Category Archive for: Technology [Return to Main]

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.”

Monday, September 12, 2011

"Sports Stories Written by Algorithm"

Should sports reporters worry that computers will take their jobs?:

Sports stories written by algorithm, by Shane Greenstein: Have you suspected for some time that most writing about sporting events is formulaic? Well, suspect no more! It is possible to have a computer write a sports story merely from the box score. ... It is described in this article.
Now, seriously, there are two ways to read this article, and one of them is substantially more right than the other. The first interpretation would foresee a massive replacement of sports writers with computers... The second interpretation would foresee the growth of a new service, the creation of stories for events that previously did not receive them — such as local high school games.
I think we will see more of the latter in the next few years.
First of all, the computers do not yet employ that extra verve or wordplay or attitude that makes for great sports writing. ... So the best sports writers are in no danger of losing their uniqueness, the voice that gives their writing value. Second, there is considerable demand for the second type of service. There are lots of sporting events played all over the country. A routine sports story would enhance a web page, and add just a nice element to a summary. Lots of places will pay ten dollars for that (which is what the price is today), and that price will decline with time.
Think about it: Much of sporting news follows a routine canon, a contest with ups and downs and comebacks and heroism and more. These are played out every day on high school playgrounds and in many others places, but the only stories ever written are those written in the heads of the right fielder. Now we have another source.
Onward to a new form of journalism!

Wednesday, August 24, 2011

Bhagwati: The Outsourcing Bogeyman

Jagdish Bhagwati says outsourcing myths are standing in the way of free trade initiatives ("If free trade is to regain the support of statesmen who now hesitate over liberalizing trade with developing countries, the myths that turn outsourcing into an epithet must be countered"). He says we shouldn't worry about outsourcing jobs because we can always use protectionism to save them:

there are manmade restrictions to outsourcing particular types of expertise: professional organizations often intervene to kill outsourcing simply by requiring credentials that only they can provide. Thus, foreign radiologists need US certification before they are allowed to read the x-rays sent from the US. Until recently, only two foreign firms qualified.

So no need to worry. If assembly line work is threatened by outsourcing, simple, just require US certification for the workers who produce these goods.

Don't get me wrong, I think free trade is almost always the best answer. But in supporting it, we shouldn't hide from the short-run distributional consequences that fall on some segments of the population. Acknowledging that the costs exist, and then addressing them is a much better route to preserving free trade inititatives.

Wednesday, July 06, 2011

Rogoff: Technology and Inequality

In this column, I said:

... I’ve never favored redistributive policies, except to correct distortions in the distribution of income resulting from market failure, political power, bequests and other impediments to fair competition and equal opportunity. I’ve always believed that the best approach is to level the playing field so that everyone has an equal chance. ...
But increasingly I am of the view that even if we could level the domestic playing field, it still won’t solve our wage stagnation and inequality problems. Redistribution of income appears to be the only answer. ...
We’ve given the market economy 40 years to solve the problem of growing inequality, and the result has been even more inequality. Markets do not appear to be able to solve this problem on their own, at least not in any reasonable timeframe. Some people say education is the answer, but we have been trying to reform education for decades, yet the problems remain. The idea that a fix for education is just around the corner is wishful thinking. ...

However, Kenneth Rogoff disagrees: (those ideas are apparently "foolish" and "dangerous")

Until now, the relentless march of technology and globalization has played out hugely in favor of high-skilled labor, helping to fuel record-high levels of income and wealth inequality around the world. ...
There is no doubt that income inequality is the single biggest threat to social stability around the world, whether it is in the United States, the European periphery, or China. Yet it is easy to forget that market forces, if allowed to play out, might eventually exert a stabilizing role. Simply put, the greater the premium for highly skilled workers, the greater the incentive to find ways to economize on employing their talents. ...
My Harvard colleague Kenneth Froot and I once studied the relative price movements of a number of goods over a 700-year period. To our surprise, we found that the relative prices of grains, metals, and many other basic goods tended to revert to a central mean tendency over sufficiently long periods. We conjectured that even though random discoveries, weather events, and technologies might dramatically shift relative values for certain periods, the resulting price differentials would create incentives for innovators to concentrate more attention on goods whose prices had risen dramatically.
Of course, people are not goods, but the same principles apply. As skilled labor becomes increasingly expensive relative to unskilled labor, firms and businesses have a greater incentive to find ... substitutes for high-price inputs. ...
The next generation of technological advances could also promote greater income equality by leveling the playing field in education. ... Surely, higher education will eventually be hit by the same kind of sweeping wave of technology that has flattened the automobile and media industries, among others. If the commoditization of education eventually extends to at least lower-level college courses, the impact on income inequality could be profound.
Many commentators seem to believe that the growing gap between rich and poor is an inevitable byproduct of increasing globalization and technology. In their view, governments will need to intervene radically in markets to restore social balance.
I disagree..., the past is not necessarily prologue: given the remarkable flexibility of market forces, it would be foolish, if not dangerous, to infer rising inequality in relative incomes in the coming decades by extrapolating from recent trends.

It seems to me that "the single biggest threat to social stability around the world" poses asymmetric risks. If he's right, then things might improve "in the coming decades." That doesn't help anyone today, and that's a problem, but at least it eventually goes away. But what if he's wrong?

I'm still really uncomfortable calling for government intervention for reasons beyond those listed above -- I don't think I've fully convinced myself even yet -- but with the "threat to social stability" hanging over us, do we have the time to wait and see if the problem fixes itself?

Tuesday, June 14, 2011

Karl Smith: Capital vs. Labor

Karl Smith makes a good point:

Capital vs. Labor, by Karl Smith: Catherine Rampell is exploring a thesis about the hiring practices. A sample

On Friday, I wrote about how equipment and software prices are getting rapidly cheaper while the cost of labor has been getting more expensive, making capital a more attractive investment to companies than people. Tax incentives that encourage earlier capital investment may be helping, too.

Importantly this only makes sense if capital and labor are substitutes in production. Typically we think of them as complements.

Lets take some obvious examples. Suppose to create welded metal I need both a welder and welding torch. The welding torch goes down in price. That means that its actually cheaper to create each piece of welded metal. This will allow me as a factory owner to either lower my price, sell more welded metal while maintaining my profit margin.

However, to do this I will need more welders. So a fall in the price of welding torches, increases the demand for welders.

On the other hand suppose that I am an airline considering whether to have more booking agents or whether to invest in more sophisticated booking software. Specialized software can run well into the multi-millions but if it gets just cheap enough it might actually be a better deal than new agents.

So the falling price of capital alone isn’t enough. It depends on how the capital interacts with the workers. Moreover, it would take some fancy math to show this, but until capital can do everything labor can do – that is until the singularity – some types of jobs must be complements to capital.

Those jobs will always be in more demand as capital get cheaper. The question is how much skill you need to do those jobs. This is the whole issue of skill-biased technological change.

Let me add that within this framing of the question, one fear is that technology is producing more and more substitutes for labor than ever before, digital technology in particular, and there is uncertainty about what that means for the future.

Saturday, May 28, 2011

Driverless Cars

Tyler Cowen wants government to pave the way for -- or at least get out of the way of -- driverless cars.

Monday, March 14, 2011

"The Internet and Local Wages: A Puzzle"

This is from a description of new research forthcoming in the American Economic Review, “The Internet and Local Wages: A Puzzle,” by Avi Goldfarb, Chris Forman and Shane Greenstein:

What has the Internet Done for the Economy?, Kellogg Insight: ...There is widespread optimism among media commentators and policy makers that the Internet erases geographic and socioeconomic boundaries. The Death of Distance and The World Is Flat, two books that espouse that rosy view, were bestsellers. But in the early days of the Internet, the income gap between the upper and middle classes actually began to grow. “We thought it was just a very natural question to ask: is the Internet responsible?” Greenstein says.
Misplaced Optimism
The researchers studied trends from 1995 to 2000 in several large sets of data, including the Quarterly Census of Employment and Wages—which gives county-level information on average weekly wages and employment—and the Harte Hanks Market Intelligence Computer Intelligence Technology Database, which holds survey information about how firms use the Internet. In total, the researchers included relevant data for nearly 87,000 private companies with more than 100 employees each. Based on their older work, they focused only on advanced Internet technologies.
Out of about 3,000 counties in the U.S., in only 163 did business adoption of Internet technologies correlate with wage and employment growth, the study found. All of these counties had populations above 150,000 and were in the top quarter of income and education levels before 1995. Between 1995 and 2000, they showed a 28 percent average increase in wages, compared with a 20 percent increase in other counties (Figure 1).

Figure 1. Advanced Internet investment and wage growth by county type.

Why did the Internet make such big waves in these few areas? Greenstein believes the reason was that these areas already had sophisticated companies and the communications infrastructure needed to seize on the Internet’s opportunities. But there are other possibilities. The impact could have been due to a well-known phenomenon called “biased technical change,” which means that new technologies can thrive only in places with skilled workers who know how to use them. Or it could have been because cities brought certain advantages—denser labor markets, better communication, tougher competition—than more remote areas.
“Each one of those explanations is plausible in our data, and probably explains a piece of it. But none of them by themselves can explain the whole story,” Greenstein says. “It’s really a puzzle.” ...

Monday, March 07, 2011

Paul Krugman: Degrees and Dollars

I've noted in the past that education is essential, but it won't work for everyone. What's the answer for everyone else?:

Degrees and Dollars, by Paul Krugman, Commentary, NY Times: It is a truth universally acknowledged that education is the key to economic success. Everyone knows that the jobs of the future will require ever higher levels of skill. ...
But what everyone knows is wrong..., the idea that modern technology eliminates only menial jobs, that well-educated workers are clear winners, may dominate popular discussion, but it’s actually decades out of date.
The fact is that since 1990 or so the U.S. job market has been characterized not by a general rise in the demand for skill, but by “hollowing out”: both high-wage and low-wage employment have grown rapidly, but medium-wage jobs — the kinds of jobs we count on to support a strong middle class — have lagged behind. And the hole in the middle has been getting wider...
Why is this happening? The belief that education is becoming ever more important rests on the plausible-sounding notion that advances in technology increase job opportunities for those who work with information — loosely speaking, that computers help those who work with their minds, while hurting those who work with their hands.
Some years ago, however, the economists David Autor, Frank Levy and Richard Murnane argued that this was the wrong way to think about it. Computers, they pointed out, excel at routine tasks, “cognitive and manual tasks that can be accomplished by following explicit rules.” Therefore, any routine task — a category that includes many white-collar, nonmanual jobs — is in the firing line. ... Most of the manual labor still being done in our economy seems to be of the kind that’s hard to automate. ...
And then there’s globalization. Once, only manufacturing workers needed to worry about competition from overseas, but the combination of computers and telecommunications has made it possible to provide many services at long range. ... Alan Blinder and Alan Krueger suggest ... that high-wage jobs performed by highly educated workers are, if anything, more “offshorable” than jobs done by low-paid, less-educated workers. If they’re right, growing international trade in services will further hollow out the U.S. job market.
So what does all this say about policy?
Yes, we need to fix American education. In particular, the inequalities Americans face at the starting line — bright children from poor families are less likely to finish college than much less able children of the affluent — aren’t just an outrage; they represent a huge waste of the nation’s human potential.
But ... the notion that putting more kids through college can restore the middle-class society we used to have is wishful thinking. It’s no longer true that having a college degree guarantees that you’ll get a good job, and it’s becoming less true with each passing decade.
So if we want a society of broadly shared prosperity, education isn’t the answer — we’ll have to go about building that society directly. We need to restore the bargaining power that labor has lost over the last 30 years, so that ordinary workers as well as superstars have the power to bargain for good wages. We need to guarantee the essentials, above all health care, to every citizen.
What we can’t do is get where we need to go just by giving workers college degrees, which may be no more than tickets to jobs that don’t exist or don’t pay middle-class wages.

Tuesday, February 15, 2011

"The Upside of the Tech Bubble"

Tim Duy:

The Upside of the Tech Bubble, by Tim Duy: Felix Salmon’s op-ed piece detailing the declining importance of American stock markets is well worth the read. I think it is especially interesting in light of the general push toward defined contribution benefit plans. My suspicion is that most participants in such plans feel they “need” to be heavily invested in US equities, and equities funds most likely dominate other options. If Salmon’s assessment of stock markets is correct, I think this means that the public is being pushed into a retirement dead end. I would appreciate some follow-up on how the average investor should manage their 401k plans in this environment.

In a follow-up blog posting, however, I think Salmon goes a bit far when describing the tech stock bubble of the 1990s:

The NYSE is place for algorithms and speculators to make bets on financial assets. It last funneled real amounts of money into the broader economy during the dot-com boom, leaving behind a lot of Aeron chairs and little else.

I have gone back and forth on this topic, ultimately concluding that the tech bubble was not all that bad. To be sure, there were some spectacular failures – Pets.com comes to mind. But when you scrape away the detritus, you find the building blocks of all the technology that is increasingly integrated in our everyday life. The bubble-driven intensity of activity in information technology almost certainly accelerated its development and adaptation. Many news ideas were explored; some failed, some succeeded. The successes, however, outweighed the failures, leaving productivity much higher as a result (that this productivity has not translated into higher real wages, however, remains a disappointment).

Also note that much of the spending during that period was dedicated to capital that depreciated very quickly. Consequently, the impact on future consumption/production was limited. The excess computer produced in 1999 was nearly worthless just a few years later. Time for a replacement, bubble or not. Housing, obviously, is very different – the capital is long lived, locking resources into place for decades.

In short, the tech bubble was a wild ride, but I am wary about declaring it an absolute failure of the capital allocation process.

Friday, February 11, 2011

The Spread of Technology: The Printing Press

Printa
Printb
Printc
Printd
Printe
Printf

More here: Information technology and economic change: The impact of the printing press, Vox EU.

Thursday, February 03, 2011

Bing's Conduct Crosses the Line

Shane Greenstein says Bing is behaving legally, but not ethically:

Bing imitates Google: Their conduct crosses a line, by Shane Greenstein, Virulent Word of Mouse: Imitation happens. ... Slate.com installs a better tool for soliciting comments, and a month later the same feature shows up at the Huffington Post. Chrysler brings out a minivan and within a two product cycles every other auto assembler has one too. Nobody loses sleep over this.
Moreover, the Internet makes monitoring a rival easier, so imitation involves less hassle and far lower costs than it used to. ...
What happened? ... Google’s engineers hypothesized that users of Microsoft Internet Explorer were entering search requests into Google’s search bar and getting results. They speculated that Microsoft began using that data to tweak the Bing search engine. In short, Google’s users and answers were informing Bing’s results.
That hypothesis turned out to be right. Neither party denies it. ... Bing monitors Google by watching users...
In the modern Internet,... there is no longer any privacy for users. Providers want to know as much as they can, and generally the rich suppliers can learn quite a lot about user conduct and preferences. ...
In the offline world, such intimate familiarity with a rival’s users would be uncomfortable. It would seem like an intrusion. Why is it permissible in the online world? Why is there any confusion about this? Why isn’t this cut and dry?
In other words, the transaction between supplier and user is between supplier and user, and nobody else should be able to observe it without permission of both supplier and user. The user alone does not have the right or ability to invite another party to observe all aspects of the transaction.
That is what bothers me about Bing’s behavior. There is nothing wrong with them observing users, but they are doing more than just that. They are observing their rival’s transaction with users. And learning from it. In other contexts that would not be allowed without explicit permission of both parties.
Moreover, one party does not like it in this case, as they claim the transaction with users as something they have a right to govern and keep to themselves. There is some merit in that claim. ...
What happens now?
This looks like a classic high tech standoff. No law is being broken, so nothing can stop Bing from learning from users that go to Google’s search engine. Judging from their remarks, it sounds like they intend to keep on doing just what they are doing.
That makes me sad. The righteous reaction of Microsoft’s management seems tone deaf.
They had a choice to do it differently (and still have this choice). It would have been much more grown up for them to admit the unintended benefit they have gotten by watching their rival interact with their user. It would more ethical to swear they had not intended to benefit from a type of spying on their rival that would be unethical in other contexts. It would have been mature to then declare that they would win in the long run with good hard innovation instead of gaining advantage from this little piece of information.

(There's quite a bit more detail and explanation in the post.)

Tuesday, February 01, 2011

"The Great Decoupling"

Lane Kenworthy notes the decoupling of economic growth from median income growth in the early 1970s:

The great decoupling, Consider the Evidence: Tyler Cowen’s e-book The Great Stagnation offers a novel explanation of the slowdown in U.S. median income growth since the 1970s. ... Innovation has slowed. ... But I’m skeptical on two counts.

First, I’m not convinced that innovation has in fact slowed significantly. ... Computers are the engine of the postindustrial economy; they are the modern counterpart to steel, railroads, and the assembly line. Advances in computer hardware and software, their widespread dissemination, and their application to myriad tasks — automation and coordination of supply chains in manufacturing, record keeping and scheduling in services, and much much more — surely represent a massive improvement.

Second,... A key difference between the WW2-1973 period and the decades since then is that median income growth has become decoupled from economic growth. (Mark Thoma makes this point too.) The rate of economic growth has been lower in the recent era, but it’s nevertheless been decent. Yet median income growth has been very slow. This contrasts sharply with the prior period.

Here’s one way to see this (others here):

Thegreatdecoupling-figure1-version1[1]

...Median family income was $64,000 in 2007. Had it kept pace with GDP per family since the mid-1970s, it instead would have been around $90,000.

I’m all for helping to accelerate the rate of innovation. But the big change in recent decades lies in the degree to which economic growth lifts middle-class incomes. If we want to understand slow income growth, that should be our focus.

Saturday, January 29, 2011

Cowen: Innovation Is Doing Little for Incomes

I need to think about this more before responding:

Innovation Is Doing Little for Incomes, by Tyler Cowen, Commentary, NY Times: My grandmother, who was born in 1905, spoke often about the immense changes she had seen, including the widespread adoption of electricity, the automobile, flush toilets, antibiotics and convenient household appliances. Since my birth in 1962, it seems to me, there have not been comparable improvements. ...[C]ompared with what my grandmother witnessed, the basic accouterments of life have remained broadly the same.
The income numbers for Americans reflect this slowdown in growth. From 1947 to 1973 — a period of just 26 years — inflation-adjusted median income in the United States more than doubled. But in the 31 years from 1973 to 2004, it rose only 22 percent. And, over the last decade, it actually declined. ...
Although America produces plenty of innovations, most are not geared toward significantly raising the average standard of living. It seems that we are coming up with ideas that benefit relatively small numbers of people, compared with the broad-based advances of earlier decades, when the modern world was put into place. ...
Sooner or later, new technological revolutions will occur, perhaps in the biosciences, through genome sequencing, or in energy production, through viable solar power, for example. But these transformations won’t come overnight, and we’ll have to make do in the meantime. Instead of facing up to this scarcity, politicians promote tax cuts and income redistribution policies to benefit favored constituencies. Yet these are one-off adjustments and, over time, they cannot undo the slower rate of growth in average living standards.
It’s unclear whether Americans have the temperament to make a smooth transition to a more stagnant economy. After all, we’ve long thought of our country as the land of unlimited opportunity. In practice, this optimism has meant that we continue to increase government spending, whether or not we can afford it.
In the narrow sense, the solution to the stagnation of median income will not be a political one. And one of the hardest points to grasp about this quandary is that no one in particular is to blame. Scientific progress has never proceeded on an even, predictable basis, even though for part of the 20th century it seemed that it might.
Science should be encouraged with subsidies for basic research, as well as private charity, educational reform, a business culture geared toward commercializing inventions, and greater public appreciation for the scientific endeavor. A lighter legal and regulatory hand could ease the path of future innovations.
Nonetheless, advancing discovery is not a goal to be reached by the mere application of will. Precisely because there is no obvious villain and no simple fix, and many complex factors behind success, science as a general topic doesn’t play a big role in American political discourse. When it comes to understanding our macroeconomic predicament, we often seem to be missing the point.
Until science has a greater impact again on average daily living standards, the political problem will be in learning to live within our means. Because neither major party seems to support a plausible path to fiscal balance, or to acknowledge how little control politicians actually have over future income growth, we unscientifically keep living in an age of denial.

I can't help myself -- one quick response: The uneven technological progress described above seems to provide a good reason for the government to be the agent of intertemporal transfers from the booming times to the times that are stagnating. In essence, this is just a business cycle with a long and uncertain periodicity, so the same types of stability arguments apply (particularly since "Scientific progress has never proceeded on an even, predictable basis," i.e. being alive during a boom time is mostly due to luck, not an individual's superior skill). Thus, while the argument above is that we are at a low point of the cycle, therefore the government should be less active, I think there is just as strong or stronger argument on the other side, i.e. that this is when government needs to become more active (both in terms of promoting innovation and in terms of smoothing the income variation due to uneven growth in productivity). The difference between us, perhaps, is that Tyler sees the technological plateau as permanent, or at least very long-lived (though he does say that sooner or later technological advances will come). I do not, I see the plateau -- if it exists at all -- as part of a longer up and down cycle.

Okay, that's not the strongest argument ever made, so one more quick response: More importantly, I also can't resist wondering whose incomes are stagnating and why. The economy will continue to grow. Yes, we've had a recent recession. But GDP has not and will not be stagnant over a longer time frame. Productivity increases will still drive economic growth. The question is how that growth will be shared.

The stagnation of income for typical (median) households in recent decades has little to due with stagnating productivity -- productivity has still been rising. It has much more to do with how the gains from rising productivity have been divided up. This is yet another reason why complaints about active government and "income redistribution policies to benefit favored constituencies" ring hollow. When you leave out that a mal-distribution of income already exists, i.e. when your implicit underlying assumption is that the people who did get the growth over the last few decades deserved every penny of it (despite bubbles giving false gains to people at the top, and many other problems), of course you'll oppose redistributive policies. But I tend to think that the gains were not distributed according to changes in productivity -- labor did not get its share -- and government intervention to correct that is appropriate.

Saturday, November 27, 2010

Toles: There is No 'Rest of the Trick'

Tom Toles:

Toles2See also: Rising worker productivity, innovation boosts profits but may lessen hiring need, by Anthony Feld and Craig Torres (I think there's more to the delayed recovery of labor markets than just changes in productivity, but that's part of the story).

On the title, there is supposed to be a "rest of the trick," but it doesn't come until later. The idea is that the labor that is freed up from the increased productivity will be used to produce new goods and services thereby increasing the quantity and variety of the nation's output. In a dynamic, growing economy, even though there's a delay before the new jobs appear (and hence a need to help workers through the transition), the new jobs are supposed to be even better than the old ones. But as workers look forward, the fear is that that won't be the case. Workers who have lost jobs face an uncertain future where, if they can get new jobs at all, they are unlikely to pay as well or have the same level of benefits as the jobs they lost. New workers do not appear to have the same opportunities that their parents had, particularly workers without a college degree.

If workers could be assured that rising productivity would translate into better jobs and higher pay, the outlook would be different. But the last several decades of stagnant wages have undermined that promise. The growth that has occurred was not widely shared -- it did not trickle down as promised -- and the frustrations and uncertainties households have are understandable. It's a mistake to think that just because the economy starts growing again, all will be well. If the growth that occurs post-recession simply picks up where pre-recession growth left off, i.e. with income gains flowing mainly to the upper classes, and with even more income inequality than we have now, the frustrations and tensions will continue to build and our troubles will not have ended.

Sunday, July 04, 2010

Innovation, Scaling, and the Industrial Commons

Rajiv Sethi:

Innovation, Scaling, and the Industrial Commons, by Rajiv Sethi: ..Yves Smith ... directed her readers to an article by Andy Grove calling for drastic changes in American policy towards innovation, scaling, and job creation in manufacturing. The piece is long, detailed and worth reading in full, but the central point is this: an economy that innovates prolifically but consistently exports its jobs to lower cost overseas locations will eventually lose not only its capacity for mass production, but eventually also its capacity for innovation:

Bay Area unemployment is even higher than the... national average. Clearly, the great Silicon Valley innovation machine hasn’t been creating many jobs of late -- unless you are counting Asia, where American technology companies have been adding jobs like mad for years.

The underlying problem isn’t simply lower Asian costs. It’s our own misplaced faith in the power of startups to create U.S. jobs... Startups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter.

The scaling process is no longer happening in the U.S. And as long as that’s the case, plowing capital into young companies that build their factories elsewhere will continue to yield a bad return in terms of American jobs...

How could the U.S. have forgotten [that scaling was crucial to its economic future]? I believe the answer has to do with a general undervaluing of manufacturing -- the idea that as long as “knowledge work” stays in the U.S., it doesn’t matter what happens to factory jobs... I disagree. Not only did we lose an untold number of jobs, we broke the chain of experience that is so important in technological evolution... our pursuit of our individual businesses, which often involves transferring manufacturing and a great deal of engineering out of the country, has hindered our ability to bring innovations to scale at home. Without scaling, we don’t just lose jobs -- we lose our hold on new technologies. Losing the ability to scale will ultimately damage our capacity to innovate.

Grove recognizes, of course, that companies will not unilaterally change course unless they face a different set of incentives, and that this will require a vigorous industrial policy:

The first task is to rebuild our industrial commons. We should develop a system of financial incentives: Levy an extra tax on the product of offshored labor. (If the result is a trade war, treat it like other wars -- fight to win.) Keep that money separate. Deposit it in the coffers of what we might call the Scaling Bank of the U.S. and make these sums available to companies that will scale their American operations. Such a system would be a daily reminder that while pursuing our company goals, all of us in business have a responsibility to maintain the industrial base on which we depend and the society whose adaptability -- and stability -- we may have taken for granted... Unemployment is corrosive. If what I’m suggesting sounds protectionist, so be it... If we want to remain a leading economy, we change on our own, or change will continue to be forced upon us.

Neither Grove's diagnosis nor his proposed solutions will persuade those who are convinced that protectionism of any kind is folly. I am not entirely convinced myself, and suspect that he may be underestimating the likelihood (and consequences) of cascading retaliatory actions and a collapse in international trade. But the argument must be taken seriously, and anyone opposed to his proposals really ought to come up with some alternatives of their own.

Update (7/4). In an email (posted with permission) Yves adds:

On the one hand, you are right, any move towards protectionism (or even permitted-within-WTO pushback against mercantilist trade partners) could very quickly get ugly. But the flip side is I wonder if we have a level of global integration that is inherently unstable (both for Rodrik trilemma reasons, international economic integration with insufficient government oversight creates political problems, plus the Reinhart/Rogoff finding that high levels of international capital flows are associated with financial crises). If so, we may have a short run (messiness of reconfiguration) v. long term (costs of really big financial crises) tradeoff.

This is a good point. The purpose of my post was to highlight Grove's analysis of the symbiotic relationship between innovation and scaling (which I think is both interesting and valid), and to challenge those who are opposed to his reform proposals to explain how they would deal with the situation in which we find ourselves. Passive tolerance of mass unemployment, widening income inequality, and withering innovative capacity is not an option.

---

Update (7/4). Tyler Cowen is predictably dismissive of Grove's article, but (less predictably) seems not to have read it very closely. What Grove means by scaling is the process by means of which "technology goes from prototype to mass production" as companies "work out design details, figure out how to make things affordably, build factories, and hire people by the thousands." This is not about increasing returns to scale as economists normally use the term (declining average costs as a function of output). So Tyler's claim that "at best, given the logic of [Grove's] argument, this would imply a tax only on the increasing returns industries" is not correct. And I cannot imagine what he means when he says that the "big exporting success these days is Germany, which has less "scale" than does the United States." Less scale in what sense? Population or per-capita income differences between the two countries are entirely irrelevant here. Is he trying to say that Germany engages in less scaling (and hence more offshoring) than does the United States? This would be relevant, but is empirically dubious.

Like Tyler, I am not convinced that Grove's policy proposals are wise. But his analysis of the relationship between innovation and scaling and the need for a policy response really does deserve to be read with more care.

I am not convinced either, but the problem of where good jobs will come from in the future is an important concern. If the new jobs that are created are not as good, on average, as the jobs being lost, anything could happen.

Friday, May 28, 2010

"Digital Robber Barons?"

Paul Krugman is on vacation, so I essentially picked an article randomly (by date) from the PKarchive. This column appeared December 6, 2002. Not much has changed:

Digital Robber Barons?, by Paul Krugman, Commentary, NY Times: Bad metaphors make bad policy. Everyone talks about the "information highway." But in economic terms the telecommunications network resembles not a highway but the railroad industry of the robber-baron era — that is, before it faced effective competition from trucking. And railroads eventually faced tough regulation, for good reason: they had a lot of market power, and often abused it.
Yet the people making choices today about the future of the Internet — above all Michael Powell, chairman of the Federal Communications Commission — seem unaware of this history. They are full of enthusiasm for the wonders of deregulation, dismissive of concerns about market power. And meanwhile tomorrow's robber barons are fortifying their castles.
Until recently, the Internet seemed the very embodiment of the free-market ideal — a place where thousands of service providers competed, where anyone could visit any site. And the tech sector was a fertile breeding ground for libertarian ideology, with many techies asserting that they needed neither help nor regulation from Washington.
But the wide-open, competitive world of the dial-up Internet depended on the very government regulation so many Internet enthusiasts decried. Local phone service is a natural monopoly, and in an unregulated world local phone monopolies would probably insist that you use their dial-up service. The reason you have a choice is that they are required to act as common carriers, allowing independent service providers to use their lines.
A few years ago everyone expected the same story to unfold in broadband. The Telecommunications Act of 1996 was supposed to create a highly competitive broadband industry. But it was a botched job; the promised competition never materialized.
For example, I personally have no choice at all: if I want broadband, the Internet service provided by my local cable company is it. I'm like a 19th-century farmer who had to ship his grain on the Union Pacific, or not at all. If I lived closer to a telephone exchange, or had a clear view of the Southern sky, I might have some alternatives. But there are only a few places in the U.S. where there is effective broadband competition.
And that's probably the way it will stay. The political will to fix the 1996 act, to create in broadband the kind of freewheeling environment that many Internet users still take for granted, has evaporated.
Last March the F.C.C. used linguistic trickery — defining cable Internet access as an "information service" rather than as telecommunications — to exempt cable companies from the requirement to act as common carriers. The commission will probably make a similar ruling on DSL service, which runs over lines owned by your local phone company. The result will be a system in which most families and businesses will have no more choice about how to reach cyberspace than a typical 19th-century farmer had about which railroad would carry his grain.
There were and are alternatives. We could have restored competition by breaking up the broadband industry, restricting local phone and cable companies to the business of selling space on their lines to independent Internet service providers. Or we could have accepted limited competition, and regulated Internet providers the way we used to regulate AT&T. But right now we seem to be heading for a system without either effective competition or regulation.
Worse yet, the F.C.C. has been steadily lifting restrictions on cross-ownership of media and communications companies. The day when a single conglomerate could own your local newspaper, several of your local TV channels, your cable company and your phone company — and offer your only route to the Internet — may not be far off.
The result of all this will probably be exorbitant access charges, but that's the least of it. Broadband providers that face neither effective competition nor regulation may well make it difficult for their customers to get access to sites outside their proprietary domain — ending the Internet as we know it. And there's a political dimension too. What happens when a few media conglomerates control not only what you can watch, but what you can download?
There's still time to rethink; a fair number of Congressmen, from both parties, have misgivings about Mr. Powell's current direction. But time is running out.

One way to induce competition is to follow the model used for phone services and force internet service providers to sell their services at wholesale rates to other providers (e.g., see unbundled network elements). In any case, there's no reason why there should be so little competition in this industry other than political power that these firms have.

Monday, March 15, 2010

The Economics of Aggregation

This is for Felix. If you run a website that depends upon advertising, what is the optimal number of aggregator sites (sites that run part of your original posts plus a link back to the original)? What is the optimal length of an excerpt? This won't produce any results that can't be obtained with a few minutes of thought, it simply formalizes the exercise so that the assumptions and critical parameters are evident.

Let's start by supposing that the profit for the original content site depends upon the number of visitors, i.e. that:

π = R(sN) - W

where R is the ad revenue function, sN is the number of visitors to the site, and W is costs. It is assumed that RsN > 0, i.e. that ad revenue increases with the number of visitors. This function could be made more complicated, but so long as profit is increasing in the number of visitors, this will suffice since the profit function will reduce to something along these lines in any case.

The number of visitors has two parts, s and N, where N is the total available audience for the type of content you are offering, and s is your share of that audience. I will assume that aggregators, denoted by A, increase the total size of the audience. That is, they provide a service by grouping and filtering content, the grouping/filtering of content lowers transactions (search) costs for readers, and this increases their number. More formally:

N = N(A),  NA > 0

What determines the share of the audience, s, that comes to the site? The share is assumed to depend negatively upon the number of aggregators (since aggregators divert traffic), and positively upon he number of "clickthroughs" from the aggregators:

s = s(A,C),  sA < 0, and sC > 0.

What determines the number of clickthroughs, C? The value of C depends upon two things, the number of visitors to aggregators, rN, where r is the share of the total audience captured by the aggregators, and the average length of excerpts among the aggregators, L:

C = C(rN,L),  CrN > 0 and CL < 0.

Clickthroughs are assumed to go up when aggregators get more visitors, and to go down when aggregators run longer excerpts, so longer excerpts are bad for the originator. But there's also a benefit to longer excerpts, the share of visitors to aggregators goes up when the length of excerpts goes up, and this increases clickthroughs:

r = r(L,A),  rL > 0, rA >0.

It is also assumed that the share to aggregators is increasing in the number of aggregators, A.

Finally, I am holding costs, W, constant since they don't vary in any important way with the parameters of interest, the number of aggregators, A, and the average length of an excerpt, L.

There are two tradeoffs built into this setup. First, as the number of aggregators goes up, the size of the audience goes up (at a decreasing rate), and that increases the visitors to the original content site. However, the share of the audience goes down since more people will choose to do their reading at the aggregators rather than the original site. For the length of an excerpt, L, the tradeoff is that as L goes up, more people visit the aggregator sites since the quality of their posts is higher, and that increases the total size of the audience and the number of clickthroughs. But it also reduces the originator's share of the audience.

More formally, the profit function is:

π = R[s(A,c(r(L,A)N(A),L))N(A)] - W

Then the first order conditions for A and L are:

πA = RsN[[sA + sCCrN(rNA + rAN)]N + sNA] = 0
πL = RsN[sCCrNrLN+ sCCL]N = 0

These are both intuitive (and obvious - hope I got the derivatives right). Let's take the second equation first. This equation, which is the first order condition for L, reduces to:

CrNrLN= -CL

The term on the left-hand side is the marginal benefit to the original content provider from an increase in L (with A constant). It says that when L goes up, aggregators get a higher share of traffic since the quality of their services goes up (some of the increase in traffic is brand new, i.e. it does not all come from the content provider). The right-hand side is the marginal cost. It says that when L, the average excerpt length goes up, the percentage of clickthroughs goes down. The optimal L balances these two effects on the margin. Importantly, for some parameter values the solution is interior, i.e. the optimal excerpt length is greater than zero, and it's possible that the optimum is for full, uncut excerpts. (For example, if CL is relatively small, i.e. if increasing the excerpt length has little detrimental effect on the number of clickthroughs, then the solution is likely to be interior and the excerpt length longer. If CrN or rL is large, i.e., if clickthroughs are quite responsive to increases in aggregator traffic, or if traffic to aggregators responds strongly to increases in excerpt length, then this also points toward an interior solution and longer excerpt lengths, perhaps even full excerpts.)

The first order condition for the number of aggregators, A, can be written as:

RsN[sC(CrN(rNA + rAN))N + sNA] = -RsNsAN

As before, this says that marginal cost equals marginal benefit. When the number of aggregators, A, goes up, the marginal cost is that the share of the total available visitors, sN, for the original content provider goes down (because s falls), and this in turn lowers ad revenue. This is the right-hand side of the equation, -RsNsAN. The marginal benefit of A going up is threefold. First, as A goes up, N goes up and this increases traffic to the originator for any given value of s. This is the last term, RsNsNA, on the left-hand side of the equation. Second, because the increase in A also increases N, and visitors to aggregator sites depend upon rN, visitors to aggregator sites also go up, clickthroughs then go up, and this increases the share and ad revenue for the original content provider. This is captured by the term RsNsCCrNrNAN. Third, as A goes up, the share, r, to aggregators goes up, and this also increases clickthroughs to the original site. This term is RsNsCCrNrAN2.

More succinctly, on the benefit side, when A goes up, both r and N go up. Two of the marginal benefit terms capture the increase in the aggregators share, rN that results, and how the increase in rN affects clickthroughs and ultimately ad revenue. The other term captures how the increase in N affects the originators traffic, sN.

Again, importantly, the optimal number of aggregators (from the original content providers point of view) is not necessarily zero. An optimum at zero requires a corner solution, so it depends upon the value of the parameters.

Finally, let me emphasize that this is a very quick effort -- I literally threw it together while watching my Ph.D. students take their final this afternoon -- and there are many ways in which it could be improved. It is intended to illustrate some of the effects that are at work in this decision, and to make the argument that the optimal values of L and A are not necessarily zero, nothing more.

Next up -- when there's time -- what's the optimal length of an rss feed? If there are only two choices, all or (essentially) none, what are the conditions under which the full rss solution prevails?

Friday, February 12, 2010

They Replaced Horses, Didn't They?

Nick Rowe wonders "why human labor didn't go the same way as horse labor":

Of horses and men, by Nick Rowe: As a teenager I read Kurt Vonnegut's novel Player Piano. It's stuck in my economist's mind ever since. It describes life in the near-future when technology and machines have destroyed the demand for nearly all human labor, except for the labor of a small, highly-educated minority. The vast majority of the population would be unemployed, but for government make-work projects.
The book was published in 1952, so Vonnegut's near-future is our recent past. It didn't happen. But could it happen?
You can try to answer that question by playing with production functions... Or you can think about horses.
When horse-power became cheaper than human-power, horse labor replaced human labor. When steam-power in turn became cheaper than horse-power, horses in turn became replaced. The demand for horse labor rose, then fell. If the population of horses had kept growing at the same rate as the population of humans, most horses now would be redundant, with just a small elite minority of horses employed in very special jobs. Improving technology did in fact drastically reduce the demand for horse labor. If Kurt Vonnegut's novel had been about horses, it would have been a historical novel, not science fiction.
It happened to horses; why couldn't it happen to humans?
It's true that humans own the means of production (including their own labor, and horses' labor), and horses don't. That's important, because humans will therefore (at least in aggregate) reap the increased income from any increased output, even if human labor no longer has value. But for a human who owns only his own labor, that is little consolation.
New technology destroyed the demand for the labor of horses. There is nothing that makes it impossible for new technology to destroy the demand for the labor of humans. It hasn't happened yet, but it might. What's surprising, or what ought to surprise us, is that it hasn't happened yet. ...
The only reason I can think of why Kurt Vonnegut's novel never came true, why human labor didn't go the same way as horse labor, is this: humans are a lot more versatile than horses.

Will human versatility always be enough to dodge and weave around all possible changes in technology, forever? I doubt it. Forever is a long time.

Sort of reminds me of this.

Monday, January 18, 2010

A Technocratic Solution to Financial Instability?

Robert Shiller says financial engineering can fix the instability problems in financial markets:

Engineering Financial Stability, by Robert J. Shiller, Commentary, Project Syndicate: The severity of the global financial crisis ... has to do with a fundamental source of instability in the banking system, one that we can and must design out of existence. To do that, we must advance the state of our financial technology.
In a serious financial crisis, banks find that the declining market value of many of their assets leaves them short of capital. They cannot raise much more capital during the crisis, so, in order to restore capital adequacy, they stop making new loans and call in their outstanding loans, thereby throwing the entire economy – if not the entire global economy – into a tailspin.
This problem is rather technical in nature, as are its solutions. It is a sort of plumbing problem for the banking system... Many finance experts ... have been making proposals along the lines of “contingent capital.” The proposal by the Squam Lake Working Group ... seems particularly appealing. ... The group calls their version of contingent capital “regulatory hybrid securities.” The idea is simple: banks should be pressured to issue a new kind of debt that automatically converts into equity if the regulators determine that there is a systemic national financial crisis, and if the bank is simultaneously in violation of capital-adequacy covenants in the hybrid-security contract.
The regulatory hybrid securities would have all the advantages of debt in normal times. But in bad times, when it is important to keep banks lending, bank capital would automatically be increased by the debt-to-equity conversion. The regulatory hybrid securities are thus designed to deal with the very source of systemic instability that the current crisis highlighted.
The proposal also specifies a distinct role for the government in encouraging the issuance of regulatory hybrid securities, because banks would not issue them otherwise. Regulatory hybrid securities would raise the cost of capital to banks (because creditors would have to be compensated for the conversion feature), whereas the banks would rather rely on their “too big to fail” status and future government bailouts. Some kind of penalty or subsidy thus has to be applied to encourage banks to issue them. ...
Contingent capital, a device that grew from financial engineering, is a major new idea that might fix the problem of banking instability, thereby stabilizing the economy – just as devices invented by mechanical engineers help stabilize the paths of automobiles and airplanes. If a contingent-capital proposal is adopted, this could be the last major worldwide banking crisis – at least until some new source of instability emerges and sends financial technicians back to work to invent our way of it.

The last sentence highlights why we shouldn't put all of our regulatory eggs into one policy basket, a point I've made before in arguing for broad based solutions that limit the damage if a breakdown occurs. That is, while contingent capital might help, and maybe even fix existing problems, we should also be sure to implement measures that limit the damage and protect us if the financial sector implodes again despite the creative financial engineering and regulatory changes designed to prevent it.