Economist's View

"The Great Moderation: What Caused It and Is It Over?"

The paper below says that, contrary to what you might think, the Great Moderation is not over. What is the Great Moderation? From the paper:

The idea of “the Great Moderation” came to widespread public attention in a 2004 speech by then-Federal Reserve Governor Ben Bernanke.1 He began his speech with a statement of empirical fact: “One of the most striking features of the economic landscape over the past twenty years or so has been a substantial decline in macroeconomic volatility.”

This empirical fact was established in two influential academic papers by Kim and Nelson (1999) and McConnell and Perez-Quiros (2000).2 Both papers presented evidence of a large reduction in the volatility of U.S. real GDP growth over the past half-century. Furthermore, both papers found that the reduction was sudden and estimated to have occurred in 1984Q1.

This sudden reduction in volatility is visible to the naked eye in Figure 1, which plots seasonally-adjusted quarterly U.S. real GDP growth for the period of 1947Q2-2009Q3.

Let me repeat a list of factors from a previous post that have been proposed to explain the Great Moderation:

• Better technology, e.g. information processing allowing better inventory control and management
• Better policy, e.g. inflation targeting
• Good luck so that no big shocks hit the economy
• Financial innovation and deregulation
• Globalization leading to dispersed risk
• Better business practices (this is less common, here's the link)
• Increased rationality of participants in financial markets
• Demographic shifts (again, since this less commonly offered as an explanation, here's the link)

Much of the literature prior to the crisis found that monetary policy was at least a contributing factor, if not the major factor behind this change (e.g. empirical evidence from Clarida, Gali, and Gertler of a large increase in the coefficient on inflation in the Taylor rule that, in New Keynesian models, would lead to a more stable economy). However, this paper focuses on the "good luck" explanation and finds that "smaller economic shocks related to oil prices, productivity, and inventories explain much of the Great Moderation." In addition, the paper finds that our good fortune may not be over:

The Great Moderation: What Caused It and Is It Over?, by James Morley: In this Macro Focus, our resident time series econometrician, James Morley, tries to rehabilitate the “Great Moderation.” His findings are both surprising and encouraging:

• Contrary to conventional wisdom, the Great Moderation was not a myth. There has been a very real, broad-based decline in U.S. macroeconomic volatility since the mid-1980s.

• The reduction in volatility does not appear to be primarily the result of better policy or changes in the structural response of the economy to shocks.

• Instead, the Great Moderation appears to be mostly due to smaller economic shocks (e.g., oil price shocks, productivity shocks, and inventory mistakes).

• The technological basis for the smaller shocks means that the prognosis for the continuation of the Great Moderation is much better than you might think.

Given the financial and economic turmoil of the past few years, it would be easy to believe the “Great Moderation” was a myth based on wishful thinking. Many commentators have proclaimed as much and even many of us who study the phenomenon have started to wonder whether it was all too good to be true.

Despite these doubts, a dispassionate examination of the data suggests that the stabilization of economic activity since the mid-1980s was very much a reality. The more legitimate question is whether or not it is now over. This Macro Focus seeks to answer this question through careful analysis of what caused the Great Moderation. The finding that it was largely due to smaller economic shocks for technological reasons implies a surprisingly optimistic prognosis for its continuation. ... [paper]

"Search Technologies and Retail Competition"

Has internet search technology achieved its promise of frictionless commerce?

Search Technologies and Retail Competition, by Glenn Ellison,^* NBER Reporter: When the Internet first came into wide consumer use, one heard a lot about the promise of “frictionless commerce.” New search technologies would make it easy for consumers to find the exact product they wanted at the lowest possible price. Whether such a future comes to pass is obviously of great interest to consumers and online retailers. And, it may have dramatic effects on the traditional retail and media sectors. My recent research has included several projects that aim to improve our understanding of Internet search technologies and retail markets.

Price Search and Obfuscation

The desire to better understand where search frictions come from and how they may evolve motivates my work with Sara Fisher Ellison on Pricewatch. Pricewatch is a specialty search engine serving consumers who want to buy computer parts (such as memory upgrades or video cards) at low prices from no-name e-retailers. One chooses the desired product from a menu on Pricewatch’s first page -- for example, 128 MB PC100 SDRAM memory module -- and Pricewatch returns a list, sorted by price, of dozens of retailers carrying that product. A number of retailers have built businesses by serving Pricewatch consumers, and price competition occurs far more quickly this way than in the traditional retail sector: rankings on the Pricewatch list change throughout the day as firms raise or lower prices by a few dollars to move up or down.

Our choice to study this idiosyncratic environment may seem strange, but it illustrates how empirical work is often done in industrial organization. Developing theoretical models of the interactions between consumers and firms is the only way to address many important questions. Studying atypical environments can be a great way to get insights on how accurate models are. In our case, the simplicity of the business model of a Pricewatch retailer – basically, they just take memory modules off a shelf, put them in cardboard boxes, and mail them – makes it much easier to estimate profit functions. The frequent changes in relative prices let us estimate demand using (presumably random) short-term fluctuations. And, the generic nature of the products and retailers creates extremely price-sensitive demand, which highlights the role played by search frictions in sustaining markups.

From our first look at the Pricewatch environment it was clear that the frictionless ideal had not been fully realized.¹ Yes, prices were very low and close together. But buying a product at the advertised price was rarely simple. Often, one had to search through multiple pages and read a great deal of fine print. Most striking was the litany of automated sales pitches encouraging one to upgrade to a superior product and/or buy additional add-ons to complement what one was trying to buy. We use the term “obfuscation” to describe practices by firms that increase search frictions, and we view Pricewatch as a great environment from which to gain insights on the topic.

"Will Stimulating Nominal Aggregate Demand Solve our Problems?"

There has been a bit of a pushback, both implicit and explicit, to calls to implement policies to accelerate hiring. For example, Jim Hamilton recently noted an old theory of his where some types of unemployment cannot be overcome through standard stimulative policies (this was in response to a question about whether Arnold Kling's recalculation model can explain asymmetric adjustment, but I am focusing on the technological and physical constraints present in both Hamilton and Kling's model, not whether the asymmetries can be explained):

Will stimulating nominal aggregate demand solve our problems?, by Jim Hamilton: ...[I]n 1988 ... I presented a model in which unemployment arises from a drop in the demand for the output of a particular sector. The unemployed workers could consider trying to retrain or relocate, or might instead decide to wait it out in hopes that the demand for their specialized skills will come back. ...[T]he key kind of unemployment that I think this sort of model describes-- waiting for an opening in the particular area in which you've specialized-- is caused by drops in demand...

Insofar as the frictions in that model are of a physical, technological nature, increasing the money supply would simply cause inflation and not do anything to get people back to work. I should emphasize that I built that monetary neutrality into the model not because I think it is the best description of reality, but in order to illustrate more clearly that there is a type of cyclical unemployment that stimulating nominal aggregate nominal demand is useless for preventing.

My personal view is that real-world unemployment arises from the interaction of sectoral imbalances with frictions in the wage and price structure of the sort documented by Truman Bewley and Alan Blinder. The key empirical test, in my opinion, is at what point inflationary pressures begin to pick up. If Krugman is correct, we could have much bigger monetary and fiscal stimulus without seeing any increase in inflation. If the sectoral imbalances story is correct, it would be possible for inflation to accelerate even while unemployment remains quite high. ...

Thus, according to this view, some part of the sectoral imblances in of a "physical, technological nature," and standard demand side policy does not help. Policy may be able to induce people to stop sticking around for jobs that will never materialize and move on, but those typically aren't the kinds of policies typically associated with stimulating employment, e.g. tax credits to encourage hiring.

A new colleague of mine, Nick Sly, emails that it is not always optimal, from a long-run economic growth point of view, to provide incentives for firms to hire workers, how those incentives are structured is crucial:

There is a paper on my website called Intraindustry Trade and the Composition of Labor Market Turnover. (It is a heavily revised version with more of a trade focus.) The highlights of the paper are:

1. Because of constant turnover in labor markets, hiring costs are persistent for all firms.

2. Turnover and Hiring occur both because firms update their workforce (job creation costs) and to replace workers who leave for reasons unrelated to the firm (worker hiring costs). These phenomena are distinct 3. (KEY) I show (theoretically and confirm empirically) that each source of turnover has the opposite effect on the incentives of firms to adopt state-of-the-art production techniques. As a consequence industries with different compositions of labor mobility have varying degrees of engagement of foreign markets.

The relevance:

The act of hiring workers could be the result of demand side (firms creating new jobs) or supply side (workers need to be replaced) incentives. We may not want to jump to quickly to put people back to work if it means employing less productive production methods. The short term gains can be lost as poor matching of workers and adoption of weak production methods alter the recovery path.

I believe that the timing of the hiring tax credits, and the sort of hiring it promotes (i.e. creating new vacancies versus filling previously existing positions), will determine the long-run consequences of such a policy.

Let me try to express the main point a different way. When firms hire workers, as they are constantly doing, they have a choice between using old or new technology, and the way in which hiring incentives are structured can affect this choice. As we think about putting programs to induce firms to hire workers in place, we need to be sure that we are not giving firms the incentive to use old rather than new technology so that economic growth is maximized, and we also need to be sure that we don't distort the choice firms make toward labor intensive rather than growth maximizing change.

Our economy faces lots of adjustments as it recovers from the recession, far more than in some past recessions when we could return, pretty much, to what we were doing before the shock hit. But not this time. We have adjustments in the auto, finance, and housing sectors just for openers, and there are other underlying adjustments that are in progress as well (e.g. in the manufacturing sector). As these adjustments occur, it's important that we don't impede the necessary change, or induce firms to make suboptimal choices as we attempt to induce them to hire more workers.

But if we give firms the time they need to make the changes that are needed, there will be excess labor during these adjustment periods, both from sectoral reallocations and from technological change. The question is what we are going to do to help people who lose their jobs or are otherwise negatively affected by these transitions.

One choice is to induce firms to house the excess labor during this time period through tax or other inducements, but the danger is that in doing so you distort the choices of firms away from the optimal trajectory. Another choice is for the public sector to absorb much of the burden by providing jobs to the unemployed and providing the aid needed to carry workers through the adjustment period (and we can also provide incentives for workers to relocate in areas where they have a better chance of finding employment).

Even better, though, is to structure the incentives so that the technological change is encouraged by the hiring of new workers. For example, Nick Sly suggests that the hiring credit be only for "new" jobs offered by firms, somehow defined, because this gives firms an incentive to both hire new workers and to employ the latest technology. Thus, the best choice of all is to provide incentives to employ workers that have, as a byproduct, and inducement to maximize technology and economic growth, and then use public employment (e.g. infrastructure) or aid to help those who remain unemployed.

No matter what we do, however, there will be those who cannot find employment during these time periods, and we need to do a better job than we do in helping those who, through no fault of their own, are caught up in the tumultuous change that sometimes occurs in modern economies.

"A Vision for Innovation, Growth, and Quality Jobs"

Larry Summers, blogging from the White House, says the administration's policies will create jobs and help to ensure that "the entrepreneurial spirit that Schumpeter recognized in the early twentieth century will continue to drive the American economy":

A Vision for Innovation, Growth, and Quality Jobs, by Lawrence H. Summers: President Obama laid out his vision for innovation, growth, and quality jobs earlier today at Hudson Valley Community College. The President's plan is grounded not only in the American tradition of entrepreneurship, but also in the traditions of robust economic thought.

During the past two years, the ideas propounded by John Maynard Keynes have assumed greater importance than most people would have thought in the previous generation. As Keynes famously observed, during those rare times of deep financial and economic crisis, when the "invisible hand" Adam Smith talked about has temporarily ceased to function, there is a more urgent need for government to play an active role in restoring markets to their healthy function.

The wisdom of Keynesian policies has been confirmed by the performance of the economy over the past year. After the collapse of Lehman Brothers last September, government policy moved in a strongly activist direction.

As a result of those policies, our outlook today has shifted from rescue to recovery, from worrying about the very real prospect of depression to thinking about what kind of an expansion we want to have.

An important aspect of any economic expansion is the role innovation plays as an engine of economic growth. In this regard, the most important economist of the twenty-first century might actually turn out to be not Smith or Keynes, but Joseph Schumpeter.

"The Costs of Economic Growth"

Lee Arnold says via email "this is interesting." It's an analysis of when and if economic growth should be maximized when technological progress involves risks as well as benefits:

The Costs of Economic Growth, by Charles I. Jones, Stanford GSB and NBER, August 18, 2009: 1. Introduction In October 1962, the Cuban missile crisis brought the world to the brink of a nuclear holocaust. President John F. Kennedy put the chance of nuclear war at “somewhere between one out of three and even.” The historian Arthur Schlesinger, Jr., at the time an adviser of the President, later called this “the most dangerous moment in human history.”¹ What if a substantial fraction of the world’s population had been killed in a nuclear holocaust in the 1960s? In some sense, the overall cost of the technological innovations of the preceding 30 years would then seem to have outweighed the benefits.

While nuclear devastation represents a vivid example of the potential costs of technological change, it is by no means unique. The benefits from the internal combustion engine must be weighed against the costs associated with pollution and global warming. Biomedical advances have improved health substantially but made possible weaponized anthrax and lab-enhanced viruses. The potential benefits of nanotechnology stand beside the threat that a self-replicating machine could someday spin out of control. Experimental physics has brought us x-ray lithography techniques and superconductor technologies but also the remote possibility of devastating accidents as we smash particles together at ever higher energies. These and other technological dangers are detailed in a small but growing literature on so-called “existential risks”; Posner (2004) is likely the most familiar of these references, but see also Bostrom (2002), Joy (2000), Overbye (2008), and Rees (2003).

Technologies need not pose risks to the existence of humanity in order to have costs worth considering. New technologies come with risks as well as benefits. A new pesticide may turn out to be harmful to children. New drugs may have unforeseen side effects. Marie Curie’s discovery of the new element radium led to many uses of the glow-in-the-dark material, including a medicinal additive to drinks and baths for supposed health benefits, wristwatches with luminous dials, and as makeup — at least until the dire health consequences of radioactivity were better understood. Other examples of new products that were initially thought to be safe or even healthy include thalidomide, lead paint, asbestos, and cigarettes.

The benefits of economic growth are truly amazing and have made enormous contributions to welfare. However, this does not mean there are not also costs. How does this recognition affect the theory of economic growth?

This paper explores what might be called a “Russian roulette” theory of economic growth. Suppose the overwhelming majority of new ideas are beneficial and lead to growth in consumption. However, there is a tiny chance that a new idea will be particularly dangerous and cause massive loss of life. Do discovery and economic growth continue forever in such a framework, or should society eventually decide that consumption is high enough and stop playing the game of Russian roulette? The answer turns out to depend on preferences. For a large class of conventional specifications, including log utility, safety eventually trumps economic growth. The optimal rate of growth may be substantially lower than what is feasible, in some cases falling all the way to zero.

Paul Krugman and Charlie Stross

A few passages from a much longer discussion between Paul Krugman and science fiction author Charlie Stross (via): 

Anticipation World Con, Transcription by Edwin Steussy: ...PK: [T]his is different for me, but it should be a lot of fun. … What do you really think the world is going to look like, say, 30 years from now? ... I was thinking about this coming up – and thinking that – maybe it was just my age or something, but things don’t seem to have changed as much in the last 30 years as myself as a sci-fi reader would have expected them to. And I don’t know if I’m missing something... There is no question that things have changed, but ... I still have the sense that the transformation in the quality of life that I thought would be happening by now... If I can veer off into something I allegedly know something about, in case you haven’t heard, we have a global economic crisis. What’s amazing about it is how much it’s traditional.

CS: A good, old fashion banking crisis.

PK: They happen to involve complicated institutions that are not called banks, they do rely on IT, you no longer have to have rows of tellers to provide people fast access to cash, not subject to standard bank regulation, they can manage to have bank runs all the same. You read John Maynard Keynes‘ The Great Slump of 1930, and with just a few words changed it’s a very fine description of what’s happened to the world in the past year. We haven’t actually changed the structure of how we do things to anything like the extent one might have imagined.

CS: Working hypothesis. It’s a working hypothesis that I’m trying to get my head around. Back to 1970-ish, do you remember the book by Alvin Toffler called Future Shock?

PK: Yeah.

CS: My working hypothesis is that we are living in a future shocked civilization in fact the future shocked globe. There is a lot of evidence of it all around. The ascendancy of religious fundamentalism in all sorts of cultures is one particular response. People don’t like rapid change when it’s applied to them against their will, when it’s coercive, and when people don’t like something, an external stimulus, they tend to kick back against it. Religious fundamentalism boils down very largely to one thing: certainty in life. ... And to people who are disoriented and distressed by the way the world around them is changing that’s got to be a source of … a very attractive offer of mental stability.

PK: You know, I think this is where being an American makes a difference. And knowing that we’ve had these crazies with us consistently as a major feature of our political scene. Going back to certainly the 1920’s.

CS: Don’t they seem to be a bit louder now?

PK: They have their ups and downs. But, a lot of what we see now is … read H.L. Menken on the fundamentalists and it’s the same … it sounds very similar. In a lot of ways, I think that the modern world began in the 20’s with radio and the penetration of mass culture into places that previously had been comfortable with their bibles. So this is not so new. They got louder … I’m about to go off onto a discourse on US … it’s not clear that the fundamentalists got any more fundamentalist … what happened was that we had a political shift in the United States at least that empowered them … the break up of the old weird coalition between basically Northern labor unions and Southern segregationists … created a place where the religious right had power again but I don’t think that there’s … I’m about to switch sides here … there has been a rise in religious fundamentalism among unusual groups there are … amazing number of relatives of mine who have ... kids ... have suddenly turned orthodox and that was not something anyone quite envisioned … maybe some kind of future shock.

CS: I’ve noticed in the UK over the past decade there has been an increasing (small “c”) conservatism in the electorate fostered by a feedback loop with some newspapers. Standard headline is, “Threatening entity here going to do something hideous to you.”

PK: That’s my column for tomorrow’s New York Times actually. ...

...

CS: There’s a huge latency in ... technology. ...

PK: ...There’s a favorite story about this among the economic historians and it’s about electricity. Which is that electrification … widespread electrification is a phenomenon of the 1880’s and particularly factories were electrified in the 1880’s and it did nothing much for productivity because they were still building factories the way … a 19th century factory was a five story brick building … very tight spaces … which has a steam engine in the basement … driving trains and pulleys and shafts and it took about 30 years for them to figure out that, hey!, with each machine having it’s own electric motor, we can have a wide spread out single story floor plan with lots of space and we don’t have to be moving stuff up and down these stairs and we can have plenty of room for material flow and … we saw a little bit of that in IT, but the thing was it was terribly disappointing because although it actually does show in the GDP numbers, what was the first place where people really figured out what do with IT in a way that was productive, and the answer was Wal-mart. It turns out that all this unglamorous stuff like inventory management, basically knowing what exactly is left on the shelves the moment it is checked out of the counter being able to plan your whole system for something big box stores brought in and actually you can see that’s where the GDP growth …

CS: Logistics is vastly underrated. It’s invisible.

PK: That’s right. That’s the other thing, with globalization … about the outsourcing … about the Internet and the IT … but that’s a relatively minor thing so far, probably much bigger in ten years so, but the big thing was the freight container.

CS: Oh yeah, the freight container and the fork lift and pallet.

PK: Right. And the big cranes and the bar code on the side of the container.

CS: ...I think one of the things logistics is going to … well, computers are going to give us, is much tauter supply chains between production and consumption.

PK: That’s by the way one of the mysteries … we don’t quite know why there’s so much stuff being shipped long distances, particularly … its one thing when we’re talking about oil because oil is where it is, it has to be shipped to get to other places, but … there was a time, again thinking of the United States, a time when we knew what Detroit did for a living, we knew Troy, New York was the detachable collar and cuff center of America and all these local specializations and you could explain why stuff was being shipped back and forth. These days, it’s very very hard to figure out what’s different about the economies of different cities and so if … why is there so much … who are all those people on the plane today. Why were they traveling and … better still, when you’re flying between Cleveland and Atlanta, what is it that Cleveland has that Atlanta needs? What is it that Atlanta has that Cleveland needs? Actually, what is that Atlanta has that anyone needs? I actually did try to figure out what Atlanta’s economy is about … it seems to be about the airport. We’re not quite getting it. ... If we can all have short supply chains why don’t we have that now for all of the services that cities generate and yet we have all of this trucking going back and forth among seemingly very similar US cities.

CS: Because I reckon that complexity, the number of different components, the number of different of different specialties that you need to run a modern, high tech civilization has mushroomed by orders of magnitude over even the past 50 years. And all of this stuff is really small, very, very specialized, there’s only a very few people who do it in one place and it has to get shipped about even though it looks similar.

PK: That’s the working hypothesis, something like that. ...

I think it's difficult to see how much things have changed when you are living through it. It's like kids. When you are with them everyday, you hardly notice that they are changing, but if you don't see them for several years, the large amount of change is obvious. I don't think we fully realize yet how much of a revolution information technology - the internet in particular - is bringing about. It's not as spectacularly obvious as underground cities or flying cars, but I think the change it brings is far more pervasive both socially and economically. In the future, when people look back at this time period, they will see it as a time that brought about vast change to the world, on the order of the industrial revolution. The change has not yet been fully realized, it's only been a couple of decades or so since the internet began, which isn't that long as these things go, and we are still getting wired up at both the extensive and intensive margins (i.e. the technology is still spreading, improving, and becoming more mobile, and we are increasingly interconnecting ourselves with links, RSS feeds, Facebook, Twitter, and the like). But even so, even though this is just the beginning, the changes that have occurred already are far more extensive than we understand as we live through them. I was thinking about getting old the other day, and one of the things that disappoints me most about the prospect of my time ending is that I won't get to see how this all plays out, future shock and crazies included. I think we are living through a time of vast, important change and what the world will look like hundreds and thousands of years from now fascinates me. I wish I could stick around to see what happens.

One Operating System to Rule Them All?

Google is moving forward with its plans to develop an operating system:

Google Plans a PC Operating System, Helft and Vance, NY Times: In a direct challenge to Microsoft, Google announced ... it is developing an operating system for PCs that is tied to its Chrome Web browser.

The software, called the Google Chrome Operating System, is initially intended for use in the tiny, low-cost portable computers known as netbooks... Google said it believed the software would also be able to power full-fledged PCs.

The move is likely to sharpen the already intense competition between Google and Microsoft... “Speed, simplicity and security are the key aspects of Google Chrome OS,” said Sundar Pichai ... and Linus Upson ... in a post on a company blog. “We’re designing the OS to be fast and lightweight, to start up and get you onto the Web in a few seconds.”

Mr. Pichai and Mr. Upson said that the software would be released online later this year under an open-source license... Netbooks running the software will go on sale in the second half of 2010.

The company likely saw netbooks as a unique opportunity to challenge Microsoft, said Larry Augustin, a prominent Silicon Valley investor...

“Market changes happen at points of discontinuity,” Mr. Augustin said. “And that’s what you have with netbooks and a market that has moved to mobile devices.” ...

Google’s plans for the new operating system fit its Internet-centric vision of computing. Google believes that software delivered over the Web will play an increasingly central role, replacing software programs that run on the desktop. In that world, applications run directly inside an Internet browser, rather than atop an operating system, the standard software that controls most of the operations of a PC.

That vision challenges not only Microsoft’s lucrative Windows business but also its applications business, which is largely built on selling software than runs on PCs. ... Google said Tuesday night that it still had work to do to develop a full-fledged operating system. ... [Here's Google's announcement.]

I resisted moving from DOS to Windows, and then got stuck on Windows once I did move, so I'm probably not the best judge of whether the model Google is using to challenge Microsoft will be successful, and perhaps both models can survive by serving different needs. However, I've also spent time on mainframe batch and time-share systems where you interact with the mainframe computer through a terminal (screen and keyboard), and Google's vision reminds me of an internet wide version of that system (if I understand it correctly, and I may not). If I want to do simulations of a theoretical model, will it be like graduate school where I had to work very late at night when the system had enough free resources to accommodate my requests without being so slow as to be nearly unusable? PCs freed me from that constraint (but not the late night work habit). It was hard to work at home then as well. It was possible to connect through a phone, but it was very slow, and this was also something PCs changed. You didn't have to be at school to do computer work. If we go to the Google model, will the internet be available broadly and reliably enough so that there won't be frustrating periods when lack of an internet connection means you can't get things done unless you do the equivalent of "going to school where there's a terminal"? And I also like having data backed up locally on my own disks or other media rather than trusting a centralized system to keep it safe for me, and with sensitive data it feels much more secure that way. I suppose this isn't a problem for people who use their computers mainly to browse the internet or send email, But if you use your PC for tasks that require lots of computing power or use sensitive data, I think you have reason to wonder if some of the speed, flexibility, and security PCs give you might be compromised with this system. For that reason, I wonder if Google's model will be able to capture some segments of the market, e.g. those that desire lots of computing power be available nearly on demand. But as I said, if people had listened to me, we'd probably still be using DOS.

Old Economy/New Economy

How did people survive without Google? A colleague, Bill Harbaugh, emails:

I stink, and I needed a Laundromat in Lyon. Google translate says that's called a laverie in French. Google maps says there's one 4 blocks away. Is it open on Sunday? Laundromats don't have websites. But Google street views shows the front door - Ouvert 7 Jours.

Then the washing machine swallowed my last Euros. 

Are Advances in Technology the Source of Rising Medical Costs?

I'm not sure what to think of this. If it's true that medical technology increases life expectancy without increasing per capita medical expenditures, that's good news, but that result differs from other work in the area (and it leaves me wondering what is behind the actual and projected increase in health care costs if the source is something other than this):

The quality of medical care, behavioral risk factors, and longevity growth, by Frank R. Lichtenberg, Vox EU: The cost of medical care continues to rise rapidly in the US and other industrialized countries. According to a report from consulting firm PricewaterhouseCoopers, US employers who offer health insurance coverage could see a 9% cost increase between 2009 and 2010, and their workers may face an even larger increase.

Some observers argue that rapidly increasing health care expenditure is due, to an important extent, to medical innovation – the development and use of new drugs, diagnostics, and procedures. For example, the Kaiser Family Foundation (2007), citing Rettig (1994), claims that “advances in medical technology have contributed to rising overall US health care spending.”

Other observers argue that most medical innovations do not improve people’s health. Lexchin (2004), for example, claims that “at best one third of new drugs offer some additional clinical benefit and perhaps as few as 3% are major therapeutic advances.”

If both of these claims were true, medical innovation would result in the worst of both worlds – a large increase in cost and little or no increase in benefit (in the form of improved health outcomes). However, a study that I have recently performed casts considerable doubt on both of these claims. My findings indicate that medical innovation has yielded significant increases in life expectancy without increasing medical expenditure.

Reich: The Future of Manufacturing, GM, and American Workers

In this discussion, Robert Reich defines the term "symbolic analyst""

A growing percent of every consumer dollar goes to people who analyze, manipulate, innovate and create. These people are responsible for research and development, design and engineering. Or for high-level sales, marketing and advertising. They're composers, writers and producers. They're lawyers, journalists, doctors and management consultants. I call this "symbolic analytic" work because most of it has to do with analyzing, manipulating and communicating through numbers, shapes, words, ideas.

He continues:

The Future of Manufacturing, GM, and American Workers (Part II), by Robert Reich: Symbolic analysts have been hit by the current downturn, just as everyone else has. But over the long term, symbolic analysts will do just fine – as long as they stay away from job functions that are becoming routinized. ... The global market gives them more potential customers for their insights.

To be sure, symbolic analysts are popping up all over the world. ... But apart from recessions, demand for symbolic analysts in the U.S. will continue to grow faster than the supply. ... In decades to come, nations with the highest percentages of their working populations able to do symbolic-analytic tasks will have the highest standard of living and be the most competitive internationally.

America’s biggest challenge is to educate more of our people sufficiently to excel at such tasks. We do remarkably well with the children from relatively affluent families. ... But we’re in danger of losing ground because too many of our kids, especially those from lower-middle class and poor families, can’t get the foundational education they need. The consequence is a yawning gap in income and wealth which continues to widen. More and more of our working people finds themselves in the local service economy -- in hotels, hospitals, restaurant chains, and big-box retailers -- earning low wages with little or no benefits. Unions could help raise their wages... A higher minimum wage and larger Earned Income Tax Credit could help as well. Not all of our young people can or should receive a four-year college degree, but we can do far better for them than we're doing now. At the least, every young person should have access...

Some argue that ... we need more manufacturing in the U.S. ..., that ... the market is fallible,... that ... sometimes we need to consider what’s good for our economy and society as a whole regardless of where the market may lead us. But that’s exactly where I depart from those who believe we need to protect or bring back traditional manufacturing in the United States. To do so would be enormously costly. I just don’t get how those costs can possibly be justified.

"Should we Still Make Things?

There is a symposium on Should We Still Make Things? at Dissent Magazine. Here's part of Dean Baker's entry:

Should We Still Make Things?, by Dean Baker: I have often thought that economists should be required to have a better grasp of simple arithmetic. It would prevent them from repeating many silly comments that pass for conventional wisdom, such as that the United States will no longer be a manufacturing country in the future.

Those who know arithmetic can quickly detect the absurdity of this assertion. The implication of course is that the United States will import nearly all of its manufactured goods. The problem is that unless we can find some country that will give us manufactured goods for free forever, we have to find some mechanism to pay for our imports.

The end of manufacturing school argues that we will pay by exporting services. This is where arithmetic is so useful. The volume of U.S. trade in goods is approximately three and half times the volume of its trade in services. If the deficit in goods trade were to continue to expand, we would need an incredible growth rate in both the volume and surplus of service trade and our surplus on this trade in order to get to anything close to balanced trade.

For example, if we lose half of our manufacturing over the next twenty years, and imported services continue to rise at the same pace as the past decade, then we would have to see exports of services rise at an average annual rate of almost 15 percent over the next two decades if we are to have balanced trade in the year 2028. ... It would take a very creative story to explain how we can anticipate the doubling of the growth rate of service exports on a sustained basis. ...

[Also], the idea that U.S. workers are somehow too educated to be doing for manufacturing work, but instead will be making the beds, bussing the tables, and cleaning hotel toilets for foreign tourists is a bit laughable. Of course, with the right institutional structure (e.g. strong unions) these jobs can be well-paying jobs, but it is certainly not apparent that they require more skills than manufacturing. ...

In short, the idea that the United States can survive without manufacturing is implausible: It implies an absurdly rapid rate of growth of service exports for which there is no historical precedent. Many economists and economic pundits asserted that house prices could keep rising forever in spite of the blatant absurdity of this position. The claim that the U.S. economy can be sustained without a sizable manufacturing sector is an equally absurd proposition. 

I thought that if you looked at the value of US manufacturing, it hasn't fallen nearly as much as manufacturing employment. Thus, much of the change that has affected workers is due to changes in technology, not the exporting of jobs (this comes from a study done by the Peterson Institutute, more here). But from a worker's perspective, it doesn't matter all that much whether it's technology or jobs moving to other countries, the job is gone either way. The key, then, is to have good jobs waiting for workers when they are displaced due to inevitable (and desirable) technological change or to jobs moving overseas, jobs that are every bit as good or better than the jobs they left. That is where we are falling short. The new jobs we are creating are not as good as the jobs we are losing, when workers are forced to find new jobs they don't tend to do as well as they did in their previous job, and that is the source some of the stagnation we have seen in middle class incomes over the last few decades.

Information Technology and Economic Security

One more at TPMCafe Book Club's discussion of Eric Rauchway's book, The Great Depression and the New Deal: A Very Short Introduction:

Information Technology and Economic Security, by Mark Thoma: Eric asks a good question:

As the New Deal abetted America's move from the countryside to the city, it also saved memories of the ways of life lost.

Are we truly in a similar transition now -- to a post-suburban world, to a post-paper world? What folkways do we want documented?

I don't think we fully understand or appreciate the social, economic, and political changes the information revolution revolution will bring. I will leave it to the historians to document these changes, and I'll talk briefly instead about how the advance of information and other technology will impact -- has already impacted -- our economic security. [...continue reading...]

[Complete discussion.]

The Tech Pulse Index

The SF Fed's new Tech Pulse Index:

The Tech Pulse Index: Recent Trends in Tech-Sector Activity, by Bart Hobijn, FRB SF Economic Letter: The Tech Pulse Index tracks the growth of economic activity in the U.S. technology sector by combining information from five main tech-sector indicators on employment, investment, production, shipments, and consumption. The index extracts, on a real-time basis, the main common trend in these indicators and, therefore, tends to provide a clearer picture of trends in the tech sector than the separate indicators themselves. ...

The most recent version of the Tech Pulse Index suggests that the current downturn in the sector is much less severe than the 2001 slowdown, which was triggered by the dot-com bust. In fact, this tech-sector downturn is of the same order of magnitude as those in 1991, 1983, and 1974. Of course, given the current economic climate, it is unlikely that the most recent numbers reflect the bottom of the current business cycle in the tech sector. We expect growth of the Tech Pulse Index to fall further below its historical average in the months to come. [more here]

"The Sequencing of the Mathematical Genome"

"We may be close to seeing how computers, rather than humans, would do mathematics":

Proof by computer: Harnessing the power of computers to verify mathematical proofs, EurekAlert: New computer tools have the potential to revolutionize the practice of mathematics by providing far more-reliable proofs of mathematical results than have ever been possible in the history of humankind. These computer tools, based on the notion of "formal proof", have in recent years been used to provide nearly infallible proofs of many important results in mathematics. A ground-breaking collection of four articles by leading experts, published today in the Notices of the American Mathematical Society, explores new developments in the use of formal proof in mathematics.

When mathematicians prove theorems in the traditional way, they present the argument in narrative form. They assume previous results, they gloss over details they think other experts will understand, they take shortcuts to make the presentation less tedious, they appeal to intuition, etc. The correctness of the arguments is determined by the scrutiny of other mathematicians, in informal discussions, in lectures, or in journals. It is sobering to realize that the means by which mathematical results are verified is essentially a social process and is thus fallible. When it comes to central, well known results, the proofs are especially well checked and errors are eventually found. Nevertheless the history of mathematics has many stories about false results that went undetected for a long time. In addition, in some recent cases, important theorems have required such long and complicated proofs that very few people have the time, energy, and necessary background to check through them. And some proofs contain extensive computer code to, for example, check a lot of cases that would be infeasible to check by hand. How can mathematicians be sure that such proofs are reliable?

To get around these problems, computer scientists and mathematicians began to develop the field of formal proof. A formal proof is one in which every logical inference has been checked all the way back to the fundamental axioms of mathematics. Mathematicians do not usually write formal proofs because such proofs are so long and cumbersome that it would be impossible to have them checked by human mathematicians. But now one can get "computer proof assistants" to do the checking. In recent years, computer proof assistants have become powerful enough to handle difficult proofs.

Only in simple cases can one feed a statement to a computer proof assistant and expect it to hand over a proof. Rather, the mathematician has to know how to prove the statement; the proof then is greatly expanded into the special syntax of formal proof, with every step spelled out, and it is this formal proof that the computer checks. It is also possible to let computers loose to explore mathematics on their own, and in some cases they have come up with interesting conjectures that went unnoticed by mathematicians. We may be close to seeing how computers, rather than humans, would do mathematics.

The four Notices articles explore the current state of the art of formal proof and provide practical guidance for using computer proof assistants. If the use of these assistants becomes widespread, they could change deeply mathematics as it is currently practiced. One long-term dream is to have formal proofs of all of the central theorems in mathematics. Thomas Hales, one of the authors writing in the Notices, says that such a collection of proofs would be akin to "the sequencing of the mathematical genome".

The articles appear today in the December 2008 issue of the Notices and are freely available at http://www.ams.org/notices.

Google Chrome and Cloud Computing

When Google released its browser, Google Chrome, I said:

Microsoft's new browser will have the ability to block Google ads. Google's answer to this challenge to their business? Release a browser of their own and try to bypass IE altogether

But this seems like a much better explanation of why Google released its own internet browser:

Cloudy Forecast For Google’s New Apps, by David Rogers, Public Offering: It’s been just two months since Google rolled out ... “Knol” to much confusion, ill will among advertisers and derision for the worst brand name of all time. Many have asked whether we really need another Wikipedia.

Last month, Google announced another seemingly-redundant product: it’s new Web browser, Chrome. And at the end of this month, Google will launch the much-anticipated Android-based G1 smart phone.

Why develop a new Web browser? (Especially when Google has been spending heavily to invest in the open-source Firefox browser.) ...

We are in the midst of a huge shift towards “cloud computing” — where we store our files and software on the web rather than on our personal desktop machines. This shift began ... with services like Flickr, Facebook, and YouTube; it’s now moving to online applications like Google Docs and Zoho, which may make Microsoft Office a thing of the past. ...

Google argues that Chrome is not just another browser but rather an attempt to build the next-generation environment for the future of cloud computing. ...Chrome aims to be an operating system for the next wave of Web apps that Google is developing.

It will need to be if Google really wants to challenge ... companies like Microsoft. Many of Google’s current Web apps offer the promise of thrilling functionality (incredibly easy collaborating on Google Docs, the ability to work offline with Google Gears). But most are still trapped in a “Beta” version with limited applicability.

With the Chrome browser, Google may be able to make its Web apps more robust, so that they can really compete with Microsoft...

We’ve seen this play before from Google ... in the mobile phone space. ...Google has been developing its next generation operating system for smart phones – called Android. Google’s competitor in the mobile phone space is not Microsoft but Apple, maker of the iPhone. And industry observers have been waiting to see if the Android operating system will allow phone makers like Samsung and Nokia to roll out an “iPhone killer.” The first phone running on Android is expected this fall from HTC.

With both Chrome and Android, Google is betting on the open-source model for innovation... By contrast, Microsoft Office and Apple’s iPhone are both built on closed, proprietary systems.

Open vs. closed is a big debate these days. Techies love to extol the virtues of the open source movement. But Apple’s success shows the potential strength of closed innovation...

But Apple has not always been able to hold on to the success of its innovations. Windows stole Apple’s thunder (and huge market share) by copying the best design elements from the Mac. What’s to keep Google from swooping in like Microsoft did and copying the iPhone design..., allowing Samsung, HTC and others to dominate the smartphone market? Will the diversity of an open ecosystem triumph over Apple in the end?

What’s clear now is that Google is pursuing a two-pronged strategy aimed at a future of cloud computing. They will use Chrome as an operating system to challenge Microsoft in the world of PCs, laptops and netbooks. And they will use Android to establish an alternative Apple in the realm of mobile devices. With both prongs, they are using an open innovation approach...

It’s an audacious strategy. And it’s probably too early to tell if will succeed.

Right now, I’m hedging my bets. When people ask what me, “Which operating system do you use?”, I answer, “All three.” My mobile platform is iPhone, my laptop platform is Windows and my cloud platform is Google. But I’m open to see who comes up with the next great idea.

Skill-Based or Bubble-Based Wage Differentials?

Arindrajit Dube says there’s a paper he wishes to write once the data become available:

Does Mispricing of Financial Assets lead to Mispricing of Human Capital?

Over the late twentieth century, the financial sector grew rapidly, and attracted higher skilled workers at an increasing rate. Existing work attributes this to growth in financial sector productivity, which raised the marginal product of higher skilled workers. In this paper, we investigate the role of mispricing of financial assets (from asset bubbles) in artificially increasing returns to skill in the economy in the context of a two sector general equilibrium model. A speculative bubble arises from heterogeneous beliefs due to overconfidence and short-sales constraints, and investors perceive an option to resell the stock to others with even greater valuations. If the financial sector is relatively more intensive in the use of skilled workers, this can lead to an inefficiently large portion of these workers going to finance, and an inefficiently high skill-wage differential. Using data from the United States over the 1980 to 2012 period, we show that (1) the growth in asset bubbles were particularly important in increasing the perceived marginal product of higher-skilled workers; and (2) with the sharp retrenchment of the financial sector following the 2008 financial crisis, perceived marginal products and wages of higher skilled workers fell substantially. Our evidence shows that a large part of the “skill biased technical change” identified by earlier researchers actually represents a mispricing of human capital due to inefficiencies in the financial market.

The Internet, Cell Phones, and Economic Development

Jeff Sachs says that when it comes to ending extreme poverty, cell phones and the internet will prove to be "the most transformative technology of economic development of our time":

Internet and mobile phones spur economic development, by Jeffrey D Sachs, Project Syndicate: The digital divide is beginning to close. The flow of digital information – through mobile phones, text messaging, and the Internet – is now reaching the world’s masses, even in the poorest countries, bringing with it a revolution in economics, politics, and society.

Extreme poverty is almost synonymous with extreme isolation, especially rural isolation. But mobile phones and wireless Internet end isolation, and will therefore prove to be the most transformative technology of economic development of our time. ...

Mobile phone technology is so powerful, and costs so little per unit of data transmission, that it has proved possible to sell mobile phone access to the poor. There are now more than 3.3bn subscribers in the world, roughly one for every two people on the planet. ... Probably a significant majority of Africans have at least emergency access to a cell phone, either their own, a neighbour’s, or one at a commercial kiosk. ...

The rural poor in more and more of the world now have access to wireless ... systems... The information carried on the new networks spans public health, medical care, education, banking, commerce, and entertainment, in addition to communications among family and friends. ...

On the fully commercial side, the mobile revolution is creating a logistics revolution in farm-to-retail marketing. Farmers and food retailers can connect directly through mobile phones and distribution hubs, enabling farmers to sell their crops at higher “farm-gate” prices and without delay, while buyers can move those crops to markets with minimum spoilage and lower prices for final consumers.

The strengthening of the value chain not only raises farmers’ incomes, but also empowers crop diversification and farm upgrading more generally. ...

Education will be similarly transformed. Throughout the world, schools at all levels will go global... Universities, too, will have global classes, with students joining lectures, discussion groups, and research teams from a dozen or more universities at a time. 

In my book The End of Poverty , I wrote that extreme poverty can be ended by the year 2025. A rash predication, perhaps, given global violence, climate change, and threats to food, energy, and water supplies. But digital information technologies, if deployed co-operatively and globally, will be our most important new tools, because they will enable us to join together globally in markets, social networks, and efforts to solve our common problems.

Bandwidth Competition

A call for more competition in the market for broadband connections to information and entertainment services:

OPEC 2.0, by Tim Wu, Commentary, NY Times: Americans today spend almost as much on bandwidth — the capacity to move information — as we do on energy. A family of four likely spends several hundred dollars a month on cellphones, cable television and Internet connections, which is about what we spend on gas and heating oil.

Just as the industrial revolution depended on oil and other energy sources, the information revolution is fueled by bandwidth. If we aren’t careful, we’re going to repeat the history of the oil industry by creating a bandwidth cartel. ... That’s why, as with energy, we need to develop alternative sources of bandwidth.

Wired connections to the home ... are the major way that Americans move information. In the United States and in most of the world, a monopoly or duopoly controls the pipes that supply homes with information. These companies [are] primarily phone and cable companies...

But just as with oil, there are alternatives. ... Encouraging competition...

"A Little Forethought, a Little Prudence"

This is David Ricardo in 1823 (during his time in Parliament):

Wages of manufacturers—Use of machinery, 30 May 1823: Mr. Attwood presented a petition from the manual weavers of Stockport, complaining of the extremely low rate of wages: ‘they complained also of certain improvements in machinery, the effect of which had been to reduce the quantity of employment of those who wove by hand, and which threatened to leave a large population without any means whatever of support.’ Mr. Philips contended ‘that no means were so effectual for the benefit of the manufacturing class, as the introduction of machinery; and if parliament were foolish enough to comply with the prayer of those who wished to discourage machinery, they would inflict the greatest possible injury on the public, and especially on the petitioners themselves.’ Mr. H. G. Bennet said, ‘a very useful publication on the subject of machinery, written by Mr. Cobbett, had been extensively circulated throughout the manufacturing counties, and would, he hoped, effect a change of opinion no less extensive.’

Mr. Ricardo said, that much information might, undoubtedly, be derived from Mr. Cobbett’s publication, because that writer explained the use of machinery in such a way as to render the subject perfectly clear. He was not, however, altogether satisfied with the reasoning contained in that pamphlet; because it was evident, that the extensive use of machinery, by throwing a large portion of labour into the market, while, on the other hand, there might not be a corresponding increase of demand for it, must, in some degree, operate prejudicially to the working classes. But still he would not tolerate any law to prevent the use of machinery. The question was,—if they gave up a system which enabled them to undersell in the foreign market, would other nations refrain from pursuing it? Certainly not. They were therefore bound, for their own interest, to continue it. Gentlemen ought, however, to inculcate this truth on the minds of the working classes—that the value of labour, like the value of other things, depended on the relative proportion of supply and demand. If the supply of labour were greater than could be employed, then the people must be miserable. But the people had the remedy in their own hands. A little forethought, a little prudence (which probably they would exert, if they were not made such machines of by the poor laws), a little of that caution which the better educated felt it necessary to use, would enable them to improve their situation.

Mr. Philips instanced the fact, that the wages of the artisan were more liberal where machinery was used than where it was not used, as a proof that its introduction was not hurtful to the weaver.

Mr. Ricardo said, his proposition was, not that the use of machinery was prejudicial to persons employed in one particular manufacture, but to the working classes generally. It was the means of throwing additional labour into the market, and thus the demand for labour, generally, was diminished. [Source]

The reporting practices at the time are interesting:

How the Speeches were Reported

Parliamentary reporting in Ricardo’s time was something very different from the official shorthand reporting of the present day. The whole business was a private venture of the newspapers, and their reporters had only recently gained even a bare toleration in the House. One cannot form an estimate of the authenticity of Ricardo’s speeches as they have come down to us without some idea as to how they were recorded.

The pioneer in the reporting of debates was the Morning Chronicle, which was founded in 1769 and conducted by William Woodfall. At a time when the taking of notes by strangers in the House was strictly prohibited, Woodfall was enabled by an extraordinary memory to write up a whole debate after listening to it from the Strangers’ Gallery. When in 1789 James Perry took over the editorship from him, he introduced the system of ‘division of labour’: this consisted in employing a team of reporters, each of whom sat in on the debate for a ‘turn’ of three-quarters of an hour and then, on being relieved in the Gallery by a colleague, left to write up his report at the office. From that time onwards, even though the system came to be universally adopted, the Morning Chronicle ‘was distinguished by its superior excellence in reporting the proceedings of Parliament.’

Is McCain Confused?

Is McCain confused about what he has said in the past, or is he being less than truthful about his previous position on Social Security privatization?:

“Without privatization..." by Cliff Schecter: This is what John McCain said regarding Social Security on November 18, 2004 on C-SPAN's Road To The White House ["...Without privatization, I don't see how you can possibly, over time, make sure that young Americans are able to receive Social Security benefits"]. Why am I telling you this? Because today during a back and forth with an elderly gentleman he said this:

"I am not for privatizing Social Security. I never have been. I never will be."

In other words, here we go again. Honestly, does anyone really believe this guy is a straight-talker anymore? How many more examples of his absolute willingness to say or support anything at any given time do we need?

Ok, you need more? You got it. Here is McCain from March of this year on at least partially privatizing Social Security:

"As part of Social Security reform, I believe that private savings accounts are a part of it – along the lines of what President Bush proposed." [Wall Street Journal, 3/3/2008]

Once again, case closed. McCain has conveniently changed what he believes, because that's just what "straight-talking mavericks" do.

I guess he forgot that he voted for Bush's 2006 Social Security privatization plan.

Here's more "confusion" (this is just two things from today, it's not an exhaustive list by any means). This is part of a discussion of a report from the Tax Policy Center comparing the economic plans of the two candidates. (The report has a graph showing the impact of the plans across the income distribution. Guess which plan is more beneficial to the wealthy, McCain's or Obama's? To the working class?):

Obama And McCain On Taxes, by hilzoy: ...One more interesting note: the Wonk Room points out that this report attributes to McCain some positions that are at odds with his web site and what he's said in the past -- as recently as the day before yesterday, in fact. Most notably, McCain's website says that "John McCain will permanently repeal the Alternative Minimum Tax (AMT) – a tax that will be paid nearly exclusively by 25 million middle class families." The TPC report, by contrast, says: "Senator McCain proposes to extend permanently the AMT "patch" that has prevented most individuals and families with incomes below $200,000 from being affected by the tax."

This is a big difference. ...

The Tax Policy Center consulted with both campaigns before writing this report. If what they say is accurate, then McCain has changed an important part of his tax policy, but neither his website nor (apparently) McCain himself as of two days ago have caught up with this fact. On the other hand, if the TPC is wrong, and McCain does plan to repeal the AMT, then the TPC's estimates of the cost of his tax plans need to be revised as well.

According to the CBPP, the difference between amending the AMT to exclude people with incomes under $200,000 a year and repealing it altogether is over $50 billion dollars a year. Since the CTP estimates the cost of the candidates' tax plans over a ten year period, if they're wrong about what McCain thinks, we'll just have to tack another half a trillion dollars onto their estimate of his plan's cost.

Confusion and reckless profligacy, or no confusion and even more reckless profligacy? We report; you decide.

Maybe it's just an old guy getting confused on a variety of issues, but it's starting to look like more than that. Social Security was and is a huge political issue. The chance that he is confused about or has forgotten positions he has held in the past is just not credible unless age has started to take its toll. He either knows what he said in the past and intentionally said something else to please a voter, or he can no longer remember crucial details about key issues that happened relatively recently. Either way, it raises big questions.

He deserves the same scrutiny from the media that Clinton or Obama (or Kerry) would get if they were doing these things, but that just isn't happening.

Finally, you have to wonder if this is who you want leading you into the digital age:

Sen. McCain, You've Got Be KIDDING Me!, by Maggie Barker: ...I couldn't help but laugh in disbelief at an interview of U.S. Sen McCain admitting that he doesn't know how to use a computer.

When asked by the Politico's Mike Allen whether he uses a Mac or PC, here's what he said:

Neither. I am an illiterate that has to rely on my wife for all the assistance I can get.

I mean, really? How does he not know how to use one of most simple, yet important, technologies in our homes, workplaces, research labs, schools, universities, and enterprises? ... Sen. McCain simply seems out of touch with the modern ways of the world. And he admits it, with no apologies. How can he envision and plan for America's future when he has no interest in or curiousity of current modes of communication, commerce, and education? Sure, Sen. McCain pre-dates the computer age, but how many of us have parents or grandparents who log on every now and then? I respect Sen. McCain immensely for the sacrifices he's made for this country, but times, they are a-changin'. Sen. McCain's already been left behind.

Update: Now McCain is trying to claim that his plan is not a privatization scheme, therefore what he said is not misleading. However, from TPM:

In the post below I noted how John McCain is now going in for the same Social Security 'privatization' bamboozlement that President Bush did, claiming that calling his policy 'privatization' is some sort of lie or spin.

Here's video of McCain using the word himself in 2004 and then claiming it's all a bum rap just this morning...

More from Think Progress.

I Want It Now

An email from someone I respect says to take a look at today's column by David Brooks on savings behavior since the issue of adequate saving is particularly important in an era of increasing life expectancy. In addition, Kevin Drum says:

Culture of Debt, by Kevin Drum: ....This isn't exactly what I've come to expect from David Brooks, but today he decries the fact that "the social norms and institutions that encouraged frugality and spending what you earn have been undermined" and then goes on to name names...

I doubt that I'd end up agreeing with Brooks 100% about how to address this problem, but this isn't a bad start. It's a worthwhile column to read.

Mathew Yglesias reacts similarly:

Brooks on Debt Culture, by Mathey Yglesias: Kevin Drum recommends David Brooks' column on America's seduction by the culture of debt and then says "I doubt that I'd end up agreeing with Brooks 100% about how to address this problem." I actually tend to think that Brooks (and Drum) are overstating the problem somewhat, but Brooks' proposals seem like good ideas to me...

The idea of trying to establish some kind of non-predatory mechanism that would soak up some of the demand for "payday loans" seems especially promising to me.

Here's the column:

The Great Seduction, by David Brooks, Commentary, NY Times: The people who created this country built a moral structure around money. The Puritan legacy inhibited luxury and self-indulgence. Benjamin Franklin spread a practical gospel that emphasized hard work, temperance and frugality. Millions of parents, preachers, newspaper editors and teachers expounded the message. ...

Over the past 30 years, much of that has been shredded. The social norms and institutions that encouraged frugality and spending what you earn have been undermined. The institutions that encourage debt and living for the moment have been strengthened. ...

Income Volatility

There's a lot being written about free trade today, e.g. see this discussion from Greg Mankiw (some of the discussion is about technological change rather than free trade, but it has the same characteristics in terms of displacing labor, Free Exchange explains how trade and technology are related here). Given these discussions, perhaps it's a good time to recall that it's not just the level and distribution of income that matters, it's also the volatility, and according to the latest estimates from Jacob Hacker and Elizabeth Jacobs, family income volatility has been rising in recent decades:

Income volatility: Another source of growing economic insecurity, by Jacob Hacker and Elisabeth Jacobs: There are many dimensions to the economic insecurity facing American families today. Mid-level incomes have stagnated in real terms over the past few years, and most recently, higher gas and food prices are taking a larger bite out of paychecks. But one dimension of economic insecurity gets less attention: the increase in family income volatility, or how much families' incomes fluctuate up and down over time.

Recent analysis shows that families are facing much greater income swings than they did a generation ago. The Chart plots the increase in average family income volatility, showing various peaks and valleys around an upward trend since the mid-1970s. Over the last three decades, volatility by this measure has doubled.

Most Americans have little in the way of easily tapped wealth to tide them over when their incomes drop. It is on the downward trips of the economic roller coaster that jobs, houses, savings, and other things gained on the way up get lost. No wonder Americans are worried about their economic security.

Financial Innovations

I went to a session today on financial innovation. The panelists were:

• Michael Milken, Chairman, Milken Institute; Chairman, FasterCures / The Center for Accelerating Medical Solutions
• Lewis Ranieri, Prime Originator and Founder, Hyperion Private Equity Funds; Chairman, CEO and President, Ranieri & Co. Inc.
• Richard Sandor, Chairman and CEO, Chicago Climate Exchange; Senior Fellow, Milken Institute
• Myron Scholes, Nobel Laureate, 1997; Chairman, Platinum Grove Asset Management
• Moderator: Andrew Rosenfield, Managing Partner, Guggenheim Partners LLC; Chairman, Guggenheim Investment Advisors

These are some of the architects of the mortgage backed securities and other innovative financial instruments.

The people on stage still very much believe in financial innovation. They see financial innovation as a means of solving the world's major problems, e.g. making it possible to trade property rights for water and air, as a way to save endangered species, as a way of lifting the poor out of poverty, as a solution (rather than a cause) of the problems we are having today in mortgage markets. It is very much in their own financial interests to believe these things, and these are people who know how to sell an idea or product or they wouldn't be where they are, and it was clear from a variety of sessions they were there - in part - to argue against regulation that would inhibit their ability to create new financial instruments. So all of their comments should be taken in that light. They have convinced themselves that they hold the keys to the drivers of world growth and the solutions to the world's problems, and they do not want anything standing in their way. In fact, one of their biggest regrets from the crisis is that other countries will no longer hold our financial system in such high esteem and will shy away from financial innovation that could be very helpful to their development (and the panelist's pocketbooks). Their creations are now viewed as imperfect, and that seemed to bother them.

In their defense of financial innovation, they said something I've said too, so I have some sympathy for the argument. They said that it wasn't the financial vehicles themselves that were the problem, it was the way that they were used, and the way that warnings of impending trouble were ignored. And the biggest problem in the way they were used was to give people free (zero price) options. People could purchase a house with zero money down, realize the gains if the price goes up, and since the loans are non-recourse, walk away relatively unscathed if the price turns downward. Giving people free options was the problem, it wasn't the financial instruments themselves (in fact, they thought that since they distributed the losses all over the world, the new financial instruments probably saved US banks who could not have absorbed the losses on their own).

Another problem that was cited was bond agencies, though Milken argued that any investor ought to do their own rating and not trust anyone else (to which Scholes replied why should we duplicate the same effort thousands of times - wouldn't it be better if the market could do this for us and save the duplicated effort?), so his was another area they cited as needing attention. But notice that, once again, it's not the financial instruments, it's the lousy ratings agencies.

What is their solution to our financial market problems? They say, unsurprisingly, that this is not something the government needs to solve, or can solve, the government needs to get out of the way and let the private sector solve the problem. I'm supportive of the idea that we should be careful about getting in the way of financial innovation, but I don't think the solution is for the government to get out of the way, there are market failures (e.g. moral hazard from lack of capital requirements) that will not correct themselves.

But you should watch it yourself - click on the link "Financial Innovations: Complexity Isn't Innovation, Leverage Isn't Credit" in the list below the video player (starts at 3:45 min):

"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.

Shiller: Has Financial Innovation Been Discredited?

Robert Shiller says we shouldn't try to limit financial market innovation, we might need it to prevent another crisis:

Has Financial Innovation Been Discredited?, by Robert J. Shiller, Project Syndicate: Skeptics of financial liberalization and innovation have been emboldened by the crisis in the world’s credit markets... Are these skeptics right? Should we halt financial liberalization and innovation in order to prevent crises like the sub-prime disaster from recurring? ...

Brad DeLong: Would Marx Say a Rising Tide Lifts All Boats?

Brad says that "over the past generation, confidence in the 'Kuznets curve' has faded":

Would Marx say rising tide today lifts all boats?, by J. Bradford DeLong, Project Syndicate: A century and a half ago, Karl Marx both gloomily and exuberantly predicted that the modern capitalism he saw evolving would prove incapable of producing an acceptable distribution of income.

Wealth would grow, Marx argued, but would benefit the few, not the many: the forest of upraised arms looking for work would grow thicker and thicker, while the arms themselves would grow thinner and thinner.

Ever since, mainstream economists (in the West) have earned their bread and butter patiently explaining why Marx was wrong. Yes, the initial disequilibrium shock of the industrial revolution was and is associated with rapidly rising inequality as opportunities are opened to aggressiveness and enterprise, and as the market prices commanded by key scarce skills rise sky-high. But this was - or was supposed to be - transient.

A technologically stagnant agricultural society is bound to be an extremely unequal one: by force and fraud, the upper class pushes the peasants' standards of living down to subsistence and takes the surplus as the rent on the land they control.

By contrast, mainstream economists argued, a technologically advancing industrial society was bound to be different.

First, the key resources that command high prices and thus produce wealth are not fixed, like land, but are variable: the skills of craft workers and engineers, the energy and experience of entrepreneurs, and machines and buildings are all things that can be multiplied.

As a result, high prices for scarce resources lead not to zero- or negative-sum political games of transfer but to positive-sum economic games of training more craft workers and engineers, mentoring more entrepreneurs and managers, and investing in more machines and buildings.

Second, democratic politics balances the market. Government educates and invests. It also provides social insurance by taxing the prosperous and redistributing benefits to the less fortunate.

Economist Simon Kuznets proposed the existence of a sharp rise in inequality upon industrialization, followed by a decline to social-democratic levels.

But, over the past generation, confidence in the "Kuznets curve" has faded. Social-democratic governments have been on the defensive against those who claim that redistributing wealth exacts too high a cost on economic growth.

The consequence has been a loss of morale among those of us who trusted market forces and social-democratic governments to prove Marx wrong about income distribution in the long run - and a search for new and different tools of economic management.

Increasingly, pillars of the establishment are sounding like shrill critics. Consider Martin Wolf, a columnist at The Financial Times.

Wolf recently excoriated the world's big banks as an industry with an extraordinary "talent for privatizing gains and socializing losses ... (and) get(ting) ... self-righteously angry when public officials ... fail to come at once to their rescue when they get into (well-deserved) trouble ... (T)he conflicts of interest created by large financial institutions are far harder to manage than in any other industry."

For Wolf, the solution is to require that such bankers receive their pay in installments over the decade after which they have done their work. But Wolf's solution is not enough, for the problem is not confined to high finance.

The problem is a broader failure of market competition to give rise to alternative providers and underbid the fortunes demanded for their work by our current generation of mercantile princes. [Cartoon with article]

Update: Jim Devine at EconoSpeak comments on the article.

Clean Coal?

President Bush, in the State of the Union Address:

To build a future of energy security, we must trust in the creative genius of American researchers and entrepreneurs and empower them to pioneer a new generation of clean energy technology. Our security, our prosperity, and our environment all require reducing our dependence on oil. ... Let us fund new technologies that can generate coal power while capturing carbon emissions. ... Let us create a new international clean technology fund, which will help developing nations like India and China make greater use of clean energy sources. ... The United States is committed to strengthening our energy security and confronting global climate change. And the best way to meet these goals is for America to continue leading the way toward the development of cleaner and more energy-efficient technology. To keep America competitive into the future, we must trust in the skill of our scientists and engineers and empower them to pursue the breakthroughs of tomorrow.

SciAm Observations follows up:

Clean Coal Turns to Cinders, by Steven Ashley, SciAm Observations: For those journalists who have been monitoring “clean coal” technology over the last few years, it was no surprise to hear that the U.S. Department of Energy has canceled its so-called FutureGen plant, which was to burn coal to produce electricity and then sock away the resulting climate change-causing carbon dioxide emissions underground. ...

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.

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.

Alex Tabarrok: "Reason to be Highly Optimistic about the Future"

Don't worry, things are going to turn out great:

Dismal Science Sees Upbeat Future, Alexander Tabarrok, Forbes: Forget the talk of recession. The world is about to enter a new era in which miracle drugs will conquer cancer and other killer diseases and technological and scientific advances will trigger unprecedented economic growth and global prosperity.

Pie in the sky optimism? Perhaps. But there are reasons to be optimistic, and they rest ... within the badly misnamed "dismal science," economics.

To understand why economics triggers such optimism, imagine that there are two deadly diseases. One disease is relatively rare, the other common. ... If you don't want to die, it's much better to have the common disease. ... The cost of developing drugs for rare and common diseases are about the same, but the revenues aren't ... larger markets mean more profits.

As a result, there are more drugs to treat diseases with a lot of patients than to treat rare diseases, and more drugs means greater life expectancy. Patients diagnosed with rare diseases ... are 45% more likely to die before age 55 than are patients diagnosed with more common diseases. So imagine this: If China and India were as wealthy as the U.S., the market for cancer drugs would be eight times larger than it is today. ...

Like pharmaceuticals, new computer chips, software and chemicals also require large research and development (R&D) expenditures. As India, China and other countries become wealthier, companies will increase their worldwide R&D investments. Most importantly, as markets expand, companies and countries will put to work the greatest asset of all for the betterment of mankind: brain power.

Amazingly, there are only about 6 million scientists and engineers in the entire world, nearly a quarter of whom are in the U.S. ... But if the world as a whole were as wealthy as the U.S..., there would be more than five times as many scientists and engineers worldwide.

People used to think that more population was bad for growth. In this view, people are stomachs--they eat, leaving less for everyone else. But once we realize the importance of ideas in the economy, people become brains--they innovate, creating more for everyone else. New ideas mean more growth, and even small changes in economic growth rates produce large economic and social benefits. ...

In the 20th century, two world wars diverted the energy of two generations from production to destruction. ... Communism isolated much of the world, reducing trade in goods and ideas--to everyone's detriment. World poverty meant that the U.S. and a few other countries shouldered the burdens of advancing knowledge nearly alone.

The battles of the 20th century were not fought in vain. Trade, development and the free flow of people and ideas are uniting all of humanity, maximizing the incentives and the means to produce new ideas. This gives us reason to be highly optimistic about the future.

"Dancing With Tycoons?"

Whenever I read about thinkers like Adam Smith or Karl Marx and their evolutionary approach to modes of production, e.g. their explanations for the transition from feudalism to capitalism, I always wonder if capitalism is the end of the road, the last of the great modes of production, or if something else will follow. Marx, of course, thought capitalism would be supplanted by socialism and then communism, but I'm not so sure about that. I've always thought one possibility for the next step is worker ownership, though it's not quite clear how such firms would get started in the first place, i.e. where the capital would come from and who would decide which firms to start. But I suppose institutions could be constructed that would solve this problem (I'm not recommending this, but you could, for example, pass a constitutional amendment or more simply a law requiring an entrepreneur to sell the firm to the employees after the initial investment had been tripled or after fifteen years had passed, whichever comes first, or something along those lines. But that lacks institutional imagination and in any case I'm probably thinking too narrowly. Technological change, robots, computers, things I can't think of yet because they haven't been invented, things like that will likely frame the next step in our evolution to the next mode of production). So is this - capitalism as we know it - the end of the road, or will something else follow? Will capitalism be replaced by a newer, better mode of production? What will it be?

Here's David Warsh on a related topic - employee stock ownership plans:

Dancing With Tycoons?, Economic Principles: One of the things that news reporters learn early in their careers, if they are fortunate, is not to take anyone’s claim to authority too seriously. For example, I remember meeting Louis Kelso in the early 1980s.

Kelso was the San Francisco attorney and amateur economist who, starting in 1958, had gained a measure of fame as the author of a plea for employee ownership that he called The Capitalist Manifesto...

But it wasn’t until Mortimer Adler, the entrepreneurial educator, University of Chicago hanger-on, and founder of a Great Books of the Western World business, took an interest ... and agreed to share a byline on The Capitalist Manifesto that Kelso’s “two-factor economics of reality” began to attract a following, mainly among lawyers, small investors and businessfolk. A steady stream of books poured forth... He was in the process of taking his critique of neoclassical economics to Mike Wallace and 60 Minutes when we met.

Private-equity artists William Simon, Michael Milken, and Ronald Perelman were in their ascendancy at the time; the buyout firm of Kohlberg Kravis Roberts & Co. was gathering steam: famous journal articles, by Franco Modigliani & Merton Miller and Michael Jensen & William Meckling, were revolutionizing the practice of corporate finance: though wealthy, Kelso was an easy guy to ignore. He died, at 77, in 1991.

On the other hand, Kelso had been politically acute. In the early 1970s, he and his associates made a concerted effort to sell their ideas on Capitol Hill. They culminated in a famous dinner at the Madison Hotel in 1973 with Louisiana Sen. Russell Long. Son of famous Louisiana demagogue Huey Long and chairman of the Finance Committee, Sen. Long became a convert over the course of the four-hour meal. He was no populist Robin Hood, he asserted (implying that his father had been), but he liked the idea that every worker should become an owner of capital – he even paid for dinner. (Norman Kurland has written a thorough history of the episode.)

The upshot was that the influential Long wrote a series of little-noted tax breaks for Employee Stock Ownership Plans (ESOPs) into an enormous piece of legislation that eventually would become the Employee Retirement Income Security Act of 1974 (ERISA). The measure thus created a set of opportunities for a new generation of missionary organizers of worker ownership for firms for whom the Chrysler bailout of 1979 was a signal event. ...

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.

"The 'Browning' of African Technology"

G. Pascal Zachary says we are falling behind in Africa:

The “Browning” of African technology, by G. Pascal Zachary: A number of newspapers in Asia are carrying an essay I wrote recently for Project Syndicate..., which argues that many critical needs in Africa are being met and will be met going forward by Indians and Chinese. ...

Maybe Africa is no longer a “white man’s burden,” not because we have been persuaded by NYU professor William Easterley to abandon the continent, but rather because Chinese and Indians have supplanted (or will) Westerners in the task of “saving” Africa. The irony is delicious, and the practical implications enormous.   

While Westerners debate amongst themselves whether foreign-aid to Africa helps or hurts — a debate, I think, is increasingly irrelevant — Indians and Chinese are pragmatically (if not always effectively) engaging Africa. ...

The essay is here.

"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?

Be Evil?

I don't think Aaaron Edlin is a big fan of the market power exploiting profit maximizers at Microsoft:

System That Stole Christmas, by Aaron Edlin, Project Syndicate: Before asking for a new Windows PC this holiday season, remember the old adage: ''Be careful about what you wish for."

In the best of all worlds, we would all benefit from the so-called ''network effects'' that result from most people using the same software: everyone could easily communicate with each other and teach each other how to use the software efficiently. Unfortunately, since Microsoft uses network effects to maximize its profits rather than to benefit users, the world it delivers is far from the best.

Consider Vista, yet another "great" new operating system that Microsoft rolled out this year, together with Office 2007. The first person at my company to use Vista was our Executive Vice-President. He was furious. Vista and Office 2007 came with his new Dell computer by default. Dell didn't ask: "Would you prefer the old versions of the operating system and MS Office that you know how to use?" So our VP got a shiny new computer that he didn't know how to use: functions were rearranged, and keyboard shortcuts were different.

Think of the productivity cost of millions like him having to adjust to a new system. Moreover, his coworkers couldn't read the Microsoft Word files that he sent them in the new ".docx" format. They wrote back and asked him to resend files in the older ".doc" format ― which might not have worked if he had inadvertently used some new-fangled formatting feature.

To be sure, Microsoft does provide a patch that allows old versions of Office to read the new ".docx" format. But Microsoft doesn't publicize it ― or warn you if your Office 2007 file is about to become incompatible with older versions.

While Microsoft could have kept the traditional ".doc" as its default format for MS Word, this would not have served its purpose: eventually, after enough of the world pays for Office 2007, holdouts will be dragged along, kicking and screaming. Then, in four or five years, Microsoft will begin our agony all over again. ...

Whenever Microsoft rolls out a new operating system, the question is not whether you should switch, but when. Adding new features can speed the transition, but what is necessary is only that the new system be incompatible with existing systems in certain respects, and that a sufficient number of people expect that it will become the new standard.

Of course, creating new software is costly. So why should Microsoft bother?

The Nobel laureate Ronald Coase answered that question long ago. According to "the Coase Conjecture," a monopolist selling a durable good must sell it at marginal cost. For Microsoft, the problem is that the marginal cost of software is zero. As a result, Microsoft cannot extract anything close to its full monopoly rents unless it sells upgrades. ...

So, by creating incompatibilities, some subtle and some obvious, that make its old software obsolete, Microsoft can sell its operating systems at high profit margins without fear that people will wait until the price drops. The price will never drop, because Microsoft will just roll out a new system, again at high profit margins.

Microsoft has been in antitrust trouble for 15 years, and ... it will probably be in trouble again. When that happens, I hope the antitrust authorities will consider a remedy that Ian Ayres, Hal Varian, and I devised.

Suppose Microsoft had to license its old software freely whenever it brings out a new version. This would give the company an incentive to ensure that new versions are compatible with and significantly better than old versions ― otherwise the new versions wouldn't sell, or at least not easily. If Microsoft's new software had to compete successfully at least against its old software, we would know the world was improving.

In the meantime, I recommend installing the Microsoft patch to your old computer and just suffering the devil you know.

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?

"Job-Creating Offshoring?"

Since we are already talking about immigrants, may as well continue the Lou Dobbs type topics. Here is evidence from Japan that offshoring may help to create domestic jobs:

Job-creating offshoring?, by Mitsuyo Ando and Fukunari Kimura, Vox EU: European business is internationalising its supply chain; European manufacturing employment is falling. The correlation – combined with a lively anecdotes of West European jobs being transferred to low-wage Central European nations – has given rise to a growing choir of anxious voices. Public opinion and politicians both worried that globalization would ship jobs abroad and domestic workers will suffer.

The term ‘hollowing out’ is not new. Kūdōka (hollowing-out due to offshoring) has been a concern in Japan since the mid-1980s. Since it has been going on so long in Japan, it is natural place to look to the Japanese data for the employment impact of this new form of manufacturing organisation.

"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.

"The 'Death of Distance' May be Premature"

How has the growth of digital technology changed the spatial distribution of service industries in the U.S?:

The geographic concentration of services today mirrors that of manufacturing a century ago, by Klaus Desmet and Esteban Rossi-Hansberg, Vox EU: In the last two decades, rapid improvements in Information and Communications Technology – ICT – has wrought enormous change on the world. As with other so-called general purpose technologies, its productivity impact was initially not much felt. As Solow quipped in 1987, computers were everywhere “except in the productivity statistics”. But with the passing of time, the potential of ICT unfolded. The productivity figures started to pick up. One concrete example of the benefits from ICT is the recent growth in outsourcing and offshoring of different tasks. Now that “everything you can send down a wire is up for grabs”, in the words of Nandan Nilekani, the CEO of Infosys Technologies, it would appear that distances no longer matter, and that any task can be performed anywhere.

However, evidence from the US suggests that announcing the “death of distance” may be premature. If distances were to cease to play a role, then economic activity should become more equally spread across space, as firms and workers move from areas with high land rents to areas with low land rents. In line with this prediction, manufacturing employment inside the US has de-concentrated in recent decades; US counties with small manufacturing employment have experienced faster than average manufacturing job growth. The pattern for services, however, looks very different.

Except for very small and very large counties, the last 20-30 years have witnessed increasing spatial concentration in services. Focusing on intermediate-sized US counties, the larger ones, in terms of service employment, have seen faster growth in service jobs. The picture below shows how, between 1970 and 2000, manufacturing became increasingly de-concentrated, whereas the different service sectors, such as retail, exhibited an S-shape growth pattern, with growing concentration for intermediate-sized counties.

More Food Divided by More People

Caroline Baum on the Neo-Malthusians:

Neo-Malthusians Worry About Food Supply Again, by Caroline Baum, Bloomberg: Some bad ideas refuse to die... Take, for example, the notion that the world population will outrun the food supply. That prediction ... gained currency with Thomas Malthus in the late 18th century; was revitalized with the 1968 publication of ''The Population Bomb,'' by biologist Paul Ehrlich, predicting famine and death on an unprecedented scale; reappeared, courtesy of the Club of Rome, in the 1972 book, ''Limits to Growth;'' and garnered renewed media attention in 1980, when economist Julian Simon challenged Ehrlich on his prediction of massive shortages of natural resources (Simon won), before landing on today's doorstep with the huge rally in grain prices.

On cue, the headlines are once again warning of dire consequences from rising food prices and low grain stockpiles.

Why is this sort of Malthusian gloom and doom so appealing to so many? You don't have to be a farmer or an agricultural economist to raise an eyebrow over predictions of chronic crop shortages. While weather may affect crop yields from one season to the next, shortages ...[and] higher prices induce producers to increase their output. And somehow man, through his eternal inventiveness, always finds a way to produce more with less.

That said, consumers are currently paying higher prices for food. ...

''We are not suddenly going to run out of food,'' says Michael Swanson, senior agricultural economist at Wells Fargo & Co... ''There will be a supply response.''

Already U.S. farmers have planted 93 million acres of corn this year compared with 78 million acres in 2006 in response to increased demand in the production of ethanol, a gasoline additive and substitute fuel. Swanson calls the increase ''unprecedented.'' ...

Put aside the romance associated with tilling the land, and farmers are no different from other businessmen. They want to make a profit. Give them an incentive in the form of higher crop prices, and they'll jump on it.

Farmers aren't content with the same output per acre year after year. Through a combination of better seed, better chemicals and improved farming practices, ''supply has been able to meet demand,'' Swanson says.

In 1970, the corn yield was 72.4 bushels per harvested acre, according to Keith Collins, chief economist at the U.S. Department of Agriculture. Thirty years later, that same acre was yielding twice as much. ...

And that's before the introduction of some ''remarkable technology coming down the pipeline,'' including a Global Positioning System (GPS) for precision agriculture, Swanson says.

The application of satellite positioning and navigation systems will enable farmers to better manage their land. It's being described as the next evolution in agriculture, promising increased productivity and reduced production costs.

It sounds pretty impressive. Which makes you wonder why there are so many folks willing, at the slightest provocation, to take the other side of that bet.

Part of the concern is over the effect higher food prices will have on the world's poor. While it's true that the effect of higher food prices depends upon things such as whether an individual is a farmer or a consumer, and it's also true that food prices may be relatively lower in the future, lower prices in the future don't provide much comfort to those who are already living near the edge and facing even more hardship from higher food prices today.

IBM Challenges Microsoft with Suite Deal

Another jab at Microsoft:

I.B.M. to Offer Office Software Free in Challenge to Microsoft’s Line, by Steve Lohr, NY Times: I.B.M. plans to mount its most ambitious challenge in years to Microsoft’s dominance ... by offering ... desktop software, called I.B.M. Lotus Symphony... The programs will be available as free downloads from the I.B.M ... Symphony software is a free alternative to Microsoft’s mainstay Office programs — Word, Excel and PowerPoint. ...

Its offerings are versions of open-source software developed in a consortium called OpenOffice.org. ... I.B.M.’s engineers have been working with OpenOffice technology for some time. But last week, I.B.M. declared that it was formally joining the open-source group, had dedicated 35 full-time programmers to the project and would contribute code to the initiative.

Free office productivity software has long been available from OpenOffice.org, and the open-source alternative has not yet made much progress against Microsoft’s Office. But I.B.M. ... has such reach and stature with corporate customers that its endorsement could be significant. ...

I.B.M. executives compare this move with the push it gave Linux... In 2000, I.B.M. declared that it would forcefully back Linux with its engineers, its marketing and its dollars. The support from I.B.M. helped make Linux a mainstream technology in corporations, where it competes with Microsoft’s Windows server software.

I.B.M. is also joining forces with Google... Google supports the same document formats in its online word processor and spreadsheet service.

I.B.M. views its Symphony desktop offerings as part of a broader technology trend that will open the door to faster, more automated movement of information within and between organizations.

A crucial technical ingredient, they say, is the ... OpenDocument Format. It makes digital information independent of the program, like a word processor or spreadsheet, that is used to create and edit a document. OpenDocument Format is based on an Internet-era protocol called XML, short for Extensible Markup Language, which enables automated machine-to-machine communication.

For example, an individual investor might create a spreadsheet with automated links to market information, and prices at which he or she wants to buy or sell shares in particular stocks. The person would get an alert by e-mail or cellphone message of price swings, and could create the document for a buy or sell order with a keystroke.

Or, in a doctor’s office, patient records could be linked to hospital, clinic and other databases and updated automatically.

Microsoft has the same vision of software automation, but it champions its own document format, called Office Open XML. Earlier this month, Microsoft failed in its initial effort to have Office Open XML ratified as a global technical standard by the International Organization for Standardization... The OpenDocument Format, backed by I.B.M., Google, Sun and others, was approved by the standards organization last year.

I.B.M. clearly regards its open-source desktop offerings as a strategic move in the document format battle. ... Any inroads I.B.M. and its allies make against Microsoft, analysts say, will not come easily. “Three major players — I.B.M., Google and Sun — are now solidly behind a potential competing standard to Office,” said Rob Koplowitz, an analyst at Forrester Research. “But it’s a tough road. Office is very entrenched.”

"Cultural Assimilation, Cultural Diffusion, and the Origin of the Wealth of Nations"

I find myself resistant to "culture" as an explanation for differences in economic outcomes among groups of people, but I shouldn't let that stop me from passing along work in the area. This paper asks why Europe is ahead of Asia today in terms of wealth and knowledge when a thousand years ago their positions were reversed. The answer, according to this work, is the relative degrees of cultural assimilation and cultural diffusion due predominantly to differences in geography:

Asia was geographically less vulnerable to cultural diffusion and thus benefited from enhanced assimilation, lower cultural diversity and greater accumulation of society-specific human capital; this was an edge in the agricultural stage. Greater cultural rigidity, however, diminished the ability to adapt to a new technological paradigm, delaying their industrialisation.

The theory "is distinctive in its abstraction from cultural traits themselves... It is the variation in ... cultural assimilation and cultural diffusion, governed partly by geography, which is crucial." Here's more:

Cultural assimilation, cultural diffusion and the origin of the wealth of nations, by Quamrul Ashraf and Oded Galor, Vox EU: At the start of the 2nd millennium CE, civilisations of Asia were arguably well ahead of European societies in both wealth and knowledge. By the 12th century, China employed water-driven machinery to make textiles and coke-based smelting to produce iron, technologies that would not appear in Europe for more than five hundred years. Yet, during the process of the Industrial Revolution, the technological leaders of the pre-industrial era were leapfrogged by European economies that accelerated into the modern age of sustained economic growth.

What can explain the delayed emergence of sustained growth in China and other leading agricultural societies?

"European Pigs Were The Must Have Farm Animal"

An intelligently designed research effort uses evidence from mitochondrial DNA to learn more about the spread of agriculture among Stone Age farmers in Europe and the Middle East:

Pig study sheds new light on the colonisation of Europe by early farmers, EurekAlert: The earliest domesticated pigs in Europe, which many archaeologists believed to be descended from European wild boar, were actually introduced from the Middle East by Stone Age farmers, new research suggests.

The research ... analysed mitochondrial DNA from ancient and modern pig remains. Its findings also suggest that the migration of an expanding Middle Eastern population, who brought their ‘farming package’ of domesticated plants, animals and distinctive pottery styles with them, actually ‘kickstarted’ the local domestication of the European wild boar.

While archaeologists already know that agriculture began about 12,000 years ago in the central and western parts of the Middle East, spreading rapidly across Europe between 6,800 – 4000BC, many outstanding questions remain about the mechanisms of just how it spread. This research sheds new and important light on the actual process of the establishment of farming in Europe.

Opposition to the Introduction of Machines During the Industrial Revolution

Arguments for and against the use of machines:

Leeds Woollen Workers Petition, 1786, Modern History Sourcebook: This petition by workers in Leeds (a major center of wool manufacture in Yorkshire) appeared in a local newspaper in 1786. They are complaining about the effects of machines on the previously well-paid skilled workers.

To the Merchants, Clothiers and all such as wish well to the Staple Manufactory of this Nation.

The Humble ADDRESS and PETITION of Thousands, who labour in the Cloth Manufactory.

SHEWETH, That the Scribbling-Machines have thrown thousands of your petitioners out of employ, whereby they are brought into great distress, and are not able to procure a maintenance for their families, and deprived them of the opportunity of bringing up their children to labour: We have therefore to request, that prejudice and self-interest may be laid aside, and that you may pay that attention to the following facts, which the nature of the case requires.

Social Consequences of the Industrial Revolution

Chapter 14 of Gregory Clark's new book A Farewell to Alms on the social consequences of the Industrial Revolution begins with:

14 Social Consequences

In proportion, therefore, as the repulsiveness of the work increases, the wage decreases. -- Karl Marx and Friedrich Engels (1848)

The Industrial Revolution was driven by the expansion of knowledge. Yet, stunningly, unskilled labor has reaped more gains than any other group. Marx and Engels, trumpeting their gloomy prognostications in The Communist Manifesto in 1848, could not have been more wrong about the fate of unskilled workers. Figure 14.1 shows a typical image of Industrial Revolution misery that somehow has worked its way into modern popular consciousness.

Figure 14.1 Able-bodied poor breaking stones for roads in Bethnal Green, London, 1868

The reality is very different. By 1815 real wages in England for both farm laborers and the urban unskilled had begun the inexorable rise that has created affluence for all. Nor was it even the case that the gains to land and capital initially exceeded those of labor. From 1760 to 1860 real wages in England rose faster than real output per person. The innovators, the owners of capital, the owners of land, and the owners of human capital all experienced modest rewards, or no rewards, from advances in knowledge. Thus modern growth, right from its start, by benefiting the most disadvantaged groups in preindustrial society, particularly unskilled workers, has reduced inequality within societies.

But while growth so far has been benign, there is no guarantee that it will continue to promote equality within societies. We may soon face the gloomy dystopia feared by so many writers, in which the wages of unskilled labor drop below the socially determined "subsistence wage" and societies are forced to support a large fraction of the population permanently through the public purse.

This section of the chapter (pgs. 285-289) is part of a more general discussion of changes in inequality. It looks at past and potential future changes in the wages of unskilled labor:

Technological Advance and Unskilled Wages

We think of the Industrial Revolution as practically synonymous with mechanization, with the replacement of human labor by machine labor. Why in high-income economies is there still a robust demand for unskilled labor? Why do unskilled immigrants with little command of English still walk across the deserts of the U.S. Southwest to get to the major urban labor markets to reap enormous rewards for their labor, even as undocumented workers? Why were there people camped out for months and even years at the Channel Tunnel freight depot in northern France, waiting for a chance to break through the security fence and hop onto a train for Britain?

Gregory Clark's "A Farewell to Alms"

In the Preface to his book on the cause of the Industrial Revolution, A Farewell to Alms, Gregory Clark says:

This book takes a bold approach to history. ... It is an unabashed attempt at big history, in the tradition of The Wealth of Nations, Das Kapital, The Rise of the Western World, and most recently Guns, Germs, and Steel. All these books, like this one, ask: How did we get here? Why did it take so long? Why are some rich and some poor? Where are we headed? ...

Doubtless some of the arguments developed here will prove oversimplified, or merely false. They are certainly controversial, even among my colleagues in economic history. But far better such error than the usual dreary academic sins, which now seem to define so much writing in the humanities, of willful obfuscation and jargon-laden vacuity. As Darwin himself noted, "false views, if supported by some evidence, do little harm, for every one takes a salutary pleasure in proving their falseness: and when this is done, one path towards error is closed and the road to truth is often at the same time opened."' Thus my hope is that, even if the book is wrong in parts, it will be clearly and productively wrong, leading us toward the light. ...

Here's part of a longer write-up on the book:

In Dusty Archives, a Theory of Affluence, by Nicholas Wade, NY Times: For thousands of years, most people on earth lived in abject poverty... But with the Industrial Revolution, some societies traded this ancient poverty for amazing affluence.

Historians and economists have long struggled to understand how this transition occurred and why it took place only in some countries. ...

Gregory Clark, an economic historian at the University of California, Davis, believes that the Industrial Revolution — the surge in economic growth that occurred first in England around 1800 — occurred because of a change in the nature of the human population. The change was one in which people gradually developed the strange new behaviors required to make a modern economy work. The middle-class values of nonviolence, literacy, long working hours and a willingness to save emerged only recently in human history, Dr. Clark argues.

Because they grew more common in the centuries before 1800, whether by cultural transmission or evolutionary adaptation, the English population at last became productive enough to escape from poverty, followed quickly by other countries with the same long agrarian past. ...

"Adam Smith and the iPhone"

Jonathan Wight of the University of Richmond says Adam Smith "pointed out that consumers often buy products not so much for their usefulness, as for the intrinsic beauty of their form and function":

Adam Smith and the iPhone, by Jonathan B. Wight, Commentary, ProJo.com: Consumers have now had a few weeks to fiddle with their new iPhones — the latest “must-have” device that makes phone calls, plays music, schedules appointments, surfs the Web...

Two questions emerge: Do consumers gobble up gadgets actually intending to use all these dazzling functions? Is the iPhone another example of wasteful spending by consumers crushed with debt — or, is it the sharp edge of technological innovation and progress that will bear fruit over time?

The history of economic thinking offers some insights. Adam Smith, the 18th Century economist and moral philosopher, pointed out that consumers often buy products not so much for their usefulness, as for the intrinsic beauty of their form and function. He writes, “What pleases these lovers of toys is not so much the utility, as the aptness of the machines which are fitted to promote it.”

A man, for example, buys a new watch that keeps exquisite time — not because he wishes to arrive on time, but because he wishes to own a machine capable of producing perfect time. Smith says the person who buys this watch “will not always be found either more scrupulously punctual than other men, or more anxiously concerned upon any other account, to know precisely what time of day it is.” Rather, what interests him is “the perfection of the machine” that attains this knowledge.

This is an important insight into human nature. A machine’s beauty is judged on the basis of hypothetical usefulness, and this characteristic is often valued more highly than actual usefulness. People buy fast cars that can potentially go 150 miles an hour, without ever intending to take them on the track.

Hence, products are purchased for what may seem like superficial or wasteful reasons. Many critics of capitalism bemoan our throw-away society, and the pressure to take on credit-card loans merely to assuage peer insecurity, in the guise of $100 sneakers or some other fad.

Smith would agree, and he worries, “How many people ruin themselves by laying out money on trinkets of frivolous utility? . . . All their pockets are stuffed with little conveniencies. They contrive new pockets, unknown in the clothes of other people, in order to carry a greater number.”

The owners of iPhones can actually unburden their pockets of the devices that the new machine replaces. But will owning the iPhone make anyone happier? People delude themselves into thinking so, but Smith says that after the initial rush of excitement, they will return to whatever state of happiness is their natural equilibrium. Only by constantly upgrading can one rekindle a blissful rush.

Smith’s system of progress through competition thus relies on consumers who stimulate markets by buying ever-more beautiful goods. The “invisible hand” operates through the self-delusion that compels people to think happiness depends on owning machines that perform feats of little actual utility. This stimulates technological innovation, which paradoxically may produce genuine human progress in the long run.

The genius of a competitive market system is not in the individual products produced, but in the climate of experimentation and discovery that unleashes the creativity of a society. ...

Trends in IT Employment

Lily Hsueh looks at trends in IT employment in this Economic Letter from the San Francisco Fed:

Trends in Bay Area IT Employment, by Lily Hsueh, Economic Letter, FRBSF: ...For the purposes of this analysis, IT will be divided into two broad components: manufacturing and services. The IT manufacturing component includes companies that make computers, communications equipment and their primary building blocks, semiconductors, and other advanced electronic machinery, as well as a variety of advanced measuring and testing equipment, such as photonics and electrometrical and aeronautical devices, along with consumer electronics (Daly and Valletta 2004). The IT services component includes internet service providers and computer programming, design, management services, and research and engineering services.

Figure 1 provides telling evidence on the evolution of IT employment trends in the Bay Area as well as on the region's long dominance as a leader in IT employment. The figure plots the share of the nation's IT employment from 1990 to 2006 for the five metropolitan areas cited among the nation's largest centers for IT employment by the American Electronics Association (2000). This 16-year period covers the years leading up to a productivity surge that was largely driven by developments in IT, the dot-com boom, the recession in 2001-2002, which was largely led by a retrenchment in IT investment (marked by the second gray bar in the figure), and the subsequent recovery.

Although the Bay Area has seen a fall in its share of the nation's IT employment, it nonetheless has been the leader among metropolitan areas throughout this period of booms and busts in the industry, and remains so today. Shares also have shifted for the other top IT centers. For example, although Los Angeles has maintained its second-place ranking, its share of the nation's IT employment has fallen. The Boston area, too, has seen some erosion in its IT employment share, and, indeed, it has ceded its third-place ranking to Washington, D.C., where the share has risen. Seattle remains in the fifth-place position, with its share showing a steady upward movement...