conclusion as Feldstein on whether aggregate demand changes can impact long-run growth):

Seven Questions: Martin Feldstein on the “R” Word, Foreign Policy: Foreign Policy: Everyone is anxiously discussing the possibility that the U.S. economy is in a recession or that it will be soon. You wrote in December that the probability of a recession in 2008 has now reached 50 percent. Where do you stand now?

Martin Feldstein: Well, I think it’s higher. ...

FP: And how bad do you think it could get?

MF: It could get worse than the typical recession because the usual channels for turning something like this around through monetary policy are going to be less effective now due to the problems of the credit markets. The housing decline is really very serious this time. You put those two together, and I think we could end up with something that’s deeper and longer than has traditionally been true. But it depends on the Fed, the White House, and Congress doing something to either prevent or dampen the magnitude of a downturn...

FP: U.S. President George W. Bush has proposed a roughly $140 billion stimulus package that centers on one-time tax rebates. But George Mason University economist Russell Roberts says the very idea of an economic stimulus package is “like taking a bucket of water from the deep end of a pool and dumping it into the shallow end.” As he put it, “If you can make the economy grow, why wait for bad times?” So, is the idea of a stimulus package just political theater, or do you expect it to really help?

MF: I do expect it to help, but let me be clear about why it’s not like moving water from one end of the pool to the other, or more accurately, why it is not a way of making the economy grow under all circumstances. If the economy is fully employed and growing at a normal pace, 3.5 percent, with unemployment under 5 percent and no expectation of a downturn, then aggregate demand is not the problem. Then, the only way to get the economy to grow more is to have more investment in capital equipment, people working harder, more innovation, and so on. And you can’t do that by simply giving money back to taxpayers to spend more. So, the “spend more” approach to increasing economic activity is not about long-term growth. What it’s about is offsetting the risk of an economic downturn. ...

Repeating from yesterday, which was in large part a follow-up to comments on the Landsburg article about fiscal policy:

I am less concerned with whether stabilization policy stimulates private consumption, private investment, or government investment than others seem to be, the important thing is to increase aggregate demand as fast as possible and get the economy moving again, and it doesn't much matter which component of aggregate demand, C, I, G, or NX is behind the stimulus. ... Real output growth is independent of demand changes in the long-run in most, but not all macro models. Demand shocks change short-run conditions, but the economy eventually finds its way back to the long-run path... Stabilization policy ... changes the speed at which you return to the long-run path, but its impact on the path itself is minor or non-existent. So the important thing is to get incentives or money to the people most likely to impact aggregate demand quickly which, fortuitously, is also happens to be the people most in need of help.

Andrew Samwick: A Better Way to Respond to Downturns

Here's Andrew Samwick on fiscal policy. I disagree with some of this, e.g. if you wait until you know if monetary policy works then it's too late for fiscal policy. Also, it's not clear that monetary policy works faster than fiscal policy. Monetary policy can be put into place faster than fiscal policy, but once in place it takes longer to impact the economy. When you put the implementation and effectiveness lags together, there is no necessary winner between the two types of policies.

In the post below this one on the same topic, I didn't do a very good job of separating the focus of the short-run stabilization policy (whether to try to change C, I, G, or NX) from its consequences (crowding out and crowding in), so let me try to clear that up here. I covered crowding out and crowding in the next post, so the focus here is on whether policy ought to be directed at C or I, or even G (G can be either consumption or investment; also, NX is harder to change, but policies can also be directed at NX, e.g. subsidizing exports).

Andrew recommends focusing on government investment when implementing stabilization policy. I have no problem with spending on infrastructure rather than giving tax rebates so long as such policies can be put into place quickly enough. Andrew's advance planning (see below) is supposed to make the policies easy to implement quickly, but I have some doubts about how well that would work, though I have also made the point that some of these projects are implementable on short-notice (and some, e.g. grants to state and local government, can prevent existing projects from being shut down and can be accomplished very quickly). I am less concerned with whether stabilization policy stimulates private consumption, private investment, or government investment than others seem to be, the important thing is to increase aggregate demand as fast as possible and get the economy moving again, and it doesn't much matter which component of aggregate demand, C, I, G, or NX is behind the stimulus. If you believe theory, which component is changed won't have much long-run impact on investment anyway. Real output growth is independent of demand changes in the long-run in most, but not all macro models. Demand shocks change short-run conditions, but the economy eventually finds its way back to the long-run path (assuming government provides the supporting infrastructure, but that doesn't have to be done with stabilization policy). Stabilization policy simply changes the speed at which you return to the long-run path, but its impact on the path itself is minor or non-existent. So the important thing is to get incentives or money to the people most likely to impact aggregate demand quickly which, fortuitously, is also happens to be the people most in need of help:

A Better Way to Deal With Downturns, by Andrew A. Samwick, Commentary, Washington Post: ...While politically expedient, the stimulus package is unjustified in the short run and harmful in the longer term. ...

The $150 billion agreement calls for tax rebates to low- and middle-income households as well as business incentives. Doubtless, this will boost economic activity. If you pull levers, you get movement. Personal consumption and business investment will increase relative to what they might otherwise have been. But there is no discussion of repaying the money through higher taxes in the near term. Let's drop the euphemism of "stimulus package" and call this agreement by its proper name: "deficit spending."

It is ironic that additional borrowing is prescribed as the remedy for a malady that arose from unwise borrowing. ... If we acknowledge that bad loans fueled the activity, why is it now a widely shared policy objective to maintain that level of activity?

The answer is a combination of three factors. The first is elected officials' fear that they will be punished in November for an economic downturn unless they do "something" to avoid it. Few things precipitate bipartisan agreement so quickly. Using the incomes of future taxpayers to purchase reelection today is irresponsible but common public policy.

The second factor is policymakers' fear that unless "something" is done, a temporary economic downturn could become more protracted. This fear, to the extent that it is justified, is better addressed by the Federal Reserve lowering short-term interest rates, which would stimulate the economy more quickly and comprehensively than would fiscal policy. The Fed did just this on Tuesday. Yet the fiscal-policy lever has been yanked before any data have indicated whether the Fed's stimulus has had its intended effect.

The third factor is the recognition that some households will bear a disproportionate burden of an economic downturn, combined with a belief that "something" should be done to help them. Government has a choice in whom it taxes to finance this relief -- other taxpayers today or all taxpayers in the future. That the agreement holds the former group harmless was also praised by Bush. This "stimulus bill" is really $150 billion worth of some future generation's resources appropriated to finance our own consumption. Why are we entitled to pass on this additional debt? ...

In political arguments, you can't beat something with nothing. But we can learn from this experience to have a better menu of fiscal policy options the next time around. Two changes to our budget policy would go a long way toward that goal.

First, we should rule out deficit spending to finance a consumption binge. As the economy slows, the deficit will widen even without changes in fiscal policy. But an honest budget policy would be calibrated to balance the budget over a complete business cycle. Years of cyclical deficits will be offset by years of cyclical surpluses. As a corollary, we must not waive pay-as-you-go rules that require spending that increases the current deficit to be offset later, when the economy is stronger.

Second, we can plan well in advance. The federal government has a critical role in maintaining and developing public infrastructure, whether in transportation, telecommunications or energy transmission projects. A sensible capital budget would include a prioritized list of projects that need attention. Some would be slated for this year, some for 2009 and so on, over the useful lives of the projects. When economic growth falters, the government would be in a position to move some of the projects from later years into the present year.

This approach to counter-cyclical fiscal policy has several advantages. Perhaps most obvious is that it forces the government to establish priorities for capital projects. It reduces overall expenditures by doing more of the work in times of economic slack, when costs are lower. It also abides by pay-go rules, since projects moved up to 2008 need not be done in 2009. With a little forethought, short-term economic concerns and long-term budget goals need not be in conflict.

Paul Krugman: Debunking the Reagan Myth

Paul Krugman explains why people should be upset with Barack Obama's praise of Ronald Reagan:

Debunking the Reagan Myth, by Paul Krugman, Commentary, New York Times: Historical narratives matter. That’s why conservatives are still writing books denouncing F.D.R. and the New Deal; they understand that the way Americans perceive bygone eras ... affects politics today.

And it’s also why the furor over Barack Obama’s praise for Ronald Reagan is not, as some think, overblown. The fact is that how we talk about the Reagan era still matters immensely for American politics.

Bill Clinton knew that in 1991, when he began his presidential campaign. “The Reagan-Bush years,” he declared, “have exalted private gain over public obligation, special interests over the common good, wealth and fame over work and family. The 1980s ushered in a Gilded Age of greed and selfishness, of irresponsibility and excess, and of neglect.”

Contrast that with Mr. Obama’s recent statement ... that Reagan offered a “sense of dynamism and entrepreneurship that had been missing.” ...[W]here in his remarks was the clear declaration that Reaganomics failed?

For it did fail... Yes, there was a boom in the mid-1980s, as the economy recovered from a severe recession. But while the rich got much richer, ...[b]y the late 1980s, middle-class incomes were barely higher than they had been a decade before — and the poverty rate had actually risen.

When the inevitable recession arrived, people felt betrayed — a sense of betrayal that Mr. Clinton was able to ride into the White House.

Given that reality, what was Mr. Obama talking about?... For example, I’m not sure what “dynamism” means, but if it means productivity growth, there wasn’t any resurgence in the Reagan years. Eventually productivity did take off — but [not until]... 1995.

Similarly, if a sense of entrepreneurship means having confidence in the talents of American business leaders,... American business prestige didn’t stage a comeback until the mid-1990s, when the U.S. began to reassert its technological and economic leadership.

I understand why conservatives want to rewrite history and pretend that these good things happened while a Republican was in office... But why would a self-proclaimed progressive say anything that lends credibility to this rewriting of history — particularly right now, when Reaganomics has just failed all over again?

Like Ronald Reagan, President Bush began his term in office with big tax cuts for the rich and promises that the benefits would trickle down to the middle class. Like Reagan, he also began his term with an economic slump, then claimed that the recovery from that slump proved the success of his policies.

And like Reaganomics — but more quickly — Bushonomics has ended in grief. The public mood today is as grim as it was in 1992. Wages are lagging... Employment growth in the Bush years has been pathetic... [T]he optimism of the 1990s has evaporated.

This is, in short, a time when progressives ought to be driving home the idea that the right’s ideas don’t work, and never have.

It’s not just a matter of what happens in the next election. Mr. Clinton won his elections, but — as Mr. Obama correctly pointed out — he didn’t change America’s trajectory the way Reagan did. Why?

Well, I’d say that the great failure of the Clinton administration ... was the fact that it didn’t change the narrative, a fact demonstrated by the way Republicans are still claiming to be the next Ronald Reagan.

Now progressives have been granted a second chance to argue that Reaganism is fundamentally wrong: once again, the vast majority of Americans think that the country is on the wrong track. But they won’t be able to make that argument if their political leaders, whatever they meant to convey, seem to be saying that Reagan had it right.

Creative Entry

Are business cycles and the creative destruction they bring about healthy for the economy? Do we need business cycles to clear out the inefficient firms to make room for more creative and more efficient firms to take their place?

The research described below finds that "recessions do not appear to be times of massive cleansing of less-efficient incumbents." The creative destruction of existing firms is about the same in both booms and recessions, there is nothing special about the firms that are driven from the marketplace when things are bad, so bad times are no more effective at cleaning out the inefficient than good times. It is on the entry side where there are differences over the business cycle, and making it easier for firms to enter in recessions rather than accelerating their departure may be a means of encouraging innovation and "an effective method for stabilizing the economy":

Are there cleansing effects of recessions? Entry and exit of manufacturing plants over the business cycle, by Yoonsoo Lee and Toshihiko Mukoyama, Vox EU: Creative destruction is a major driving force of modern market economies.[1] Firms enter and exit the marketplace, plants are built and destroyed, and workers change jobs and occupations. In recent decades, economists have started to learn that the amount of reallocation that occurs in market economies is massive.[2] It is the rule rather than the exception, and it is essential in a well-functioning market economy. The microeconomic ups and downs of reallocation allow new products to be introduced, new technologies to be put to use, and resources to be moved to productive places.

Modern market economies also experience ups and downs at the aggregate level. Booms and recessions—sometimes mild, sometimes severe—occur all the time, and stabilizing the business cycle is one of the major policy goals of many governments. But before conducting a stabilization policy, a natural question to ask is: how are macroeconomic fluctuations (business cycles) and microeconomic fluctuations (creative destruction) related? If macroeconomic fluctuations reflect the resource reallocations of a well-functioning market economy, the business cycle may not be such a problem after all.

One popular view among economists is that business cycles do in fact represent waves of creative destruction. Booms are times of heavy creation, and recessions are times of heavy destruction. If so, attempts to stabilize the business cycle could actually hamper the healthy process of resource reallocation. Recessions would not be a bad thing either, especially from a long-run perspective, because they would serve to cleanse the economy of inefficient production units.[3] Not all economists agree. Some hold the opposite view and see recessions as times of slow reallocation,[4] where creation and destruction decelerate. In their view, a recession is indeed a bad thing.

"What’s Your Consumption Factor?"

Jared Diamond continues to worry about overshoot - using up resources faster than they can be replaced - and the eventual collapse of consumption, though he does see encouraging signs:

What’s Your Consumption Factor?, by Jared Diamond, Commentary, NY Times: ...The average rates at which people consume resources ... and produce wastes ... are about 32 times higher in North America, Western Europe, Japan and Australia than they are in the developing world. That factor of 32 has big consequences. ...

People in the third world are aware of this difference in per capita consumption, although most of them couldn’t specify that it’s by a factor of 32. When they believe their chances of catching up to be hopeless, they sometimes get frustrated and angry, and some become terrorists, or tolerate or support terrorists. ... There will be more terrorist attacks against us ... as long as that ... difference of 32 in consumption rates persists.

People who consume little want to enjoy the high-consumption lifestyle. Governments of developing countries make an increase in living standards a primary goal... And tens of millions of people in the developing world seek the first-world lifestyle on their own, by emigrating...

Among the developing countries that are seeking to increase per capita consumption rates at home, China stands out. It has the world’s fastest growing economy...

Per capita consumption rates in China are still about 11 times below ours, but let’s suppose they rise to our level. Let’s also make things easy by imagining that nothing else happens ... China’s catching up alone would roughly double world consumption rates. Oil consumption would increase by 106 percent, for instance, and world metal consumption by 94 percent.

If India as well as China were to catch up, world consumption rates would triple. If the whole developing world were suddenly to catch up, world rates would increase elevenfold. It would be as if the world population ballooned to 72 billion people (retaining present consumption rates).

Some optimists claim that we could support a world with nine billion people. But I haven’t met anyone crazy enough to claim that we could support 72 billion. Yet we often promise developing countries that if they will only adopt good policies — for example, institute honest government and a free-market economy — they, too, will be able to enjoy a first-world lifestyle. This promise is impossible, a cruel hoax: we are having difficulty supporting a first-world lifestyle even now for only one billion people.

We Americans may think of China’s growing consumption as a problem. But the Chinese are only reaching for the consumption rate we already have. To tell them not to try would be futile.

The only approach that China and other developing countries will accept is to aim to make consumption rates and living standards more equal around the world. But the world doesn’t have enough resources to allow for raising China’s consumption rates, let alone those of the rest of the world, to our levels. Does this mean we’re headed for disaster?

No, we could have a stable outcome in which all countries converge on consumption rates considerably below the current highest levels. Americans might object: there is no way we would sacrifice our living standards for the benefit of people in the rest of the world. Nevertheless, whether we get there willingly or not, we shall soon have lower consumption rates, because our present rates are unsustainable.

Real sacrifice wouldn’t be required, however, because living standards are not tightly coupled to consumption rates. Much American consumption is wasteful and contributes little or nothing to quality of life. For example, per capita oil consumption in Western Europe is about half of ours, yet Western Europe’s standard of living is higher by any reasonable criterion, including life expectancy, health, infant mortality, access to medical care, financial security after retirement, vacation time, quality of public schools and support for the arts. Ask yourself whether Americans’ wasteful use of gasoline contributes positively to any of those measures. ...

Just as it is certain that within most of our lifetimes we’ll be consuming less than we do now, it is also certain that per capita consumption rates in many developing countries will one day be more nearly equal to ours. These are desirable trends, not horrible prospects. ...

Fortunately, in the last year there have been encouraging signs. Australia held a recent election...; the new government immediately supported the Kyoto Protocol on cutting greenhouse gas emissions.

Also in the last year, concern about climate change has increased greatly in the United States. Even in China, vigorous arguments about environmental policy are taking place, and public protests recently halted construction of a huge chemical plant... Hence I am cautiously optimistic. The world has serious consumption problems, but we can solve them if we choose to do so.

Though he does end on an optimistic note, at least for him, I can't be as gloomy about the future. Somehow, we'll figure it out and keep moving forward. Won't we?

Phelps: Innovative Thinking for European Business

Edmund Phelps reiterates his belief that Europe stifles innovation and dynamism, and that globalization may help to bring about positive change:

Innovative thinking for European business, by Edmund Phelps, Commentary, Financial Times: The great ideas about enterprise and society were all European. ... The thinking bore fruit. By the last decades of the 19th century, Europe’s business was humming and productivity was growing at record speed – both powered by unprecedented innovation. ...

Yet European ideas hostile to capitalism also arose. In the 20th century, they shaped on the continent a system that was a giant step backward – a set of values and institutions that has been badly lacking in internal dynamism and stultifying, save when external opportunities lit the way.

At the core of this reaction were the tenets of corporatism: a tradition of “solidarism”, originating with the corporazioni of ancient Rome and the medieval guilds, inspired the formation of industrial unions and employer confederations. These combines operate against entry of the outsider with an innovative idea for starting a new company and instill uncertainty even for incumbent enterprises.

A desire for order led to virtual unanimity being required among “stakeholders” and the “social partners” for a change to be allowed. ... An ethic of egalitarianism deterred the individual from deviating from his or her group... This could only have damped the entrepreneurial spirit.

A distaste for “money-grubbing” led many young people to prepare for the public sector or to manage the family business rather than start a new one.  An attitude called “scientism” deriving from the rationalism of the French Enlightenment saw ... entrepreneurs and traders as worthless and held that rational economic policy demanded a co-ordinating role by the state – indicative planning and some key state enterprises.

The corporatist tenet that companies are arms of the state for the good of society was also inimical to dynamism. It caused owners and managers of a company to fear that oversize profits would make it a target of politicians. It led to a system of patronage... It also led to state protection of threatened companies through tax relief, tariffs and bars to competition. Whole industries were subsidised as “national treasures”.

Making companies into a protected preserve led them to become social clubs in which only those with connections were let in. ... Flexibility and rapid response suffered. ...

Can the continent, with this legacy, regain high dynamism so as to lift its employment, productivity and spirits? ... Now it is said that the corporate sector has the power to transform itself... However, if the interests of owners and managers did not lift economic performance before, why should those interests raise performance now?

The general argument is that globalisation ... heightens pay-offs from better-performing economic structures. Moreover, the contact of continental companies with Anglo-American capitalism can make vivid to them some ways by which they can pull up performance.

For me, the key point is that globalisation has opened markets for the launch of continental European innovations – and these new markets have fast growth rates. This will create jobs and speed growth.

Time will tell how innovative the continental companies will become. Many companies may have to struggle in unreceptive domestic markets. Some managers may shun the risks... Finally, one wonders how large the gains can be without the revolution in workplace attitudes that high dynamism requires.

We may soon find out if his implicit air of superiority for the dynamism of the U.S. economy over Europe's is justified depending on whether we have a hard or soft landing as a result of the financial market crisis (and how it compares to Europe's response to similar problems).

I am going to make the counterargument to Phelps the lazy way - with your help (I hope). Suppose that you do accept that Europe has consciously chosen a different institutional structure that provides more social insurance, and that this has come at a cost (the size and even the existence of these costs is controversial). How would you defend the European system? Are the costs smaller than Phelps infers? What benefits would you point to, i.e. what does Europe have that the U.S. does not that more than makes up for any reduced innovation and dynamism?

"Productivity vs. Employment Growth: A Zero-Sum Game?"

New Economist discusses a new paper by Ian Dew-Becker and Robert J. Gordon on a potential tradeoff between employment growth and productivity growth, and what it could mean for growth policy:

Productivity vs employment growth: a zero-sum game?, by New Economist: All economists know productivity matters. But they also know it isn't easy to measure, nor to explain the often large and persistent productivity gaps between nations. A new paper by Harvard's Ian Dew-Becker and Northwestern University's Robert J. Gordon makes a provocative contribution to the productivity debate. Presented at a meeting of the NBER Program on Technological Progress and Productivity Measurement in Boston last week, the authors argue there is a "strong negative tradeoff between productivity and employment growth". The ... paper [is] The Role of Labour‐Market Changes In the Slowdown of European Productivity Growth...

The policy implications of their research are stark:

The strong evidence that we find for a productivity‐employment growth tradeoff changes the questions that European policymakers should be asking. They should no longer ask how they should boost productivity growth or raise employment growth. Most policies will push productivity and employment in opposite directions, and we have shown that these offsetting effects make the effects of policies on growth in output per capita ambiguous. Our new policy framework suggests that policy changes be assessed as much on their effects on government budgets as on productivity or employment, since the productivity-employment tradeoff causes some policy changes to have a negligible effect on growth in output per capita.

I'm not sure I'd necessarily agree with the authors 'zero sum' conclusions. There are for example some economies which perform better on both productivity and employment growth than others; so it's not always such a direct trade-off. One implication - that higher employment rates or higher productivity in large part reflect different national preferences - has certainly been argued before. But if their general 'zero-sum' argument proves to be more the rule than the exception, it has profound implications for policy makers throughout the OECD - especially in Europe.

Update: In comments, Ian Dew-Becker says:

I guess I should probably make it clear that we never in the paper say that anything is "zero-sum" or that raising employment by 1% lowers productivity by an equal amount.  Nor do we say that there are never times when both productivity and employment rise.  What we simply do is ask what happens if there is an *exogenous* change in employment.  In that case, theory tells us that we should expect productivity to fall by about 1/3 of one percent for every 1% rise in employment.  Our point estimates are closer to 2/3, but they have large standard errors. 

We directly address the criticism that there can be times when technological improvements raise employment and productivity simultaneously.  A good chunk of the paper is spent on statistical methods to deal with that problem.

"Creative Destruction's Reconstruction"

Brad DeLong on Schumpeter, my comments are at the end:

Creative Destruction's Reconstruction: Joseph Schumpeter Revisited, by J. Bradford Delong, Chronicle of Higher Education: My guess is that average literate Americans know of three 20th-century economists: John Maynard Keynes, Milton Friedman, and Alan Greenspan. ... In Prophet of Innovation: Joseph Schumpeter and Creative Destruction ..., Thomas K. McCraw, an emeritus professor of business history at Harvard Business School, tries to add another name to the list - Joseph Schumpeter. ...

Over the previous two and a half centuries, three different economic worldviews, in succession, reigned. In the late 18th and early 19th centuries, Adam Smith's was the key economic perspective, focusing on domestic and international trade and growth, the division of labor, the power of the market, and the minimal security of property and tolerable administration of justice that were needed to carry a country to prosperity. You could agree or you could disagree with Smith's conclusions and judgments, but his was the proper topical agenda.

The second reign was that of David Ricardo and Karl Marx. Their preoccupations dominated the late 19th and early 20th centuries. They worried most about the distribution of income and the laws of the market that made it so unequal. They were uneasy about ... whether an ungoverned market economy could produce a distribution of income - both relative and absolute - fit for a livable world. Again, you could agree or disagree with their judgments about trade, rent, capitalism, and machinery, but they asked the right questions.

The third reign was that of John Maynard Keynes. His agenda dominated the middle and late 20th century. Keynes's theories centered on what economists call Say's Law... Say's Law supposedly guaranteed something like full employment..., if the market was allowed to work. Keynes argued that Say's Law was false in theory, but that the government could, if it acted skillfully, make it true in practice. Agree or disagree with his conclusions, Keynes was in any case right to focus on the central bank and the tax-and-spend government to supplement the market's somewhat-palsied invisible hand to achieve stable and full employment.

But there ought to have been a fourth reign, for there was a set of themes not sufficiently explored. That missing reign was Schumpeter's, for he had insights into the nature of markets and growth that escaped other observers. It is in that sense that the late 20th and early 21st centuries in economics ought to have been his: He asked the right questions for our era.

China’s Ability to Gain Technology from Foreign Firms

A colleague, Bruce Blonigen, and his co-author Alyson Ma say there's little evidence to support the view that "China extracts rents and technology from foreign competitors, thus allowing it to grow even faster and longer than most would have imagined possible." China has managed to attract considerable foreign investment, but that investment has only had a moderate impact on technology transfer and the sophistication of Chinese firms:

Will China soon be making not only cheaper, but also better, products than everyone else?, by Bruce Blonigen and Alyson C. Ma, Vox EU: The opening of China and its breathtaking ascendancy to major-player status in world markets has led to significant hand-wringing by the rest of the world on many fronts. The huge outflow of cheap unskilled-labour-intensive products from China and its ramifications for wages and welfare in both developed and other less-developed countries has been a primary concern.

Recently, new hand-wringing concerns have been raised by various commentators. As it turns out, the composition of China’s exports is much closer to that of OECD countries than its level of per-capita income would suggest.[1] This has substantial implications not only for China’s ability to sustain its growth, but also for real wages of all workers in developed countries, not just unskilled ones.

A significant factor behind this surprising export sophistication by China may be the role of industrial policy to promote technologically-advanced industries. While it is well known that the Chinese government has historically had preferential tax treatment and free trade zones for foreign firms, it also often negotiates technology transfer arrangements with foreign firms. These are either through restrictions that limit FDI to joint venturing with a domestic partner or simply offering quid pro quo arrangements of technology transfer from the foreign firm to domestic ones in exchange for the foreign firm’s ability to sell to the huge Chinese market.[2]

A prime example of how this may be successful is a case in the auto industry. The Chinese government has always required foreign automakers to partner with domestic producers. Shanghai Automotive (a Chinese-owned firm) recently announced plans to start up its own factory to produce a luxury sedan after jointly producing autos in China with General Motors and Volkswagen for many years.[3]

The X-factor in all of this is China’s large and growing domestic market. It may be precisely the pivotal factor allowing China the leverage to wring out important and significant technology transfer concessions from foreign firms. China’s predecessors (such as Japan, Korea, and Taiwan) did not have this same advantage when pursuing their own industrial policies for growth in previous decades. Thus, one wonders if the upcoming growth of China will make the previous Asian miracles look pedestrian.

While the scenario we have just laid out is plausible, recent evidence suggests otherwise. China’s ability to gain technology from foreign firms and develop its own productive sophistication has actually not been that significant.

Are we Headed for Collapse?

Am interview with Jared Diamond, and a response by Jerry Taylor from Cato:

How much longer can we 'overshoot'? ... Kai Ryssdal: There's a technical term for what we're doing as we eat, shop, drive and go about our daily lives. The word is "overshoot" -- when a population uses up resources faster than they can be replaced.

Today, we're consuming about 30 percent more trees, fish and fossil fuels than the planet can regenerate. We can run a deficit like this for a little while, but there are limits to how big a hole we can dig before it gets too deep to get out of.

To help understand those limits we spoke with Jared Diamond. He's a professor of geography at the University of California, Los Angeles. You might know him better though his books -- Collapse, among others. When we talked, I asked him whether we've overshot our resources already:

Jared Diamond: Of course we are in overshoot and everybody knows that we are in overshoot -- and we are overshooting the things that people talk most about. First thing we're running out of is oil, and everybody knows it. Second thing we're running out of is water. Something like 70 percent of the fresh water in the world is already utilized. Topsoil -- we're exploiting it and it's running off into the ocean. We've already exhausted something like maybe half of the topsoil that was originally in the Great Plains. And then fish and forests...

Ryssdal: Is the rate of use increasing? Are things getting worse more quickly than they did 20 years ago?

Diamond: Yes, things are getting worse more quickly, for obvious reasons -- namely, the human population is increasing, and worse yet, average consumption rates are increasing. That's to say, out of the world's six-and-a-half-billion people, the majority are in the so-called Third World, but they are working hard to catch up.

Ryssdal: The same way that I would imagine there's no one thing you can point to where you'd say that's the tipping point of decline, is there one thing that can be done to reverse that decline?

Diamond: Yes, and that is to stop looking for the one thing that we could do to reverse the decline. The reason is that there are about a dozen major problems and we got to solve them all. If we solve 11 of those problems, but we don't solve the water problem, we're finished. Or if we solve 11 of those problems but we don't solve the problem of topsoil and agriculture, we're finished. So we've got to solve all 12 problems and not look for that one problem that's most important.

Ryssdal: It seems to me what we're missing is the "or else" part of this discussion... There's a whole list of things we have to fix -- what happens if we don't?

Diamond: History is full of the "or elses." For example, the most advanced Native American society of the New World, the Maya, had astronomy and astronomical observatories and writing and books. They chopped down their trees, they ran into water problems, and the big Maya cities that American tourists go to visit today, they go abandoned.

Ryssdal: Are we seeing those crashes anywhere today?

Diamond: Absolutely. The African country of Rwanda, the most densely population country in Africa, began to get deforested, massive problems of soil erosion, too many people and not enough food... And in 1994 Rwandans transiently quote "solved" -- if I can put it in quotes -- their population problems in the most awful way imaginable. Namely, six million Rwandans killed, one million Rwandans in brutal ways, and drove another two million into exile. That's an example of a country that did not master its environmental problems.

Ryssdal: How much time to we have left?

Diamond: If we carried on as we are now, then I would expect that we will not have a First World lifestyle anywhere sometime between 30 and 50 years from now. ...

An "alternative view" to Jared Diamond's Collapse:

Jerry Taylor: The case for sustainability seems reasonable enough. After all, who is for "unsustainability"? But trying to pin down what sustainability means is like trying to nail Jell-O to a wall.

One of the more popular definitions comes from the U.N., which defines sustainability as that which "meets the needs of the present without compromising the ability of future generations to meet their own needs." But how can we reasonably be expected to know what the needs of people in 2107 might be? The challenges they might face are no more obvious to us than our present-day challenges might be to people living in 1907.

Nevertheless, the U.N. definition can be read as a call to improve human welfare over time. An entire profession has grown up around that proposition. It is known as economics. ...

Some understand sustainability as a call to protect the natural resource base from deteriorating so that future generations will be as blessed as we are. But the wealth created by exploiting resources is often more beneficial than the wealth preserved by "banking" those resources for future use. Otherwise, there would be little point in exploiting resources for commercial use in the first place.

Are present generations truly worse off because past generations drew down stocks of minerals and metals to make advanced satellites, build modern industry, and -- through the wealth thereby created -- develop advanced medicines and dozens of other life-enhancing technologies and practices? I don't think so.

Fine, you might say. But isn't there a case for making sure that important resources are maintained at a "minimum critical level" and that the proceeds of their use be preserved for future generations? Sure -- but that's functionally indistinguishable from the mission to maximize human welfare over time.

There's nothing necessarily wrong with sustainability. It just doesn't add much to the intellectual conversation.

I find myself in an intermediate position. While the type of collapse described above seems overly pessimistic, we'll muddle our way through somehow, there are reasons - market failures - that we do not value the present and future tradeoffs properly, and that this leads to inefficient resource use, i.e. there is the potential for overconsumption. So the idea that we don't need to worry about sustainability, that market forces will do it for us, is not one I share. Even many conservatives recognize the need for government intervention to overcome market failures of this type - using a carbon tax versus other ways of limiting greenhouse gas emissions is one such example - and the debate is mostly about the form of the interventions rather than about the need for us to find a sustainable path.

The Canseco Dummy

Phil Izzo on unethical contagion:

Unethical Contagion: The Canseco Effect, by Phil Izzo, WSJ Economics Blog: ...[I]n a new paper Eric D Gould ... and Todd Kaplan ... wonder what happens when ... productivity is based on unethical practices. The economists study the example of baseball player Jose Canseco, who admitted to taking steroids over the course of his career. They examine data to determine whether his presence affected the performance of his teammates.

They found that a player’s performance increased significantly after he played with Canseco and found that no other baseball player produced a similar effect.

The findings “suggest that workers not only learn productive skills from their co-workers, but sometimes those skills may derive from unethical practices. These findings may be relevant to many workplaces where competitive pressures create incentives to adopt unethical means to boost productivity and profits,” the authors said.

Of course, they do offer a caveat... “It is also possible that [Canseco’s] colleagues benefited from his workout habits, batting technique and work ethic”...

Is There a Productivity Crisis in Our Future?

Dean Baker and John Schmitt are worried about a productivity slowdown (graph):

The real economic crisis, by John Schmitt and Dean Baker, Comment is Free: All the bad news about the bursting of the US housing bubble ... has deflected the world's attention from what is arguably an even more fundamental problem...: the sharp deceleration in productivity growth since the middle of 2004. ...

For Europeans, long-encouraged to see the United States as the flexible economic ideal, the productivity slowdown sounds another note of caution about the US model. Europeans already know that the US economy generates substantial inequality. The last three years of slow productivity growth now suggest that all that inequality apparently doesn't even guarantee faster growth.

Economists ... agree that the growth rate of productivity is the single most important determinant of the long-run prospects for a country's standard of living.

The deceleration in US productivity growth since the second half of 2004 is striking by historical standards. Between 1947 and 1973, the golden age of postwar capitalism, productivity growth averaged about 2.8% per year in the United States. At that pace, the output of the average worker was set to double about every 25 years... From 1973 through 1995, however, productivity growth took a nosedive, with the average rate dropping to just 1.4%. At this lower rate, average worker output would take about 50 years to double, implying far slower progress in living standards.

From the mid-1990s on, however, official productivity growth again accelerated rapidly, returning to a 2.9% rate reminiscent of the golden age. Quite suddenly, though, in the second half of 2004, productivity growth dropped sharply. From the third quarter of 2004, productivity growth rate, at 1.3% per year, has not even managed to match the 1.4% growth rate of the productivity bust of 1973-1995. ...

The productivity numbers are likely even worse than they look. The most important reason is that the official productivity figures don't handle the rapid depreciation of new technology very well. Productivity gauges average output per hour worked - including what workers produce simply to replace obsolete machinery. But, the portion of output that workers produce just to replace worn-out machinery does not actually improve our standard of living. ...

In the earlier postwar period, when machinery depreciated fairly slowly, ignoring this depreciation effect on productivity growth didn't matter much. The driving force behind the 1996-2004 productivity acceleration, however, was massive investment in computers, software and related high-tech machinery, all of which become obsolete much faster than earlier generations of capital goods. (Try running Windows Vista on the computer you bought just a couple of years ago.) Since 1995, however, the depreciation effect is large - almost 0.2 percentage points per year. After we make this adjustment, productivity growth since the middle of 2004 falls from an already disappointing 1.3% per year to a mere 1.1%... Such a severe deceleration in productivity growth constitutes a serious long-term threat to US living standards.

Meanwhile, how has Europe been faring? According to internationally comparable data from the Groningen Growth and Development Centre, between 1995 and 2004, the United States outperformed most of Europe...

Between 2004 and 2006, however, the US lead all but evaporated. The US rate fell to 1.7%, not much different from the rates in Germany (1.7%), France (1.4%), and the United Kingdom (1.4%). If current trends continue, US growth rates may soon be trailing those of Europe (as was the case for almost the entire postwar period before 1995).

Europeans who want their countries to adopt economic policies that are more like those in the United States should consider these data carefully. There is an argument for adopting policies that lead to more inequality and less economic security when the result is more rapid economic growth. There is no obvious argument for more inequality and less security when the result is the same or even slower economic growth.

"Is the United States Losing Its Productivity Advantage?"

Mary Amiti and Kevin Stiroh of the NY Fed look at how strong foreign productivity growth will affect the U.S. economy:

Is the United States Losing Its Productivity Advantage?, by Mary Amiti and Kevin Stiroh, Current Issues, September 2007  Volume 13, Number 8, FRB NY: Strikingly high rates of labor productivity growth in China, India, and other emerging economies have prompted concerns that U.S. workers and firms are losing ground to their competitors in world markets. A closer look at the evidence, however, suggests that rapid foreign productivity growth will bring gains as well as losses to the U.S. economy. Some import-competing firms may be compelled to restructure or leave the market, but consumers will benefit from lower import prices and more import varieties, and U.S. exporters may gain access to cheaper intermediate products from abroad.

Since 1995, the United States has experienced a period of strong labor productivity growth, with GDP per employee advancing at a rate of 2.0 percent a year. While this rate easily exceeds the 1.0 percent average growth rate seen in the euro area, it falls markedly short of labor productivity growth in emerging markets, which has averaged more than 4.0 percent across developing Asia and Eastern Europe.[1] China and India, two large emerging economies of particular interest, have seen spectacular growth rates of 6.4 and 4.4 percent per year, respectively.

Labor productivity growth—the ability to produce more output per hour worked—is almost universally viewed as a positive development for an economy. When productivity growth is strong, an economy becomes wealthier, living standards rise, and short-run inflationary pressures may be tempered. Many observers of the rapid rise of China and India, however, express fear that strong productivity growth in foreign countries will harm the U.S. economy, displacing workers and making it more difficult for U.S. producers to compete in a global marketplace.

In this edition of Current Issues, we look more closely at differences in productivity growth across countries and examine how strong productivity growth abroad may affect the U.S. economy. We consider the reasons for the euro area’s weak productivity growth and the emerging market economies’ robust performance. We then turn our attention to the potential channels through which foreign productivity growth can affect U.S. workers, producers, and consumers. Our review of the evidence suggests that rapid growth of productivity abroad will have mixed effects on the U.S. economy, bringing gains to some groups and losses to others. Consumers, for example, may benefit from lower import prices and a greater variety of imports, while U.S. firms that compete with firms in emerging economies may be forced to restructure or exit the market. In the concluding section, we discuss some of the implications of our analysis.

FRBSF: Changing Productivity Trends

Bharat Trehan of the San Francisco Fed examines changing productivity trends:

Changing Productivity Trends, by Bharat Trehan, Economic Letter. FRBSF: As important as productivity growth is to the health of the economy, much remains to be understood about how and why its trend growth rate changes. This Economic Letter discusses some of the points of debate in the research on these issues.