Category Archive for: Technology [Return to Main]

Wednesday, October 29, 2014

'Digital Divide Exacerbates US Inequality'

The digital divide:

Digital divide exacerbates US inequality, by David Crow, FT: The majority of families in some of the US’s poorest cities do not have a broadband connection, according to a Financial Times analysis of official data that shows how the “digital divide” is exacerbating inequality in the world’s biggest economy. ...
The OECD ranks the US 30th out of 33 countries for affordability...
There is a very strong correlation with race and income. Just 45 per cent of households with an income of less than $20,000 a year have broadband whereas the rate for those earning $75,000 or more is 91 per cent. About a third of African American and Hispanic households are unconnected compared to 20 per cent for white households and 10 per cent for Asian households.

Sunday, September 28, 2014

'The rise of China and the Future of US Manufacturing'

Acemoglu, Autor, Dor, Hansen, and Price (I've noted this paper once or twice already in recent months, but thought it worthwhile to post their summary of te work):

The rise of China and the future of US manufacturing, by Daron Acemoglu, David Autor, David Dorn, Gordon H. Hanson, and Brendan Price, Vox EU: The end of the Great Recession has rekindled optimism about the future of US manufacturing. In the second quarter of 2010 the number of US workers employed in manufacturing registered positive growth – its first increase since 2006 – and subsequently recorded ten consecutive quarters of job gains, the longest expansion since the 1970s. Advocating for the potential of an industrial turnaround, some economists give a positive spin to US manufacturing’s earlier troubles: while employment may have fallen in the 2000s, value added in the sector has been growing as fast as the overall US economy. Its share of US GDP has kept stable, an achievement matched by few other high-income economies over the same period (Lawrence and Edwards 2013, Moran and Oldenski 2014). The business press has giddily coined the term ‘reshoring’ to describe the phenomenon – as yet not well documented empirically – of companies returning jobs to the United States that they had previously offshored to low-wage destinations. 
Before we declare a renaissance for US manufacturing, it is worth re-examining the magnitude of the sector’s previous decline and considering the causal factors responsible for job loss. The scale of the employment decline is indeed stunning. Figure 1 shows that in 2000, 17.3 million US workers were employed in manufacturing, a level that with periodic ups and downs had changed only modestly since the early 1980s. By 2010, employment had dropped to 11.5 million workers, a 33% decrease from 2000. Strikingly, most of this decline came before the onset of the Great Recession. In the middle of 2007, on the eve of the Lehman Brothers collapse that paralysed global financial markets, US manufacturing employment had already dipped to 13.9 million workers, such that three-fifths of the job losses over the 2000 to 2010 period occurred prior to the US aggregate contraction. Figure 1 also reveals the paltriness of the recent manufacturing recovery. As of mid-2014, the number of manufacturing jobs had reached only 12.1 million, a level far below the already diminished pre-recession level.

Figure 1. US employment , 1980q1-2014q3

Source: US Bureau of Labor Statistics.

We examine the reasons behind the recent decline in US manufacturing employment (Acemoglu et al. 2014). Our point of departure is the coincidence of the 2000s swoon in US manufacturing and a significant increase in import competition from China (Bernard et al. 2006). Between 1990 and 2011 the share of global manufacturing exports originating in China surged from two to 16% (Hanson 2012). This widely heralded export boom was the outcome of deep economic reforms that China enacted in the 1980s and 1990s, which were further extended by the country’s joining the World Trade Organization in 2001 (Brandt et al. 2012, Pierce and Schott 2013). China’s share in US manufacturing imports has expanded in concert with its global presence, rising from 5% in 1991 to 11% in 2001 before leaping to 23% in 2011. Could China’s rise be behind US manufacturing’s fall?
The first step in our analysis is to estimate the direct impact of import competition from China on US manufacturing industries. Suppose that the economic opening in China allows the country to realise a comparative advantage in manufacturing that had lain dormant during the era of Maoist central planning, which entailed near prohibitive barriers to trade. As reform induces China to reallocate labour and capital from farms to factories and from inefficient state-owned enterprises to more efficient private businesses, output will expand in the sectors in which the country’s comparative advantage is strongest. China’s abundant labour supply and relatively scarce supply of arable land and natural resources make manufacturing the primary beneficiary of reform-induced industrial restructuring. The global implications of China’s reorientation toward manufacturing – strongly abetted by inflows of foreign direct investment – are immense. China accounts for three-quarters of all growth in manufacturing value added that has occurred in low and middle income economies since 1990.
For many US manufacturing firms, intensifying import competition from China means a reduction in demand for the goods they produce and a corresponding contraction in the number of workers they employ. Looking across US manufacturing industries whose outputs compete with Chinese import goods, we estimate that had import penetration from China not grown after 1999, there would have been 560,000 fewer manufacturing jobs lost through 2011. Actual US manufacturing employment declined by 5.8 million workers from 1999 to 2011, making the counterfactual job loss from the direct effect of greater Chinese import penetration amount to 10% of the realised job decline in manufacturing.
These direct effects of trade exposure do not capture the full impact of growing Chinese imports on US employment. Negative shocks to one industry are transmitted to other industries via economic linkages between sectors. One source of linkages is buyer-supplier relationships (Acemoglu et al. 2012). Rising import competition in apparel and furniture – two sectors in which China is strong – will cause these ‘downstream’ industries to reduce purchases from the ‘upstream’ sectors that supply them with fabric, lumber, and textile and woodworking machinery. Because buyers and suppliers often locate near one another, much of the impact of increased trade exposure in downstream industries is likely to transmit to suppliers in the same regional or national market. We use US input-output data to construct downstream trade shocks for both manufacturing and non-manufacturing industries. Estimates from this exercise indicate sizeable negative downstream effects. Applying the direct plus input-output measure of exposure increases our estimates of trade-induced job losses for 1999 to 2011 to 985,000 workers in manufacturing and to two million workers in the entire economy. Inter-industry linkages thus magnify the employment effects of trade shocks, almost doubling the size of the impact within manufacturing and producing an equally large employment effect outside of manufacturing.
Two additional sources of linkages between sectors operate through changes in aggregate demand and the reallocation of labour. When manufacturing contracts, workers who have lost their jobs or suffered declines in their earnings subsequently reduce their spending on goods and services. The contraction in demand is multiplied throughout the economy via standard Keynesian mechanisms, depressing aggregate consumption and investment. Helping offset these negative aggregate demand effects, workers who exit manufacturing may take up jobs in the service sector or elsewhere in the economy, replacing some of the earnings lost in trade-exposed industries. Because aggregate demand and reallocation effects work in opposing directions, we can only detect their net impact on total employment. A further complication is that these impacts operate at the level of the aggregate economy – as opposed to direct and input-output effects of trade shocks which operate at the industry level – meaning we have only as many data points to detect their presence as we have years since the China trade shock commenced. Since China’s export surge did not hit with full force until the early 1990s, the available time series for the national US economy is disconcertingly short.
To address this data challenge, we supplement our analysis of US industries with an analysis of US regional economies. We define regions to be ‘commuting zones’ which are aggregates of commercially linked counties that comprise well-defined local labour markets. Because commuting zones differ sharply in their patterns of industrial specialisation, they are differentially exposed to increased import competition from China (Autor et al. 2013). Asheville, North Carolina, is a furniture-making hub, putting it in the direct path of the China maelstrom. In contrast, Orlando, Florida (of Disney and Harry Potter World Fame), focuses on tourism, leaving it lightly affected by rising imports of manufactured goods. If the reallocation mechanism is operative, then when a local industry contracts as a result of Chinese competition, some other industry in the same commuting zone should expand. Aggregate demand effects should also operate within local labour markets, as shown by Mian and Sufi (2014) in the context of the recent US housing bust. If increased trade exposure lowers aggregate employment in a location, reduced earnings will decrease spending on non-traded local goods and services, magnifying the impact throughout the local economy.
Our estimates of the net impact of aggregate demand and reallocation effects imply that import growth from China between 1999 and 2011 led to an employment reduction of 2.4 million workers. This figure is larger than the 2.0 million job loss estimate we obtain for national industries, which only captures direct and input-output effects. But it still likely understates the full consequences of the China shock on US employment. Neither our analysis for commuting zones nor for national industries fully incorporates all of the adjustment channels encompassed by the other. The national-industry estimates exclude reallocation and aggregate demand effects, whereas the commuting-zone estimates exclude the national component of these two effects, as well as the non-local component of input-output linkage effects. Because the commuting zone estimates suggest that aggregate forces magnify rather than offset the effects of import competition, we view our industry-level estimates of employment reduction as providing a conservative lower bound.
What do our findings imply about the potential for a US manufacturing resurgence? The recent growth in manufacturing imports to the US is largely a consequence of China’s emergence on the global stage coupled with its deep comparative advantage in labour-intensive goods. The jobs in apparel, furniture, shoes, and other wage-sensitive products that the United States has lost to China are unlikely to return. Even as China’s labour costs rise, the factories that produce these goods are more likely to relocate to Bangladesh, Vietnam, or other countries rising in China’s wake than to reappear on US shores. Further, China’s impact on US manufacturing is far from complete. During the 2000s, the country rapidly expanded into the assembly of laptops and cell-phones, with production occurring increasingly under Chinese brands, such as Lenovo and Huawei. Despite this rather bleak panorama, there are sources of hope for manufacturing in the United States. Perhaps the most encouraging sign is that the response of many companies to increased trade pressure has been to increase investment in innovation (Bloom et al. 2011). The ensuing advance in technology may ultimately help create new markets for US producers. However, if the trend toward the automation of routine jobs in manufacturing continues (Autor and Dorn 2013), the application of these new technologies is likely to do much more to boost growth in value added than to expand employment on the factory floor.
References
Acemoglu D, V Carvalho, A Ozdaglar, and A Tahbaz-Salehi (2012), “The Network Origins of Aggregate Fluctuations.” Econometrica, 80(5): 1977-2016.
Acemoglu D, D H Autor, D Dorn, G H Hanson, and B Price (2014), “Import Competition and the Great US Employment Sag of the 2000s.” NBER Working Paper No. 20395.
Autor, D H and D Dorn (2013), “The Growth of Low Skill Service Jobs and the Polarization of the US Labor Market.” American Economic Review, 103(5), 1553-1597.
Autor D H, D Dorn, and G H Hanson (2013a) “The China Syndrome: Local Labor Market Effects of Import Competition in the United States.” American Economic Review, 103(6): 2121-2168.
Bernard A B, J B Jensen, and P K Schott (2006), “Survival of the Best Fit: Exposure to Low-Wage Countries and the (Uneven) Growth of US Manufacturing Plants.” Journal of International Economics, 68(1), 219-237.
Bloom N, M Draca, and J Van Reenen (2012), “Trade Induced Technical Change? The Impact of Chinese Imports on Innovation, IT, and Productivity.” Mimeo, Stanford University.
Brandt L, J Van Biesebroeck, and Y Zhang (2012), “Creative Accounting or Creative Destruction? Firm-Level Productivity Growth in Chinese Manufacturing.” Journal of Development Economics, 97(2): 339-351.
Hanson, G (2012), “The Rise of Middle Kingdoms: Emerging Economies in Global Trade.” Journal of Economic Perspectives, 26(2): 41-64.
Mian, A and A Sufi (2014), “What Explains the 2007-2009 Drop in Employment?” Econometrica, forthcoming.
Pierce, J R and P K Schott (2013), “The Surprisingly Swift Decline of US Manufacturing Employment.” Yale Department of Economics Working Paper, November.

Tuesday, July 22, 2014

'Will Automation Take Our Jobs?'

Running late today -- two very quick ones. First, from Scientific American:

Will Automation Take Our Jobs?: Last fall economist Carl Benedikt Frey and information engineer Michael A. Osborne, both at the University of Oxford, published a study estimating the probability that 702 occupations would soon be computerized out of existence. Their findings were startling. Advances in ... technologies could, they argued, put 47 percent of American jobs at high risk of being automated in the years ahead. Loan officers, tax preparers, cashiers, locomotive engineers, paralegals, roofers, taxi drivers and even animal breeders are all in danger of going the way of the switchboard operator.
Whether or not you buy Frey and Osborne's analysis, it is undeniable that something strange is happening in the U.S. labor market. Since the end of the Great Recession, job creation has not kept up with population growth. Corporate profits have doubled since 2000, yet median household income (adjusted for inflation) dropped from $55,986 to $51,017. ... Erik Brynjolfsson and Andrew McAfee ... call this divergence the “great decoupling.” In their view, presented in their recent book The Second Machine Age, it is a historic shift. ...

Tim Taylor:

The Next Wave of Technology?, by Tim Taylor: Many discussions of "technology" and how it will affect jobs and the economy have a tendency to discuss technology as if it is one-dimensional, which is of course an extreme oversimplification. Erik Brynjolfsson, Andrew McAfee, and Michael Spence offer some informed speculation on how they see the course of technology evolving in "New World Order: Labor, Capital, and Ideas in the Power Law Economy," which appears in the July/August 2014 issue of Foreign Affairs (available free, although you may need to register).

Up until now, they argue, the main force of information and communications technology has been to tie the global economy together, so that production could be moved to where it was most cost-effective. ...
But looking ahead, they argue that the next wave of technology will not be about relocating production around the globe, but changing the nature of production--and in particular, automating more and more of it. If the previous wave of technology made workers in high-income countries like the U.S. feel that their jobs were being outsourced to China, the next wave is going to make those low-skill workers in repetitive jobs--whether in China or anywhere else--feel that their jobs are being outsources to robots. ...
If this prediction holds true, what does this mean for the future of jobs and the economy?

1) Outsourcing would become much less common. ...

2) For low-income and middle-income countries like China..., their jobs and workforce would experience a dislocating wave of change.

3) Some kinds of physical capital are going to plummet in price, like robots, 3D printing, and artificial intelligence...

4)  So..., who does well in this future economy? For high-income countries like the United States, Brynjolfsson, McAfee, and Spence emphasize that the greatest rewards will go to "people who create new ideas and innovations," in what they refer to as a wave of "superstar-based technical change." ...

This final forecast seems overly grim to me. While I can easily believe that the new waves of technology will continue to create superstar earners, it seems plausible to me that the spread and prevalence of many different new kinds of technology offers opportunities to the typical worker, too. After all, new ideas and innovations, and the process of bringing them to the market, are often the result of a team process--and even being a mid-level but contributing player on such teams, or a key supplier to such teams, can be well-rewarded in the market. More broadly, the question for the workplace of the future is to think about jobs where labor can be a powerful complement to new technologies, and then for the education and training system, employers, and employees to get the skills they need for such jobs. If you would like a little more speculation, one of my early posts on this blog, back on July 25, 2011, was a discussion of "Where Will America's Future Jobs Come From?"

Saturday, April 05, 2014

'Automation Alone Isn’t Killing Jobs'

Tyler Cowen:

Automation Alone Isn’t Killing Jobs, by Tyler Cowen, Commentary, NY Times: Although the labor market report on Friday showed modest job growth, employment opportunities remain stubbornly low in the United States, giving new prominence to the old notion that automation throws people out of work.
Back in the 19th century, steam power and machinery took away many traditional jobs, though they also created new ones. This time around, computers, smart software and robots are seen as the culprits. They seem to be replacing many of the remaining manufacturing jobs and encroaching on service-sector jobs, too.
Driverless vehicles and drone aircraft are no longer science fiction, and over time, they may eliminate millions of transportation jobs. Many other examples of automatable jobs are discussed in “The Second Machine Age,” a book by Erik Brynjolfsson and Andrew McAfee, and in my own book, “Average Is Over.” The upshot is that machines are often filling in for our smarts, not just for our brawn — and this trend is likely to grow.
How afraid should workers be of these new technologies? There is reason to be skeptical of the assumption that machines will leave humanity without jobs. ...

See also, Dean Baker "If Technology Has Increased Unemployment Among the Less Educated, Someone Forgot to Tell the Data."

Wednesday, April 02, 2014

'Inequality is Caused by Ideology, not Technology'

John Quiggin:

Inequality is caused by ideology, not technology, by  John Quiggin: I’ve just had an article published at New Left Project, under the title Don’t Blame the Internet for Rising Inequality. Much of it will be familiar, but I want to stress a particular, and I think novel, critique of the idea that skill-intensive technology is responsible for rising inequality

...The real gains over this period have gone to a subset of the top 1 per cent, dominated by CEOs, other senior managers and finance industry operators. This group has nearly quadrupled its real income over the past 30 years...

This is a major problem for the Race Against the Machine hypothesis. Much of the growth in income share of the top 1 per cent occurred before 2000, when the stereotypical CEO was a technological illiterate who had his (sic) secretary print out his emails. Even today, the technology available to the typical senior manager—a PC with access to the Internet, and a corporate intranet with very limited capabilities—is no different to that of the average knowledge worker, and inferior to that of workers in tech-intensive specialties.

Nor does the ownership of capital explain much here. Even for tech-intensive jobs, the capital and telecomm requirements for an individual worker cost no more than $10,000 for a top-of-the-line computer setup (amortized over 3-5 years), and perhaps $1000 a year for a broadband internet connection. This is well within the capacity of self-employed professional workers to pay for themselves, and in fact many professionals have better equipment at home than at work. Advances in information and communications technology thus can’t explain the vast majority of the growth in inequality over the past three decades.

...

Tuesday, March 04, 2014

'Will MOOCs Lead to the Democratisation of education?'

Some theoretical results on MOOCs:

Will MOOCs lead to the democratisation of education?, by Joshua Gans: With all the recent discussion of how hard it is for journalists to read academic articles, I thought I’d provide a little service here and ‘translate’ the recent NBER working paper by Daron Acemoglu, David Laibson and John List, “Equalizing Superstars” for a general audience. The paper contains a ‘light’ general equilibrium model that may be difficult for some to parse.
The paper is interested in what the effect of MOOCs or, in general, web-based teaching options would be on educational outcomes around the world, the distribution of those outcomes and the wages of teachers. ...

Thursday, February 20, 2014

'Moore's Law: At Least a Little Longer'

Tim Taylor:

Moore's Law: At Least a Little Longer: One can argue that the primary driver of U.S. and even world economic growth in the last quarter-century is Moore's law--that is, the claim first advanced back in 1965 by Gordon Moore, one of the founders of Intel Corporation that the number of transistors on a computer chip would double every two years. But can it go on? Harald Bauer, Jan Veira, and Florian Weig of the McKinsey Global Institute consider the issues in "Moore’s law: Repeal or renewal?" a December 2013 paper. ...
The authors argue that technological advances already in the works are likely to sustain Moore's law for another 5-10 years. This As I've written before, the power of doubling is difficult to appreciate at an intuitive level, but it means that the increase is as big as everything that came before. Intel is now etching transistors at 22 nanometers, and as the company points out, you could fit 6,000 of these transistors across the width of a human hair; or if you prefer, it would take 6 million of these 22 nanometer transistors to cover the period at the end of a sentence. Also, a 22 nanometer transistor can switch on and off 100 billion times in a second. 
The McKinsey analysts point out that while it is technologically possible for Moore's law to continue, the economic costs of further advances are becoming very high. They write: "A McKinsey analysis shows that moving from 32nm to 22nm nodes on 300-millimeter (mm) wafers causes typical fabrication costs to grow by roughly 40 percent. It also boosts the costs associated with process development by about 45 percent and with chip design by up to 50 percent. These dramatic increases will lead to process-development costs that exceed $1 billion for nodes below 20nm. In addition, the state-of-the art fabs needed to produce them will likely cost $10 billion or more. As a result, the number of companies capable of financing next-generation nodes and fabs will likely dwindle."
Of course, it's also possible to have performance improvements and cost decreases on chips already in production: for example, the cutting edge of computer chips today will probably look like a steady old cheap workhorse of a chip in about five years. I suspect that we are still near the beginning, and certainly not yet at the middle, of finding ways for information and communications technology to alter our work and personal lives. But the physical problems and  higher costs of making silicon-based transistors at an ever-smaller scale won't be denied forever, either.

Monday, February 17, 2014

Paul Krugman: Barons of Broadband

We should be more worried than we are about monopoly power:

Barons of Broadband , by Paul Krugman, Commentary, NY Times: Last week’s big business news was the announcement that Comcast ... has reached a deal to acquire Time Warner... If regulators approve the deal, Comcast will be an overwhelmingly dominant player in the business...
So let me ask two questions about the proposed deal. First, why would we even think about letting it go through? Second, when and why did we stop worrying about monopoly power?
On the first question, broadband Internet and cable TV are already highly concentrated industries... Comcast perfectly fits the old notion of monopolists as robber barons...
And there are good reasons to believe ... that monopoly power has become a significant drag on the U.S. economy as a whole.
There used to be a bipartisan consensus in favor of tough antitrust enforcement. During the Reagan years, however, antitrust policy went into eclipse, and ever since measures of monopoly power... have been rising fast.
At first, arguments against policing monopoly power pointed to the alleged benefits of mergers in terms of economic efficiency. Later, it became common to assert that the world had changed in ways that made all those old-fashioned concerns about monopoly irrelevant. Aren’t we living in an era of global competition? Doesn’t ... creative destruction ... constantly tear down old industry giants and create new ones?
The truth, however, is that many goods and especially services aren’t subject to international competition: New Jersey families can’t subscribe to Korean broadband. Meanwhile, creative destruction has been oversold: Microsoft may be ... in decline, but it’s still enormously profitable thanks to the monopoly position it established decades ago.
Moreover, there’s good reason to believe that monopoly is itself a barrier to innovation...: why upgrade your network or provide better services when your customers have nowhere to go?
And the same phenomenon may be ... holding back the economy as a whole. One puzzle ... has been the disconnect between profits and investment. Profits are at a record high..., yet corporations aren’t reinvesting their returns in their businesses. Instead, they’re buying back shares, or accumulating huge piles of cash. This is exactly what you’d expect to see if a lot of those record profits represent monopoly rents.
It’s time, in other words, to go back to worrying about monopoly power, which we should have been doing all along. And the first step on the road back from our grand detour on this issue is obvious: Say no to Comcast.

Tuesday, February 11, 2014

'Enslave the Robots and Free the Poor'

Martin Wolf on the "rise of intelligent machines":

Enslave the robots and free the poor, by Martin Wolf, Commentary, FT: ...we must reconsider leisure. For a long time the wealthiest lived a life of leisure at the expense of the toiling masses. The rise of intelligent machines makes it possible for many more people to live such lives without exploiting others. Today’s triumphant puritanism finds such idleness abhorrent. Well, then, let people enjoy themselves busily. What else is the true goal of the vast increases in prosperity we have created?
...we will need to redistribute income and wealth. ... The revenue could come from taxes on bads (pollution, for example) or on rents (including land and, above all, intellectual property). Property rights are a social creation. The idea that a small minority should overwhelming benefit from new technologies should be reconsidered. ...

Saturday, February 08, 2014

Job Polarization and Middle-Class Workers’ Wages

The decline of the middle class:

Job polarization and the decline of middle-class workers’ wages, by Michael Boehm, Vox EU: The decline of the middle class has come to the forefront of debate in the US and Europe in recent years. This decline has two important components in the labour market. First, the number of well-paid middle-skill jobs in manufacturing and clerical occupations has decreased substantially since the mid-1980s. Second, the relative earnings for workers around the median of the wage distribution dropped over the same period, leaving them with hardly any real wage gains in nearly 30 years.
Job polarization and its cause
Pioneering research by Autor, Katz, and Kearney (2006), Goos and Manning (2007), and Goos, Manning, and Salomons (2009) found that the share of employment in occupations in the middle of the skill distribution has declined rapidly in the US and Europe. At the same time the share of employment at the upper and lower ends of the occupational skill distribution has increased substantially. Goos and Manning termed this phenomenon “job polarization” and it is depicted for US workers in Figure 1.

Figure 1. Changes in US employment shares by occupations since the end of the 1980s

Polar1

Notes: The chart depicts the percentage point change in employment in the low-, middle- and high-skilled occupations in the National Longitudinal Survey of Youth (NLSY) and the comparable years and age group in the more standard Current Population Survey (CPS). The high-skill occupations comprise managerial, professional services and technical occupations. The middle-skill occupations comprise sales, office/administrative, production, and operator and laborer occupations. The low-skill occupations include protective, food, cleaning and personal service occupations.
In an influential paper, Autor, Levy, and Murnane (2003) provide a compelling explanation: they found that middle-skilled manufacturing and clerical occupations are characterized by a high intensity of procedural, rule-based activities which they call “routine tasks”. As it happens, these routine tasks can relatively easily be coded into computer programs.
Therefore, the rapid improvements in computer technology over the last few decades have provided employers with ever cheaper machines that can replace humans in many middle-skilled activities such as bookkeeping, clerical work and repetitive production tasks. These improvements in technology also enable employers to offshore some of the routine tasks that cannot be directly replaced by machines (Autor 2010).
Moreover, cheaper routine tasks provided by machines complement the non-routine abstract tasks that are intensively carried out in high-skill occupations. For example, data processing computer programs strongly increased the productivity of highly-skilled professionals. Machines also do not seem to substitute for the non-routine manual tasks that are intensively carried out in low-skill occupations. For example, computers and robots are still much less capable of driving taxis and cleaning offices than humans. Thus, the relative economy-wide demand for middle-skill routine occupations has declined substantially.
This routinization hypothesis, due to Autor, Levy, and Murnance, has been tested in many different settings and it is widely accepted as the main driving force of job polarization.
The effect of job polarization on wages
Around the same time as job polarization gathered steam in the US, the distribution of wages started polarizing as well. That is, real wages for middle-class workers stagnated while earnings of the lowest and the highest percentiles of the wage distribution increased. This is depicted in Figure 2.

Figure 2. Percentage growth of the quantiles of the US wage distribution since the end of the 1980s

Polar2

Notes: The chart depicts the change in log real wages along the quantiles of the wage distribution between the two cohorts for the NLSY and the comparable years and age group in the CPS.

It thus seems natural to think that the polarization of wages is just another consequence of the declining demand for routine tasks. However, there exists some evidence that is not entirely consistent with this thought: virtually all European countries experienced job polarization as well, yet most of them haven’t seen wage polarization but rather a continued increase in inequality across the board. Moreover, other factors that may have generated wage polarization in the US have been proposed (e.g. an increase in the minimum wage, de-unionization, and ‘classical’ skill-biased technical change).

In my recent paper I try to establish a closer link between job polarization and workers’ wages (Boehm 2013). In particular, I ask three interrelated questions:

  • First, have the relative wages of workers in middle-skill occupations declined as should be expected by the routinization hypothesis?
  • Second, have the relative wage rates paid per ‘constant unit of skill’ in the middle-skill occupations dropped with polarization?
  • Third, can job polarization explain the changes in the overall wage distribution?

I answer these questions by analyzing two waves of a representative survey of teenagers in the US carried out in 1979 and 1997. The survey responses provide detailed and multidimensional characteristics of these young people that influence their occupational choices and wages when they are 27 years old in the end of the 1980s and the end of the 2000s.

Using these characteristics, I compute the probabilities of workers in the 1980s and today choosing middle-skill occupations and then compare the wages associated with these probabilities over time. My empirical strategy relies on predicting the occupations that today’s workers would have chosen had they lived in the 1980s and then comparing their wages to those of workers who actually chose these occupations at that time.

The results from this approach show a substantial negative effect of job polarization on middle-skill workers. The positive wage effect associated with a 1% higher probability of working in high-skill jobs (compared to middle-skill jobs) almost doubled between the 1980s and today. The negative wage effect associated with a 1% higher probability of working in low-skill services jobs compared with middle-skill jobs attenuated by over a third over the same period.

I find similar results when controlling for college education, which is arguably a measure of absolute skill. This suggests that it is indeed the relative advantage in the middle-skill occupations for which the returns in the labor market have declined.

In the next step of my analysis, I estimate the changes in relative market wage rates that are offered for a constant unit of skill in each of the three occupational groups. Again, the position of the middle-skill occupations deteriorates substantially: the wage rates paid in the high-skill occupations increased by 20% compared to the middle while the wage rate in the low-skill occupations rose by 30%. This decline in the relative attractiveness of working in middle-skill occupations is consistent with the massive outflow of workers from these jobs.

Finally, I check what effect the changing prices of labour may have had on the overall wage distribution and whether they can explain the wage polarization that we observe in the US. Figure 3 shows that the change in the wage distribution due to these price effects reproduces the overall distribution reasonably well in the upper half while it fails to match the increase of wages for the lowest earners compared to middle earners.

Figure 3. Actual and counterfactual changes in the US wage distribution

Polar3

Notes: The chart plots the actual and counterfactual changes in the wage distribution in the NLSY when workers in 1980s are assigned the estimated price changes in their occupations.
At first glance, this is surprising given the strong increase in relative wage rates for low-skill work and the increase in the wages of workers in low-skill occupations. The reason is that these workers now move up in the wage distribution, which lifts not only the (low) quantiles where they started out but also the (middle) quantiles where they end up. The inverse happens for workers in middle-skill occupations but with the same effect on the wage distribution.
Conclusions
Despite the above findings, my paper does not provide the last word about the effect of job polarisation on the bottom of the wage distribution. This is because, for example, my estimates do not take into account potential additional wage effects from workers moving out of the middle-skill occupations into low-skill occupations. Therefore, we cannot yet finally assess the role that job polarisation versus policy factors (such as the raise of the minimum wage) played on the lower part of the wage distribution in the US.
However, what emerges unambiguously from my work is that routinization has not only replaced middle-skill workers’ jobs but also strongly decreased their relative wages. Policymakers who intend to counteract these developments may want to consider the supply side: if there are investments in education and training that help low and middle earners to catch up with high earners in terms of skills, this will also slow down or even reverse the increasing divergence of wages between those groups. In my view, the rising number of programs that try to tackle early inequalities in skill formation are therefore well-motivated from a routinization-perspective.
References
Acemoglu, D and D H Autor (2011), “Skills, Tasks and Technologies: Implications for Employment and Earnings”, in Handbook of Labor Economics edited by Orley Ashenfelter and David Card, Vol. 4B, Ch. 12, 1043-1171.
Autor, D H (2010), "The polarization of job opportunities in the US labour market: Implications for employment and earnings", Center for American Progress and The Hamilton Project.
Autor, D H and D. Dorn (2013), “The Growth of Low-Skill Service Jobs and the Polarization of the US Labor Market”, The American Economic Review, 103(5), 1553–97.
Autor D H, L F Katz, and M S Kearney (2006), "The Polarization of the US Labor Market", The American Economic Review 96.2, 189-194.
Autor D H, F Levy and R Murnane (2003), ‘The Skill Content of Recent Technological Change: An Empirical Exploration’, Quarterly Journal of Economics 118(4): 1279-1333.
Boehm, M J (2013), “The Wage Effects of Job Polarization: Evidence from the Allocation of Talents”, Working Paper.
Goos, M and A Manning (2007), "Lousy and lovely jobs: The rising polarization of work in Britain", The Review of Economics and Statistics 89.1, 118-133.
Goos M, A Manning and A Salomons (2009), “Explaining Job Polarization in Europe: The Roles of Technology, Globalization and Institutions”, American Economic Review Papers and Proceedings 99(2): 58-63
Michaels G, A Natraj, and J Van Reenen (2013), “Has ICT Polarized Skill Demand? Evidence from Eleven Countries over 25 Years”, forthcoming in Review of Economics and Statistics; earlier version available as CEP Discussion Paper No. 987 (http://cep.lse.ac.uk/pubs/download/dp0987.pdf).
Spitz-Oener, A (2006), "Technical change, job tasks, and rising educational demands: Looking outside the wage structure", Journal of Labor Economics 24.2, 235-270.
References
1 This figure and the ones below are based on two representative samples for 27 year old males in the United States (the National Longitudinal Survey of Youth (NLSY) and the Current Population Survey (CPS)). For qualitatively similar statistics on all prime age workers, refer to Acemoglu & Autor (2011).
2 Examples of tests of the routinization hypothesis include Michaels et al (2013) who find that industries with faster growth of information and communication technology had greater decreases in the relative demand for middle educated workers; Spitz-Oener (2006) who shows that job tasks have become more complex in occupations that rapidly computerized; and Autor and Dorn (2013) who show that local labour markets that specialised in routine tasks adopted information technology faster and experienced stronger job polarisation.
3 For the details of this estimation, please refer to the paper.

Thursday, January 23, 2014

Don't Blame the Robots for our Wage or Job Problems

I'm a bit more sympathetic to the skill based technical change causing wage inequality arguments than Larry Mishel, technological change is at least part of the story in my view (but, importantly, not the whole story, unionization and relative bargaining power between workers and firms, political forces, etc. are also at work), but his arguments are certainly worth noting (and this extract may not fully reflect his views):

The Robots Are Here and More Are Coming: Do Not Blame Them for our Wage or Job Problems, , by Lawrence Mishel: The “robots are coming” narrative dominating discussions of the economy  was popularized by Erik Brynjolfsson and Andrew McAfee in their 2011 book, Race Against the Machine. They have built on that theme in the richer, deeper The Second Machine Age (W.W. Norton, 2014). The first half of the book provides a valuable window, at least for a non-technologist like me, into past developments and the future trajectory of digitization. Their claim is that digitization will do for mental power what the steam engine did for muscle power—that is, quite a bit, transforming our lives at work and play.
The remainder of the book dwells on the role of digitization in generating both bounty (more consumer choice and greater output, wealth, and income) and spread (greater inequalities of wages, income, and wealth). In treating these topics, they heavily rely on the work of others. As in their last book, they do not provide much direct evidence of the connection between technological change and wage inequality. I study these issues and believe they are wrong to tightly link digitization and robots to wage inequality and the slow job growth of the 2000s. Although the authors claim “technology is certainly not the only force causing this rise in spreads, but it is one of the main ones” my fear is that this book, like their last one, will fuel the mistaken narrative that technology is responsible for our job and wage problems and that we are powerless to obtain more equitable growth. ...
On wage inequality, the authors offer “skill-biased technical change” or SBTC as the explanation. In fact, they offer two distinct SBTC narratives, both of which cannot be simultaneously true and neither of which aptly explains wage trends.
In general, SBTC narratives are weak because they cannot explain one of the key inequality trends, the remarkable wage and income growth of the top 1.0 and 0.1 percent. ...
Specifically, the authors’ first SBTC narrative, the “race between technology and skills,” falls short because it doesn’t square with recent trends. Under this narrative, technological change makes employers value education more, and the more education or skills one has, the better one fares. Despite the absence of prima facie evidence for this popular narrative for two decades, it barrels along anyway. For instance, the wage gap between middle and low-wage workers has been stable or falling since 1987 or so, meaning that those with the least skills have done at least as well or better than those in the middle. ...
The second narrative is that technology is eroding jobs and wages in middle-wage occupations but expanding opportunities and wages among low- and high-wage occupations. This “job polarization” narrative, which emerged around 2006, was designed to overcome the flaw in the education narrative’s explanation of wage trends in the 1990s, when low-wage workers fared as well or better than middle-wage workers. The accumulating evidence now shows that job polarization has not occurred in the entire 2000s...
So, again, these two SBTC narratives can’t both be true—either middle-wage workers are doing better than low-wage workers or they’re not. And neither one can explain the trends of the 2000s, the period where one would expect digitization’s impact to be most evident. The robots are here and more will be coming but they are not responsible for our employment or our wage problems. Read the first half of the book to learn about technology but take the second half with a grain of salt. For understanding wage inequality you should look elsewhere.

Tuesday, December 24, 2013

'Robots and Economic Luddites'

Dean Baker:

Robots and Economic Luddites: They Aren't Taking Our Jobs Quickly Enough: Lydia DePillis warns us in the Post of 8 ways that robots will take our jobs. It is amazing how the media have managed to hype the fear of robots taking our jobs at the same time that they have built up fears over huge budget deficits bankrupting the country. You don't see the connection? Maybe you should be an economics reporter for a leading national news outlet.
Okay, let's get to basics. The robots taking our jobs story is a story of labor surplus, too many workers, too few jobs. Everything that needs to be done is being done by the robots. There is nothing for the rest of us to do but watch.
There can of course be issues of distribution. If the one percent are able to write laws that allow them to claim everything the robots produce then they can make most of us very poor. But this is still a story of society of plenty. We can have all the food, shelter, health care, clean energy, etc. that we need; the robots can do it for us.
Okay, now let's flip over to the budget crisis that has the folks at the Washington Post losing sleep. This is a story of scarcity. We are spending so much money on our parents' and grandparents' Social Security and Medicare that there is no money left to educate our kids.
Some confused souls may say that the problem may not be an economic one, but rather a fiscal problem. The government can't raise the tax revenue to pay for both the Social Security and Medicare for the elderly and the education of our kids. This is confused because if we are living in the world where the robots are doing all the work then the government really doesn't need to raise tax revenue, it can just print the money it needs to back its payments.
Okay, now everyone is completely appalled. The government is just going to print trillions of dollars? That will send inflation through the roof, right? Not in the world where robots are doing all the work it won't. If we print money it will create more demands for goods and services, which the robots will be happy to supply. As every intro econ graduate knows, inflation is a story of too much money chasing too few goods and services. But in the robots do everything story, the goods and services are quickly generated to meet the demand. Where's the inflation, robots demanding higher wages?
In short, you can craft a story where we have huge advances in robot technology so that the need for human labor is drastically reduced. You can also craft a story where an aging population leads to too few workers being left to support too many retirees. However, you can't believe both at the same time unless you write on economic issues for the Washington Post.
Just in case anyone cares about what the data says on these issues, the robots don't seem to be winning out too quickly. Productivity growth has slowed sharply over the last three years and it is well below the pace of 1947-73 golden age. (Robots are just another form of good old-fashioned productivity growth.)

labor productivity

On the other hand, the scarcity mongers don't have much of a case either. Even if productivity growth stays at just a 1.5 percent annual rate its impact on raising wages and living standards will swamp any conceivable tax increases associated with caring for a larger population of retirees.

Thursday, November 21, 2013

'Don’t Blame the Robots: Assessing the Job Polarization Explanation of Growing Wage Inequality'

From Lawrence Mishel, Heidi Shierholz, and John Schmitt:

Don’t Blame the Robots: Assessing the Job Polarization Explanation of Growing Wage Inequality, by Lawrence Mishel, Heidi Shierholz, and John Schmitt, EPI–CEPR Working Paper: Executive summary Many economists contend that technology is the primary driver of the increase in wage inequality since the late 1970s, as technology-induced job skill requirements have outpaced the growing education levels of the workforce. The influential “skill-biased technological change” (SBTC) explanation claims that technology raises demand for educated workers, thus allowing them to command higher wages—which in turn increases wage inequality. A more recent SBTC explanation focuses on computerization’s role in increasing employment in both higher-wage and lower-wage occupations, resulting in “job polarization.” This paper contends that current SBTC models—such as the education-focused “canonical model” and the more recent “tasks framework” or “job polarization” approach mentioned above—do not adequately account for key wage patterns (namely, rising wage inequality) over the last three decades. Principal findings include:
1. Technological and skill deficiency explanations of wage inequality have failed to explain key wage patterns over the last three decades, including the 2000s.
The early version of the “skill-biased technological change” (SBTC) explanation of wage inequality posited a race between technology and education where education levels failed to keep up with technology-driven increases in skill requirements, resulting in relatively higher wages for more educated groups, which in turn fueled wage inequality (Katz and Murphy 1992; Autor, Katz, and Krueger 1998; and Goldin and Katz 2010). However, the scholars associated with this early, and still widely discussed, explanation highlight that it has failed to explain wage trends in the 1990s and 2000s, particularly the stability of the 50/10 wage gap (the wage gap between low- and middle-wage earners) and the deceleration of the growth of the college wage premium since the early 1990s (Autor, Katz, and Kearney 2006; Acemoglu and Autor 2012). This motivated a new technology-based explanation (formally called the “tasks framework”) focused on computerization’s impact on occupational employment trends and the resulting “job polarization”: the claim that occupational employment grew relatively strongly at the top and bottom of the wage scale but eroded in the middle (Autor, Levy, and Murnane 2003; Autor, Katz, and Kearney 2006; Acemoglu and Autor 2012; Autor 2010). We demonstrate that this newer version—the task framework, or job polarization analysis—fails to explain the key wage patterns in the 1990s it intended to explain, and provides no insights into wage patterns in the 2000s. We conclude that there is no currently available technology-based story that can adequately explain the wage trends of the last three decades.
2. History shows that middle-wage occupations have shrunk and higher-wage occupations have expanded since the 1950s. This has not driven any changed pattern of wage trends.
We demonstrate that key aspects of “job polarization” have been taking place since at least 1950. We label this “occupational upgrading” since it primarily consists of shrinkage in relative employment in middle-wage occupations and a corresponding expansion of employment in higher-wage occupations. Lower-wage occupations have remained a small (less than 15 percent) and relatively stable share of total employment since the 1950s, though they have grown in importance in the 2000s. Occupational upgrading has occurred in decades with both rising and falling wage inequality and in decades with both rising and falling median wages, indicating that occupational employment patterns, by themselves, cannot explain the salient wage trends.
3. Evidence for job polarization is weak.
We use the Current Population Survey to replicate existing findings on job polarization, which are all based on decennial census data. Job polarization is said to exist when there is a U-shaped plot in changes in occupational employment against the initial occupational wage level, indicating employment expansion among high- and low-wage occupations relative to middle-wage occupations. As shown in Figure E (explained later in the paper but introduced here), in important cases, these plots do not take the posited U-shape. More importantly, in all cases the lines traced out fit the data very poorly, obscuring large variations in employment growth across occupational wage levels.
4. There was no occupational job polarization in the 2000s.
In the 2000s, relative employment expanded in lower-wage occupations, but was flat at both the middle and the top of the occupational wage distribution. The lack of overall job polarization in the 2000s is a phenomenon visible in both the analyses of decennial census/American Community Survey data provided by proponents of the tasks framework/job polarization perspective (Autor 2010; Acemoglu and Autor 2012) and in our analysis of the Current Population Survey. Thus, the standard techniques applied to the data for the 2000s do not establish even a prima facie case for the existence of overall job polarization in the most recent decade. This leaves the job polarization story, at best, as an account of wage inequality in the 1990s. It certainly calls into question whether it should be a description of current labor market trends and the basis of current policy decisions.
5. Occupational employment trends do not drive wage patterns or wage inequality.
We demonstrate that the evidence does not support the key causal links between technology-driven changes in tasks and occupational employment patterns and wage inequality that are at the core of the tasks framework and job polarization story. Proponents of job polarization as a determinant of wage polarization have, for the most part, only provided circumstantial evidence: both trends occurred at the same time. The causal story of the tasks framework is that technology (i.e., computerization) drives changes in the demand for tasks (increasing demand at the top and bottom relative to the middle), producing corresponding changes in occupational employment (increasing relative employment in high- and low-wage occupations relative to middle-wage occupations). These changes in occupational employment patterns are said to drive changes in overall wage patterns, raising wages at the top and bottom relative to the middle. However, the intermediate step in this story must be that occupational employment trends change the occupational wage structure, raising relative wages for occupations with expanding employment shares and vice-versa. We demonstrate that there is little or no connection between decadal changes in occupational employment shares and occupational wage growth, and little or no connection between decadal changes in occupational wages and overall wages. Changes within occupations greatly dominate changes across occupations so that the much-focused-on occupational trends, by themselves, provide few insights.
6. Occupations have become less, not more, important determinants of wage patterns.
The tasks framework suggests that differences in returns to occupations are an increasingly important determinant of wage dispersion. Using the CPS, we do not find this to be the case.  We find that a large and increasing share of the rise in wage inequality in recent decades (as measured by the increase in the variance of wages) occurred within detailed occupations.  Furthermore, using DiNardo, Fortin, and Lemieux’s reweighting procedure, we do not find that occupations consistently explain a rising share of the change in upper tail and lower tail inequality for either men or women.
7. An expanded demand for low-wage service occupations is not a key driver of wage trends.
We are skeptical of the recent efforts of Autor and Dorn (2013) that ask the low-wage “service occupations” to carry much or all of the weight of the tasks framework. First, the small size and the slow, relatively steady growth of the service occupations suggest significant limitations of a technology-driven expansion of service occupations to be able to explain the large and contradictory changes in wage growth at the bottom of the distribution (i.e., between middle and low wages, the 50/10 wage differential), let alone movements at the middle or higher up the wage distribution. The service occupations remain a relatively small share of total employment; in 2007, they accounted for less than 13 percent of total employment, and just over half of employment in the bottom quintile of occupations ranked by wages. Moreover, these occupations have expanded only modestly in recent decades, increasing their employment share by 2.1 percentage points between 1979 and 2007, with most of the gain in the 2000s. Relative employment in all low-wage occupations, taken together, has been stable for the last three decades, representing a 21.1 percent share of total employment in 1979, 19.7 percent in 1999, and 20.0 percent in 2007.
Second, the expansion of service occupation employment has not driven their wage levels and therefore has not driven overall wage patterns. The timing of the most important changes in employment shares and wage levels in the service occupations is not compatible with conventional interpretations of the tasks framework. Essentially all of the wage growth in the service occupations over the last few decades occurred in the second half of the 1990s, when the employment share in these occupations was flat. The observed wage increases preceded almost all of the total growth in service occupations over the 1979–2007 period, which took place in the 2000s, when service occupation wages were falling (another trend that contradicts the overall claim of the explanatory power of service occupation employment trends).
8. Occupational employment trends provide only limited insights into the main dynamics of the labor market, particularly wage trends.
A more general point can and should be drawn from our findings: Occupational employment trends do not, by themselves, provide much of a read into key labor market trends because changes within occupations are dominant. Recent research and journalistic treatment of the labor market has highlighted the pattern of occupational employment growth to assess the extent of structural unemployment, the disproportionate increase in low-wage jobs, and the “coming of robots”—changes in workplace technology and the consequent impact on wage inequality. The recent academic literature on wage inequality has highlighted the role of changes in the occupational distribution of employment as the key factor. In particular, occupational employment trends have become increasingly used as indicators of job skill requirement changes, reflecting the outcome of changes in the nature of jobs and the way we produce goods and services. Our findings indicate, however, that occupational employment trends give only limited insight and leave little imprint on the evolution of the occupational wage structure, and certainly do not drive changes in the overall wage structure. We therefore urge extreme caution in drawing strong conclusions about overall labor market trends based on occupational employment trends by themselves.

I suppose I should note that I haven't read this closely enough yet to endorse every word (or not). Full paper here (scroll down).

Thursday, October 24, 2013

'Physiocracy and Robots'

Yet another travel day, can't remember the last weekend I was home (no complaints though), so one more from Brad DeLong and that's it for awhile:

Physiocracy and Robots, by Brad DeLong: The physiocrats saw France as having four kinds of jobs:

  • Farmers
  • Skilled artisans
  • Flunkies
  • Landowning aristocrats

Farmers, they thought, produced the net value in the economy--the net product. Their labor combined with water, soil, and sun grew the food they and others ate. Artisans, the physiocrats thought, were best seen not as creators but as transformers of wealth--transformers of wealth in the form of food into wealth in the form of manufactures. Aristocrats collected this net product--agricultural production in excess of farmers' subsistence needs--and spent it buying manufactured goods and, when they got sated with manufactured goods, employing flunkies.

In this framework, the key economic variables are:

  • the fraction f who are farmers.
  • the net product per farmer n.
  • the fraction who can be set to work making manufactured goods that aristocrats can consume before becoming sated m.

The key equilibrium quantity in this system is:

(nf-m)/(1-f-m) = W

This gives the standard of living of the typical flunky--say, a runner for His Grace the Cardinal. The numerator is the amount of resources on which flunkies can subsist. The denominator is the number of flunkies. If this quantity W is low, the country is poor: flunkies are ill-paid, begging and thievery are rampant, and the reserve army of potential unemployed puts downward pressure on artisan and farmer living standards as well. If this quantity is high, the country is prosperous.

The physiocrats saw a France undergoing a secular decline in the farmer share f, and they worried. A fall in f produced a sharper decline in W. Therefore they called for:

  • Scientific farming to boost n and so boost the net product nf.
  • A reallocation of the tax burden to make it less onerous to be a farmer--and so boost the farmer share f and so boost the net product nf.

With the unquestioned assumption that there were limits on how high the net product per farmer n could be pushed, the physiocrats would have forecast that France of today, with only 5% of the population farmers, would be a hellhole: huge numbers of ill-paid flunkies sucking up to the aristocratic landlords.

Well, the physiocrats were wrong about the decline of the agricultural share of the labor force. And let us hope that the techno-pessimists are similarly wrong about the rise of the robots.

Saturday, October 12, 2013

'The ICT Revolution Isn’t Over'

Paul Krugman:

The ICT Revolution Isn’t Over: ...I thought I would make one casual observation about technology. Here it is:... the relatively limited impact so far of the much-heralded rise of ICT — information and communication technologies. For a long time these technologies seemed to be doing nothing for the economy; then, finally, they seemed to kick in circa 1995. But the new era of productivity growth, as Bob says, wasn’t a match for the long boom post World War II, and seemed to have petered out by the late 2000s.
What I’d note, however, is that there is almost surely a second wind coming. The 1995-2007 productivity rise was basically a “wired” phenomenon, a lot of it having to do with local area networks rather than the Internet. Wireless data is a whole different thing, and it’s a surprisingly recent thing — the iPhone was introduced in 2007, the iPad in 2010. And we know from repeated experience that it takes quite a while for new technologies to show up in economic growth, a point famously made by Paul David and confirmed by the 25-year lag between the introduction of the microprocessor and the 90s productivity takeoff.
So there’s more coming. How big is another question.

Thursday, September 26, 2013

The New Normal? Slower R&D Spending

From the Atlanta Fed's macroblog:

The New Normal? Slower R&D Spending: In case you need more to worry about, try this: the pace of research and development (R&D) spending has slowed. The National Science Foundation defines R&D as “creative work undertaken on a systematic basis in order to increase the stock of knowledge” and application of this knowledge toward new applications. ...
R&D spending is often cited as an important source of productivity growth within a firm, especially in terms of product innovation. But R&D is also an inherently risky endeavor, since the outcome is quite uncertain. So to the extent that economic and policy uncertainty has helped make businesses more cautious in recent years, a slow pace of R&D spending is not surprising. On top of that, the federal funding of R&D activity remains under significant budget pressure. See, for example, here.
So you can add R&D spending to the list of things that seem to be moving more slowly than normal. Or should we think of it as normal?

Sunday, September 08, 2013

'Is Technological Progress a Thing of the Past?'

Has technological progress slowed down?:

Is technological progress a thing of the past?, by Joel Mokyr, Vox EU: Technological progress has been at the heart of economic growth for two centuries. Some authors, however, have suggested that product and process innovation are running out of steam:

  • Robert J Gordon and Tyler Cowen, inter alia, have expressed the view that technological progress is slowing down (Gordon 2012, Cowen 2011).
  • Jan Vijg has suggested that the industrialised West of the 21st century will resemble the declining Empires of late Rome and Qing China (Vijg 2011).

Their basic point is that technological dynamism is fizzling out. The low-hanging fruits that have improved our lives so much in the 20th century have all been picked. We should be ready for a more stagnant world in which living standards rise little if at all.

History and the future

History is always a bad guide to the future and economic historians should avoid making predictions. All the same, the historical records provide some insights into what makes societies technologically creative. Such insights, in turn can be used at the basis for looking ahead to assess how likely such a decline is to take place.

The answer is short and simple: we ain’t seen nothin’ yet, the best is still to come.

Supply and the demand sides of innovation

My argument concerns both the supply and the demand sides of innovation. Starting with supply, what is it that accounts for sustained technological progress? The relation between scientific progress and technology is a complex two-way street. For example, 19th-century energy-physics learned more from the steam engine than the other way around.

The historical record makes clear that science depends on technology in that it depends on the instruments and tools that are needed for science to advance. New instruments opened new horizons in what Derek Price called "artificial revelation”, observations through instruments that allow us to see things that would otherwise be invisible.

Examples:

  • The Scientific Revolution of the 17th century depended critically on the development of the telescope, the microscope, the barometer, the vacuum pump, and similar contraptions.
  • The achromatic-lens microscope developed by Joseph J Lister (father of the famous surgeon) in the 1820s paved the way for the germ theory, the greatest breakthrough in medicine before 1900.

The same was true in physics, for instance:

  • The equipment designed by Heinrich Hertz allowed him to detect electromagnetic radiation in the 1880s and Robert Millikan’s ingenious oil-drop apparatus allowed him to measure the electric charge of an electron (1911).

In the twentieth century, the impact of instruments on progress is even more apparent. For example:

  • X-ray crystallography, developed in 1912, was crucial forty years later in the discovery of the structure of DNA.

If tools and instruments are a key to further scientific progress, it is hard not to be impressed by the possibilities of the 21st century:

  • DNA sequencing machines and cell analysis through flow cytometry (to mention but two) have revolutionised molecular microbiology.
  • High-powered computers are helping research in every domain conceivable, from content analysis in novels to the (very hard) problems of turbulence.
  • Astronomy, nanochemistry, and genetic engineering are all areas in which progress has been mind-boggling in the past few decades thanks to better tools.

To be sure, there is no automatic mechanism that turns better science into improved technology. But there is one reason to believe that in the near future it will do so better and more efficiently than ever before. The reason is access.

Inventors, engineers, applied chemists, and physicians all need access to best-practice science to answer an infinite list of questions about what can and cannot be done. Search engines were invented in the 18th century through encyclopaedias and compendia that arranged all available knowledge in alphabetical order, making it easy to find. Textbooks had indexes that did the same. Libraries developed cataloguing systems and other techniques that made scientific information findable.

But these search systems have their limitations. One might have feared that the explosion of scientific knowledge in the 20th century could outrun our ability to find what we are looking for. Yet the reverse has happened. The development of searchable databanks of massive sizes has even outrun our ability to generate scientific knowledge. Copying, storing, transmitting, and searching vast amounts of information today is fast, easy, and practically free. We no longer deal with megabytes or gigabytes. Instead terms like petabytes (a million gigabytes) and zettabytes (a million petabytes) are being bandied about. Scientists can now find the tiniest needles in data haystacks as large as Montana in a fraction of a second.
And if science sometimes still proceeds by ‘trying every bottle on the shelf’ – as in some areas it still does – it can search with blinding speed over many more bottles, perhaps even peta-bottles.

Have all the low-hanging fruits been picked?

One answer is that the analogy is flawed. Science builds taller and taller ladders, so we can reach the upper branches, and then the branches above them.

  • A less obvious answer is that technological progress is fundamentally a dis-equilibrating process.

Whenever a technological solution is found for some human need, it creates a new problem. As Edward Tenner put it, technology ‘bites back’. The new technique then needs a further ‘technological fix’, but that one in turn creates another problem, and so on. The notion that invention definitely ‘solves’ a human need, allowing us to move to pick the next piece of fruit on the tree is simply misleading.

  • Each solution perturbs some other component in the system and sows the seed of more needs; the ‘demand’ for new technology is thus self-sustaining.

The most obvious example for such a dynamic is in our never-ending struggles with insects and harmful bacteria. In those wars, evolutionary mechanisms decree that after most battles we win, the enemy regroups by becoming resistant to whatever poison we throw at them. Drug-resistant bacteria are increasingly common and require novel approaches to new antibiotics. The search for novel antibiotics will resume with tools that Chain and Florey would never have dreamed of – but even such new antibiotics will eventually lead to adaptation.

In agriculture, the advance in fertiliser use has helped avert the Malthusian disasters that various doom-and-gloom authors predicted. But the vast increase in nitrate use following Fritz Haber’s epochal invention of the nitrogen-fixing process before World War I has now led to serious environmental problems in aquifer pollution and algae blooms. Again, technology will provide us with a fix, possibly through genetic engineering in which more plants can fix their own nitrates rather than needing fertiliser or bacteria that convert nitrates into nitrogen at more efficient rates.

Another example is energy: For better or for worse, modern technology has relied heavily on fossil fuels: first coal, then oil, and now increasingly on natural gas. The bite-back here has been planetary in scope: climate change is no longer a prospect, it is a reality. Can new technology stop it? There is no doubt that it can, even if nobody can predict right now what shape that will take, and if collective action difficulties will actually make it realistic.

What will the workers do?

Perhaps the biggest bite-back is what happens to human labour. If technology replaces workers, what will the role of people become? From Kurt Vonnegut to Erik Brynjolfsson, dystopias about an idle and vapid humanity in a robotised economy have worried people. There will be disruption and pain, but the new technology will also create new demand for workers, to perform tasks that a new technology creates.

  • In 1914 who could have imagined occupations such as video game programmer or identity-theft security guard?
  • Physical therapists, social media consultants, and TV sports commentators are all occupations created by new technology.

It seems plausible that the future, too, will create occupations we cannot imagine, let alone envisage. Furthermore, the task that 20th-century technology seems to have carried out the easiest is to create activities that fill the ever-growing leisure time that early retirement and shorter work-weeks have created. Technological creativity has responded to the growth of free time: a bewildering choice of programmes on TV, the rise of mass tourism, access at will to virtually every film made and opera written, and a vast pet industry are just some examples. The cockfights and eye-gouging contests with which working classes in the past entertained themselves have been replaced by a gigantic high-tech spectator-sports industrial complex, both local and global.

Keynes’ vision

In his brief Economic Possibilities for our Grandchildren (1931) Keynes foresaw much of the future impact of technology. His insights may surprise those who regard him as the prophet of unemployment: “all this [technological change] means in the long run [is] that mankind is solving its economic problem” (italics in original). Contemplating a world in which work itself would become redundant thanks to science and capital (Keynes did not envisage robots, but they would have strengthened his case), he felt that this age of leisure and abundance was frightening people because “we have been trained too long to strive and not to enjoy”.

References

Brynjolfsson, Erik and Andrew McAfee (2011), Race Against the Machine, New York, Digital Frontier Press.

Cowen, Tyler (2011), The Great Stagnation, New York, Dutton.

Gordon Robert J (2012), “Is US Economic Growth over? Faltering Innovation confronts the six Headwinds”, NBER Working paper series, 18315, August.

Mokyr, Joel (2002), The Gifts of Athena, Princeton, Princeton University Press.

Price, Derek J de Solla (1984a), “Notes towards a Philosophy of the Science/Technology Interaction” in Rachel Laudan (ed.) The Nature of Knowledge: are Models of Scientific Change Relevant?, Dordrecht, Kluwer.

Tenner, Edward (1996), Why Things Bite Back: Technology and the Revenge of Unintended Consequences, New York, Knopf.

Vijg, Jan (2011), The American Technological Challenge: Stagnation and Decline in the 21st Century, New York, Algora Publishing.

Vonnegut, Kurt (1974), Player Piano, New York, Dell Paperbacks.

Sunday, August 25, 2013

'How Technology Wrecks the Middle Class'

I've had many posts on the Autor and Dorn paper on the hollowing out of the middle class (see here too), and this is yet another, but let me add one thing. This explains the demise of the middle class as a result of technological change. However, there are those who argue that the troubles of the working class has happened for other reasons, e.g. the demise of unions as politicians favored business over labor, or that there have been other political/institutional changes that worked against the middle class. My own view is that it wasn't one or the other, both technology and politics mattered:

How Technology Wrecks the Middle Class, by David Autor and David Dorn, Commentary, NY Times: In the four years since the Great Recession officially ended, the productivity of American workers — those lucky enough to have jobs — has risen smartly. But the United States still has two million fewer jobs than before the downturn, the unemployment rate is stuck at levels not seen since the early 1990s and the proportion of adults who are working is four percentage points off its peak in 2000.
This job drought has spurred pundits to wonder whether a profound employment sickness has overtaken us. And from there, it’s only a short leap to ask whether that illness isn’t productivity itself. Have we mechanized and computerized ourselves into obsolescence?
Are we in danger of losing the “race against the machine,” as the M.I.T. scholars Erik Brynjolfsson and Andrew McAfee argue in a recent book? Are we becoming enslaved to our “robot overlords,” as the journalist Kevin Drum warned in Mother Jones? Do “smart machines” threaten us with “long-term misery,” as the economists Jeffrey D. Sachs and Laurence J. Kotlikoff prophesied earlier this year? Have we reached “the end of labor,” as Noah Smith laments in The Atlantic? ...

Sunday, August 18, 2013

'Does the Government Stifle Innovation? I Don’t See It (To the Contrary…)'

Jared Bernstein responds to the Robert Shiller article I linked to yesterday:

Does the Government Stifle Innovation? I Don’t See It (To the Contrary…): I usually find economist Robert Shiller’s commentaries resonant and insightful, but this one seemed more confusing than enlightening. The thrust of the piece is the concern that government activities to promote innovation can just as easily stifle it.

The piece introduces the notion of corporatism, from a new book by Ed Phelps. What means “corporatism”? It’s:

…a political philosophy in which economic activity is controlled by large interest groups or the government. Once corporatism takes hold in a society…people don’t adequately appreciate the contributions and the travails of individuals who create and innovate. An economy with a corporatist culture can copy and even outgrow others for a while…but, in the end, it will always be left behind. Only an entrepreneurial culture can lead.

... I don’t get it. While “entrepreneurial culture” will always be essential, many innovations that turned out to be economically important in the US have government fingerprints all over them. From machine tools, to railroads, transistors, radar, lasers, computing, the internet, GPS, fracking, biotech, nanotech—from the days of the Revolutionary War to today—the federal government has supported innovation often well before private capital would risk the investment (read about it here).

Shiller’s critical, for example, of the manufacturing innovation institutes that the White House has been both touting and setting up. He’s certainly right to ask what it is these new creations do and why we need them... But most manufacturers I’ve spoken to about them tells me they fill an important niche, essentially building a path through the Death Valley between the university lab and the factory floor. If so, that’s a classic coordination failure in which markets have been known to underinvest. ...

To be clear, my argument is not at all that government efforts in this area are all successful or are somehow always free of the corruption that is too common when politics enters the fray. My points are that a) many important innovations have involved government support somewhere along the way, and b) while one could and should worry about waste in this area, I’ve not seen evidence, nor does Shiller provide any, of stifling. ...

So I’d suggest we be more careful in where we point the corporatist finger.

Saturday, August 17, 2013

Shiller: Why Innovation Is Still Capitalism’s Star

Quick one -- see previous post -- from Robert Shiller:

Why Innovation Is Still Capitalism’s Star, by Robert Shiller, Commentary, NY Times: Capitalism is culture. To sustain it, laws and institutions are important, but the more fundamental role is played by the basic human spirit of independence and initiative.
The decisive role of the “spirit of capitalism” is an old concept, going back at least to Max Weber, but it needs refreshing today with new evidence and new thinking. Edmund S. Phelps, a professor of economics at Columbia University and a Nobel laureate, has written an interesting new book on the subject. It’s called “Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge and Change” (Princeton University Press), and it contains a complex new analysis of the importance of an entrepreneurial culture.
Professor Phelps discerns a troubling trend in many countries, however, even the United States. He is worried about corporatism, a political philosophy in which economic activity is controlled by large interest groups or the government. Once corporatism takes hold in a society, he says, people don’t adequately appreciate the contributions and the travails of individuals who create and innovate. An economy with a corporatist culture can copy and even outgrow others for a while, he says, but, in the end, it will always be left behind. Only an entrepreneurial culture can lead.
Is the United States really becoming corporatist? I don’t entirely agree with such a notion. ...

Saturday, July 13, 2013

Computers and Unemployment: This Time is Different?

This essay/report by Frank Levy and Richard J. Murnane attempts to answer the question "How do we ensure American middle class prosperity in an era of ever-intensifying globalization and technological upheaval?":

Dancing with Robots: Human Skills for Computerized Work, by Frank Levy and Richard J. Murnane: On March 22, 1964, President Lyndon Johnson received a short, alarming memorandum from the Ad Hoc Committee on the Triple Revolution. The memo warned the president of threats to the nation beginning with the likelihood that computers would soon create mass unemployment:

A new era of production has begun. Its principles of organization are as different from those of the industrial era as those of the industrial era were different from the agricultural. The cybernation revolution has been brought about by the combination of the computer and the automated self-regulating machine. This results in a system of almost unlimited productive capacity which requires progressively less human labor. Cybernation is already reorganizing the economic and social system to meet its own needs.

The memo was signed by luminaries including Nobel Prize winning chemist Linus Pauling, Scientific American publisher Gerard Piel, and economist Gunnar Myrdal (a future Nobel Prize winner). Nonetheless, its warning was only half right. There was no mass unemployment— since 1964 the economy has added 74 million jobs. But computers have changed the jobs that are available, the skills those jobs require, and the wages the jobs pay.

For the foreseeable future, the challenge of “cybernation” is not mass unemployment but the need to educate many more young people for the jobs computers cannot do. Meeting the challenge begins by recognizing what the Ad Hoc Committee missed—that computers have specific limitations compared to the human mind. Computers are fast, accurate, and fairly rigid. Human brains are slower, subject to mistakes, and very flexible. By recognizing computers’ limitations and abilities, we can make sense of the changing mix of jobs in the economy. We can also understand why human work will increasingly shift toward two kinds of tasks: solving problems for which standard operating procedures do not currently exist, and working with new information— acquiring it, making sense of it, communicating it to others. ...

Friday, June 14, 2013

Paul Krugman: Sympathy for the Luddites

If the share of income going to labor continues to decline, how should we respond?:

Sympathy for the Luddites, by Paul Krugman, Commentary, NY Times: In 1786, the cloth workers of Leeds, a wool-industry center in northern England, issued a protest against the growing use of “scribbling” machines, which were taking over a task formerly performed by skilled labor. “How are those men, thus thrown out of employ to provide for their families?” asked the petitioners. “And what are they to put their children apprentice to?”
Those weren’t foolish questions. Mechanization eventually ... led to a broad rise in British living standards. But it’s far from clear whether typical workers reaped any benefits during the early stages of the Industrial Revolution; many workers were clearly hurt. And often the workers hurt most were those who had, with effort, acquired valuable skills — only to find those skills suddenly devalued.
So are we living in another such era? ... The McKinsey Global Institute recently released a report on a dozen major new technologies that it considers likely to be “disruptive”... and ... some of the victims of disruption will be workers who are currently considered highly skilled...
So should workers simply be prepared to acquire new skills? The woolworkers of 18th-century Leeds addressed this issue back in 1786: “Who will maintain our families, whilst we undertake the arduous task” of learning a new trade? Also, they asked, what will happen if the new trade, in turn, gets devalued by further technological advance?
And the modern counterparts of those woolworkers might well ask further, what will happen to us if, like so many students, we go deep into debt to acquire the skills we’re told we need, only to learn that the economy no longer wants those skills?
Education, then, is no longer the answer to rising inequality, if it ever was (which I doubt).
So what is the answer? If the picture I’ve drawn is at all right, the only way we could have anything resembling a middle-class society — a society in which ordinary citizens have a reasonable assurance of maintaining a decent life as long as they work hard and play by the rules — would be by having a strong social safety net, one that guarantees not just health care but a minimum income, too. And with an ever-rising share of income going to capital rather than labor, that safety net would have to be paid for to an important extent via taxes on profits and/or investment income.
I can already hear conservatives shouting about the evils of “redistribution.” But what, exactly, would they propose instead?

Friday, June 07, 2013

Total Information Awareness

Dan Little:

Total information awareness?, Understanding Society: I'm finding myself increasingly distressed at this week's revelations about government surveillance of citizens' communications and Internet activity. First was the revelation in the Guardian of a wholesale FISA court order to Verizon to provide all customer "meta-data" for a three-month period -- and the clarification that this order is simply a renewal of orders that have been in place since 2007. (One would certainly assume that there are similar orders for other communications providers.) And commentators are now spelling out how comprehensive this data is about each of us -- who we call, who those people call, when, where, … This comprehensive data collection permits the mother of all social network analysis projects -- to reconstruct the widening circles of persons with whom person X is associated. This is its value from an intelligence point of view; but it is also a dark, brooding risk to the constitutional rights and liberties of all of us.
Second is the even more shocking disclosure -- also in the Guardian -- of an NSA program called PRISM that claims (based on the secret powerpoint training document published by the Guardian) to have reached agreements with the major Internet companies to permit direct government access to their servers, without the intermediary of warrants and requests for specific information. (The companies have denied knowledge of such a program; but it's hard to see how the Guardian document could be a simple fake.) And the document claims that the program gives the intelligence agencies direct access to users' emails, videos, chats, search histories, and other forms of Internet activity.
Among the political rights that we hold most basic are the rights of political expression and association. It doesn't matter much if a government agency is able to work out the network graph of people with whom I am associated around the project of youth soccer in my neighborhood. But if I were an Occupy Wall Street organizer, I would be VERY concerned about the fact that government is able to work out the full graph of my associates, their associates, and times and place of communication. At the least this fact has a chilling effect on political organization and protest -- both of which are constitutionally protected rights of US citizens. At the worst it makes possible police intervention and suppression based on the "intelligence" that is gathered. And the activities of the FBI in the 1960s against legal Civil Rights organizations make it clear that agencies are fully capable of undertaking actions in excess of their legal mandate. For that matter, the rogue activities of an IRS office with respect to the tax-exempt status of conservative political organizations illustrates the same point in the same news cycle!
The whole point of a constitution is to express clearly and publicly what rights citizens have, and to place bright-line limits on the scope of government action. But the revelations of this week make one doubt whether a constitutional limitation has any meaning anymore. These data collection and surveillance programs are wrapped in tight secrecy -- providers are not permitted to make public the requests that have been presented to them. So the public has no legitimate way of knowing what kind of information collection, surveillance, and intelligence activity is being undertaken with respect to their activities. In the name of homeland security, the evidence says that government is prepared to transgress what we thought of as "rights" with abandon, and with massive force. (The NSA data center under construction in Utah gives some sense of the massiveness of these data collection efforts.)
We are assured by government spokespersons that appropriate safeguards are in place to ensure and preserve the constitutional rights of all of us. But there are two problems with those assurances, both having to do with secrecy. Citizens are not provided with any account by government about how these programs are designed to work, and what safeguards are incorporated. And citizens are prevented from knowing what the exercise and effects of these programs are -- by the prohibition against telecom providers of giving any public information about the nature of requests that are being made under these programs. So secrecy prevents the very possibility of citizen knowledge and believable judicial oversight. By design there is no transparency about these crucial new tools and data collection methods.
All of this makes one think that the science and technology of encryption is politically crucial in the Internet age, for preserving some of our most basic rights of legal political activity. Being able to securely encrypt one's communications so only the intended recipients can gain access to them sounds like a crucial right of self-protection against the surveillance state. And being able to anonymize one's location and IP address -- through services like TOR router systems -- also seems like an important ability that everyone ought to consider making use of. Voice services like Skype seem to be fully compromised -- Microsoft, the owner of Skype, was the first company to accept the PRISM program, according to the secret powerpoint. But perhaps new Internet-based voice technologies using "trust no one" encryption and TOR routers will return the balance to the user. Intelligence and law enforcement agencies sometimes suggest that only people with something to hide would use an anonymizer in their interactions on the Web. But given the MASSIVE personalized data collection that government is engaged in, it would seem that every citizen has an interest in preserving his or her privacy to whatever extent possible. Privacy is an important human value in general; and it is a crucial value when it comes to the exercise of our constitutional rights of expression and association.
Government has surely overstepped through creation of these programs of data collection and surveillance; and it is hard to see how to put the genie back in the bottle. One step would be the creation of much more stringent legal limits on the data collection capacity of agencies like NSA (and commercial agencies, for that matter). But how can we trust that those limits will be respected by agencies that are accustomed to working in the dark?

Thursday, May 30, 2013

'Labor Union Decline, Not Computerization, Main Cause of Rising Corporate Profits'

I haven't read this paper, so I can't say a lot about how much confidence to place in the results, but it did grab my attention (and I believe it's in one of the top journals for sociology):

Labor union decline, not computerization, main cause of rising corporate profits, EurekAlert: A new study suggests that the decline of labor unions, partly as an outcome of computerization, is the main reason why U.S. corporate profits have surged as a share of national income while workers' wages and other compensation have declined.
The study, "The Capitalist Machine: Computerization, Workers' Power, and the Decline in Labor's Share within U.S. Industries," which appears in the June issue of the American Sociological Review, explores an important dimension of economic inequality...
Tali Kristal, an assistant professor of sociology at the University of Haifa in Israel ... found that from 1979 through 2007, labor's share of national income in the U.S. private sector decreased by six percentage points. This means that if labor's share had stayed at its 1979 level (about 64 percent of national income), the 120 million American workers employed in the private sector in 2007 would have received as a group an additional $600 billion, or an average of more than $5,000 per worker, Kristal said.
"However, this huge amount of money did not go to the workers," Kristal said. "Instead, it went to corporate profits, mostly benefiting very wealthy individuals."
The question is: why did this happen?
"Some economists contend that computerization is the primary cause and that it has increased the productivity of machines and skilled workers, prompting firms to reduce their overall demand for labor, which resulted in the rise of corporate profits at the expense of workers' compensation," Kristal said. "But, if that were the case,... then labor's share should have declined in all economic sectors, reflecting the fact that computerization has occurred across the board in the past 30 to 40 years."
This is not the case, however... "It was highly unionized industries — construction, manufacturing, and transportation — that saw a large decline in labor's share of income," Kristal said. "By contrast, in the lightly unionized industries of trade, finance, and services, workers' share stayed relatively constant or even increased. So, what we have is a large decrease in labor's share of income and a significant increase in capitalists' share in industries where unionization declined, and hardly any change in industries where unions never had much of a presence. This suggests that waning unionization, which led to the erosion of rank-and file workers' bargaining power, was the main force behind the decline in labor's share of national income."
In addition to the erosion of labor unions, Kristal found that rising unemployment as well as increasing imports from less-developed countries contributed to the decline in labor's share.
"All of these factors placed U.S. workers in a disadvantageous bargaining position versus their employers," said Kristal...

Saturday, May 18, 2013

Bernanke: Economic Prospects for the Long Run

Chairman Ben S. Bernanke is an optimist when it comes to our long-run economic prospects (i.e. he does not endorse the notion that productivity is slowing). I'm with him. (This is a graduation speech Bernanke gave at Bard College at Simon's Rock, Great Barrington, Massachusetts):

Economic Prospects for the Long Run: Let me start by congratulating the graduates and their parents. The word "graduate" comes from the Latin word for "step." Graduation from college is only one step on a journey, but it is an important one and well worth celebrating.
I think everyone here appreciates what a special privilege each of you has enjoyed in attending a unique institution like Simon's Rock. It is, to my knowledge, the only "early college" in the United States; many of you came here after the 10th or 11th grade in search of a different educational experience. And with only about 400 students on campus, I am sure each of you has felt yourself to be part of a close-knit community. Most important, though, you have completed a curriculum that emphasizes creativity and independent critical thinking, habits of mind that I am sure will stay with you.
What's so important about creativity and critical thinking? There are many answers. I am an economist, so I will answer by talking first about our economic future--or your economic future, I should say, because each of you will have many years, I hope, to contribute to and benefit from an increasingly sophisticated, complex, and globalized economy. My emphasis today will be on prospects for the long run. In particular, I will be looking beyond the very real challenges of economic recovery that we face today--challenges that I have every confidence we will overcome--to speak, for a change, about economic growth as measured in decades, not months or quarters.
Many factors affect the development of the economy, notably among them a nation's economic and political institutions, but over long periods probably the most important factor is the pace of scientific and technological progress. Between the days of the Roman Empire and when the Industrial Revolution took hold in Europe, the standard of living of the average person throughout most of the world changed little from generation to generation. For centuries, many, if not most, people produced much of what they and their families consumed and never traveled far from where they were born. By the mid-1700s, however, growing scientific and technical knowledge was beginning to find commercial uses. Since then, according to standard accounts, the world has experienced at least three major waves of technological innovation and its application. The first wave drove the growth of the early industrial era, which lasted from the mid-1700s to the mid-1800s. This period saw the invention of steam engines, cotton-spinning machines, and railroads. These innovations, by introducing mechanization, specialization, and mass production, fundamentally changed how and where goods were produced and, in the process, greatly increased the productivity of workers and reduced the cost of basic consumer goods. The second extended wave of invention coincided with the modern industrial era, which lasted from the mid-1800s well into the years after World War II. This era featured multiple innovations that radically changed everyday life, such as indoor plumbing, the harnessing of electricity for use in homes and factories, the internal combustion engine, antibiotics, powered flight, telephones, radio, television, and many more. The third era, whose roots go back at least to the 1940s but which began to enter the popular consciousness in the 1970s and 1980s, is defined by the information technology (IT) revolution, as well as fields like biotechnology that improvements in computing helped make possible. Of course, the IT revolution is still going on and shaping our world today.
Now here's a question--in fact, a key question, I imagine, from your perspective. What does the future hold for the working lives of today's graduates? The economic implications of the first two waves of innovation, from the steam engine to the Boeing 747, were enormous. These waves vastly expanded the range of available products and the efficiency with which they could be produced. Indeed, according to the best available data, output per person in the United States increased by approximately 30 times between 1700 and 1970 or so, growth that has resulted in multiple transformations of our economy and society.1 History suggests that economic prospects during the coming decades depend on whether the most recent revolution, the IT revolution, has economic effects of similar scale and scope as the previous two. But will it?

Continue reading "Bernanke: Economic Prospects for the Long Run" »

Monday, April 29, 2013

'The Welfare Queen of Denmark'

[Listening to Nouriel Roubini's pessimism about the future during the lunch panel as I do this -- the video of the panel discussing the state of the global economy should be available later today.]

Nancy Folbre objects to the "gendered language" used in the debate over social insurance programs, and to the conclusion that "cuddly" capitalism is bad for innovation:

The Welfare Queen of Denmark, by Nancy Folbre, Commentary, NY Times: ...In short, the Danish record offers no support for the social-spending-hurts-growth position. That doesn’t mean that some economists can’t figure out a way to make that argument anyway. For instance, Daron Acemoglu, James A. Robinson and Thierry Verdier have devised a theoretical model to show why what they term “cuddly” capitalism of the Danish sort may just be free-riding on the “cutthroat” capitalism of the United States sort.
The model posits that cutthroat levels of inequality, as in the United States, promote high levels of technological innovation. The benefits of these innovations cross national borders to help Danes and other Scandinavians achieve growth. In other words, they may be able to get away with being “cuddly,” but some country (like the United States) just has to be tough enough to reward risk-taking, even if it leads to hurt feelings.
The gendered language deployed in this model echoes a general tendency to view social spending in feminine terms: women like to cuddle and are often described as more risk-averse than men. It’s not uncommon to see the term “nanny state” used as a synonym for the welfare state.
Call the Scandinavians sissies if you like, but plenty of evidence in the latest World Competitiveness Report testifies to high levels of overall innovation there — as you might expect in economies even more export-oriented than our own. Danes are world leaders in renewable energy technology, especially wind power. ...

As I've noted before, "an enhanced safety net -- a backup if things go wrong -- can give people the security they need to take a chance on pursuing an innovative idea that might die otherwise, or opening a small business. So it may be that an expanded social safety net encourages innovation."

Wednesday, March 27, 2013

'Do Intellectual Property Rights on Existing Technologies Hinder Subsequent Innovation?'

Out and about today, so quickly:

Do intellectual property rights on existing technologies hinder subsequent innovation?, EurekAlert: A recent study (Journal of Political Economy 121:1 February 2013) suggests that some types of intellectual property rights discourage subsequent scientific research.
"The goal of intellectual property rights – such as the patent system – is to provide incentives for the development of new technologies. However, in recent years many have expressed concerns that patents may be impeding innovation if patents on existing technologies hinder subsequent innovation," said Heidi Williams, author of the study. "We currently have very little empirical evidence on whether this is a problem in practice."
Williams investigated the sequencing of the human genome by the public Human Genome Project and the private firm Celera. Genes sequenced first by Celera were covered by a contract law-based form of intellectual property, whereas genes sequenced first by the Human Genome Project were placed in the public domain. Although Celera's intellectual property lasted a maximum of two years, it enabled Celera to sell its data for substantial fees and required firms to negotiate licensing agreements with Celera for any resulting commercial discoveries. ...
Williams' conclusion points to a persistent 20-30 percent reduction in subsequent scientific research and product development for those genes held by Celera's intellectual property.
"My take-away from this evidence is that – at least in some contexts – intellectual property can have substantial costs in terms of hindering subsequent innovation," said Williams. "The fact that these costs were – in this context – 'large enough to care about' motivates wanting to better understand whether alternative policy tools could be used to achieve a better outcome. It isn't clear that they can, although economists such as Michael Kremer have proposed some ideas on how they might. ..."

Thursday, March 21, 2013

'Inequality Rising and Permanent Over Past Two Decades'

A new Brookings paper finds that most of the increase in inequality in recent decades is permanent:

Inequality Rising and Permanent Over Past Two Decades: In “Rising Inequality: Transitory or Permanent: New Evidence from a Panel of U.S. Tax Returns” (PDF), Vasia Panousi and Ivan Vidangos of the Federal Reserve Board, Shanti Ramnath of the U.S. Treasury Department, Jason DeBacker of Middle Tennessee State and Bradley Heim of Indiana University use new data to closely examine inequality, finding an increase in “permanent inequality” -- the advantaged becoming permanently better-off, while the disadvantaged becoming permanently worse-off. ...

[Listen to BPEA Co-editor Justin Wolfers discuss this paper: Inequality Rising and Permanent Over Past Two Decades (1:55)]

Using a large panel of income data from U.S. federal tax returns for the period 1987-2009, the authors show that for men’s labor earnings, the increase in inequality was entirely permanent (100 percent), while for total household income, roughly three-quarters of the increase in inequality was permanent. They estimate that the permanent variance for men’s earnings roughly doubled in the 20 years between 1987 and 2009, while the permanent variance of total household income increased by about 50 percent over the same period.

Looking at the impact of tax policy on inequality, the paper finds that although the U.S. federal tax system is indeed progressive in that it has provided some help in mitigating the increase in income inequality over the sample period, it has, however, not significantly altered the broadly increasing inequality trend. All told, the results suggest that rising income inequality will likely lead to greater disparity in families’ well-being and reduce social welfare in the long-run.

“The distinction between permanent and transitory inequality is important for various reasons. First, it is useful in evaluating the proposed explanations for the documented increase in annual cross-sectional inequality. For example, if rising inequality reflects solely an increase in permanent inequality, then consistent explanations would include, for example, skill-biased technical change or long-lasting changes in firms’ compensation policies. By contrast, an increase in transitory inequality could reflect increases in income mobility, driven perhaps by greater flexibility among workers to switch jobs. Second, the distinction is useful because it informs the welfare evaluation of cross-sectional inequality increases. Specifically, lifetime income captures long-term available resources, and hence an increase in permanent inequality would reduce welfare according to most social welfare functions. By contrast, increasing transitory inequality would have less of an effect on welfare, especially in the absence of liquidity constraints restricting consumption smoothing,” they write.

There's been a big debate/fight over whether the increase in inequality is mostly due to technological change or to changes in the rules of the game (e.g. institutional and political changes that helped the demise of unions). Above, this is captured as "skill-biased technical change or long-lasting changes in firms' compensation policies." I think both are at work, and that there are interactions between the two explanations (technological change that allows production to be moved in fact or in threat to other countries, for example, works against unions and changes the balance of political power, and that can lead to changes in the laws, rules, and regulations that unions need to be effective).

In any case, changing this long-run trend is one of the most important social issues that we face.

Ed Leamer Argues the Unemployment Problem is Mostly Structural (I Disagree, and Policy Can Help in Any Case)

I disagree with the claim that our unemployment problem is mostly structural (and hence there is nothing that monetary or fiscal policy can do about it) and I've presented lots of evidence supporting the view that there is a large cyclical component (e.g., latest). But not everyone agrees. Here's Ed Leamer arguing for the structural interpretation:

Here's how I see it. As I said, I am convinced by the evidence showing there's a large cyclical component to the unemployment problem, but I could be wrong (and so could Leamer and others -- I think they are). So which is the bigger error, not helping struggling households who could be helped, or trying to extend a hand when it's not going to do much good? I'd rather make the mistake of trying to help when it isn't necessary instead of leaving people stranded when help is possible.

But suppose unemployment is, in fact, mostly a structural problem. If we could help to overcome the "slow uptake" problem after recessions by (1) providing public employment that bridges the gap until private sector jobs are available, (2) keeping people connected to the labor market and reducing the likelihood they'll drop out, go on disability, or choose some other socially costly alternative, (3) enhancing our long-run growth prospects, (4) saving ourselves money in the long-run, and (5) accomplish this with policies directed at "supply-side" problems that help with demand at the same time, shouldn't we do it?

Infrastructure spending has these features. We can delay basic maintenance for awhile much as a household or business can defer maintenance on a car or delivery vehicles, but there comes a point when the failure to do basic maintenance will cost us even more in the long-run (change your oil now, or change your engine later). We have delayed investment in infrastructure long-enough, and it's time to put people to work rebuilding for the future. These policies don't depend upon whether its cyclical or structural, we have the need -- the benefits exceed the costs (which are unusually low due to the recession) -- and there are millions of people who want to work, but cannot find employment. Why not put them to work doing something productive?

Sunday, February 17, 2013

We Must Make the New Machines

Harvard's Ricardo Hausmann is interviewed in the MIT Technology Review:

You Must Make the New Machines, by Antonio Regalado: ...Why has the number of American manufacturing jobs been decreasing so quickly?
The fundamental reason is that productivity in manufacturing has been rising rapidly and demand for manufactured products has been growing more slowly. To supply the stuff that people want requires fewer jobs.
And then, manufacturing is becoming feasible in more parts of the world. There is more competition, including from countries with much lower wages. As they emulate American production, they take market share.
What’s the best manufacturing strategy for the U.S. in that situation?
It’s certainly not playing defense and trying to save jobs. The U.S. has very, very high wages compared to other countries. Yet it also has a comparative advantage, which is deep knowledge, high R&D intensity, and the best science and technology base in the world.
The step that makes the most sense for the U.S. is to become the producer of the machinery that will power the next global manufacturing revolution. That is where the most complex and sophisticated products are, and that is the work that can pay higher wages.
What kind of revolution are you talking about?
My guess is that developments around information technology, 3-D printing, and networks will allow for a redesign of manufacturing. The world will be massively investing in it. The U.S. is well positioned to be the source of those machines. It can only be rivaled by Germany and Japan. ...
The U.S. ... should look to ... pharmaceuticals, chemicals, and machinery. It’s very hard to get into those. Very few countries are in that game. ...
If you look broadly at the U.S...., the country is super-competitive at agriculture and the industries that support it, like farm machinery, agrochemicals, and genetically modified seeds. It is strong in aerospace with Boeing, GE, Northrop Grumman, and Pratt & Whitney. It is a leader in pharmaceuticals and medical equipment, and it is the clear leader in information technology and the Internet. New industries often arise from the combination of capabilities...
How well is the U.S. doing in staying competitive?
For a while now, the U.S. has been much less focused on being competitive than most other places are. Americans have the feeling they are born to win, and if they don’t, someone else is cheating. The U.S. has many self-inflicted wounds. It has an infrastructure that’s increasingly lousy and a corporate tax rate higher than most countries’. But the most important [problem] is immigration policy. It’s been a real disaster by preventing the attraction and retention of the high-skilled people who come here to study and then don’t stay.

Tuesday, February 05, 2013

Arguments For and Against the Use of Machines

A repeat from the past: 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.

The number of Scribbling-Machines extending about seventeen miles south-west of LEEDS, exceed all belief, being no less than one hundred and seventy! and as each machine will do as much work in twelve hours, as ten men can in that time do by hand, (speaking within bounds) and they working night-and day, one machine will do as much work in one day as would otherwise employ twenty men.

As we do not mean to assert any thing but what we can prove to be true, we allow four men to be employed at each machine twelve hours, working night and day, will take eight men in twenty-four hours; so that, upon a moderate computation twelve men are thrown out of employ for every single machine used in scribbling; and as it may be supposed the number of machines in all the other quarters together, to nearly equal those in the South-West, full four thousand men are left to shift for a living how they can, and must of course fall to the Parish, if not timely relieved. Allowing one boy to be bound apprentice from each family out of work, eight thousand hands are deprived of the opportunity of getting a livelihood.

We therefore hope, that the feelings of humanity will lead those who have it in their power to prevent the use of those machines, to give every discouragement they can to what has a tendency so prejudicial to their fellow-creatures.

This is not all; the injury to the Cloth is great, in so much that in Frizing, instead of leaving a nap upon the cloth, the wool is drawn out and the Cloth is left thread-bare.

Many more evils we could enumerate, but we would hope, that the sensible part of mankind, who are not biassed by interest, must see the dreadful tendancy of their continuance; a depopulation must be the consequence; trade being then lost, the landed interest will have no other satisfaction but that of being last devoured.

We wish to propose a few queries to those who would plead for the further continuance of these machines:

Men of common sense must know, that so many machines in use, take the work from the hands employed in Scribbling, and who did that business before machines were invented.

How are those men, thus thrown out of employ to provide for their families; and what are they to put their children apprentice to, that the rising generation may have something to keep them at work, in order that they may not be like vagabonds strolling about in idleness? Some say, Begin and learn some other business. Suppose we do; who will maintain our families, whilst we undertake the arduous task; and when we have learned it, how do we know we shall be any better for all our pains; for by the time we have served our second apprenticeship, another machine may arise, which may take away that business also; so that our families, being half pined whilst we are learning how to provide them with bread, will be wholly so during the period of our third apprenticeship.

But what are our children to do; are they to be brought up in idleness? Indeed as things are, it is no wonder to hear of so many executions; for our parts, though we may be thought illiterate men, our conceptions are, that bringing children up to industry, and keeping them employed, is the way to keep them from falling into those crimes, which an idle habit naturally leads to.

These things impartially considered will we hope, be strong advocates in our favour; and we conceive that men of sense, religion and humanity, will be satisfied of the reasonableness, as well as necessity of this address, and that their own feelings will urge them to espouse the cause of us and our families -

Signed, in behalf of THOUSANDS, by

Joseph Hepworth Thomas Lobley

Robert Wood Thos. Blackburn

From J. F. C. Harrison, Society and Politics in England, 1780-1960 (New York: Harper & Row, 1965), pp. 71-72.


Letter from Leeds Cloth Merchants, 1791, Modern History Sourcebook: This statement by the Cloth Merchants of Leeds (a major center of wool manufacture in Yorkshire) defended the use of machines. It appeared in 1791.

At a time when the people, engaged in every other manufacture in the Kingdom, are exerting themselves to bring their work to market at reduced prices, which can alone be effected by the aid of machinery, it certainly is not necessary that the cloth merchants of Leeds, who depend chiefly on a foreign demand, where they have for competitors the manufacturers of other nations, whose taxes are few, and whose manual labour is only half the price it bears here, should have occasion to defend a conduct, which has for its aim the advantage of the Kingdom in general, and of the cloth trade in particular; yet anxious to prevent misrepresentations, which have usually attended the introduction of the most useful machines, they wish to remind the inhabitants of this town, of the advantages derived to every flourishing manufacture from the application of machinery; they instance that of cotton in particular, which in its internal and foreign demand is nearly alike to our own, and has in a few years by the means of machinery advanced to its present importance, and is still increasing.

If then by the use of machines, the manufacture of cotton, an article which we import, and are supplied with from other countries, and which can every where be procured on equal terms, has met with such amazing success, may not greater advantages be reasonably expected from cultivating to the utmost the manufacture of wool, the produce of our own island, an article in demand in all countries, almost the universal clothing of mankind?

In the manufacture of woollens, the scribbling mill, the spinning frame, and the fly shuttle, have reduced manual labour nearly one third, and each of them at its-first Introduction carried an alarm to the work people, yet each has contributed to advance the wages and to increase the trade, so that if an attempt was now made to deprive us of the use of them, there is no doubt, but every person engaged in the business, would exert himself to defend them.

From these premises, we the undersigned merchants, think it a duty we owe to ourselves, to the town of Leeds, and to the nation at large, to declare that we will protect and support the free use of the proposed improvements in cloth-dressing, by every legal means in our power; and if after all, contrary to our expectations, the introduction of machinery should for a time occasion a scarcity of work in the cloth dressing trade, we have unanimously agreed to give a preference to such workmen as are now settled inhabitants of this parish, and who give no opposition to the present scheme.

Appleby & Sawyer

Bernard Bischoff & Sons

[and 59 other names]

From J. F. C. Harrison, Society and Politics in England, 1780-1960 (New York: Harper & Row, 1965), pp. 72-74.

Thursday, January 24, 2013

'Robots and All That'

Fred Moseley responds to my comments on his comments (I suggested that if he wants a theory of exploitation that is consistent, he should consider dropping Marx's Labor Theory of Value, which does not actually explain value, and instead explain exploitation in more modern terms, i.e. with reference to why workers have not received their marginal products in recent decades):

Thanks to Mark for posting my critical comment on Krugman’s explanation of stagnant real wages and declining wage share of income, and for his introductory comment, which raises fundamental issues.
A question for Mark: how do you know what the “MP benchmark” is that workers should have received. The MP benchmark is presumably the “marginal product of labor”, but how do you know what this is? I know of no time series estimates of the aggregate MPL (independent of income shares) for recent decades. If you know of such estimates, please send me the reference(s).
What you have in mind may be estimates like Mishel’s estimates of the “productivity of labor” and the “real wage of production workers”, which shows a widening gap in recent years (see Figure A in “The wedges between productivity and median compensation growth”; ). But these estimates of the “productivity of labor” are not of the MPL of marginal productivity theory, but are instead the total product divided by total labor. These estimates are more consistent with Marxian theory than with marginal productivity theory. And I agree that explaining this divergence is an important key to understanding the increasing inequality in recent decades. I think the explanation has to do with a number of factors that have put downward pressure on wages: higher unemployment, outsourcing and threat of more, declining real minimum wage, attacks on unions, etc. This is very different from Krugman’s “capital-biased technological change”.
A word on the labor theory of value: the LTV is not mainly a micro theory of prices, but is instead primarily a macro theory of profit. And I think that it is the best theory of profit by far in the history of economics (there is not much competition). It explains a wide range of important phenomena in capitalist economies: conflicts over wages, and conflicts over the length of the working day and the intensity of labor in the workplace, endogenous technological change, trends and fluctuations in the rate of profit over time, endogenous causes of economic crises, etc. (For further discussion of the explanatory power of Marx’s theory see my “Marx Economic Theory: True or False? A Marxian Response to Blaug’s Appraisal”, in Moseley (ed.) Heterodox Economic Theories: True or False?; available here:
Marginal productivity, in very unfavorable contrast, can explain none of these important phenomena.
Thanks again.
Fred

Just one comment. If the LTV cannot explain input or output prices, and it doesn't, how can it explain profit?

(Okay, two -- In defense of Krugman, his book Conscience of a Liberal was anything but a “capital-biased technological change” explanation of rising inequality, and he stated the “capital-biased technological change” explanation as something to look into rather than a conclusion he has drawn. For example, he says:

More on robots and all that ... there’s another possible resolution: monopoly power. Barry Lynn and Philip Longman have argued that we’re seeing a rapid rise in market concentration and market power. The thing about market power is that it could simultaneously raise the average rents to capital and reduce the return on investment as perceived by corporations, which would now take into account the negative effects of capacity growth on their markups. So a rising-monopoly-power story would be one way to resolve the seeming paradox of rapidly rising profits and low real interest rates. As they say, this calls for more research; but the starting point is to realize that there’s something happening here, what it is ain’t exactly clear, but it’s potentially really important.

So I don't think it's completyely fair to say that Krugman's explanation for rising inequality is "capital-biased technological change.")

Wednesday, January 16, 2013

Will Online Education Reduce the Income Gap?

My latest column argues that online education has the potential to help lots of people, but contrary to some claims:

...traditional colleges are not going away, and the potential of online education to reduce inequality is overrated. ...

See: Will Online Education Reduce the Income Gap?

Tuesday, January 15, 2013

'Skill-Biased Technological Change and Rising Wage Inequality'

Lots of discussion recently about whether technological change is the primary source of wage inequality in recent decades (as opposed to policy and institutions). According to this, there are many "problems and puzzles for the skill biased technical change story": 

Skill-Biased Technological Change and Rising Wage Inequality: Some Problems and Puzzles, by Owen Sidar: Dylan Matthews has a nice post on the inequality & skill biased technical change debate between David Autor, who is one of my favorite labor economists, and some folks at EPI.

I wanted to highlight this paper by David Card and John DiNardo that goes through some problems and puzzles for the skill biased technical change story. Here’s how they conclude:

Our main conclusion is that, contrary to the impression conveyed by most of the recent literature, the SBTC hypothesis falls short as a unicausal explanation for the evolution of the U.S. wage structure in the 1980s and 1990s. Indeed, we find puzzles and problems for the theory in nearly every dimension of the wage structure. This is not to say that we believe technology was fixed over the past 30 years or that recent technological changes have had no effect on the structure of wages. There were many technological innovations in the 1970s, 1980s, and 1990s, and it seems likely that these changes had some effect on relative wages. Rather, we argue that the SBTC hypothesis by itself is not particularly helpful in organizing or understanding the shifts in the structure of wages that have occurred in the U.S. labor market. Based on our reading of the evidence, we believe it is time to reevaluate the case that SBTC offers a satisfactory explanation for the rise in U.S. wage inequality in the last quarter of the twentieth century. 

I think that skill-biased technical change is part of the explanation for rising inequality, but it's far from the entire story.

Friday, December 28, 2012

Paul Krugman: Is Growth Over?

How important is the digital revolution?

Is Growth Over?, by Paul Krugman, Commentary, NY Times: The great bulk of the economic commentary you read in the papers is focused on the short run: the effects of the “fiscal cliff” on U.S. recovery, the stresses on the euro, Japan’s latest attempt to break out of deflation. This focus is understandable... But... What do we know about the prospects for long-run prosperity? The answer is: less than we think.
The long-term projections produced by official agencies, like the Congressional Budget Office, generally make two big assumptions. One is that economic growth over the next few decades will resemble growth over the past few decades. ... On the other side, however, these projections generally assume that income inequality, which soared over the past three decades, will increase only modestly looking forward. ...
Yet this conventional wisdom is very likely to be wrong on one or both dimensions.
Recently, Robert Gordon ... created a stir by arguing that economic growth is likely to slow sharply — indeed, that the age of growth that began in the 18th century may well be drawing to an end. ...
It’s an interesting thesis... And while I don’t think he’s right, the way in which he’s probably wrong has implications equally destructive of conventional wisdom. For the case against Mr. Gordon’s techno-pessimism rests largely on the assertion that the big payoff to information technology, which is just getting started, will come from the rise of smart machines.
If you follow these things, you know that the field of artificial intelligence has for decades been a frustrating underachiever... Lately, however, the barriers seem to have fallen... So machines may soon be ready to perform many tasks that currently require large amounts of human labor. This will mean rapid productivity growth and, therefore, high overall economic growth.
But — and this is the crucial question — who will benefit from that growth? Unfortunately, it’s all too easy to make the case that most Americans will be left behind, because smart machines will end up devaluing the contribution of workers, including highly skilled workers whose skills suddenly become redundant. The point is that there’s good reason to believe that the conventional wisdom embodied in long-run budget projections — projections that shape almost every aspect of current policy discussion — is all wrong.
What, then, are the implications of this alternative vision for policy? Well, I’ll have to address that topic in a future column.

Wednesday, December 19, 2012

Krugman’s Explanation of Stagnant Real Wages

On the run today -- guests arriving soon and I am nor yet ready -- so some quick ones. This one came by email from Fred Moseley, and I haven't had a chance to give it much (i.e. any) thought. Comments?:

Krugman’s explanation of stagnant real wages: In a recent post on his NYT blog (“Technology and Wages”) Paul Krugman argued that the reason for stagnant real wages in the US economy in recent years is that technological change has been “capital-biased”, in the sense of Hick’s “capital using” technological change. Unfortunately, Krugman did not explain clearly what he means by “capital biased technological change” (as several readers complained).
According to Hicks, capital-using technological change (i.e. Krugman’s capital-biased) increases the marginal product of capital faster than the marginal product of labor (i.e. ↑MPK > ↑MPL). Krugman concludes that “we’re seeing new technologies that look, on a cursory overview, as if they’re capital biased.”
My question to Krugman (if I may) is: how do you know that technological change has been “capital biased”? A “cursory overview” of what data? What is the empirical evidence for this conclusion? How are the MPL and MPK estimated, independently of wages and profit? I know of no way to do this, especially for an aggregate production function.
Furthermore, the MPL (or MPK) is a logically incoherent concept, because the MPL (a partial derivative of the production function) requires that labor be increased by one unit and all the other inputs be held constant. But that is not possible in all goods-producing industries – it is not possible to increase labor and output without at the same time increasing raw material inputs (and other intermediate inputs); e.g. it is not possible to produce another shirt without more cloth, and not possible to produce another car without more tires, brakes, etc. If a firm hired labor up to the point where the real wages = MPL, it would lose money, because it would not have taken into account the extra cost of additional raw materials and other intermediate inputs. This non-existence of marginal products is not widely recognized, but it should be.
Another reader made a similar criticism: “The argument depends on the theory that workers are paid their marginal product. Some people hold to this old idea, however it is not supported by the empirical evidence.” Amen.
For further discussion of criticisms of marginal productivity theory (a two part paper), see here and here.
It is time we stop talking about marginal products and look for other better, logically consistent and empirically supported theories of the distribution of income.
I agree with Krugman in a subsequent post where he stated: “If you want to understand what’s happening to income distribution in the 21st century, you need to stop talking so much about skills, and start talking much more about profits and who owns the capital.”.
But marginal productivity theory is not a coherent way to talk about profits.
Fred Moseley
Mount Holyoke College

Saturday, December 15, 2012

'Inequality: Power vs. Human Capital'

Chris Dillow:

Inequality: power vs human capital, by Chris Dillow: David Ruccio points to labor's falling share of income in the US and says:

We need to talk much more about profits and who owns capital. And, in addition, who appropriates and distributes the surplus and to whom that surplus is subsequently distributed.

This is like saying a man should put his trousers on before leaving the house. It's good advice, but it shouldn't need saying.

A nice new paper by Amparo Castello-Climent and Rafael Domenech at the University of Valencia supports his point. They point out that there's no correlation between inequality of human capital and inequality of incomes. This is true across time.. And it's true across countries... This is a challenge for the neoclassical view that income inequality is due to inequality of marginal productivities. ...

Instead, the more obvious possible reason for the lack of link between human capital and income equality is simply that inequality reflects not differences in productivity but differences in power which themselves arise from institutional differences. Inequality is higher in south America than in Japan or South Korea simply because south America has extractive institutions which enable a small minority to exploit the masses, whereas Japan and South Korea do not.

Institutional differences in power also help explain another fact: why does the return to university education differ so much (pdf) across European nations of similar income? It is higher in the UK than in Germany or Nordic countries, for example. It's hard to explain this by technical change or globalization, as these factors should have affected countries reasonably similarly. A more plausible possibility, surely, is that institutional factors - the power of capital over labor - allow (some) graduates greater access to the economic surplus in the UK than it allows them in the Nordic countries.

Although I'm speaking here in macroeconomic terms, the point holds at a micro level too. Why did Rebekah Brooks get a £10.9m payoff from Murdoch? It's not because she has obvious greater marginal productivity or technical human capital than the rest of us. It's because (for reasons we needn't consider) she had privileged access to the surplus.

Inequality, then, is better explained by power than by human capital or marginal productivity.

This is not a novel thought, or the first time I've made this point, but more and more it seems that we shouldn't think of these as competing explanations for inequality, but rather as complementary explanations that are mutually reinforcing.

Wednesday, December 12, 2012

'Cautionary Details on U.S. Manufacturing Productivity'

Awhile back I asked Tim Taylor if it would be okay to reprint a post occasionally in full or in part, and he quickly and graciously said I could. As he notes, this is an important addendum to the standard story on manufacturing, productivity, and employment. The bottom line is that "the condition of U.S. manufacturing looks more ominous than the standard story" would have us believe:

Cautionary Details on U.S. Manufacturing Productivity: Susan Houseman, by Tim Taylor: There's a basic and often-told story about output and employment in the U.S. manufacturing sector: I'm sure I've told it a time or two myself. The story begins by pointing out that the total quantity of U.S. manufacturing output has actually held up fairly well over recent decades, although it hasn't grown as quickly as the services sector. However, productivity growth in manufacturing has been rising quickly enough that productivity growth. However, manufacturing productivity has been rising quickly enough that, even though manufacturing output has remained fairly strong, the number of jobs has been falling. The standard historical analogy is that just as rising agricultural productivity meant that fewer U.S. farmers were needed, now rising manufacturing productivity means that fewer manufacturing workers are needed.

That story isn't exactly wrong, at least not over the long-run, but Susan Houseman has been digging down into the details and finding arguments which suggests that it is a seriously incomplete version of what's happening in the U.S. manufacturing sector. Houseman presented some of these arguments in a paper written with Christopher Kurz, Paul Lengermann, and Benjamin Mandel, called  "Offshoring Bias in U.S. Manufacturing," which appeared in the Spring 2011 issue of my own Journal of Economic Perspectives. (Like all articles in JEP back to the first issue in 1987, it is freely available courtesy of the American Economic Association.) In turn, their JEP paper was a revision of a more detailed Federal Reserve working paper in 2010, available here. However, Houseman offers a nice overview of her arguments in an interview recently published in fedgazette, a publication of the Federal Reserve Bank of Minneapolis. ...
After reading Houseman, when you hear the standard story about how high productivity in manufacturing is leading to reduced employment, the following thoughts should rattle through your head:

1)  Most of the productivity growth in manufacturing is computers. Houseman: "First, a very important fact, but one I find most people don’t know—including some people who write a lot about the manufacturing sector—is that manufacturing growth in real [price-adjusted] value added and productivity wasn’t that strong without the computer and electronics industry. The computer industry is small—it only accounts for about 12 percent of manufacturing’s value added....  But we find that without the computer industry, growth in manufacturing real value added falls by two-thirds and productivity growth falls by almost half. It doesn’t look like a strong sector without computers."

2) Most of the productivity growth in manufacturing computers is because computers are becoming so much faster and better over time, and government statistics count that a productivity growth, not because an average worker is producing a dramatically greater quantity of computers. Houseman: "The standard argument is that the rapid productivity growth in computers is coming from product innovation. This year’s computers and semiconductors are faster and do more than last year’s models. And that product innovation essentially gets captured in the price indexes the government uses to deflate computer and semiconductor shipments. The price indexes for most products increase over time—that’s inflation. But, for example, the price indexes used to deflate computer shipments have actually fallen by a whopping 21 percent per year since the late 1990s. Those rapid price declines largely reflect adjustments for the growing power of computers. And that extraordinary decline in computer price indexes translates into extraordinary growth in real value added and productivity in the computer industry as measured in government statistics. So, in some statistical sense, today’s computer may be the equivalent of, say, 13 computers in 1998. ... The reason jobs in computers have been lost is not because productivity growth has crowded them out; not at all. It’s because much of the production has gone overseas...."

3)  A sizeable share of what looks like growth in manufacturing productivity is actually from importing less expensive inputs to production. Houseman: "[T]here’s been a lot of growth in manufacturers’ use of foreign intermediate inputs since the 1990s, and most of those inputs come from developing and low-wage countries where costs are lower. We point out that those lower costs aren’t being captured by statistical agencies, and so, as a result, the growth of those imported inputs is being undercounted. ...  Suppose an auto manufacturer used to buy tires from a domestic tire manufacturer. Then it outsources the purchase of its tires to, say, Mexico, and the Mexicans sell the tires for half the price. That price drop—when the auto manufacturer switches to the low-cost Mexican supplier—isn’t caught in our statistics. And if you don’t capture that price drop, it’s going to look like, in some statistical sense, the manufacturer can make the same car but only needs two tires. ... Our statistical agencies try to measure price changes, but they miss them when the price drops because companies have shifted to a low-cost supplier. So because we don’t catch the price drop associated with offshoring, it looks like we can produce the same thing with fewer inputs—productivity growth. It also looks like we are creating more value here in the United States than we really are."

4) If productivity in manufacturing rises because of automation, then those gains in productivity may benefit the owners of the machines--that is, benefit capital rather than labor. Houseman: "And then another standard story has to do with automation. Basically, capital is substituting for labor. Automation can lead to job losses. And the returns from automation, or higher capital use, won’t necessarily be shared with workers."

5) If low-wage labor-intensive manufacturing tasks are now more likely happen overseas, an higher-wage tasks remain in the U.S., then it may appear as if the productivity of an average U.S. manufacturing worker is higher--but it's just a shift in the composition of U.S. manufacturing workers. Houseman: "Then, finally, there’s probably been some shifting in the sorts of production that occur here. In particular, less of the labor-intensive production is done in the United States, and that would result in job losses and higher labor productivity. Again, the gains from that productivity growth aren’t necessarily going to be shared with remaining workers. So part of the answer to the puzzle is that even if productivity gains are real, there’s really nothing that guarantees those gains will be broadly shared by workers."

Add all these factors up, and the condition of U.S. manufacturing looks more ominous than the standard story of high productivity and resulting job losses. For more on the future of global and U.S. manufacturing, see this November 30 post on "Global Manufacturing: A McKinsey View."

Tuesday, December 04, 2012

Rogoff: Innovation Crisis or Financial Crisis?

Kenneth Rogoff says our troubles may last awhile but thye aren't permanent:

Innovation Crisis or Financial Crisis?, by Kenneth Rogoff, Commentary, Project Syndicate: As one year of sluggish growth spills into the next, there is growing debate about what to expect over the coming decades. Was the global financial crisis a harsh but transitory setback to advanced-country growth, or did it expose a deeper long-term malaise?
Recently, a few writers, including internet entrepreneur Peter Thiel and political activist and former world chess champion Garry Kasparov, have espoused a fairly radical interpretation of the slowdown. In a forthcoming book, they argue that the collapse of advanced-country growth is not merely a result of the financial crisis; at its root, they argue, these countries’ weakness reflects secular stagnation in technology and innovation. As such, they are unlikely to see any sustained pickup in productivity growth without radical changes in innovation policy.
Economist Robert Gordon takes this idea even further. ...
These are very interesting ideas, but the evidence still seems overwhelming that the drag on the global economy mainly reflects the aftermath of a deep systemic financial crisis, not a long-term secular innovation crisis. ...
Attributing the ongoing slowdown to the financial crisis does not imply the absence of long-term secular effects, some of which are rooted in the crisis itself. ... Taken together, these factors make it easy to imagine trend GDP growth being one percentage point below normal for another decade, possibly even longer. ..
So, is the main cause of the recent slowdown an innovation crisis or a financial crisis? Perhaps some of both, but surely the economic trauma of the last few years reflects, first and foremost, a financial meltdown...

Thursday, November 29, 2012

'High-Frequency Trading and High Returns'

Have to teach classes in a bit, and running late, so just have time for a quick post -- this is from Ricardo Fernholz, a professor of economics at Claremont McKenna College:

High-Frequency Trading and High Returns, The Baseline Scenario: The rise of high-frequency trading (HFT) in the U.S. and around the world has been rapid and well-documented in the media. According to a report by the Bank of England, by 2010 HFT accounted for 70% of all trading volume in US equities and 30-40% of all trading volume in European equities. This rapid rise in volume has been accompanied by extraordinary performance among some prominent hedge funds that use these trading techniques. A 2010 report from Barron’s, for example, estimates that Renaissance Technology’s Medallion hedge fund – a quantitative HFT fund – achieved a 62.8% annual compound return in the three years prior to the report.
Despite the growing presence of HFT, little is known about how such trading strategies work and why some appear to consistently achieve high returns. The purpose of this post is to shed some light on these questions and discuss some of the possible implications of the rapid spread of HFT. ...

Tuesday, November 06, 2012

'Jobless Recoveries and the Disappearance of Routine Occupations'

About those jobless recoveries (I discussed this paper here after seeing it presented at a conference, but the authors should have a chance to provide their own explanation):

Jobless recoveries and the disappearance of routine occupations, by Henry Siu and Nir Jaimovich, Vox EU: Economic recoveries aren’t what they used to be. Since the end of the Great Recession in June 2009:

  • US real GDP per capita grew by 3.6%,
  • but per capita employment fell by 1.8% over and above the 5.5% that was lost during the recession.

This malaise in the US labor market has been the subject of countless economic policy debates and may be the decisive factor in the upcoming US election. The fact that employment is recovering much slower than GDP is a relatively new phenomenon; jobless recoveries have only really occurred after the recessions of 1991 and 2001. These last three recoveries represent a distinct break from previous postwar episodes of recession when both GDP and employment would vigorously rebound following recessions (Schreft and Singh 2003; Groshen and Potter 2003; Bernanke 2009).

Our current research indicates that a jobless recovery is not simply an ‘economy-wide‘ delay in firms hiring again. Instead, it can be traced to a lack of recovery in a subset of occupations; those that focus on “routine” or repetitive tasks that are increasingly being performed by machines (Jaimovich and Siu 2012).

Continue reading "'Jobless Recoveries and the Disappearance of Routine Occupations'" »

Thursday, October 18, 2012

Will an FTC Prize End Robocalls?

I like this too:

FTC Offers $50,000 Prize to End Robocalls, by Kevin Drum: Economists have long touted the value of prizes to motivate innovation. ... Today, the FTC announced a prize for a ... worthy cause:

After years of using traditional regulatory tools to block billions of illegal marketing calls, the FTC says, the agency is launching a public contest in search of new technical solutions.

The prize: $50,000.

....The agency will be taking entries between Oct. 25 and Jan. 17. Judges will score proposals based on workability (worth 50 percent), ease of use (worth 25 percent) and the idea’s potential for a wide rollout (worth 25 percent). Applicants can submit ideas to block pre-recorded marketing calls on landlines, cellphones or both.

Hooray! Seriously. I don't know if this will work, and I don't know if $50,000 is enough, but this is a great idea. It's exactly the kind of thing that might prompt some unappreciated genius to come up with a harebrained idea that's just crazy enough to work. We should do more stuff like this.

Tuesday, October 02, 2012

Rogoff: King Ludd is Still Dead

Kenneth Rogoff:

King Ludd is Still Dead, by Kenneth Rogoff, Commentary, Project Syndicate: Since the dawn of the industrial age, a recurrent fear has been that technological change will spawn mass unemployment. Neoclassical economists predicted that this would not happen, because people would find other jobs, albeit possibly after a long period of painful adjustment. By and large, that prediction has proven to be correct.
Two hundred years of breathtaking innovation since the dawn of the industrial age have produced rising living standards for ordinary people in much of the world, with no sharply rising trend for unemployment. Yes, there have been many problems, notably bouts of staggering inequality and increasingly horrific wars. On balance, however, throughout much of the world, people live longer, work much fewer hours, and lead generally healthier lives.
But there is no denying that technological change nowadays has accelerated, potentially leading to deeper and more profound dislocations. In a much-cited 1983 article, the great economist Wassily Leontief worried that the pace of modern technological change is so rapid that many workers, unable to adjust, will simply become obsolete, like horses after the rise of the automobile. Are millions of workers headed for the glue factory? ...

Sunday, September 23, 2012

'Hard Times Come Again Once More?'

This is David Warsh on the worries about a great stagnation in our future (I remain an optimist about the future, at least when it comes to productivity. I think that, since we are part of it, it's hard to see how big of an impact the digital revolution will have on the future, or even how big of an impact it has had already. So I believe we will continue to grow robustly once our current troubles are behind us. But as digital technology advances and eliminates working class jobs -- jobs with decent pay and decent benefits -- there is a danger of an increasingly two-tiered society. For that reason, I think we are worried about the wrong thing. The big problems of the future will be about distribution, not production. We'll have plenty of stuff, but wil it be distributed in a way that allows prosperity to be widely shared?):

Hard Times Come Again Once More?, by David Warsh: I keep a couple of books on the shelf above my desk to remind me of how much things have changed over the past hundred years. One is Only Yesterday: An Informal History of the 1920s, by Frederick Lewis Allen, which first appeared in 1931. The other is The Great Leap: The Past Twenty-Five Years in America, by John Brooks, published in 1966. Some crackerjack journalist is surely working today on a similarly successful treatment of the as-yet hard-to-characterize years since 1966. In the meantime, The Good Life and Its Discontents: The American Dream in the Age of Entitlement 1945-1995, by Robert Samuelson, takes the story forward.
The really interesting question, though, has to do with what to expect in the next twenty years.
One thing that Yesterday and Leap have in common, a characteristic that in all likelihood will be shared by the book that eventually joins them, is that there are hardly any numbers in them – nothing to link together the two  epochs, or to foreshadow the future.  Measurement is the province of economists. Compelling journalism seldom has time.
Therefore I have been reading, with special interest (and a certain dread), Is US Economic Growth Over? Faltering Innovation Confronts the Six Headwinds, by Robert J. Gordon, of Northwestern University.  In fact, I read it last summer, even before it was a National Bureau of Economic Research working paper, since Gordon is a friend. It’s a short report (25 pages) on an ambitious work in progress.
Beyond the Rainbow: The American Standard of Living Since the Civil War, a book version of the article, already long in preparation, will be anything but brief when it’s finally done. It will, however, be the definitive survey of American living standards over the last 150 years. (Think Carmen Reinhart and Kenneth Rogoff, This Time Is Different, on the history of financial crises.) It will formulate an educated guess about the future as well.  And since that prediction has implications for anyone following the election campaign (and more than just them!), there is good reason for considering it now.
The standard assumption is that, after the disruptions of the financial crisis, and once various fiscal imbalances have been resolved (pensions, health care obligations, etc.), the United States will resume the real per capita GDP growth of around 2 percent a year that we’ve enjoyed since 1929.  In the immediate aftermath of the crisis, I toyed with it myself.  Technology, the growth of knowledge, will see us through.
What if it won’t? ... There are two sides to Gordon’s argument... [continue reading] ...

Sunday, September 16, 2012

David Ricardo 'On Machinery'

David Ricardo, in the third edition of his Principles (this is from chapter 31, "On Machinery," 1821), reconsiders how the invention of new machinery affects labor:

Ever since I first turned my attention to questions of political economy, I have been of opinion, that such an application of machinery to any branch of production, as should have the effect of saving labour, was a general good, accompanied only with that portion of inconvenience which in most cases attends the removal of capital and labour from one employment to another. It appeared to me, that provided the landlords had the same money rents, they would be benefited by the reduction in the prices of some of the commodities on which those rents were expended, and which reduction of price could not fail to be the consequence of the employment of machinery. The capitalist, I thought, was eventually benefited precisely in the same manner. He, indeed, who made the discovery of the machine, or who first usefully applied it, would enjoy an additional advantage, by making great profits for a time; but, in proportion as the machine came into general use, the price of the commodity produced, would, from the effects of competition, sink to its cost of production, when the capitalist would get the same money profits as before, and he would only participate in the general advantage, as a consumer, by being enabled, with the same money revenue, to command an additional quantity of comforts and enjoyments. The class of labourers also, I thought, was equally benefited by the use of machinery, as they would have the means of buying more commodities with the same money wages, and I thought that no reduction of wages would take place, because the capitalist would have the power of demanding and employing the same quantity of labour as before, although he might be under the necessity of employing it in the production of a new, or at any rate of a different commodity. ...
These were my opinions, and they continue unaltered, as far as regards the landlord and the capitalist; but I am convinced, that the substitution of machinery for human labour, is often very injurious to the interests of the class of labourers.
My mistake arose from the supposition, that whenever the net income of a society increased, its gross income would also increase; I now, however, see reason to be satisfied that the one fund, from which landlords and capitalists derive their revenue, may increase, while the other, that upon which the labouring class mainly depend, may diminish, and therefore it follows, if I am right, that the same cause which may increase the net revenue of the country, may at the same time render the population redundant, and deteriorate the condition of the labourer. ...
That the opinion entertained by the labouring class, that the employment of machinery is frequently detrimental to their interests, is not founded on prejudice and error, but is conformable to the correct principles of political economy.

However, he goes on to say that this shouldn't be viewed as a call to discourage machinery:

The statements which I have made will not, I hope, lead to the inference that machinery should not be encouraged.  ... The employment of machinery could never be safely discouraged in a State, for if a capital is not allowed to get the greatest net revenue that the use of machinery will afford here, it will be carried abroad, and this must be a much more serious discouragement to the demand for labour, than the most extensive employment of machinery; for, while a capital is employed in this country, it must create a demand for some labour; machinery cannot be worked without the assistance of men, it cannot be made but with the contribution of their labour. By investing part of a capital in improved machinery, there will be a diminution in the progressive demand for labour; by exporting it to another country, the demand will be wholly annihilated.

So, in Ricardo's view, it is a choice between the potential for detrimental effects on labor from the use of new machinery versus even worse effects if the machinery is not used at all. His argument can certainly be questioned, at least in some places, but this is not the positive "lift all boats" theory of growth that is often attributed to Ricardo.

Monday, September 10, 2012

Gordon: Is US Economic Growth Over?

Robert Gordon is "deliberately provocative" (I'm an optimist):

Is US economic growth over? Faltering innovation confronts the six, by Robert J. Gordon, Vox EU: Global growth is slowing – especially in advanced-technology economies. This column argues that regardless of cyclical trends, long term economic growth may grind to a halt. Two and a half centuries of rising per-capita incomes could well turn out to be a unique episode in human history.

It is time to raise basic questions about the process of economic growth, especially the assumption – nearly universal since Solow’s seminal contributions of the 1950s (Solow 1953) – that economic growth is a continuous process that will persist forever.

  • There was virtually no growth before 1750;
  • There is no guarantee that growth will continue indefinitely.

This column introduces my CEPR Policy Insight, which argues in detail that the rapid progress made over the past 250 years could well turn out to be a unique episode in human history (Gordon 2012).

The data I use only concern the US and view the future from 2007 while pretending that the financial crisis did not happen. The focus is on per-capita real GDP growth in the frontier country since 1300, the UK until 1906 and the US afterwards. Growth in the frontier economy gradually accelerated after 1750, reached a peak in the middle of the 20th century, and it has been slowing since. The paper is about 'how much further could the frontier growth rate decline?'

Continue reading "Gordon: Is US Economic Growth Over?" »

Thursday, August 09, 2012

Spamming the Spammers

Joshua Gans:

... A few years back I contacted Yahoo and Google with an idea to counter spammers. What if for each spam email that they picked up, they responded — perhaps entering details into phishing forms? This would overwhelm spammers and they would not be able to find ‘legitimate’ responses from the gullible few. That would really alter their returns. Unfortunately, it was explained to me that such a measure would constitute an attack by a US corporation and, apparently, that is against US law. ...

Tuesday, April 24, 2012

"The DRM Free Movement for eBooks Expands"

Joshua Gans notes a new development in the eBook wars:

The DRM free movement for eBooks expands, Digitopoly: So it started with JK Rowling who went platform independent and effectively DRM free on the Harry Potter series. This meant that for those books purchasers would not be locked into any one platform (e.g., Kindle) and that also meant that no platform could use lock-in to build up market power. Interestingly, you can’t buy those books from Apple’s iBookstore but you can buy them direct from Pottermore and import them into iBooks... Some other publishers have offered DRM free versions but JK Rowling was the first to break through Amazon’s store to get what is effectively a non-platform specific version on the Kindle.

Today comes an announcement from TOR books (who is owned by Macmillan) that their entire line of science fiction books will be available in a DRM free version. ...

Now as Amazon sells these as does Apple, I wonder if that means TOR will be using a similar method that Pottermore uses to break through those platforms. It will be interesting to see.

This all suggests that publishers are waking up to the fact that if they have ceded power to eBook platforms it is of their own choosing by insisting on DRM. ...

The same thing happened in music. DRM was the thing that got music publishers interested in digital downloads (like iTunes) and then something we couldn’t have predicted in 2003 happened; DRM was abandoned and nobody really noticed. What is more DRM was abandoned with a coincidental 30% (!) price increase to consumers as compensation for the extra value provided by portability. My feeling (based on no real evidence) is that overall the consumers won out of that deal (they are paying a little more to save on paying lots more later). It will be interesting to see how TOR’s pricing changes as it goes DRM free.

Publishers were always aggregators to some extent. They (supposedly) found the best writing from all the manuscripts that are out there, or solicited it themselves, and then made it available for a fee (the price of the book).

As authors take things into their own hands and self-publishing in the form of eBooks proliferates, there will likely be a role for publishers to continue doing this. They won't get paid for binding books in the traditional sense, but they can still offer a platform where authors will get noticed in return for exclusivity. That is, if a site develops a reputation for aggregating the best content and has a large following, then it can use that reputation to attract the best authors to the site. It can also lock the authors up with contracts that do not allow them to publish on other sites in return for exposure (which works best with new authors). The public can go to the site, know there's a good chance of finding something interesting -- just like browsing for books now -- and then purchase an eBook (the sites could also be supported, in part or in whole, by ads).

Or will some other model prevail?

Thursday, November 17, 2011

Joshua Gans: Entrepreneurship and Inequality

Do you agree with this?:

Entrepreneurship and inequality, by Joshua Gans: So I was reading Felix Salmon’s account of a debate here in Toronto between Paul Krugman and Larry Summers. ... I was struck by this passage.

Summers also tried to defend inequality, at least in part, by saying that “suppose the United States had 30 more people like Steve Jobs” — that, he said, would be a good thing even as it increased inequality. “So we do need to recognize that a component of this inequality is the other side of successful entrepreneurship; that is surely something we want to encourage.”

Now there is nothing new in this view. It is an argument for inequality that reminds me of Ted Baxter (from the Mary Tyler Moore Show) who intended to have six children in the hope that one of them grows up to solve the population problem. The inequality version is that we accept inequality in the hopes of getting the fruits of entrepreneurship.

So no one disagrees with encouraging entrepreneurship. ... But when we link it to inequality in this way we are asking ... whether the poor (or middle class) are happy outsourcing knowledge creation and are each willing to pay a bit to see that happen.

Seen in this light, the problem of inequality is a design problem. This is something that Jean Tirole and Glen Weyl have recently investigated. They ask a related question: when is it a good idea to confer entrepreneurs with market power (as a reward)? The answer turns out to be, when the government does not know much about the nature of demand for innovative products. In this world, by exposing entrepreneurial rewards to what they can get through monopoly pricing, we screen for innovations that maximize the gap between innovative benefits and innovative costs. The implication here is that if we outsourced innovation to creative geniuses, we would do it in a way that allows them to charge high prices.

But does that carry over when there is real inequality? Let’s face it, the actual products Steve Jobs produced were not priced for the poor. The best we can say is that when they were imitated the poor received some benefits (which may also be arguable). So is it really the case that poorer people would be willing to be taxed more (by government or through monopoly pricing) in order to bring out more people like Steve Jobs? Instead, the Steve Jobs argument is surely one for a lateral wealth transfer from those with wealth — innovators or not — to be more concentrated amongst those who innovate. It is inequality in talent and skill and its mismatch to wealth that drives the argument not inequality in wealth.

It takes a village to make an iPad.

Monday, October 24, 2011

"More Jobs Predicted for Machines, Not People"

The "key to winning the race" is to make machines complements, not substitutes:

More Jobs Predicted for Machines, Not People, by Steve Lohr, NY Times: A faltering economy explains much of the job shortage in America, but advancing technology has sharply magnified the effect, more so than is generally understood...
The automation of more and more work once done by humans is the central theme of “Race Against the Machine,” an e-book to be published on Monday. “Many workers, in short, are losing the race against the machine,” the authors write.
Erik Brynjolfsson, an economist and director of the M.I.T. Center for Digital Business, and Andrew P. McAfee, associate director and principal research scientist at the center, are two of the nation’s leading experts on technology and productivity. The tone of alarm in their book is a departure for the pair, whose previous research has focused mainly on the benefits of advancing technology. ...
Faster, cheaper computers and increasingly clever software, the authors say, are giving machines capabilities that were once thought to be distinctively human, like understanding speech, translating from one language to another and recognizing patterns. ...
The skills of machines, the authors write, will only improve. ... Yet computers, the authors say, tend to be narrow and literal-minded, good at assigned tasks but at a loss when a solution requires intuition and creativity — human traits. A partnership, they assert, is the path to job creation in the future.
“In medicine, law, finance, retailing, manufacturing and even scientific discovery,” they write, “the key to winning the race is not to compete against machines but to compete with machines.”